PANA hearing of Jean-Claude Juncker: How Luxembourg resisted European tax cooperation and made money with its circumvention INTRODUCTION “Mister Clean” Jean-Claude Juncker has not always been at the forefront of fighters against tax evasion and tax avoidance There was a time, not so long ago, where normally allow for bank secrecy towards fighting tax evasion and tax avoidance the tax authorities to be over. was not such a high priority in the European Union and the perspective of These past years progress would almost having to reach unanimous agreement make people forget that automatic between all Member States had information exchange already existed in discouraged more than one to present the European Union before being adopted ambitious tax reforms. by the G20. Indeed, the European Savings Tax Directive (EUSTD) was adopted on Tax scandals like Offshore Leaks (2013), 3rd June 2003vi and entered into effect on Lux Leaks (2014), Swiss Leaks (2015), 1st July 2005. The EUSTD required the Panama Papers (2016), Bahamas Leaks automatic exchange of information (2016) and the Malta Files (2017) revealed between Member States on a limited how worldwide a new business sector of information: interest paid on savings held systematic tax evasion and tax avoidance by private persons. The objective of this as well as money laundering has emerged proposal was to ensure interest payments over time. Although the complicity of some made in one Member States to residents European Member States in this game of other Member States were fully was proven in the Special Committees declared to the country of residence and TAXE Ii and TAXE IIii of the European taxed in accordance with the law of that Parliament and other inquiries, so far state of residence. In other words, to nobody has been held accountable for prevent tax evasion. these scandals. Even “Mister Clean” Jean- Claude Juncker, former Finance and Many non-EU states also agreed to Prime Minister of Luxembourg, refused introduce similar measures. These any responsibility whilst it is generally countries included the UK crown recognized that Luxembourg issued dependencies (Guernsey, Isle of Man and tailored tax rulings to multinational Jersey), British Overseas Territories corporations and thus actively helped to (Anguilla, British Virgin Islands, Cayman dodge taxes elsewhere. While recently the Islands, Gibraltar, Montserrat and Turks story of tax rulings has been widely and Caicos Islands), Dutch overseas discussed, the role of Luxembourg and its territories (Aruba, Curaçao and Sint long-term Finance Minister and Prime Maarten) as well as Switzerland, Andorra, Minister in helping individuals to evade Liechtenstein, Monaco and San Marino. taxes on capital income has been widely neglected. However, some countries were granted a special treatment, thanks to intensive In 2014, the European Union revised its blocking and lobbying in the Council of Directive on Administrative Cooperation Member States. This paper details how (DAC2iii) to implement the international Luxembourg obtained a concession in the standard of automatic exchange of tax EUSTD. Instead of automatically informationiv between tax authorities, exchanging information, it was authorised agreed by the G20. This game changer – to levy a withholding tax deducted from though still containing some flawsv - will interest earned in Luxembourg, partially passed on to the EU country of residence. (Chapter 1). Austria and Belgium also Based on data from the Bank of benefited from this special clause, International Settlements, this paper aims together with several other covered non- at identifying how Luxembourg has EU countriesvii. In a nutshell, Luxembourg become an attractive place for individuals and other jurisdictions not exchanging willing to circumvent the EUSTD, which information automatically with other mechanisms were used and provides a countries allowed tax evaders to hide their conservative approach to quantify the cost money from the tax authorities of their of these circumventions (Chapter 2). residence. Until today Luxembourg does not cooperate effectively in order to help Finally, this paper demonstrates how its partner countries to bring their tax Luxembourg has not grasped the scale of evaders to justice. The behaviour of the problem, by continuing to block a Luxembourg is even more detrimental to reform of the EUSTD until 2014 (Chapter its neighbours as the Grand Duchy 3) and by refusing cooperation with its tolerated the creation of a tax avoidance neighbour countries to investigate the business on its territory helping wealthy systematic circumvention of the EUSTD individuals to formally move the ownership (Chapter 4). Chapter 5 provides some of their funds into offshore companies recommendations for the European located in tax havens and thus escaping Commission and Member States today. the scope of the EUSTD. CHAPTER 1 LUXEMBOURG AS A TAX REFORM BLOCKER Jean-Claude Juncker is currently the In a Council meeting in October 2000ix President of the European Commission, – a few weeks before the European after being Luxembourg’s Finance Minister Finance Ministers agreed on a common from 1989 to 2009 and Prime Minister declaration presenting the main from 1995 to 2013. As he explained during aspects of the future EUSTD – a European Parliament hearing in Luxembourg was promoting an September 2015 of the Special Committee extreme position. It was already clear investigating the Luxleaks scandalviii he from the past months of negotiations that has not discovered tax matters when the Grand Duchy did not want to moving to Brussels. He mentioned the role automatically exchange information with of the Luxembourg Presidency in 1997 in their counterparts and called for levying a establishing the European Code of withholding tax instead as a fall-back Conduct on Business Taxation and in optionx. However, Member States still starting discussions on the future Savings needed to agree on the rate of this Tax Directive, to harmonise the taxation of withholding tax and most national savings in Europe. delegations expressed the view that it should be at least 20% to 25% in order to What Mr Juncker failed to mention in be meaningful. While Belgium argued September 2015 is how Luxembourg has for a 15% tax rate, Luxembourg was the been fighting tooth and nails against an country asking for the lowest rate, at ambitious EUSTD proposal, until it 10% only. In the end, Luxembourg lost obtained a narrow scope and the the case – thanks to the determination of possibility of not exchanging tax countries like France and Italy – and was information with other European countries forced to agree on a gradual approach: in exchange of levying a withholding tax. 15% withholding tax from 1st of July 2005, 20% from 1st July 2008 and finally 35% from 1st January 2011.xi In another meeting early November capital gains tax, it also wanted to exclude 2000xii, Luxembourg was one of the statutory funds from the scope of the countries – often together with Austria, future directive and claimed that the which was also trying to protect its withholding to be levied (or the exchange banking secrecy – fighting hard to limit of information) should only be done on the the scope of the EUSTD. For example, amount of interest received (not on the Luxembourg considered unacceptable the total amount in bank accounts). possibility to exchange information on This adds to a previous meeting general (no matter if interests were (September 2000xiii) where Luxembourg received in a private capacity or in a insisted that the future EUSTD should business capacity), some countries like only apply to natural persons receiving Germany, going even further by proposing interest in their private capacity. to ensure that partnerships would also be Luxembourg was pretty isolated in holding covered. Luxembourg was only supported this position, as many countries wanted by the Netherlands and Greece at the the directive to apply to natural persons in time. In the end, three European Member Turks and Caicos Islandsxiv. If one can States – Luxembourg, Austria and judge the efficiency of a legislation by the Belgium – opposed the principle of limited number of its exemptions, it was automatic information, even in the long clear that the EUSTD was in a bad way term. This resulted in the Article 11 of from the start. the EUSTD granting a ‘transitional period’ for the trio, allowed to apply a Similarly, other countries like withholding tax instead of exchanging Singapore, Hong Kong, Macao, information until they decided otherwise. Bermuda and Barbados have been That ‘transitional’ period terminated in asked back in the days to implement 2009 for Belgium, but only ended in 2014 similar measures as in the EUSTD but for Luxembourg and Austria, once the always refused to do so. United States’ unilateral moved to oblige countries to exchange information – Exchanging tax information or levying a through its Foreign Account Tax withholding tax could hardly – even a Compliance Act (FATCA) – created an decade ago – be considered equivalent international dynamic to revise the global measures. The purpose of automatic standards of tax transparency. On top, the information exchange was to ensure that EU Directive on Administrative the adequate amount of tax was paid by Cooperation (2011/16/EU) adopted in an individual in his/her country of tax 2011 contained a most favoured nation residency. Levying a withholding tax was clause: if a Member State provides wider only a bad compromise – to pass the cooperation to a third country than that obstacle of obtaining a unanimous provided for under the Directive, it may not agreement among the Member States – refuse such wider cooperation to another with no intention to seriously fight tax Member State that requests it on its own evasion. In fact, the low rate applied at the behalf. Facing increasing international beginning was actually probably still pressure, Austria and Luxembourg had no bearable by many tax evaders, who were choice but to abandon their banking facing higher tax rates should the taxes secrecy towards tax authorities.