Both in the case of Luxembourg and the Netherlands, the tax avoidance schemes, although varying according to the needs of each customer, have the following constants: The use of mailbox companies in Luxembourg or Amsterdam, usually with no staff, that the taxation of the company does not take place in the country where it operates, but in a jurisdiction of low or zero taxation.
So all legal? Not quite…
“If a mailbox company is the “intermediary” between two other companies, as far as taxation goes, it should be ignored, and instead assumed that the other two companies have a direct relationship.”
This statement came from a European Commission official that did not want to be named, according to the newspapers To Vima and Ta Nea during the period of the LuxLeaks story. In practice, what the Commission is implying is that the Greek government must intervene and dismiss as virtual (and therefore illegal) these triangular relationships. The companies involved in LuxLeaks (or in DutchLeaks) should be challenged in courts and eventually taxed as if the avoidance schemes were not legal then, which would have the potential to generate many millions of euros for the Greek government.
But these practices are legal in Luxembourg – reply in chorus the self-appointed defenders of tax avoidance.
“It may be legal in Luxembourg because this is their business model, robbing other countries tax revenue. And this is also true partially for the Netherlands. Time has come all over the world to start challenging before the courts the way the multinationals set up their tax schemes. We shall not do it in Luxembourg or the Netherlands but in Greece, in Norway, in France, in Germany… They are going around saying it is legal but that is not necessarily true. It is forbidden in all countries not to pay fair taxes. The law clearly forbids setting up artificial constructions whose only purpose is not to pay taxes.”
The above statement becomes even more relevant as it comes from somebody who has fought multinationals with the capacity of a judge. Eva Joly , currently member of the European Parliament with the Greens and vice-chair of the TAXE Committee on tax rulings, said the above in a public event organized in Athens by SOMO and ThePressProject — which can be viewed here).
The report on Eldorado Gold by the Dutch organization SOMO tries to solve the confusion between tax evasion and tax avoidance. “In practice the line between the two is not always clear: practices are only found to be illegal when identified as fraudulent by tax authorities, which in turn require sufficient resources to identify and prosecute aggressive tax planning methods. Furthermore, tax planning methods that significantly reduce tax payments are in violation of the spirit of the law, which courts may find unlawful if cases are brought forward but remain legal if unchallenged “. The term 'tax avoidance' is used throughout SOMOs' report, but the Dutch NGO makes clear that “these practices could also entail tax evasion if tested in court and found fraudulent.”
But the accountacny companies that engineer those schemes, such as PwC, insist they’re not doing anything wrong, right?
Actually, no.
As we’ll see, big accounting and auditing firms admit that many tax avoidance strategies are routinely illegal.
In Britain during 2012-2013, the Public Accounts Committee of the House of Commons, after a series of tumultuous hearings with the heads of the Big Four – that is the four leading accounting and audit firms, drew their conclusions and released a report entitled “Accounting firms and their role in tax avoidance.” Even more interesting than their findings are the minutes of the hearings, during which the committee chairman, Margaret Hodge faced the heads of the companies with an equal dose of scorn and anger. So to those who insist that avoidance is legal, here are some extracts from the minutes that might convince you otherwise.
Kevin Nicholson, Head of Tax, PwC Great Britain: Let me start with the main question. First of all, evasion is illegal and tax avoidance is not. That is the first thing we should say.
MP Austin Mitchell: Advice is legal until it is struck down by a court. Many of the schemes you are selling are potentially illegal because they could be struck down.
Kevin Nicholson: Well, I will answer that question. All of the advice that we give, Mr Mitchell—this gets to the point of how we determine this—we provide under a code of conduct, which is on our website and which has been globally agreed since about 2005 or 2006. It has four or five main principles. The first is that advice has to be supportable in law—it has to be legal. When we give the advice, we have to believe that it is supportable in law. That is a legal position we have taken.
Chair: I just want to challenge you on this. I have talked to somebody who works in PwC, and what they say is that you will approve a tax product if there is a 25% chance—a one-in-four chance—of it being upheld. That means that you are offering schemes to your clients—knowingly marketing these schemes—where you have judged there is a 75% risk of it then being deemed unlawful. That is a shocking finding for me to be told by one of your tax officials. I bet it is mirrored by all four accountancy firms sitting here.
Later on in the proceedings:
Bill Dodwell, Head of Tax Policy, Deloitte LLP: Our advice is that one is only allowed to file a tax return claiming a tax position if one has a more than 50% view that it will succeed.
Chair: You do it at more than 50%? That is useful. They do it at 25%. You do it at more than 50%.
Bill Dodwell: Yes.
Chair: So for half the schemes that are included and filed in tax returns there is a risk that they could be proved, later down the line, to be unlawful.
What follows is the conclusion by the House of Commons Committee of Public Accounts: “[The accountancy firms’] current principles only require their advice to have more than a 50% chance of succeeding if tested in court and there are no consequences for the firms if their scheme is rejected at a Tribunal.”
In other words, the Big Four themselves admit that the solutions they provide to their customers one in two times (or 3 or 4 in the case of PwC) would likely be rejected by the courts as illegal! But even when caught breaking the law, there are no penalties for the company.