Jean Claude Juncker, the new President of the European Commission whose term started on 1 November, wanted his institution to become more “political”. This wish was fulfilled earlier than he expected.  The same week, the world press published a detailed inquiry by the International Consortium of Investigative Journalists, on extraordinary tax breaks offered by the Finance Ministry of his country, Luxembourg, to multinational companies with headquarters there.

The scandal was called “Luxleaks” because the information came from files “leaked” from a Luxembourg office of PricewaterhouseCoopers (PWC); they related to ‘rulings’ negotiated between these companies and the Luxembourg tax authorities between 2002 and 2010. The way they were presented to the general public generated an immediate uproar: reckless multinationals manage to avoid paying taxes at the time when the ordinary citizen is the victim of austerity policies “imposed” by the European Commission – whose new President was the initiator of these tax breaks in his country of origin!

Luxembourg is indeed a well-known fiscal paradise and by far the richest country in the European Union. Jean Claude Juncker, who was Prime Minister for 18 years, is credited for this success. His zeal in defending his country’s tax regime was well known by his colleagues in the European Council. When the G 20 advocated for tax transparency during the financial crisis, with support from Austria, he stubbornly resisted for years the application at the EU level of the principle of automatic exchange of information between tax authorities.

Curiously, this weakness did not prevent the major political groups in the European Parliament from endorsing him as their candidate for President of the Commission. But ghosts of the past always come back to haunt politicians. Juncker, ‘poacher turned gamekeeper’, should have expected this. Instead, he apparently suffered so much emotionally from the attack that for a number of days he disappeared from the public eye. But when he came back, on 13 November, he managed to regain the initiative by making proposals to address the problem, which were immediately supported by the major political groups in the European Parliament, thus demonstrating that he is a good politician.

‘Rulings’ are a well-known and perfectly legal practice used by tax authorities in many countries to inform (wealthy) taxpayers of the amount of  taxes they will have to pay in order to help them anticipate it in their accounting. The problem is that they also have become a way for skilled intermediaries – like PWC – to negotiate the most attractive tax arrangements on behalf of their clients.

The information leaked from PWC exposes, among other evidence, how the ‘rulings’ were used to confirm transfer pricing arrangements between a firm and its subsidiaries, resulting in a very low rate of taxation for the Luxembourg subsidiary where the tax was levied.

But this was not really news. The EU Commission had already started to investigate some of these schemes in 2013, used to the benefit of four companies in three different Member States: Apple in Ireland, Fiat and Amazon in Luxembourg and Starbucks in the Netherlands. 

What will be the consequences of the “Luxleaks”?

From a political point of view, 76 MEP from the extreme right (including UKIP, Cinque Stelle and Marine Le Pen’s Front National) presented a ‘motion of censure’ in the European Parliament against the European Commission, which will be voted on Thursday 27 November. It stands no chance of reaching the two thirds majority required, but it will allow the populist Eurosceptics to mobilize attention, a day after Juncker will have presented his famous 300 billion euro investment plan aimed at reviving the EU economy. The extreme left did not want to join the motion presented by the extreme right, but will undoubtedly also make its voice heard.

Juncker himself announced, when he came back from his short ‘escape’, that the Commission will soon propose a directive on the automatic exchange of information regarding tax rulings negotiated between national administrations and multinationals. It will be presented in January by Commissioner Moscovici, in charge of tax issues.

Juncker also promised that the Commission would rework its proposal for a common consolidated corporate tax base (CCCTB). The proposal, presented in 2011, has since been  ‘bogged down’ in the Council (according to the Commission’s spokesman) but, even revised, has little chance of being approved due to the unanimity rule still applicable to tax matters in the EU.  

An effective way of dealing with the problem is to address it through the EU rules on state aid, as the Commission has already started to do.

Indeed, EU law provides that any selective advantage granted by an EU Member State to an individual company is prohibited – and needs to be reimbursed – if it distorts competition in the European internal market.

Two weeks before the leaks were published, Covington circulated an alert on this issue. 

The new Commissioner in charge of competition, Danish Margrethe Vestager, told the press on 20 November that she “admired the journalistic work” on this issue and that the Commission considered the Luxleaks as “market information” and would “evaluate whether or not it will lead us to opening new cases”.

As mentioned above, several cases – Apple in Ireland, Starbucks in the Netherlands, Fiat and Amazon in Luxembourg – are already under investigation by the European Commission. The four investigations relate to tax rulings validating transfer pricing agreements (‘advance pricing agreements’ or APAs). These are agreements on the prices charged for commercial transactions between parts of the same corporate group. The investigation centers on the calculation methods for these APAs and their compatibility with internationally agreed standards. The OECD Transfer Pricing Guidelines will be used as the reference point to assess potential state aid.

Vestager insisted that bringing these four cases to a conclusion will remain a priority and that the decision could come by spring of next year. But the Commission has also asked for detailed information on other cases from the authorities of several EU countries: “we don’t want every single tax ruling but we do want to look at a list if there are certain patterns in the use of tax rulings”, said Vestager.

This signals a quick start for Vestager, who was chosen for the competition post because of her record as Minister for the Economy in Denmark.

Photo of Jean De Ruyt Jean De Ruyt

Ambassador Jean De Ruyt is a senior public policy advisor in Covington’s EU public policy team.  Ambassador De Ruyt, a non-lawyer, is among the most experienced diplomats in Europe.  Most recently, he served as the Permanent Representative of Belgium to the European Union…

Ambassador Jean De Ruyt is a senior public policy advisor in Covington’s EU public policy team.  Ambassador De Ruyt, a non-lawyer, is among the most experienced diplomats in Europe.  Most recently, he served as the Permanent Representative of Belgium to the European Union and was chair of the Committee of Permanent Representatives during the 2010 Belgian Presidency of the Council.

Ambassador De Ruyt works with Covington’s transatlantic government affairs team, which includes experienced lawyers as well as former senior policymakers.  The team advises clients on a range of European public affairs issues, including the EU policy-making processes, functioning of the European institutions, development of EU legislation and accession of new EU members.  Ambassador De Ruyt has particular expertise in the workings of the EU Council and EU institutions more broadly, transatlantic relations and United Nations development policy.

Ambassador De Ruyt was closely involved in Europe’s response to the financial crisis and the resulting legislation at the European level.  He was instrumental in the creation of the European diplomatic service and, as the Permanent Representative, facilitated the resolution of a variety of state aid and competition policy disputes for Belgian companies.

Ambassador De Ruyt was involved in the negotiation of the European Single Act and the Nice and Lisbon Treaties, in initiatives relating to the implementation of the Oslo agreements in the Middle East and in the rebuilding of peace in Central Africa.  He also participated in the stabilisation of former Yugoslavia and the development of NATO and European Defence.