Wednesday, October 29, 2014

Why 50,000 foreign cos are housed in Luxembourg; and how a bearded tax official with a ponytail helped them

EUROPE’S tiny nation Luxembourg has just 5.5 lakh residents, but it is home to 50,000 companies where one bearded tax official with a ponytail helped build a tax haven. As Wall Street Journal has written in a recent article, confidential tax arrangements for MNCs like Amazon and Fiat have saved taxes but they are now under pressure from the EU. At a time, Swiss Bank account holders are the newsmakers in India, albeit for wrong reasons, here is about a tax bureaucrat named Marius Kohl who as head of...
a government agency called Sociétés 6 in Luxembourg, gave nod to many such tax arrangements for multinational companies at an amazing speed, helping companies to save billions of dollars. The importance of the official can be gauged from the fact that he alone approved or rejected the tax deals. After 37 years of service, he got retired, and not one but a team of six officials replaced him. According to WSJ article, the oral rulings, prevalent during Kohl era are no longer acceptable, and the waiting time for approval now stretches up to six months.
That the tax rate in Luxembourg is as low as 1.1% against 15.5% in UK, 21.2% in China, 30% in India, 36.1% in Germany, and 57.1% in Japan, foreign companies want to set up shop in that country mainly to save tax. In other words, if a company makes a profit of 100 dollars in India, it needs to pay 30 dollars as corporate tax whereas in Luxembourg, it has to shell out mere 1.1 dollar.
Now, European Union is clamping down on a few MNCs like Amazon and Fiat. But for Luxembourg, the issue is quite tricky as the country’s income is coming from helping companies not pay taxes in those nations where the value was created.
As WSJ reported, Kohl is regarded within Luxembourg’s close-knit tax advisory community as an unsung national hero. Some even suggest he deserves a medal. After all, the corporate structures that this tax babu approved account for 80% of Luxembourg’s 1.5 billion Euro in annual corporate tax revenue. Kohl says, he was given freedom to work in his way, and no one including the country’s finance minister had influenced him. Kohl was reported as saying in the WSJ report that he had no regrets. He further claimed that the work he did definitely “benefited” his country while admitting that the benefits might not be in terms of the country’s image and reputation.

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