Leaked Luxembourg files expose global companies' secret deals to avoid tax

Pepsi, Ikea, FedEx and nearly 340 other international companies have secured secret deals from Luxembourg, allowing many of them to slash their global tax bills by routing hundreds of billions of dollars through the tiny European country, leaked documents show.

The companies have saved billions of dollars in total taxes, according to a review of nearly 28,000 pages of confidential documents obtained by the Washington-based International Consortium of Investigative Journalists and shared with journalists from 26 countries, including CBC News.

The companies can book big tax savings by creating complicated accounting and legal structures that move profits to low-tax Luxembourg from higher-tax countries where they're headquartered or do lots of business.

In some instances, the leaked records indicate, companies have enjoyed effective tax rates of less than one per cent on the profits they've shuffled into Luxembourg even while maintaining the barest of presences there.

The leaked files show, among other things, that the Canadian Crown corporation that invests federal public servants' pension money set up a web of entities based in Luxembourg to handle real-estate transactions in Berlin. It was able to avoid paying close to $20 million in German land-transfer taxes.

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The documents include 548 private tax rulings sometimes known as "comfort letters" that Luxembourg provided between 2002 and 2010 to corporations seeking favourable tax treatment. The letters provide written assurance in advance that proposed corporate structures and transactions, designed to create tax savings, will be viewed favourably by the country's Finance Ministry.

The European Union and Luxembourg have been fighting for months over Luxembourg's reluctance to turn over information about such tax rulings to the EU, which is investigating whether the country's tax deals with Amazon and Fiat Finance violate European law.

Luxembourg officials have supplied some information to the EU but have refused, EU officials say, to provide a larger set of documents relating to its tax rulings.

Profits shifted

The leaked documents reviewed by the global consortium of journalists involve deals negotiated by PricewaterhouseCoopers (PwC), one of the world's largest accounting firms, on behalf of hundreds of corporate clients.

The records show PwC tax advisers helped come up with financial strategies featuring loans among sister companies and other moves designed to shift profits from one part of a corporation to another to reduce or eliminate taxable income.

The records reveal, for example:

• FedEx Corp. set up two Luxembourg affiliates to shift earnings from its Mexican, French and Brazilian operations to affiliates in Hong Kong. Profits moved from Mexico to Luxembourg largely as tax-free dividends. Luxembourg agreed to tax only 0.25 per cent of FedEx's non-dividend income flowing through this arrangement leaving the remaining 99.75 per cent tax-free. FedEx declined comment on the specifics of its Luxembourg tax arrangements.
• A unit of PepsiCo used Luxembourg subsidiaries to arrange loans among sister companies that allowed it to reduce its tax rate on its $1.4-billion US purchase of a controlling interest in Russia's largest juice maker. At least $750 million of the money in the purchase travelled through a Luxembourg subsidiary named Tanglewood, before landing in a Pepsi subsidiary in Bermuda. Luxembourg acted as a tax-reducing conduit as the profits moved from Russia to Bermuda.
• Ikeahas used Luxembourg as part of its complex tax-savings strategy. Inter IKEA Group, the independent cluster of companies that owns the store's trademark and grants franchising rights, includes a Luxembourg holding company, a Luxembourg finance company, a Liechtenstein foundation and a Swiss finance arm. Leaked documents show Ikea's Luxembourg operations opened the Swiss subsidiary in 2009 to outsource part of their financing operations to yet another low-tax jurisdiction, allowing the company to save on taxes.

"A Luxembourg structure is a way of stripping income from whatever country it comes from,'' said Stephen Shay, a professor of international taxation at Harvard University's law school and a former tax official in the U.S. Treasury Department.

The country, he said, "combines enormous flexibility to set up tax reduction schemes, along with binding tax rulings. It's like a magical fairyland."

Pepsi declined to comment on the specifics of its tax arrangements. Inter Ikeasaid its tax planning complies with all laws and regulations, adding that its total effective corporate income tax rate is currently around 14 per cent.

'No way are these sweetheart deals'

Other companies seeking tax deals from Luxembourg come from private equity, real estate, banking, manufacturing, pharmaceuticals and other industries, the leaked files show. They include Accenture, Abbott Laboratories, American International Group (AIG), Amazon, Deutsche Bank, H.J. Heinz, JP Morgan Chase, Burberry, and Procter & Gamble.

For their part, Luxembourg's officials and defenders say the landlocked country's system of private tax agreements is above reproach.

"No way are these sweetheart deals," Nicolas Mackel, chief executive of Luxembourg for Finance, a quasi-governmental agency, said in an interview.

"The Luxembourg system of taxation is competitive. There is nothing unfair or unethical about it," Mackel said. "If companies manage to reduce their tax bills to a very low rate, that's a problem not of one tax system but of the interaction of many tax systems."

Former Luxembourg prime minister Jean-Claude Juncker, who was in power when many of the jurisdiction's tax breaks were crafted, has promised to crack down on tax dodging in his new post as president of the European Commission, but has also said he believes his own country's tax regime is in "full accordance" with European law.

PricewaterhouseCoopers said the reporting by the international journalists consortium is based on "outdated" and "stolen" information, "the theft of which is in the hands of the relevant authorities." It said its tax advice and assistance are "given in accordance with applicable local, European and international tax laws and agreements and is guided by a PwC global tax code of conduct."

In its statement, PwC said media do not have "a complete understanding of the structures involved." While the company can't comment on specific client matters, it rejects "any suggestion that there is anything improper about the firm's work."

Tax rates whittled down

Some of the leaked documents obtained by the journalism consortium were first reported on in 2012 by Edouard Perrin for France 2 public television and by the BBC, but most of the PwC documents have never before been analyzed by reporters.

Less than a third of the tax deals in the leaked files include a specific figure for the amount of money companies said they planned to "invest" through their Luxembourg agreements. The total for those deals was roughly $215 billion US between 2002 and 2010.

The figure would likely grow to several hundred billion dollars if investments from other deals in the leaked documents were included. And the overall figure for money shuffled through Luxembourg as the result of confidential tax agreements would grow even larger if tax deals arranged through other accounting firms were included.

Statistics Canada figures show that Canadian citizens and corporations had $30.2 billion Cdnstashed in the European grand duchy as of 2013. Canadians for Tax Fairness says the Canadian government is getting "outmanoeuvred by corporations and very rich people looking to get even richer at the expense of the rest of us."

More than 170 of the Fortune 500 companies have a Luxembourg branch, according to U.S.-based Citizens for Tax Justice, a non-profit research and advocacy group and a partner of Canadians for Tax Fairness.

While Luxembourg maintains a statutory corporate tax rate of 29 per cent, the leaked files show that the country has routinely approved tax rulings that whittle down what counts as taxable income to practically nothing.

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This can drop Luxembourg's effective tax rate deep into single digits. For instance, according to the most recent U.S. government data, American corporations that flowed their overseas profits through Luxembourg in 2012 paid an average of 1.1 per cent in taxes to the country.

"This is the first time really that we've seen inside the workings of Luxembourg as a tax haven," said Richard Brooks, a former U.K. tax inspector and author of the book The Great Tax Robbery, who was hired by the international journalists consortium to help review some of the leaked documents.

"The countries that are losing money, they don't know about it, don't know how it operates at all."