The tiny Grand Duchy of Luxembourg is once again battling accusations of being a tax haven after the OpenLux investigation revealed the country hosts "55,000 offshore companies managing assets worth at least €6 trillion".
The investigation, conducted by French newspaper Le Monde and other media partners, describes these companies as "phantom" because they neither have offices nor employees.
According to the claims, nearly 90% of these entities are controlled by non-Luxembourgers, such as billionaires, multinationals, sportsmen, artists, high-ranking politicians and royal families.
Luxembourg's government said it "rejects the claims made in these articles as well as the entirely unjustified portrayal of the country and its economy".
The official statement declared the nation as being "fully in line and compliant with all EU and international regulations and transparency standards and transparency standards".
But despite the assurances, the OpenLux exposé inevitably made headlines around the world and reinforced the image of the Grand Duchy as a tax haven, a dreaded label that has for years been associated with the small country of just 626,000 residents.
The controversy also brought forward an uncomfortable reality: the conspicuous absence of Luxembourg in the EU's list of tax havens.
The EU's blacklist
The traditional idea of a tax haven talks about a country or territory that imposes a low tax rate - or no tax rate at all - and is used by corporations to avoid tax which otherwise would be payable in a high-tax country.
According to the International Monetary Fund, tax havens collectively cost governments between $500 billion and $600 billion a year in lost corporate tax revenue.
In a bid to fight tax fraud, evasion and avoidance, as well as money laundering, the European Union decided to establish a list of "non-cooperative jurisdictions for tax purposes".
The first list was adopted in December 2017 and is updated twice a year by national ministers in the Council of the EU.
The council doesn't employ the term "tax haven" and instead talks of "countries that encourage abusive tax practices, which erode member states' corporate tax revenues".
"The aim is not to name and shame countries but to encourage positive change in their tax legislation and practices, through cooperation," the official site of the council reads.
But there's a catch: the list exclusively targets non-EU countries.
At the time of writing, the countries and territories blacklisted are all located outside the bloc: American Samoa, Anguilla, Barbados, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands, Vanuatu and Seychelles.
EU neighbours like Switzerland, San Marino and Andorra are highlighted in green, meaning that the council considers they cooperate with the bloc and have implemented all the necessary commitments. Others, like Turkey, Morocco and Australia, are tinted in orange: they do not yet comply with all international tax standards but have committed to reform.
Shortcomings and omissions
For advocates, the EU's blacklist falls short of the bloc's high ambitions.
A recent analysis by Oxfam says the list "continues to fail in effectively identifying the countries which use harmful tax practices and help the richest dodge their tax bills".
Oxfam notes that in 2019, five EU member states (Cyprus, Ireland, Luxembourg, Malta and the Netherlands) presented "economic indicators typical of tax havens (e.g. high levels of Foreign Direct Investment, intellectual property payments, interests, dividends)".
The report adds that Luxembourg had levels of Foreign Direct Investments coming in and out of the country 67 to 100 times bigger than its total GDP.
"OpenLux provides very clear evidence on how Luxembourg allows billionaires and big corporations to avoid paying their fair share of taxes. In some cases, launder illicit money," Chiara Putaturo, inequality and tax policy advisor at Oxfam's EU Office, told Euronews.
Putaturo argued that the situation inside Grand Duchy is not much different than what one can witness in the Cayman Islands, a British overseas territory in the Caribbean often considered the prototype of a tax haven.
"In terms of facilitating tax avoidance, Luxembourg and the Cayman Islands are at the same level. The Cayman Islands have zero corporate tax rate, while Luxembourg uses other kinds of instruments," she said.
"In particular, [Luxembourg] has a system that favours the profit shifting within a company through the payment, for instance, of dividends or intellectual property. It's a more complex system that is also easier to hide."
In its Corporate Tax Haven Index, the advocacy group Tax Justice Network considers the Cayman Islands the third worst tax haven for corporate tax avoidance. Luxembourg is placed three positions below, in sixth spot.
Neither country is included in the EU's blacklist. In fact, the Cayman Islands was removed from the list in October 2020, prompting a backlash from civil society groups.
Calls for change
European legislators agree with advocates that the weakness and flaws of the EU's tax haven blacklist require urgent change.
Last month, in a resolution approved with 587 votes in favour and 50 against, MEPs proposed to reform the process of blacklisting countries to make it more transparent, consistent and impartial.
MEPs believe that the list has not lived up to "its full potential, [with] jurisdictions currently on the list covering less than 2% of worldwide tax revenue losses". They call the current system "confusing and ineffective".
Among the suggested reforms, MEPs want the council to widen the scope of the list and make members of the bloc subject to scrutiny. Lawmakers say that EU countries falling foul should be considered tax havens until "substantial tax reforms are implemented".
Luxembourg is only named once in the resolution when MEPs quote the aforementioned Corporate Tax Haven Index.
The text was approved two weeks before the publication of the OpenLux revelations, which are poised to fuel the debate and provide legislators with extra ammunition.
"You can't have the Cayman Islands, Bermuda or any other tax haven without the help and cooperation of judications like Luxembourg, the Netherlands or Ireland," Dutch MEP Paul Tang, who is chair of the subcommittee on tax matters, told Euronews.
"Especially, Luxembourg and the Netherlands are huge in attracting so-called phantom investment, that is done on paper but is really intended to avoid taxation. Luxembourg is a big player [in the field]."
Tang believes the reason that the EU finds it so difficult to tackle the problem is due to the requirement of unanimity. Any measure related to tax policy must be adopted unanimously by all member states. The European Parliament has only the right to be consulted on tax matters, except on budgetary-related issues, for which it is co-legislator.
"Within the European Union you are not allowed to speak out and name and shame. And I think the European Parliament is the only institution that does it, that speaks openly about the role of Ireland, Luxembourg and the Netherlands, and that we should do, otherwise the situation won't change. We need to call it by its name, and its name is called Luxembourg," he said.
The Dutch MEP is confident that the pandemic-induced economic crisis will act as an incentive to clamp down on tax fraud and tax evasion, given that governments are desperately looking for extra sources of revenue to finance the unprecedented levels of state aid and the recovery plans.
However, as of today, the possibility of Luxembourg or the Netherlands agreeing to any changes that could make them susceptible of being scrutinised - and eventually blacklisted - by their own peers appears to be unthinkable.
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