With the road running out for tax havens, can Luxembourg finally remake its financial sector?

(MENAFN- MENAFN.COM)

In a long-awaited report, the OECD recently released two blueprints of how to completely overhaul the way that multinational corporations are taxed. One of the most important elements of the proposed remodelling of the global corporate tax code would be new rules ensuring that digital companies—including tech giants such as Google and Amazon—pay tax where they carry out their business, rather than where they register subsidiaries.

This particular reform would have a significant effect not just on the companies which have for years taken advantage of legal loopholes and favourable tax regimes to slice their tax burdens. As the OECD noted, while countless countries would benefit from the tax regime reform, “European investment hubs”—the likes of Luxembourg, the Netherlands, Switzerland, and Cyprus—would undoubtedly lose tax base. What the OECD charitably calls “European investment hubs” have long been singled out as tax havens, with Luxembourg earning particular notoriety after the LuxLeaks scandal uncovered the sweetheart deals which helped multinational giants push their tax bills near zero.

Even before the OECD-led initiative to carry out a broad reform of the international corporate tax system, it was clear that tolerance for tax havens and special tax regimes was waning, a trend that has only accelerated as the coronavirus pandemic has taken a hatchet to governments’ budgets. Luxembourg is now attempting to straddle a delicate balance, distancing itself from its reputation as a nucleus of tax avoidance while trying to maintain a competitive edge as a global financial hub. If the Grand Duchy is going to pull off this transformation, it will have to address the lingering gaps leaving it open to dodgy financial flows.

Luxembourg freeport a major reputational drain

One of the sticking points for Luxembourg to make a clean break with its tax haven past is the maximum-security warehouse known as Le Freeport Luxembourg, which has been allowing the super-rich to store their priceless art and other treasures in its climate-controlled vaults since 2015. Despite Le Freeport’s insistence that the facility’s main appeal is lower insurance premiums and easy access to the tarmac at Findel Airport, it’s more likely the fact that goods inside the freeport can be stored indefinitely, and even bought and sold, without incurring tax as long as they don’t leave the facility.

After a star-studded grand opening in 2014, the freeport quickly became a thorn in Luxembourg’s side. First came the “protracted public-relations disaster” which befell the freeport’s founder, Swiss entrepreneur Yves Bouvier. Bouvier has spent years fighting allegations from his former client, the Russian billionaire Dmitry Rybolovlev, that Bouvier schemed to overcharge him by more than $1 billion in 37 art deals. On top of his ongoing legal tussle with Rybolovlev, Bouvier is under investigation in his home country of Switzerland for alleged tax evasion, and facing media reports that he tried to blackmail a Swiss tax inspector to get the investigation dropped.

Whatever the outcome of these legal proceedings, Yves Bouvier’s business affairs have suffered, both financially—the Luxembourg freeport has posted heavy losses in recent years—and reputationally, with European policymakers pointing to “the dubious and highly problematic reputational profiles of Le Freeport’s private shareholders” as one of the reasons why the freeport and other similar facilities should be urgently phased out. MEPs who visited the Luxembourg facility excoriated it as a “black hole” with scant oversight over who actually owned the goods locked inside its vaults and a “blind spot” in the EU’s efforts to clamp down on money laundering and tax evasion. Given that policymakers in Brussels determined that the freeport presents an unacceptable risk to the European bloc, it’s difficult to see how Luxembourg could justify keeping such a facility open while trying to burnish its reputation as a transparent financial centre.

Large-scale reforms needed

Shuttering the Luxembourg freeport would be one easy measure to improve the Grand Duchy’s fiscal transparency and reduce the risk that financial criminals will exploit its institutions. But the small country will have to carry out broader reforms if it wants to maintain its status as a world-class financial sector without the special tax deals which made its name.

While OECD officials have cheered the Grand Duchy’s efforts to work towards tax compliance through moves such as its 2015 introduction of the automatic exchange of tax information with other European countries, recent research has shown that Luxembourg continues to be a key player in an “axis of tax avoidance”—alongside the UK, the Netherlands, and Switzerland—which are together responsible for 72% of global profit shifting. According to the Tax Justice Network, Luxembourg is responsible for costing the EU some $12 billion in lost corporate taxes each year—from American companies alone, making it the single largest European offender in this regard.

Part of the problem is that some of Luxembourg’s initiatives to water down the country’s notorious financial secrecy retain important loopholes. As an example, Luxembourg recently rolled out a new national database ostensibly allowing people to comb through information on companies registered in the country. The database’s heavily-restricted search function—it only permits searches based on a company name or ID number—and a number of other flaws make it far from user-friendly. Intended to shed a light on the ultimate beneficial owners of tangled corporate structures, the database often returned incomplete or plainly wrong answers, such as listing administrative directors as the ultimate owners of a firm.

The OECD’s tax reform blueprint is just the latest indication that patience is running out among policymakers and the public alike for the financial opacity and tax trickery which helped places like Luxembourg convert the core of its economy away from a struggling steel industry. The Grand Duchy still has a chance to hold onto its lucrative financial services sector—it’s carved out a niche as one of the premier offshore destinations for Chinese securities and looks set to seize substantial business from the City of London after Brexit—but it needs to do more to demonstrate that it’s cleaning up its act.

MENAFN20102020000484511177ID1100985919