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Luxembourg Ink-Outs Not Dark Enough to Hide Shiny Tax Deals

July 15, 2014

Luxembourg Black Pen Said Not Enough to Hide Fiat From EU Probe

The Fiat unit said last month it didn’t request a ruling to obtain a tax exemption and was surprised by the probe. A Fiat spokesman, who declined to be named citing company policy, said the carmaker has nothing to add beyond that statement. Photographer: Alessia Pierdomenico/Bloomberg

Luxembourg, facing a European Union probe into sweetheart tax deals with multinationals, systematically blacked out company names on documents sent to the EU in a bid to protect businesses, according to two people familiar with the investigation.

The redaction wasn’t enough to prevent the EU from starting a probe into a tax arrangement with Fiat Finance & Trade SA, a Luxembourg unit of the carmaker, said one of the people, who asked not to be identified because details of the probe aren’t public. Even though the company’s name was hidden, officials were able to discover its identity using public records, the person said.

Taking a black pen to documents is one of Luxembourg’s tactics as it seeks to defend a tax system that helped attract some of the world’s biggest companies. The bloc’s richest state on a per capita basis is also suing EU regulators for “speculative” prying into tax accords they suspect may violate rules that ban discriminatory subsidies.

“What we are seeing is Luxembourg creating deliberate opacity,” said Richard Murphy, a U.K. tax accountant and blogger. “It creates a veil of secrecy to make sure” companies’ use of their tax legislation can’t be investigated.

Fishing Expedition

The European Commission went on a fishing expedition without “prior possession of sufficient factual and objective information, capable of giving rise to a reasonable suspicion of misconduct,” Luxembourg said in an EU court filing published yesterday.

Its Finance Ministry declined to comment on its redaction of documents sent to the EU or about the court case.

The EU’s competition arm said last month it was examining tax accords in at least seven countries -- including formal probes of an Irish agreement with Apple Inc. (AAPL:US), a Dutch deal with Starbucks Corp. (SBUX:US), as well as Luxembourg’s arrangement with Fiat Finance.

The EU’s analysis of the redacted documents on Fiat sparked the decision to escalate the inquiry into Luxembourg, one of the people said.

Microsoft, Amazon

The EU is also looking at Luxembourg’s arrangements with Microsoft Corp. (MSFT:US), the world’s biggest software maker, and Amazon.com Inc. (AMZN:US), people with knowledge of the investigation said earlier this month.

The Fiat unit said last month it didn’t request a ruling to obtain a tax exemption and was surprised by the probe. A Fiat spokesman, who declined to be named citing company policy, said the carmaker has nothing to add beyond that statement.

The commission also declined to comment on Luxembourg’s court challenge and the probe. The EU’s investigations focus on so-called transfer-pricing arrangements on taxing commercial transactions between company units.

‘Fully Justified’

While Luxembourg has “cooperated” with the commission and provided most of the information requested, “the government deems its position fully justified, and will defend it during the next procedural steps,” Finance Minister Pierre Gramegna said last week in response to a parliamentary question.

Luxembourg is in touch with other countries to discuss general concerns related to inquiries into tax rulings, he said.

The EU probe comes as governments struggle to increase revenue and reduce deficits. The commission has said tax avoidance and evasion in the EU cost about 1 trillion euros ($1.4 trillion) a year.

Given the links between EU countries it’s become increasingly difficult to think of tax policy as a purely national policy, said Nicolas Veron, a fellow at the Bruegel research group in Brussels.

“This creates a space for the commission to be more assertive that perhaps it has been in the past,” he said.

‘Secrecy Jurisdiction’

As the EU attempts to stamp out harmful tax competitions, lawmakers in the U.S., the U.K., France and Italy have also scrutinized the tax affairs of companies such as Hewlett-Packard Co. (HPQ:US) and Google Inc. (GOOGL:US)

“It is up to Europe to now decide: do they actually wish to tolerate the presence of secrecy jurisdiction behavior which undermines the operation of fair markets in Europe or not?” said Murphy, who works at Tax Research LLP.

With about 550,000 inhabitants squeezed between Germany and France, Luxembourg occupies a hinge position in the EU. While it remains a steel-making center, the tiny EU nation has reinvented itself as a business and finance hub, softening the blow as traditional industries decline.

The scrutiny of the country is a potential embarrassment for Jean-Claude Juncker. The 59-year-old today won the support of EU lawmakers to become president of the European Commission, the bloc’s executive arm in charge of the tax investigation.

Juncker, who led Luxembourg until last year, helped the country win a reputation as an attractive location for international companies.

To contact the reporter on this story: Gaspard Sebag in Brussels at gsebag@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net Peter Chapman


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