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8/10/2019 How Luxembourg Rubber-stamped Tax Avoidance on an Industrial Scale
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An unprecedented international investigation into tax deals struck
withLuxembourghas uncovered the multi-billion dollar tax secrets of some
of the worlds largest multinational corporations.
A cache of almost 28,000 pages of leaked tax agreements, returns and othersensitive papers relating to over 1,000 businesses paints a damning picture
of an EU state which is quietly rubber-stamping tax avoidance on an
industrial scale.
The documents show that major companies including drugs groupShire,
City trading firm Icap and vacuum cleaner firm Dyson, who are
headquartered in the UK or Ireland have used complex webs of internal
loans and interest payments which have slashed the companies tax bills.These arrangements, signed off by the Grand Duchy, are perfectly legal.
The documents also show how some 340 companies from around the world
arranged specially-designed corporate structures with the Luxembourg
authorities. The businesses include corporations such as Pepsi, Ikea,
Accenture, Burberry, Procter & Gamble, Heinz, JP Morgan and FedEx.
Leaked papers relating to the Coach handbag firm, drugs group Abbott
Laboratories, Amazon, Deutsche Bank and Australian financial group
Macquarie are also included.
The Luxembourg tax files
1. Introduction2. How it works3. Case study: Shire4. Case study: ICAP5. Case study: Dyson6. Analysis by Richard Brooks
7.
Find out more or get in touch
A Guardian analysis has found:
A Luxembourg unit of Shire, the FTSE-100 drug firm behind
attention deficit pill Adderall, received more than $1.9bn in interest
income from other group companies in the last five years, paying
corporation tax of less than $2m over four of the years despite
minimal overheads.
http://www.theguardian.com/world/luxembourghttp://www.theguardian.com/world/luxembourghttp://www.theguardian.com/business/shirehttp://www.theguardian.com/business/shirehttp://www.theguardian.com/business/shirehttp://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav0http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav0http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav1http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav1http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav2http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav2http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav3http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav3http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav4http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav4http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav5http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav5http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav6http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav6http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav6http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav5http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav4http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav3http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav2http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav1http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale#nav0http://www.theguardian.com/business/shirehttp://www.theguardian.com/world/luxembourg8/10/2019 How Luxembourg Rubber-stamped Tax Avoidance on an Industrial Scale
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Vacuum and hand dryer firm Dyson set up companies in the Isle of
Man and Luxembourg to pour 300m of internal loans into its UK
operations in 2011. Interest payments made on those loans slashed
Dysons UK tax bill and were instead taxed at only around 1% in
Luxembourg, saving Dyson companies millions in tax.
Icap, the financial trading firm run by leading Conservative party
donor Michael Spencer, lent $870m from Luxembourg to its US
business for seven years. Interest paid out from US companies on
those loans was 247m, which was taxed at a fraction of official
corporation tax rates in the US and UK.
Stephen Shay, a Harvard Law School professor who has held senior tax
roles in the US Treasury and who last year gave expert testimony on Apples
tax avoidance structures in a Senate investigation, said: Clearly the
database is evidencing a pervasive enabling by Luxembourg of
multinationals avoidance of taxes [around the world]. He described the
Grand Duchy as being like a magical fairyland.
"Luxembourg is like a magical fairyland"Stephen Shay, Harvard professor
There is growing political pressure in the UK and abroad to stop companiesexploiting international tax rules to slash their tax bills. In January last year
David Cameron told business leaders gathered at the World Economic
Forum in Davos he would not tolerate big multinationals avoiding tax. In
particular, he criticised how companies navigate their way around
legitimate tax systems ... with an army of clever accountants.
Chancellor George Osborne has pledged to reveal new measures next
month to stop global corporations diverting profits offshore. Barack Obamahas condemned tax avoiding companies as unpatriotic and the G20 group
of nations is working on new rules to rein in aggressive tax planning.
The revelations will be embarrassing for the new president of the European
Commission, Jean-Claude Juncker, who was prime minister of
Luxembourg between 1995 and 2013. In a speech in Brussels in July,
Juncker promised to try to put some morality, some ethics, into the
European tax landscape. He has insisted that the country is not a tax
haven.
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Pressure is already building on Luxembourg after the European
Commission launched a formal investigation into whether Amazons tax
arrangements in the Grand Duchy amount to unfair state aid. The
Luxembourg tax arrangements of Italian carmaker Fiats finance unitare
also under official scrutiny by Brussels.
Asked recently if such a crackdown risked damaging the economy of
Luxembourg, one senior figure closely involved in the G20 reform
programme said: I dont care. It is like saying: If you fight drugs there will
be no jobs in certain parts of Mexico.
Recent scrutiny by politicians and media organisations of aggressive
structures used by technology groups such as Apple, Google and Amazonhave suggested US digital firms are at the vanguard of cross-border tax
avoidance. But todays revelations show many European multinationals in
non-digital industries have also made extensive use of tax engineering.
More than 80 journalists in 26 countries, working in collaboration through
theInternational Consortium of Investigative Journalists,have spent six
months scrutinising the leaked papers - after a small number of the
documents were first revealed by French TV journalist Edouard Perrin. The
papers largely relate to clients of PricewaterhouseCoopers Luxembourg.PwC is one of the largest tax advisory groups in the world.
The leaked papers show Luxembourg acting as a go-between, both enabling
and masking tax avoidance, which always takes place beyond its borders.
The documents are mainly Advance Tax Agreements - known as comfort
letters. The leaked papers include 548 of these private tax rulings. These
ATAs are typically schemes put to the Luxembourg tax authorities which, if
implemented, reduce tax bills substantially. If the Luxembourg authoritiesapprove the scheme they provide a comfort letter which is a binding
agreement.
The ECs Amazon and Fiat investigations were launched after Brussels
officials demanded that Luxembourg hand over certain ATAs.
"[I will] try to put some morality, some ethics, into the European tax landscape."Jean-Claude Juncker
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Less than a third of the tax deals brokered by PwC in the 28,000 pages of
documents include a figure for the sums multinationals planned to move
into Luxembourg schemes. However, these deals still amounted to more
than $215bn of loans and investments using the Grand Duchy between
2002 and 2010, many to massage down tax bills.
Given that many more leaked papers did not disclose sums involved, and
that PwC was just one of several accounting firms which secure deals with
the Luxembourg tax authorities, the full scale of financial flows through
Luxembourg, facilitated by comfort letters from the Grand Duchys officials,
is likely to be much higher.
PwC said questions put to it by ICIJ journalists were based on outdatedand stolen information, the theft of which is in the hands of the relevant
authorities.
But analysis of public filings with company registries around the world
indicate many of the leaked tax deals remain in force, sapping tax revenues
from public coffers today.
The Guardians detailed findings were put to Shire,Icapand Dyson. All
three declined to answer questions. They issued statements saying that theydo not engage in tax avoidance and that they pay tax in the countries where
profits are made.
Dyson stressed that its Isle of Man and Luxembourg structure was
unwound in 2013. Icap said it had started a process of winding down its
Luxembourg financing companies last month as part of a wider
reorganisation.
Many papers in the leaked tax correspondence do not reveal enoughinformation to clearly show tax consequences of each groups corporate
structuring. And some corporations will have sought comfort letters from
Luxembourg for reasons other than tax avoidance.
Many large private equity investments are also the subject of Luxembourg
ATAs. Well known buyout firms such as Blackstone and Carlyle appear in
the leaked documents, and Luxembourg investment vehicles are
commonplace in such investment firms.
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A 2008 joint venture between private equity group Apax Partners and
Guardian Media Group, which owns the Guardian, also used a Luxembourg
structure after it invested in magazine and events group Emap, now called
Top Right.
A spokesman for GMG said: We partnered with a private equity company
which regularly used such structures. A Luxembourg entity was used
because Apax already had that structure in place. The fact that the parent
company is a Luxembourg company does not give rise to any UK
corporation tax savings for GMG.
How it works
The documents reveal a number of financial structures which were
approved by the Luxembourg tax authorities, and which led to substantial
tax savings for the companies involved. One of the more common is based
on cross-border lending within a group of companies, and a mismatch
between the perceptions of Luxembourg and overseas tax authorities.
Graphic: Daan Louter, Simon Bowers, Cath Levett, Sen Clarke
How Shires internal lending cutsits tax billA tiny Luxembourg-based unit of Shire, a multinational drug firm
specialising in treatments for ADHD, Crohns disease and rare genetic
disorders, has become one of the most profitable outposts of the
pharmaceutical empire. Shire is a 24bn transatlantic drugs group with big
operations in the UK town of Basingstoke, and Pennsylvania and
Massachusetts in the US.It shifted its corporate head office from the UK to
Ireland for tax purposes in 2008 and is registered in the tax-friendly island
of Jersey. The majority of its sales are in north America.
One of Shires Luxembourg units has made $1.87bn in profits in the last
five years, largely from making loans to sister companies, as it charged
interest rates of up to 9% on those loans. With what appears to be the
consent of the Luxembourg authorities, the enormous profits generated by
this unit were taxed at a fraction of 1%.
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Shires tiny Luxembourg finance company in an office with dozens of other
corporate occupants Shire HoldingsEuropeNo2 Sarl, or SHES2 for short
has lent out a total of more than $10bn.
Away from Luxembourg, more than two-thirds of Shires $5bn in annualrevenues came from the sale of prescription drugs in the US and Canada
last year. But group profits around the world were taxed at an average of
16.4% less than half the official tax rate for most big businesses in
America.
Somehow, the FTSE 100 firm had hit upon the holy grail of tax
management: a structure that allowed it to access some of the most
profitable healthcare markets in the world while keeping its tax bill low atthe same time.
The main factor pushing down its tax bill is explained in the smallprint of
the groups annual report as intra-group items. That is, the tax
consequences of investments and transactions between Shire group
companies around the world.
Leaked letters from PwC, Shires tax advisers, reveal how far Shire was
prepared to go to conjure up tax advantages through highly artificial taxstructures.
The confidential papers reveal the critical role in group tax planning played
by SHES2 one of seven Shire companies incorporated in Luxembourg.
Over the last five years this business received $1.91bn of interest income
from loans it made to other Shire companies, including more than $580m
last year alone. By the end of 2013, sister companies within the Shire group
owed SHES2 more than $10bn in loans and interest equivalent to morethan two years sales for the entire group.
The Guardian asked Shire why it had such large internal loans when the
overall group had few borrowing needs. Shire declined to comment.
The borrower companies and where they operate remains unknown. It is
likely however that the vast interest payments have created huge tax
deductions for these sister units, whose profits are lowered by the cost of
paying the interest on the Luxembourg loans.
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With minimal operating costs including staff wage bills of less than
$55,000 a year SHES2 appears to be one of Shires most lucrative
business units with profits over five years of $1.87bn.
But Shires annual report makes mention of SHES2 only once, in anappendix that lists the groups subsidiaries.
Meanwhile, accounts for SHES2, filed in Luxembourg, show that, despite
its towering profits, the company recorded no corporate income tax charge
at all.
The Guardian sent a reporter to the offices of SHES2 in Luxembourg but
found few of the trappings to be expected of a multi-million-dollar
enterprise. Watch footage of Rupert Neate attempting to find a SHES2
employee in Luxembourg:
Company filings show SHES2 had just four official managers, two of whom
were senior figures in Shires tax department, working at UK head office in
Basingstoke, England. Among them is Fearghas Carruthers, the groups
head of tax.
The key to solving the riddle of how SHES2 appears to have made $1.91bnof interest income almost disappear for tax purposes is found in leaked
Luxembourg letters from tax advisers at PwC to the local tax office. They
offer a rare glimpse into the groups labyrinthine corporate structures.
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A diagram provided by PwC to help the Luxembourg tax authority to understand the
corporate structure of Shire. The Guardian has picked out SHES2 and an Irish company
called Shire Holdings Ireland No.2 Limited in yellow. The circle labelled LuxPE is the
Irish companys Luxembourg branch.Photograph: Guardian
The answer lies in Ireland, where Shire moved its corporate headquarters
from the UK in 2008 after the Labour government had attempted a
crackdown on UK multinationals using internal financing companies inaggressive tax planning structures.
Among a cluster of Irish-registered Shire firms is a holding company Shire
Holdings Ireland No.2 Limited, or SHIL2 for short. This Irish company has
for years been charging itself interest on billions of dollars of loans to
itself. More specifically, the interest has been charged on loans from
SHIL2s head office registered near Dublin to a SHIL2 branch office in
Luxembourg. Rupert Neate returned - to the same office block on theoutskirts of Luxembourg city - to enquire about SHIL2.
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Leaked papers show that Shires tax advisers told the Luxembourg tax
authorities that this unusual lending within the same legal entity had
transformed the drug groups wider activities in the Grand Duchy into a
lending conduit: pushing one large loan from Ireland, through two
Luxembourg units (SHIL2 and SHES2), and onwards to Shire companies
around the world.
Such a chain of back-to-back lending, advisers from PwC argued, effectively
meant Shires intra-group loans were only passing through Luxembourg.
Therefore, the local taxman did not need to conduct a rigorous assessment
of Shires tax liabilities. The full Luxembourg corporate tax rate should still
apply, but only on a notional amount of profit. In Shires case, PwC
suggested, the Grand Duchy should be satisfied taxing just 1/64% thatis 0.0156% of the billions in loans and interest owing to SHES2.
A letter of consent from the Luxembourg tax office does not appear in the
cache of leaked files, but it is clear from publicly available filings elsewhere
that the avoidance structure was set up in 2008 and appears to have
remained active at least as recently as the end of 2013.
By the end, the complex structure had created a multi-billion-dollar lending
chain, bearing no relation to Shires overall borrowing needs. The structureappeared to have little commercial benefit other than a tax conjuring trick:
tax bills have been lowered for Shire borrower companies around the world
while the groups Luxembourg operations had all but escaped
corresponding tax on the interest income.
In a statement, the group said: Shire Holdings Europe No.2 Sarl, is part of
our overall treasury operations. We have a responsibility to all our
stakeholders to manage our business responsibly; this includes managingour tax affairs in the interest of all stakeholders.
Icaps skeleton-staffed multimillion dollar office
Above a stamp shop, behind closed office blinds, on the first floor of a
terrace building overlooking a park on Boulevard Prince Henri in
Luxembourg City, the lights appear to be out.
When the Guardian pressed the buzzer one October afternoon a male voice,with what seems a Dutch accent, sounds over the crackly intercom. The
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speaker confirmed this was, indeed, the Luxembourg offices of Icap, the
London-listed financial trading group.
Polite and good humoured, he chuckled and apologised for having to catch
his breath, explaining he has just run down some stairs to answer thebuzzer. He said little else about Icaps Luxembourg lending operations,
however, and wouldnt let the Guardian in the building. Watch footage of
our reporter, Rupert Neate, trying to make contact.
Official filings show two Icap companies at this address. Together they have
sucked hundreds of millions of dollars in interest income out of the high-
tax US and, with the help of a third Icap unit, and made them all but
disappear for tax purposes.
Together they had lent a total of $870m to Icap operations in America by
March 2008. Annual accounts since then show these loans remained on the
companies books unchanged every year. They were still outstanding at the
end of March this year.
Last week the Guardian approached Icap with the findings from its
investigation into thebroker firms Luxembourg activities. In response,
Icap explained that the loans had just recently been repaid in full by thegroups US operations, and that a process to wind down its Luxembourg
unit had begun only last month.
No such information was relayed by the voice on the intercom, though
Icaps local manager has since explained that Luxembourg secrecy laws
meant he could not offer explanations.
Company accounts suggest neither of the two Icap lending firms had much
commercial activity - other than the holding of large loans to the US.The companies names are as long as they are uninformative Icap
Luxembourg Holdings (No.1) Sarl and Icap Luxembourg (No.2) Sarl. In
leaked tax correspondence they are abbreviated to generic terms LuxCo1
and LuxCo2.
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A detail from one of the documents shows
part of Icaps corporate structure, as it relates to Luxembourg.Photograph: Guardian
Over the last seven years, the two each had just one employee paid an
annual wage of less than $15,000 while other costs of operating above
the stamp shop have also been consistently small.
It is a far cry from Icaps busy trading desks in New York and London,
scenes from which every year appear in the newspapers as astring of
celebrities take over the dealing phones as part of a charity day.Last year
the Duchess of Cornwall and Strictly Come Dancings Craig Revel Horwood
manned the lines.
Offering services in many of the busiest financial markets foreign
exchange, credit, interest rates and equities the group has a busy role atthe heart of the City of London, Wall Street and other financial centres.
The chief executive, Michael Spencer, has the best political connections,
serving as treasurer of the Conservative party between 2006 an 2010.
Hisdonationsto the party have totalled nearly 5m.
But no celebrities or cabinet ministers have ties to Icaps quiet Luxembourg
offices. LuxCo1 and LuxCo2 are not mentioned among the 22 main
subsidiaries listed in Icaps annual report. Yet together the two companies
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received a total of $248m in interest on their loans to the US in the last
seven years.
And thanks to modest overheads - the pedestrian office, the single
employee - almost all of the interest income converted into profit, makingLuxCo1 and LuxCo2 among the most lucrative subsidiaries within the Icap
empire.
The tax position on the Luxembourg lending profits is less than clear from
company accounts, which record both LuxCo1 and LuxCo2 as having no
income tax to pay at all for the seven years reviewed by the Guardian.
The true position, however, is discoverable with the help of leaked tax
approvals given to Icap, in private, by the Luxembourg taxman. These show
that LuxCo1 and LuxCo2 were treated in their tax returns as part of a
lending chain. Although neither company had any borrowings themselves,
another ICAP unit, registered to the same address on Boulevard Prince
Henri did.
The Icap borrower company in question has an innocuous sounding name
ICAP US Holdings No2 Ltd, or ICAP US2 for short but it is a truly
exotic corporate creature. Despite having just one employee, paid $12,000in Luxembourg, this UK tax-resident company has three registered
addresses: a law firm in Gibraltar; Icaps international headquarters on
Broadgate in the City of London; and the office above the stamp shop on
Boulevard Prince Henri.
A clue as to its importance to Icaps finance and tax affairs comes from the
list of directors at Icap US2. These include Stephen Caplen, deputy
financial director for the Icap group, and David Ireland, Icaps head of tax.
In the Luxembourg branch office, meanwhile, the sole reprsentant
permanent is the non-board member Paul de Haan. Watch the video to
learn more about Mr de Haans role.
A leaked Luxembourg tax deal, covering all three Icap financing units,
shows these units were treated collectively as a the middle link in a lending
chain: a conduit rather than a lender.
As a result, the local tax office agreed, the borrowing activities of Icap US2sLuxembourg branch was generating tax deductions that could be neatly
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offset against the tax liabilities on almost all interest income earned at
LuxCo1 and LuxCo2.
The resulting near-zero tax bill in Luxembourg could hardly be seen as
controversial so long, of course, as the millions paid out in interest byIcap US2 in the Grand Duchy was taxed when it became income for the
lending company. And therein lies the twist.
The lender to ICAP US2 was, in fact, ICAP US 2 itself. More precisely, ICAP
US2 was lending hundreds of millions of dollars to its Luxembourg branch.
In an exotic arrangement one seen elsewhere repeatedly in the leaked tax
files the group was effectively paying interest to itself.
Meanwhile, in Britain, tax inspectors scrutinising this arrangement
recognised there was something unusual afoot. But there was not much
they could do to block it, because the UK does not recognise such internal
company lending as taxable.
The result was that Icaps interest payments - paid by Icap US2s
Luxembourg branch to another part of Icap US2 in a different country -
almost disappeared, for tax purposes. The saving ran into many tens of
million of dollars.
That said, the UK taxman was not entirely without powers to act. HMRC
was able to use its anti-avoidance powers, under the so-called controlled
foreign companies regime, to winkle out a relatively small amount of tax
from Icap US2.
Over the last five years for which there are available accounts, Icap US2
appears to have paid an average corporate income tax of $3m a year to
HMRC and $83,500 to Luxembourg.
While the precise effective tax rate achieved on Icaps interest income is
hard to calculate, it is clear that it is a fraction of the headline corporate tax
rates in the US and UK over the last seven years.
In a statement to the Guardian, Icap said: Icap is a British company, which
has always paid more tax than the UK corporation tax rate, and we do not
engage in aggressive tax avoidance. We pay all taxes due on the profits
earned in the countries in which we operate. Our Luxembourg financing
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operation was created to support a series of acquisitions Icap made in the
US in the 2000s, and is now being wound down to reduce costs. Its profits
were taxed in the UK. It is an entirely standard financing method and was
agreed by HMRC.
Dyson sweeps away profits from the taxman
Up until 2010 the corporate structure behind Dyson, the hand dryer and
vacuum cleaner group, was as functional as its products.
Shares in Dyson James Ltd (DJL), the main business, based in Malmesbury
in Wiltshire, were owned by inventor and entrepreneur Sir James Dyson,
with the founders three children each holding minority stakes.
The billionaire industrial designer, who came up with the bagless vacuum
cleaner and built a company with a 1bn turnover, has become a figurehead
and spokesman for UK engineering and science.
In the late 2000s a rash of businesses moved their headquarter operations
abroad. Shire, UBM and WPP had moved to Ireland. Ineos switched to
Switzerland. Dyson did not approve.
We dont have any plans to do that [move tax domicile], he said in 2008.
I think its wrong to direct your business for tax reasons. Your business
should be where you can do it best.
However, his company went on to use elaborate tax structures after he
made those comments.
At the start of 2010, new tiers of holding and finance companies began
sprouting into life above DJL.
Shares in DJL were now owned by a new UK holding company: Dyson
James Group Ltd (DJG), which in turn became a subsidiary of Clear Cover
Ltd, a parent company incorporated in Malta.
Two group financing companies were also established: one in the Isle of
Man called Silver Cyclone, one in Luxembourg called Blue Blade.
Leaked details of tax deals with the Luxembourg tax office show these wereto be the vehicles for a 300m injection of loans into DJG in the UK. Like
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all good corporate manoeuvres it was given a muscular-sounding code
name: Project Ajax.
In a matter of months, the simple corporate architecture that existed before
had been swept aside. Dyson and his children remained the ultimateowners but their immediate interest was now in a company registered to an
address on Ting Point in the Maltese costal town of Sliema, the site of a
former British barracks.
Back in Britain, financial transactions that bore little relation to breaking
new ground in product design began to take place. Instead of product
engineering, this was financial engineering.
In 2010 DJG had to meet new interest costs of 5.37m that were paid to
newly-created sister company Blue Blade, filings in Luxembourg show.
These costs are thought to have been largely or entirely tax-deductible -
meaning they lowered profits at DJG, and thus its tax bill.
Dyson declined to confirm this, saying only that tax matters were
commercially sensitive.
Accounts for Blue Blade show the groups corporation tax for 2010 was just55,037 an effective tax rate of just under 1%. Somehow the business had
escaped tax at anything close to the then headline rate of over 28% in
Luxembourg.
Only in leaked tax papers is an explanation to be found. In a 2009 letter to
Marius Kohl, one of Luxembourgs top taxmen, Dysons tax advisers at PwC
argued the case for Blue Blade to be charged tax on only a small fraction of
its interest income.
The letter makes clear PwC had met with Kohl to discuss the matter a
month earlier.
At the heart of the tax advisers case was a claim that Blue Blade should pay
almost no tax because although it had lent 300m to DJG, it had also
borrowed 299m from Isle of Man-based Silver Cyclone.
PwC make no secret of the fact that the loan from the Isle of Man was
interest-free. Nevertheless, it suggests, Blue Blade should properly benefit
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from a tax deduction as if it had been required to pay interest to Silver
Cyclone.
[Blue Blade] will be allowed to deduct a deemed interest on its interest free
debt involved in the financial on-lending activity, PwC wrote. Rather thantaxing all of Blue Blades lending profits, Luxembourg should only tax a tiny
fraction of the sums borrowed.
The nine-page PwC letter was sent to Kohl on 11 November. On the same
day, the Luxembourg taxman sent back a two-paragraph reply: Further to
your letter... relating to the transactions that [the Dyson group] would like
to conduct, I find the contents of said letter to be in compliance with the
current tax legislation and administrative practice.
With these words, Kohl provided official sanction for the Dyson scheme to
go ahead as PwC had described.
The Guardian asked the Dyson group why Blue Blade should qualify for a
tax deduction over deemed interest costs when, in reality, this company
had almost no borrowing costs thanks to the interest-free loan from Silver
Cyclone. Dyson did not answer.
In a statement it said: Advice a number of years ago was that a non-UK
holding structure would aid growth further, however, that has not turned
out to be the case and the holding structure of Dyson group is now entirely
in the UK.
For reasons unknown, the 300m loan from Blue Blade was repaid in less
than a year. But analysis of Dyson filings in the UK, Luxembourg, Malta
and Isle of Man show that in 2011 the group rebuilt a near identical
structure. This time, however, millions of pounds in interest payments fromUK operations went to a Luxembourg company called Copper Blade. And
the payments were higher as the Malmesbury holding company had
borrowed 550m.
This large loan was partly repaid in 2011 and again in 2012, with all debts
and the entire structure unwound last year.
Dyson told the Guardian: The Dyson family business paid 330m in UK
tax over the past three years, clearly not the act of a company avoiding its
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fair share of tax. Dysons success means that over 85% of its technology is
sold overseas ... At no time did the [groups former] non-UK structure
deliver any significant tax advantage and, of the entities in question all have
been dissolved or are in a liquidation process.
Analysis: Havens make for a global race to thebottom
Richard Brooks writes:Occupying a damp 1,000 square miles where the
French, German and Belgian borders meet, the Grand Duchy of
Luxembourg is a far cry from the palm-fringed tropical island tax haven of
popular imagination.
In fact the country owes its status as the worlds premier corporate tax
haven to its position at the heart of Europe. A founding member of the
European Economic Community in 1957, Luxembourg enjoys all the
freedoms governing investment in what is now the European Union. These
and a network of taxation agreements with all the worlds leading
economies ensure the Grand Duchy is accepted in a club of leading nations
that share basic principles on how to tax corporations operating across
national borders.
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Office buildings in Luxembourgs financial district. A far cry from the Caribbean island
vision of tax havens. Photograph: Graeme Robertson/Graeme Robertson
Such a privilege would never be afforded to island-in-the-sun tax havens.
Large economies, such as the US and UK, typically block multinationals
from shifting profits to low-tax territories by imposing withholding taxes
on payments leaving their borders. Luxembourg, by contrast, is a respected
member of the international economic club, and assumed therefore to tax
its companies fully; it even has a corporate income tax system with a 29%
rate that is now relatively high by international standards. So money flows
into the country tax-free.
Secretly, however, Luxembourg is a tax haven, offering a range of ways inwhich payments that reduce a multinationals taxable profits in a country
such as the UK or US can escape tax when received in the Grand Duchy.
These include: exempting income diverted to foreign branches of
Luxembourg companies in places like Switzerland and Ireland, tax relief for
paper investment losses, and the approval of complex hybrid financial
instruments and corporate structures within its borders. Top FTSE 100
firms like Vodafone and GlaxoSmithKline are known to have exploited
these opportunities to channel billions through Luxembourg companies.
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When a multinational approaches the Luxembourg tax authorities with a
scheme employing one of these tactics, after a meeting or two to chew over
the details a senior official rubber-stamps the plan and the company walks
away with a big tax break. In this way the Grand Duchy behaves like the
club member who enjoys all the benefits of membership while quietly
pilfering from the kitty.
"Luxembourg is like the club member who enjoys all the benefits of membershipwhile quietly pilfering from the kitty"Richard Brooks
It might be an underhand way to run a tax system, but it serves
Luxembourg well. The country has the highest levels of foreign investment
inflows and outflows in the EU, taking a small but valuable tax levy as themoney washes through. Corporate income taxes, at 5% of GDP,
consequently form a far greater share of Luxembourgs finances than they
do in other EU countries.
As the world cottons on to Luxembourgs tax poaching, pressure for
reform grows. So does embarrassment for the new president of the
European Commission, Jean-Claude Juncker, who as prime minister of the
Grand Duchy for 18 years until 2013 presided over the activity. Revelations
of precisely how its corporate tax avoidance factory works give the lie to
Junckers repeated protestations that the country is not a tax haven.
Investigations by the European Commission into deals offered by
Junckers government to Amazon and Fiat might or might not conclude
that they constituted anti-competitive state aid. But these inquiries
concern the possibility of sweetheart deals for favoured companies, when
the bigger problem is that Luxembourg offers major tax breaks to all
companies as long as they have enough money.
Neutering Luxembourg as a tax haven at the heart of Europe requires an
overhaul of its corporate tax law and administration. A concerted effort
coordinated by the OECD aims to bring many of the tax structures
facilitated by Luxembourg to an end. But, even if its proposals are
technically sufficient, it will take intense political pressure to force
Luxembourg to implement them.
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In the meantime, despite his claims to be spearheading the OECDs work,
George Osborne has enhanced the allure of Luxembourgs tax breaks. In
2012 he drastically scaled back anti-tax avoidance laws targeted at
multinationals so-called controlled foreign companies. These are tax laws
that since 1984 have caught profits diverted by UK multinationals into tax
havens. In a move specifically aimed at favouring finance companies
established in Luxembourg, Osborne reduced the tax on their profits to no
more than 5%.
Osbornes changes are designed to make the UK an attractive place for
multinationals to base themselves. They do so by accommodating predatory
tax practices, in response to opportunities provided by countries like the
Netherlands and Luxembourg. Other widely publicised tax breaks such asthe patent box special tax rate for income from intellectual property mimic
concessions elsewhere.
This is the real harm that tax havens like Luxembourg cause. They turn
tax competition into a global race to the bottom, depleting the
contributions of major corporations and leaving citizens to pick up the tab.