Last year marked the successful negotiation of a landmark global tax deal to tackle corporate tax evasion, new allegations over Luxembourg’s tax practices and the appointment of the first woman as finance minister from the country.
the Luxembourg hours reviews the three biggest tax stories of 2021.
Finally an agreement
Countries around the world have wondered for decades how to get multinationals to pay their fair share of taxes. In 2021, 136 jurisdictions, including Luxembourg, reached an agreement to impose a minimum tax rate of 15% on businesses and transfer part of the profits to the country where the income was generated.
The deal is designed to ensure that big tech companies like Facebook, Alphabet and Apple pay a minimum tax rate and do so in the countries where they make the bulk of their sales. The new rules are expected to come into effect in 2023.
The Organization for Economic Co-operation and Development (OECD), which chaired the talks, said a minimum rate could ultimately increase government revenues by $ 150 billion (€ 130 billion) per year, while that new rules would reallocate $ 125 billion (108 billion euros) of profits should be taxed in countries where large companies generate income but may have a low physical presence.
Negotiations gathered pace as the pandemic put pressure on countries’ coffers, with governments backing struggling businesses and paying the salaries of staff on leave. In July, the OECD found that corporate rates over the past 20 years had fallen in 94 of the 111 countries and territories it monitors.
The impact of the new tax rules on Luxembourg is still not clear. A study by the EU Tax Observatory, an EU-funded think tank, estimated in October that Luxembourg could receive an additional € 5.8 billion under the OECD agreement, this which would increase current corporate tax revenues by around 50%.
Overall, EU states are expected to be the biggest winners from the tax deal, earning € 80 billion in additional tax revenue, or just under a quarter of all their tax revenue. companies in 2017, according to the Observatory.
More tax disclosures
Following the LuxLeaks scandal in 2014 – when journalists discovered secret agreements between the Luxembourg tax administration and multinational companies to reduce their tax burden – a series of investigations into the Grand Duchy’s tax practices were dropped in 2021.
In February, the first such investigation – called OpenLux – alleged that the country had served as a safe haven for Italian Mafia bosses, Russian Mafiosi and Venezuelan government officials to hide their money. germany Süddeutsche Zeitung said Luxembourg “continues to attract not only the rich and famous, but also dubious personalities”.
OpenLux came a week after Prime Minister Xavier Bettel complained that the transparency imposed by the courts could hurt the country’s commercial attractiveness and that the head of a lobby for industrial companies compared forcing the government to disclose contractual details with private companies to the conduct of dictatorships.
The government has denied all allegations from the OpenLux investigations. Finance Minister Pierre Gramegna responded by saying that criticism of the Grand Duchy was born out of jealousy. “Our financial sector is successful, also after Brexit, and people think we cheated because we are so successful,” he said in a speech in parliament.
In July, investigative journalists once again shone the spotlight on Luxembourg tax practices by shattering the LuxLetters’ revelations. They claimed that letters to the tax administration can help create favorable tax conditions similar to those in tax rulings that were at the center of the LuxLeaks disclosures.
Newspapers alleged that some tax consultancy firms send a letter to the tax administration on behalf of their clients – such as a business or investment fund – indicating the tax rate they suggest the business should pay . But if the tax administration does not respond, the consulting firm considers that the administration does not dispute the rate and therefore considers that it agrees.
The Luxembourg finance ministry denied these allegations. In December, the European Commission suspended the investigation into LuxLetters. Gramegna himself had refused to testify before the European Parliament’s tax subcommittee on two occasions.
In October, Luxembourg was mentioned in a new effort by investigative journalists to shed light on how businesses, the rich and world leaders move their assets to avoid taxes.
People mentioned in the new surveys dubbed Pandora Papers included then-Czech Prime Minister Andrej Babiš, King Abdullah II of Jordan and the ruling family in Azerbaijan Aliyev. The investigation did not necessarily charge the named individuals with any crimes, but highlighted how they used international tax structures to reduce their tax bill, the International Consortium of Investigative Journalists (ICIJ ).
The Grand Duchy played no central role in the so-called “Pandora Papers”, according to the Reporter site, which had exclusive access to the documents. But with some 100,000 of the 11.9 million documents in the investigation mentioning Luxembourg, according to Reporter.lu, the margin for further revelations when the journalistic consortium publishes the documents is significant.
The successive allegations have arisen as the Grand Duchy is still struggling to get rid of its reputation as a tax haven. In 2019, the European Parliament voted in favor of declaring tax havens for Luxembourg, Malta, the Republic of Ireland and four other member states after a report by Parliament’s special tax committee concluded that the seven members “display[ed] characteristics of a tax haven and facilitate aggressive tax planning ”.
Parliament has no say in the official blacklist of EU tax havens. But Gabriel Zucman, a French economist who became the first head of the EU Tax Observatory, had earlier raised the prospect of excluding Luxembourg from the EU because of its lax tax policies.
The new Luxembourg Minister of Finance
History was also made in Luxembourg when the ruling liberals appointed the very first woman to the powerful post of finance minister in December following the shocking resignation of Pierre Gramegna.
Yuriko Backes, career diplomat and former adviser to Prime Minister Jean-Claude Juncker and Xavier Bettel, will take over in January the head of the Ministry of Finance of Gramegna, which will leave politics for family reasons.
Backes, a graduate of the London School of Economics and the School of Oriental and African Studies, was head of the Luxembourg representation at the European Commission for four years before becoming head of the Grand Ducal family last year.
Previously, she also worked as an advisor at the Ministry of Foreign Affairs as well as Luxembourg’s permanent representative to the United Nations in New York and deputy head of mission at the Luxembourg embassy in Japan.
Gramegna, 63, unexpectedly announced his resignation as he wants to spend more time with his family, he said. He has been in charge of the country’s purse strings since 2013 and has overseen the Grand Duchy’s fiscal response to the pandemic and has faced several revelations that Luxembourg is a haven for multinationals and wealthy individuals to avoid taxes.
Like Gramegna, Backes will not be an elected MP when she takes on the second most powerful office in the state. She only joined the Liberal Party the week of her inauguration.
She has no background in finance, she said in her Dec.3 unveiling. “I’m not from the financial industry,” Backes said. “I did not grow up in the finance industry. But I will take on this task.”
Luxembourg’s new finance minister is expected to run in the 2023 general election as a Liberal candidate, but has been quiet on the issue when questioned by several media outlets.
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