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On November 5, the International Consortium of Investigative Journalists revealed leaked documents demonstrating that Pepsi, IKEA, FedEx and 340 other multinational corporations received special deals from the government of Luxembourg allowing them to use the country as a tax haven.

The documents are private tax rulings from Luxembourg’s Ministry of Finance to specific corporations pledging to respect complex arrangements that shift profits from normal tax systems into Luxembourg and, in some cases, then shift those profits on to zero-tax countries like Bermuda. The deals were negotiated by PricewaterhouseCoopers, the big accounting firm with a history of facilitating tax avoidance and defending corporations against attempts to change the system.

The European Union is already investigating whether such deals made between Luxembourg’s government and Amazon and Fiat violate EU rules barring state aid that unfairly benefits some companies over others.

There are many ways such private rulings can benefit specific corporations that make their profits appear to be earned in a country where they won’t be taxed. The ruling might bless a scheme involving loans from one part of a company to another, which results in interest payments paid into the country where they won’t be taxed. This type of earning stripping is an accounting gimmick given that the parties involved are really all part of the same company. Or a ruling might bless a particular approach to transfer pricing, for example by allowing a company to “sell” a patent or copyright at a very low price to its subsidiary in a zero-tax country and then pay large royalties to that subsidiary to make it appear that profits are all earned in the tax haven.

Luxembourg apparently provides several breaks that take this sort of tax dodging to a whole different level. The article explains that the country exempts 80 percent of royalty income earned on intellectual property.

It also allows hybrid debt instruments, meaning a corporation in a normal tax jurisdiction might make a payment that is considered a deductible interest payment there, but it’s received by a subsidiary in Luxembourg where it’s considered a dividend paid out of offshore profits. The latter would not be taxed at all under Luxembourg’s territorial system.

It is therefore no surprise that many corporations set up subsidiaries in Luxembourg that are only mailboxes. They do no real business but accounting tricks make it appear, to tax authorities, that profits are earned there.

“Office buildings throughout the city are filled with brand-name corporate nameplates and little else. Some have offices and no visible employees. One building at 5 Rue Guillaume Kroll is home to more than 1,600 companies; another at 2 Avenue Charles de Gaulle houses roughly 1,450; and a building at 46A Avenue J.F. Kennedy is home to at least 1,300…”

Even if the EU is successful in cracking down on this nonsense, there may always be countries willing to facilitate this type of corporate tax dodging. As we have argued before, the only way to really stop American corporations from exploiting such offshore tax havens is to make sure corporate profits are taxed at the same rate whether they are earned domestically or offshore.