By ANDREW HIGGINS from The New York Times
LUXEMBOURG — It was a blunt and unsettling message for a country whose opaque banks have sucked in hundreds of billions of euros from abroad and whose national motto — “We want to remain what we are” — is a credo of dogged resistance to change.
“Nothing is as it was before,” Prime Minister Jean-Claude Juncker told Parliament last month, explaining why, after years of resistance, Luxembourg had decided to start sharing information with foreign tax authorities about the money stashed in its banks. “Not everything has changed, but lots of things have changed. Other changes are necessary, or everything will change.”
The attention this week on the ability of Apple and other prominent American corporations to avoid corporate taxes through offshore tax arrangements obscures a perhaps more significant development, highlighted by Luxembourg’s abrupt retreat from banking secrecy: the relentless pressures being piled on opaque money centers around the world amid a sweeping global assault on tax evasion and the secrecy that enables it.
“Bank secrecy is a relic of the past,” said Algirdas Semeta, the European Union’s senior official responsible for tax issues. “Soon we will see the death of bank secrecy around the world.”[/pullquote]
From the rain-swept avenues of Luxembourg’s capital to the sun-spangled lagoons of the British Virgin Islands in the Caribbean, the authorities are scrambling to shed the stigma of enabling tax cheats and to figure out how to change their secretive ways without driving away lucrative foreign clients.
The pressure, increased by the recent leak of a giant cache of confidential files relating to offshore havens, is “like a steamroller,” said Egide Thein, former director of the Luxembourg Economic Development Bureau.
How to keep this steamroller moving was the focus of a European Union summit meeting on Wednesday in Brussels. The gathering produced no momentous decisions but did prod Austria, the union’s last stalwart defender of banking secrecy, to accept the idea of sharing information about bank accounts held by foreigners — so long as countries outside the union, notably Switzerland, agree to do the same.
Austria and Luxembourg also gave a conditional pledge to, by the end of the year, sign onto an expanded program of automatic data sharing that would go beyond just banks to include trusts and foundations, which are widely used by wealthy Europeans to park and often hide money.
The European Commission, the union’s executive arm, has been pushing for years to enlarge the scope of financial information that is automatically shared among the bloc’s 27 member states. It has also pressed for a crackdown on “aggressive tax planning” by multinational companies like Apple, which investigators in Congress say avoided billions of taxes in America and elsewhere through an elaborate, globe-spanning web of companies revolving around outfits based in Ireland.
Ireland, which holds the European Union’s rotating presidency, has strongly supported measures to combat tax evasion, which is illegal, but has come under intense scrutiny and criticism in recent days for its role in enabling tax avoidance schemes. Prime Minister Enda Kenny, speaking Wednesday in Brussels, said that global tax rules “have not kept up” with economic changes in the digital era, but he rejected assertions by Senate investigators that Ireland gave Apple a special 2 percent tax rate. “Ireland does not do special deals or side deals with companies,” he said.
In many cases, both legal and illegal skirting of taxes occur in the same places — a global archipelago of mostly tiny “business friendly” outposts long anchored in secrecy and low or highly flexible tax rates.
Luxembourg, for example, has only 539,000 people but serves as the regional headquarters for a host of large companies that book their profits here rather than in the countries where they do business. It is also a major financial center whose 130 or so banks, mostly subsidiaries of major international institutions, held deposits of around $350 billion at the end of last year — about $650,000 per resident.
Officials here bristle at the “tax haven” label, insisting that Luxembourg attracts so much cash, most of it from foreigners, simply because the country offers political stability, honest regulators and a pool of multilingual finance professionals.
All the same, its pledge to join a Europe-wide program to exchange banking information is a significant and risky step for a country that the Tax Justice Network, a research group in London, branded the “death star” of financial secrecy in Europe because of its long and previously steadfast opposition to greater transparency.
“In five years, there will be no tax havens left on earth,” Mr. Thein predicted, because “a country cannot prosper in the long run from stealing other people’s taxes.”
Even the world’s most tight-lipped offshore havens — the Cayman Islands, Turks and Caicos Islands, and other British territories in the Caribbean — announced this month that they will begin to share bank account information, though they retain highly opaque corporate registration systems. Singapore, where France’s now disgraced former budget minister, Jérôme Cahuzac, for a time stashed secret funds, is also making it more difficult for foreigners to park money beyond the reach of tax authorities.
Regulators have been chipping away at bank secrecy for some time. For its role in illegally assisting wealthy Americans in evading taxes, the Swiss banking giant UBS agreed in 2009 to pay $780 million in fines to the United States government and turned over the names of thousands of American account holders.
But the current, escalating assault on secrecy began in 2010, when Congress passed legislation that requires foreign financial institutions to inform the Internal Revenue Service of all accounts held by American taxpayers and by foreign entities in which Americans have a substantial ownership interest.
This provided a powerful lever to the European Union to prize open opaque financial sectors both inside the 27-nation bloc and beyond. At a meeting of finance ministers in Brussels last week, the European Commission was given the go-ahead to negotiate financial information sharing accords with Switzerland, Liechtenstein, Andorra, Monaco and San Marino.
By one estimate, wealthy individuals hold unreported assets worth at least $21 trillion — far more than the entire annual economic output of the United States — in tax havens. Mr. Semeta, the European Union’s tax commissioner, estimates that Europe loses well over a trillion dollars a year through tax evasion and the more divisive and politically delicate issue of legal tax avoidance.
The big question now hanging over Luxembourg and other financial centers under pressure to share information is how many depositors will try to take their money elsewhere.
Mr. Frieden, Luxembourg’s finance minister, played down the risk of a mass flight. “Some small clients may leave, but a lot of large clients are coming in,” he said.
All the same, Luxembourg wants to make sure that more opaque rivals like Switzerland and Singapore do not gain an unfair competitive edge. Luxembourg, Mr. Frieden said, supports transparency but “wants a level playing field.”
Luxembourg bankers say the bulk of their customers have nothing to hide but still value their privacy for security and other legitimate reasons. Jean-Jacques Rommes, chief executive of the Luxembourg Bankers Association, complained that banks are being turned into “the long arm of tax authorities. Many customers don’t like that. The more money they have, the less they like it.”
Alain Steichen, a prominent Luxembourg lawyer who has worked closely with the financial sector here for years, predicts a potentially serious exodus by depositors who do not want their identities revealed. Luxembourg’s finance sector, he said, has developed far beyond its early years in the 1970s, when it became notorious for helping Belgian dentists and other modestly wealthy customers from neighboring countries hide their incomes. It now attracts sophisticated global players and involves much more than murky private banking.
Indeed, around $3 trillion is invested in mutual funds and other investment vehicles domiciled in Luxembourg. Only the United States has a bigger fund industry.
But, Mr. Steichen added, “we clearly have a legacy issue” because many of those who stashed money in Luxembourg banks in the past to avoid taxes still have accounts — and may now bolt. Such bank clients, he said, will most likely shift to other locations that still offer secrecy. But the list of those is shrinking fast.
Still very numerous, however, are opportunities for legal tax avoidance. Mr. Semeta, the European Union tax official, acknowledged that halting such practices is hard because fixing tax rates remains the prerogative of individual European states. This means, for example, that Ireland is entirely within its rights to set a corporate tax rate of 12.5 percent, less than half the level in Germany, France and Britain and just over a third the 35 percent rate in the United States.
Nonetheless, Mr. Semeta said, it is still possible to “create an environment that does not allow tax shopping.”
Luxembourg, which has the lowest sales tax rate in Europe, has been particularly adept at attracting shoppers. Amazon, for example, reports its sales in Britain and elsewhere in Europe through a Luxembourg company, which operates out of a modest building on a narrow side street in the capital’s old town. The Luxembourg office does not ship any books, but is stuffed instead with accountants and lawyers.