Ethics and governance in the European Financial centers

In a recent interview in German, Luc Frieden, the Luxembourg Luc Frieden, Minister of Treasury and Budget, stated that “Wir sind ein internationaler Finanzplatz, der internationale Regeln liebt. Und es gibt internationale Regeln zum Steuerparadies. Das ist nach OECD-Regeln ein Ort, an dem man keine oder fast keine Steuern zahlt. Das trifft auf Luxemburg nicht zu. Deshalb möchten wir, dass die Beschreibung unseres Staates der Realität entspricht, und das ist nicht immer der Fall”, which means (free translation)  “We are an international financial center, which abides by international rules. And there are international rules to define tax havens. That is according to OECD rules, a place where one pays no or nearly no taxes. That does not apply to Luxembourg. Therefore we would like that the description of our state corresponds to the reality, and that is not always the case”

 

A couple of comments about the reality of the state:

 

When Luc Frieden states that a tax haven is according to OECD rules, "a place where one pays no or nearly no taxes”, it is not accurate.

 

According to the OECD, four key factors are used to determine whether a jurisdiction is a tax haven.  The first is that the jurisdiction imposes no or only nominal taxes. This is what Frieden has in mind.

 

But the OECD adds that the no or nominal tax criterion is not sufficient, by itself, to result in characterisation as a tax haven as the OECD recognises that every jurisdiction has a right to determine whether to impose direct taxes and, if so, to determine the appropriate tax rate.  An analysis of the other key factors is needed for a jurisdiction to be considered a tax haven.  The three other factors to be considered are:  

• Whether there is a lack of transparency
• Whether there are laws or administrative practices that prevent the effective exchange of information for tax purposes with other governments on taxpayers benefiting from the no or nominal taxation.
• Whether there is an absence of a requirement that the activity be substantial

 

The description of his state that corresponds to the reality is that:

 

There is no culture of transparency: otherwise PwC and E&Y in Luxembourg would have participated to « Global Economic Crime Survey » for PwC and « Corruption or compliance – weighing the costs » for E&Y. These surveys are even not communicated. Otherwise there would be a balance sheet database like in any modern democracy. Otherwise there would be a database of judiciary judgements like in any modern democracy. And so on.

 

There are laws or administrative practices that prevent the effective exchange of information for tax purposes. In a speech before the Luxembourg Parliament on 13 March 2009, Luc Frieden announced that Luxembourg will conclude Double Taxation Agreements that conform to the OECD Model Tax Convention., which means that this was not the case before. Conventions are being signed.

But it remains that the request of information must be made on concrete, clear and precise evidence of tax evasion which excludes any “fishing expedition”. This is a problem in Luxembourg as leaders support tax evasion:

-         Cf. what stated Lucien Thiel, former director of the Luxembourg Bankers’ Association: “It is not our duty to control if the taxpayer was honest” (L’Essentiel, 27 February 2008)

-         Cf. what stated Jean-Jacques Rommes, current director of the Luxembourg Bankers’ Association to comment a tax evasion case: “It is not the banker who started” (RTBF, 19 February 2009)

Banking administrative practices actually prevent the effective exchange of information for tax purposes (Additionally in a connected field, which is AML, 60% of banks never report declarations of suspicion according to the Luxembourg FIU and ratios of comparison with other jurisdiction demonstrate a poor level of declarations of suspicion in Luxembourg : Cf. for example the comparison with Monaco).

 

There is an absence of a requirement that every activity be substantial. The Luxembourg corporate registration is full of Luxembourg-based companies that are linked to exotic jurisdictions and that exist only in the Luxembourg Corporate registration. In the tax evasion case Jean-Jacques Rommes was asked to comment on the banker who suggested a scam through Panama without even being asked to do so by the client.

 

 

At the time when the USA seem to be willing to ensure that U.S. states like Delaware and Nevada do not replace offshore countries like Switzerland, Luxembourg and the Cayman Islands as tax havens for wealthy individuals and businesses, Luxembourg goes on ignoring the paradigm shift in the world.

 

This it is not very good omen for the Luxembourg Institute For Global Financial Integrity, that is said to be intended to solve the challenges faced by the global financial sector pertaining to crime, such as fraud, tax evasion, and money laundering, and to the funding of criminal activity and terrorism.