Luxembourg Leaks: Potential Risks To Companies Whose Luxembourg Tax Rulings Have Been Released To The Public

This week, the so-called "International Consortium of Investigative Journalists" ("ICIJ"), on its website, leaked a total of 548 tax rulings that multinational companies obtained in Luxembourg in the period from 2002 to 2010. The list of companies whose rulings were disclosed includes some of the largest multinationals not only from the U.S. and Europe but also Japan, China, Russia, Brazil, and other countries. The ICIJ alleges that these companies "have channelled hundreds of billions of dollars to Luxembourg and saved billions of dollars in taxes." Some companies are alleged to have enjoyed effective tax rates of less than one percent. The ICIJ claims that in many cases, "Luxembourg subsidiaries handling hundreds of billions of dollars in business maintain little presence and conduct little economic activity in Luxembourg." The ICIJ does not state how it obtained copies of the rulings; however, the documents disclosed on the website all originate from PricewaterhouseCoopers in Luxembourg, which apparently acted as tax advisor to the companies affected. Potential Legal Risk for Companies Affected by Leaks The ICIJ itself stresses that the companies that obtained the rulings did not act illegally. Many countries around the globe issue tax rulings to companies seeking advance confirmation of the tax consequences of transactions. Unless tax rulings are obtained through misrepresentations or other illegal means, they are legal and fully enforceable. Both the OECD and the European Union have developed general frameworks to limit "harmful tax practices" or "base erosion and profit shifting." In particular, the Code of Conduct for Business Taxation agreed upon by the Council of Economic and Finance ministers of the European Union ("ECOFIN") of December 1, 1997, and the OECD Action Plan on Base Erosion and Profit Shifting, as well as the OECD's Transfer Pricing Guidelines, contain rules that seek to prevent Member States from engaging in what are regarded as unfair taxation practices. One of the criteria of the EU Code of Conduct that supports a finding of a harmful tax practice is a Member State's beneficial treatment of a company in the absence of any real economic activity in the territory of that Member State. Another criterion is a departure from internationally accepted rules of transfer pricing, in particular, the arm's-length standard. Some of the Luxembourg rulings leaked to the ICIJ might be looked on as violating one of more of these...