Tax Analysts Blog

Luxembourg Is Prosecuting the Wrong People

Posted on May 3, 2016

Because of the LuxLeaks scandal, the world knows that Luxembourg granted secret tax rulings to about 340 multinational clients of global accounting firm PwC. The leaks caused Europe to revamp its entire tax ruling regime, increasing transparency accordingly.

As the LuxLeaks trial moves into its second week, the world is learning something perhaps as important: how the Luxembourg ruling process worked for those clients. And that should raise a few eyebrows about whether the word “process” adequately described what actually happened, and whether any of the documents that Luxembourg called “rulings” were even remotely related to what the tax world considers a ruling.

Here is how the ruling process usually works:

A taxpayer seeking a ruling submits a description of the facts, along with an analysis of what it believes the tax results should be and why.

The tax authority reviews the facts and the law and decides whether the requested tax treatment is correct in whole or in part.

The tax authority issues a ruling explaining its decision.

According to the April 29 testimony of LuxLeaks defendant and former PwC employee Raphaël Halet, here is how the process actually worked for clients at the heart of LuxLeaks:

Every Wednesday, PwC prepared 30-40 ruling requests, put them on a memory stick, and delivered the stick to the head of the Luxembourg tax office responsible for issuing tax rulings.

The tax office approved most of the ruling requests by 5 p.m. that same day.

For the convenience of the Luxembourg tax office, PwC staff was instructed to keep government letterhead on hand, so they could print out final versions of the rulings without waiting for the tax office to print them.

We may never know whether Halet’s testimony is accurate, because the tax official who testified shortly afterward refused to answer any questions about how his office worked, claiming the information was privileged and confidential. Apparently Luxembourg has yet to achieve full tax transparency, despite its claims to the contrary.

Unless each ruling request consisted of one sentence – something like “We propose to pay the following amount of tax on the ‘X’ transaction: ___” – it would be impossible to read, let alone digest, analyze, and grant, 30 ruling requests in the course of a day. To believe it worked this way week in and week out is simply absurd. It is therefore appropriate to conclude that the tax office rubber-stamped hundreds of ruling requests.

Which leads to the question whether the Luxembourg government is prosecuting the wrong people. In the U.S., federal employees take an oath to preserve, protect, and defend the Constitution and laws of the United States. If Luxembourg is like other developed countries, its public employees are also sworn to administer the laws fully and fairly. Presumably they can be fired for not doing their jobs, and prosecuted for misusing their office, like by stealing government money or property.

If Halet’s uncontradicted, sworn testimony is accurate, by allowing large multinationals to write their own tax rulings, officials in the Luxembourg tax office were abdicating their responsibility to administer the country’s laws. Instead of prosecuting the selfless people who brought these abuses to the world’s attention, perhaps the government should be pursuing criminal charges against the employees who unlocked the treasury and let corporations help themselves to its contents.

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