IS THERE ANY SUBJECT more guaranteed to induce total, quivering collapse of the liberal cognoscenti, the world’s would-be reformers, than tax avoidance ? The numbers and details are staggering when not crushing, the ploys engaged to hide the dough as convoluted as they are clever. The working class and Trump-fodder could care less; they’d do the same had they the chance, just like their preachers do. For Senators and Congressmen it is so abstruse, complex, and, they suspect, threatening to their very existence, that they’d rather not touch it. Perhaps all it takes is a single, polite call from a significant source of funds to call off the investigation. What we get instead from the U.S. Congress is half-assed legislation that does nothing except make the life of American ex-pats around the world incredibly difficult come tax-time, treated as if we were all billionaires boozing around foreign capitals. The European Union talks a much better talk, but like an on-line hooker, delivers only simulation.
No one’s giving this game up voluntarily. You already know that Google and Apple and Linked-In et al are domiciled in Ireland in order to avoid taxes : the mere tip of the iceberg, and legal to boot. It is by now, standard practice, for the wealthy, our detested (but never attacked directly) 1% and the corporations. Even the Queen is in on it, as the Guardian informed us (10/2/21). Will anyone in Parliament raise the issue of her cheating her own treasury by sending the money from her wind farms to the Grand Caymans ? The champagne’s on me if the Brits do anything about what is now revealed to be The Queen’s Consent, which gives her the power to amend any legislation threatening her property or finances. Tom Paine, I’m sure, will join us for a round.
And yet with everything against it, the story won’t go away, continuing to intrude on our consciousness like an apocalyptic dream made flesh : Lux Leaks, Panama Papers, Paradise Papers. They make movies out of some of them, and sharp, determined reporters dog the story, piling detail on detail, one piece of aided and abetted financial practice leading to another until your head spins. (Readers who get that far will find a list of reporters fighting the good fight at the end of this piece.) Thursday’s le Monde returned to Luxembourg where the air is nice and the people contented, only to find, a decade after Edouard Perrin’s forays into the Grand Duchy’s cozy arrangements with transnational corporations and big league accountants, that not only has nothing changed but the figures revealed ten years ago vastly underrated the amounts of money being tucked under the covers.
The question is this: should fat cats and multinationals pay taxes at all? Our lamented, twice-impeached President, sulking in Mar a Lago while being tried for sedition in D.C., obviously doesn’t think so.
So let’s begin a short slog through the Tax Avoidance Game, with a bit of humor to make the trek bearable.
Americans have long known about tax havens like Grand Caymans and the Bahamas. Of course, the news hardly gets out before a smiling deviant like the Senator from South Carolina, looking for love in all the wrong places, rushes in front of the cameras to defend the truant, a hypocrite or thief or both, much like the clientele at his Daddy’s bar. Whether that tax-avoider is Trump or Romney, no matter. It’s his money and he’s just trying to keep it out of Washington’s hands, says the Senator. A stunning performance from a public servant. (We’ll leave the story of my distant relative for another day.)
Hardy souls in Washington State are fighting to enact a 1% tax on wealth in excess of $1 billion. No knock on them but 1% is far below what the well to do were supposed to tithe in church ages past. Have we fallen so far ? Must we beg on the corner ? Maybe anything above 1% would provoke a revolt of the Mega-Rich. No need to imagine a dystopia, we’re already there.
In the end, we’re lucky if the rich pay 15 % on their income, the way the lucky to be alive Romney does. Most pay less and some, like Trump, pay far less. That’s the way the game is played. Through their various financial “instruments” many multinationals pay none at all. In Drumpfo’s case, it won’t be enough to save him. Creditors, beedy-eyed sharks who are always hungry, are more persistant than Congressmen, who are fat. (To a Republican Senator, Trump looks like a wrathful god; to a creditor, dinner.)
A quick dive, then, into the cool waters of a worldwide swimming pool at a very private club.
"Assets held offshore, beyond the reach of effective taxation, are equal to about a third of total global assets. Over half of all world trade passes through tax havens…" Those are the words of the hardy souls at the Tax Justice Network.
Take a moment to digest that. Behind them lies the reality that the peoples of the world, with the compliance of their governments, are being stripped of their wealth by a massive game of hide and seek.
This theft is an integral part of a permissive banking environment, the result of deregulation which began in earnest in the 1980s and reached a crescendo of sorts with the repeal of Glass-Steagall Act in the U.S. in 1999. It really is, now, Business As Usual and is, in most instances, legal if skillfully camouflaged. It is achieved by a complex set of manoeuvers that include fiscal paradises, Advance Tax Agreements and a blizzard of financial "instruments" that conceal the objects underneath like a blanket of glittering snow.
A few salient facts to bear in mind at the outset:
Over 60% of all financial transactions worldwide take place within distinct, legal corporate entities. That is to say, they are intra-company affairs, moving assets from one part of an organization to another.
According to James Henry in The Price of Off-Shore Revisited, as of 2010 at least $21 to $32 trillion in the form of tax-free investments was missing in action from the world’s ledger sheets. That figure too is worth a moment’s contemplation.
At present, due to the highly complex and truly magnificent scam known as Transfer Pricing, many multinational corporations pay little or no tax at all – ever, anywhere, zilch, rien, niente, nix, nada – or as close to it as accountably possible. They maintain well-equipped armies of lawyers to make sure it stays that way. Things may be changing. Word is getting out, for which I ask the reader to bear with the numbers and persevere to the end of the article.
SHORT VERSION OF A LONG STORY
Starting in the 1970s, business in the United States and Europe became increasingly far flung and international, at the same time that the developing countries became ever more conscious of their status as economic colonies. Standard Oil begat Esso and Esso begat Exxon, Geigy became Ciba-Geigy, Sandoz acquired Gerber, Walt Disney climbed into bed with ABC and the boys in the AFL merged with the boys in the NFL. Soon the big conglomerates found themselves being taxed in two, three and more countries at the same time. A strategy of tax avoidance became necessary as a way of minimizing financial obligations for companies with global reach, and a body of regulations and agreements grew up that attempted to make sense of taxation.
Between their home base, source of production and commercial outlets, companies worked to avoid double and even triple taxation. At some point tax avoidance mutated into tax evasion: Double Tax Agreements, as they are commonly called, became, in fact, Double Non-Tax Agreements. It was, to be fair, a new aspect of international law, attempting to deal with an unprecedented situation.
This robust growth in the size and reach of American and European transnationals profited handsomely from Reagan Era liberalization and deregulation. When the push to deregulate the banks that began in the mid-1980s reached its stride during the first Bush administration, the party really got started. NAFTA was written by father Bush and its passage secured by his illegitimate (but worthy) son from Arkansas a few years later.
In 1991, Goldman Sachs asked the Commodity Futures Trading Commission, the CFTC, for a waiver on position limits, creating, in effect, a whole new field of food price speculation. The CFTC under Bush 41 agreed, with disastrous results that are still being felt in world food markets. The free market, laissez faire philosophy affects more than just money.
Financial "instruments" proliferated, as did accounting practices such as Ebitda, without anyone knowing exactly what the result would be. Then came the Clinton-era repeal of Glass-Steagel, at which point the genie was out of the bottle and all hell broke loose.
That’s a brief summary. One could write a very different and no doubt harrowing version from the point of view of the developing nations, who, far from enjoying the fruits of the independence they fought for after World War II, have found themselves sinking deeper into financial dependence with each passing year.
Fiscal paradises are not like the old fashioned tax havens. The latter is an almost traditional arrangement by which a small country or region, lacking in natural resources or industry, offers a low tax rate to investors. Fiscal paradises are the same idea – on steroids. In a fiscal paradise, any company, no matter how large or powerful, may, with the aid of half-a-dozen employees in a small second-floor office, establish a base from which they successfully avoid taxes in the countries where they operate.
Switzerland began as a tax shelter in the early 1930s, and its legendary "bank secrecy" became a euphemism for hidden Nazi plunder. (Court cases were still untangling that mess in the late 1990s.) Luxembourg became popular as a tax shelter for various European currencies and the U.S. dollar in the 1960s, although its "Holding Statute" was enacted in 1929.
The OECD (The Organization for Economic Cooperation and Development) is, in its words, "An international economic organization of 34 countries founded in 1961 to stimulate economic progress and world trade. It is a forum of countries committed to democracy and the market economy…" It is a club for the richest nations, not the only one but very important especially within the European sphere of operations.
Their rules are enacted by consensus and in 1998 when they declared that "All members’ tax authorities must communicate about Advance Tax Agreements," two countries abstained from the decision: Switzerland and Luxembourg. This has given them wide latitude to do as they please in the matter of taxation, while still remaining members in good standing of the OECD.
In 2007 the European Court of Justice heard the case known as "Cadbury Schweppes Vodaphone," regarding tax environments in the different European Union countries. Their ruling stated that a tax regimen is "Legal so long as the structure is not wholly artificial."
Rarely, if ever, has a single adverb played such a crucial role in European and, indeed, world affairs. Accountants, tax officials, representatives of the Exchequer and Senior Tax Ministers employ the word as if it were a universal salve which cures all wounds. "Artificial? Is our deal to award Bloodsport International a steeply discounted tax rate hovering near zero artificial? Of course it is. But wholly artificial? I think not." Without the judges’ kind insertion of the mollifying adverb, the great fiscal paradises – in Europe at least – might have been dealt a heavy blow. As it now stands, they are free to do as they please: to shelter, to discount, to mark down, to erase, to rubber-stamp any sort of financial shenanigans no matter how ludicrous, no matter how fictional in relation to the real world.
Ah, those Luxembourg accountants, it’s like having Harpo Marx doing your taxes : they play all the instruments like virtuosi but they never say a word.
We are ready to plant our feet in the duchy of Luxembourg, northeast of France but in fact operating virtually everywhere around the globe. Luxembourg, hotbed of the Advanced Tax Agreement – although it is not the only one and we should mention, in that regard, Switzerland, Singapore and innumerable little islands where everyone would really be happier if they were fishing and not stuffing coconut shells full of plutocrats’ ill-gotten gains.
To Luxembourg we go for two other reasons: because it is the grand duchy which, through the Luxembourgeois Jean-Claude Juncker, an entity masquerading as a human being who seemingly ruled Europe for the better part of 20 years: semi-permanent President of the group of European finance ministers, Prime Minister of Luxembourg since 1995, and President of the Eurogroup, which controls the currency, since 2005, now retired from all of them. His legacy lives on.
Luxembourg has long been one of the first stops for a corporation seeking tax relief. Not the one and not the only. Delaware ain’t bad, either.
In any case, a certain amount resides in Luxembourg's banks and the country's tax assessors are careful to claim their share, but the whole nature of modern finance, what James Henry calls "the dark side of globalization," is that money moves from haven to haven. It is loaned, subdivided, counted as securities or equities, hedged against future trades – but it does not sit still. Banking is virtual now, and "offshore" is no longer a location. Tracking any one of these funds is difficult, and not just because of secrecy. This despite all the bright noise from the G20 and other international bodies about cracking down on "financial blackholes."
SHORT VERSION : PEARSON
As they helpfully note on their website, Pearson plc is "The world's leading learning company. We have 22,500 people in more than 70 countries. We believe that wherever learning flourishes so do people.‘ The list of companies Pearson owns would fill a page or more. They are both the world's largest publishing house and the world's largest education company. Divided into Pearson International and Pearson North America (education publishing and services), they own Penguin, the Rough Guides, the Financial Times and all its services, as well as a 50% stake in The Economist (UK). They are heavily involved in educational testing and on-line learning, especially in the United States (SATs, teacher certification, textbooks, etc.). In 2009, Pearson had sales of £ 5,624 million and an operating profit of £ 858 million. They buy and shed companies with alarming rapidity.
Of Pearson's 22,000 or so employees, it is hard to say how many of them work behind the door on the second floor of 17 Rue Glesener, which is where Pearson Luxembourg No 2 sarl, FBH Inc sarl and the Luxembourg branch of Embankment Finance Ltd., among other financial entities, are located. Even with a long list of companies on the mailbox for a medium-size apartment, we can hazard the guess that there aren't very many people working inside. Edouard Perrin, his cameraman and Richard Brooks of Britain's Private Eye magazine found only one man, and he threatened them with the police if they didn't vacate premises toute de suite.
Pearson's Luxembourg branches are but a fig-leaf. They are part of the international game called "Move the Money." They - or rather that one employee, along with desks, computers and fax machines - exist to give Luxembourg tax authorities cover to declare Pearson a legitimate business in that country.
Pearson went through Luxembourg in order to avoid taxes in both the U.S. and the U.K. It was chillingly easy.
Here's how it works in the Duchy. On April 21, 2010, Price Waterhouse Cooper, in their capacity as Luxembourg accountants for Pearson plc, met with Luxembourg authorities to discuss "the tax treatement applicable to the transactions foreseen by our client." On June 24, PWC wrote to Mr. Marius Kohl to confirm details of the April meeting with him.
Kohl was the head of the Administration de Contributions Directes, Bureau d'imposition Sociétés VI : the corporate tax officer.
The PWC document is stamped as received by Kohl's office the same day, so perhaps those fax machines are actually plugged in in Luxembourg.
As an earlier November 2009 Price Waterhouse Cooper document spells out, Pearson wanted to loan $587 million to its U.S. educational outfit, Family Books at Home. Embankment Finance in the UK was ready to loan the money to a Luxembourg subsidiary. Approval by Luxembourg authorities required a certain amount of corporate reorganization if the most minimal taxes were to be paid.
To quote from the PWC letter: "A.5 Family Books at Home Inc. ("FBH"), a US company, will be transferred under PLN2, then will migrate its central administration to Luxembourg and will take the form of a Luxembourg company incorporated under the form of a limited liability company (société à responsibilité limitée)."
Moving corporate headquarters is easy these days. One simply migrates – on paper. The American company would now be headquartered in Luxembourg.
With approval, the $587 million was then passed from Pearson in the UK to Pearson Luxembourg No 2 sarl, in exchange for shares. It in turn loaned the money to the American company through FBH Inc sarl. The U.S. branch then got a tax break on interest payments it owed on the loan and no one paid taxes on the $587 million, which, from the UK revenue and IRS's point of view... disappeared.
This is the way business is done in Luxembourg. PWC is the orchestrator, its accountants, like Monty Python’s wanna-be lion tamer, come up with one more fantastic scheme after another. Companies realize the immense tax benefits by letting PWC score the music. Marius Kohl’s successors take out their big rubber stamp and give it approval. Pearson is merely one of thousands. Their metal mines closed down, the Duchy gets rich off of their percentage.
It may smell bad to you or me that a company loans itself money and then claims tax benefits. Tant pis pour nous.
Here’s a jaw-dropper from PWC's quickly-approved proposal: "B.3.9 Given the absence of significant risks on this activity, a minimum profit margin reflecting the financing activity of the Luxembourg entities should amount to 2/32% of the outstanding amount on-lent. Such margin will be subject to Luxembourg corporate income tax and municipal business tax."
Yes, you read correctly: the $587 million will be taxed by Luxembourg authorities at a rate of 2/32%. This what PWC proposed and Kohl approved it. In other words, even lower than Mitt Romney's tax schedule. 2/32% is high for Luxembourg. If Pearson had invested more in the Duchy, they would have received the optimal rate: 1/64%. In such a way does Luxembourg punish the small timers.
How does one become a bonafide Luxembourg business? Again, let's quote the Luxembourg authorities directly. Requirements are as follows: "An office space and a Luxembourg address, telephone number which will be listed in the public phonebook, the branch name which will be displayed at the premises, its own Luxembourg bank account, all necessary material to carry out its activities (e.g., desk, fax, etc.), and separate accounting records of Luxembourg branch. A manager will be appointed for the Luxembourg branch and will be in charge of its daily management."
That would be the man who met Perrin and Richard Brooks at the front door of Pearson's Luxembourg front, the one who threatened them with the police. His name was Barker, appropriately enough, and he managed more than Pearson from the second floor flat. Dozens of other companies were registered there as well. Luxembourg is full of faceless modern apartment rows, whose individual mail boxes contain a long list of names of corporate entities, of the same scale as Pearson, all operating out of apartments that might house three university students on a budget.
Now you know a little of how it works. Anyone with an appetite for such shenanigans can read The Short Chic Guide here on EuroDesk. It will be interesting to see how the English will treat their Queen, who profits from partial ownership of the seabed around the UK and then hides the money from her very own Exchequer. (Have I lost it ? Did I just type that sentence ? Owning the seabed, who dreamed that up ? But it’s true, isn’t it ? I sound like a gibbering madman in a straightjacket but that’s the world we live in.) The game has spread so far that many middle or upper middle class French have joined in. They too park their money in Luxembourg.
Sources
James Henry : http://globalhavenindustry.com/price-of-offshore/
“The United States has long been one of the world’s biggest, if not the biggest, tax havens: our latest Financial Secrecy Index ranks them as Number 2 worst offender.”
https://www.taxjustice.net/2021/01/05/how-a-mini-movement-overturned-secret-us-shell-companies/
https://www.icij.org/investigations/fincen-files/seven-things-to-watch-after-historic-anti-money-laundering-overhaul-in-the-us/
https://globalreportingcentre.org/
https://forbiddenstories.org/en/
This article on Substack is in part based on the ground-breaking reporting of Ed Perrin in Luxembourg, material that was so explosive at the time it landed him on trial in the Duchy. The rules of engagement haen’t changed since then.
Some essays are witty and vibrant but do not edify. Some essays edify but are as plodding and as painful as a dentist pulling teeth. Your essay is FANTASTIC as it is both funny and edifying.
The essay radiated gleeful wit, as evinced by your comment that, “The European Union talks a much better talk, but like an on-line hooker, delivers only simulation,” and it instructed as it discussed matters that I never heard of, “Such as the Queen’s Consent.”: Also, some of the stats you mentioned were infuriating. I think you said that one third of all wealth is to some extent “off the books” or beyond the grasp of any nation.
Your essay made me stop and think and see a very stark parallel with infectious diseases: You made it clear that the nation state may be ill equipped to stop financial titans from looting the world because the big boys can artfully send money from one jurisdiction to another. Similarly, the nation state is ill equipped to control pathogens as Ebola or Covid or Marberg can hop on an airplane and travel from Africa to New York.
Really, a great essay with a lot of work put into it. I really appreciate the footnotes.
One other thing: I hope my last message, with all those questions re communications on substack, did not annoy you. My tech problems are legion, and I often lose messages. (Eg you said you sent me an e mail, but I never found it.)
😄❤️ James Graham continues to be brilliant. This article is everything you never wanted to know about world banking and tax havens, but definitely should. Good, reliable information written in James Graham’s own literary style. I recommend it. I subscribed to this page after reading it. 👏👍👍👍