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80 • Fifty Shades of Tax Dodging Tax treaties Luxembourg has 75 tax treaties in force. 832 This is below the average for the countries covered in this report. However, Luxembourg has been rapidly expanding its treaty network in recent years. In the first quarter of 2015 alone, seven new treaties entered into force with countries that Luxembourg did not previously have a treaty with. 833 Equally telling, Luxembourg had 19 pending treaties waiting to enter into force in January 2015. 834 Many of the new treaties are with developing countries, including Laos, Botswana, Egypt, Sri Lanka, Pakistan, Senegal, Uruguay. 835 Looking at two of the most recent treaties with developing countries, there is evidence that Luxembourg is negotiating for lower withholding tax rates. For example, while the statutory withholding tax rate on dividends in Laos is 10 per cent, the rate in the treaty between Luxembourg and Laos is 5 per cent. 836 Similarly, for Sri Lanka the domestic statutory rate on dividends is also 10 per cent, while the rate in their treaty with Luxembourg is 7.5 per cent. 837 According to the Minister of Finance, all of Luxembourg’s treaties follow the OECD model and analysis of two of the most recent treaties show that this is indeed the case. 839 In the 2010 commentaries to the OECD model tax convention, the Luxembourg Government made it clear that it applies a restrictive interpretation of the OECD model when it comes to the application of domestic anti-abuse provisions and controlled foreign corporation (CFC) rules of its treaty partners. 840 The Minister of Finance in 2015 stated that Luxembourg’s treaty format could be updated and that the ministry would be ready to bring existing treaties in line with OECD BEPS recommendations. 841 As such, there seems to be no plans for using the UN model. Financial and corporate transparency A 2010 review by the Financial Action Task Force found Luxembourg to be ‘non-compliant’ or ‘partially compliant’ on 12 factors related the international standards on antimoney laundering, and a 2013 OECD review similarly rated Luxembourg as ‘non-compliant’ on corporate transparency and exchange of tax information. 842 Since then, the Luxembourg government has been busy trying to ensure that the country’s compliance improves. A follow-up review in 2014 found that the country was now ‘largely compliant’ on anti-money laundering standards. 843 Following moves to abandon the country’s banking secrecy laws that had become “a handicap”, according to the Minister of Finance, 844 and its support for automatic exchange of information, 845 a 2015 OECD review is expected to improve the country’s rating on transparency and tax information exchange. 846 Public reporting for multinational corporations The power of country by country reporting is becoming clearer as banks across Europe have started publishing this information in line with EU requirements. Using the newly published information, journalists at the UK’s Guardian newspaper noticed that Barclay’s Bank had booked £593 million in profits in their Luxembourg branch, which employed just 30 people and paid only £4 million in tax, giving them an effective tax rate of less than 0.7 per cent in the Duchy. 847 It is perhaps due to stories such as these that Luxembourg has been less than excited about the prospects of having public country by country reporting. The Minister of Finance in March 2015 stated that, while Luxembourg was in favour of country by country reporting, the government did not support making the information public. 848 New transfer pricing legislation in 2015 confirmed this stance as it introduces country by country reporting based on OECD’s BEPS recommendations. This would imply that the reporting is for tax administrations only, and only covers very large multinational groups. 849 Ownership transparency With anonymity no longer guaranteed for banking clients due to international efforts to reduce banking secrecy, some are increasingly seeking to shield their wealth from the tax authorities by using corporate vehicles such as trusts or similar structures that can help conceal the identity of the real owner. This is also reported to be the case in Luxembourg, where it is noted that assets are moving to family wealth-holding companies 850 and into the country’s so-called Freeport, a giant vault where high-value assets can be stored. 851 In light of these changes, it is troubling that Luxembourg’s business register does not capture the beneficial owner in all cases, according to a 2014 review. 852 In 2013, Luxembourg introduced a draft bill to adopt a new type of wealth fund (the patrimonial fund – also known as the ‘Luxembourg trust’ 853 ) that offers a high level of confidentiality and low tax treatment. 854 The bill was supposed to have been passed in 2014 but was delayed in order to bring it further in line with the content of the EU’s anti-money laundering directive and is pending finalisation. 855 The government’s position on allowing public access to beneficial ownership information remains unknown.
Fifty Shades of Tax Dodging • 81 EU solutions When it comes to taxation, the relationship between Luxembourg and the EU has been tense over the past year. As mentioned above, the European Commission initiated two state aid investigations in 2014 and in March 2015 it started looking into the Duchy’s tax dealings McDonald’s. 856 Concurrently, and in response to the LuxLeaks scandal, the European Parliament set up its TAXE committee, which brought a delegation of MEPs to Luxembourg in March 2015. 857 Luxembourg has been reluctant to collaborate with both processes. In relation to the state aid investigations, the government first refused to confirm the identity of the companies referred to in documents handed over to the Commission in relation to the state aid investigations. Then it threatened to drag the Commission to court over its information request on tax rulings, which was only abandoned after the request was extended to all Member States. 859 In relation to the European Parliament’s TAXE committee, the Luxembourg Parliament in April 2015 voted down a motion calling on the government to support and cooperate with the committee, encouraged by a speech from the Minister of Finance who argued that the motion was unnecessary and would not provide any added value. 860 In the second half of 2015, Luxembourg took up the rotating EU Presidency for a six-month period. The government stated that “fair taxation in the Union is an absolute priority” during the presidency. 861 However, reflecting a common argument invoked by the government, it was also made clear that a global level playing field would be preferred, and that as a consequence the EU should only pioneer improvements in tax and transparency if it could “ensure that others follow.” 862 The government has expressed some support for a more coordinated approach to corporate taxation by demonstrating some support for the Commission’s plan to revive the socalled Common Consolidated Corporate Tax Base (CCCTB) proposal. The Luxembourg Finance Committee has similarly expressed support for the CCCTB proposal. 863 Global solutions Despite insisting on the need for a global level playing field and concerted action, 864 it is noteworthy that the Luxembourg government did not support the establishment of a global intergovernmental body on taxation at the Financing for Development conference in July 2015. The government focuses on capacity building for tax administrations in its official development assistance and was a signatory to the so-called Addis Tax Initiative, which sought to bring together governments to commit to increase support for developing countries’ tax systems. 865 Despite this, a Parliamentary resolution to commission an independent study on the impact of the Luxembourg financial centre on developing countries was voted down by 56 to 2 votes in April 2015. 866 Conclusion 2015 was a crucial year for Luxembourg. After the LuxLeaks scandals the weight of the international community’s condemnation weighed heavily on the Luxembourg government. As the Luxembourg courts proceed with the charges against the LuxLeaks whistleblower and one of the key journalists behind the story, the public feeling of injustice is only likely to grow. With the one year anniversary of LuxLeaks approaching, the question of whether the problems have been solved becomes ever more pressing. Unfortunately, it seems that the Luxembourg government chose to promise fundamental reform, while continuing most of its old ways. Thus, the basic outline of the Luxembourg tax model – with its letterbox companies, tax rulings and patent box – remain intact. While some modest, albeit important, improvements have been implemented or promised, for example, in relation to its tax ruling regime, other moves such as the establishment of a Freeport and the plans to introduce a new type of foundation seem to be opening up for new tax planning opportunities. The lack of cooperation with the EU on taxation matters confirm an impression that Luxembourg still has some way to go. Perhaps most telling, the rejection of an intergovernmental body on taxation in June 2015 while insisting on the need for global concerted action on tax before the government will reform further stresses the lack of consistency in the government’s stance on tax. Some of the steps taken during the last year can have a direct impact on developing countries. These include the decision to adopt confidential country by country reporting and a rapid expansion of rate-reducing tax treaties with developing countries. In addition, the unwillingness of the Luxembourg Parliament to investigate the effect of its financial centre on developing countries while the government pursues a strategy to increase its financial sector’s market share in emerging markets again point to inconsistencies. 867
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Contents Glossary 4 Executive summa
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