Grand dodgy

JUNE 29th was judgment day in a case that has changed the face of corporate tax-planning. Antoine Deltour (pictured) and Raphaël Halet, two ex-employees of PwC, an accounting firm, and Edouard Perrin, a French journalist, had been tried in Luxembourg for their role in leaking documents that revealed sweetheart tax deals the Grand Duchy had offered to dozens of multinationals. The defendants denied the charges, which included theft of documents and violation of secrecy, arguing that their exposure of dodgy tax practices was in the public interest. Luxembourg insisted the deals were both legal and unremarkable.

The whistle-blowers faced up to ten years behind bars. However, the prosecutor—perhaps sensitive to the strong public and, in some places, political support for them abroad—called for suspended sentences of 18 months. In the end the judge handed Messrs Deltour and Halet suspended sentences of 12 months and nine months, respectively. But a conviction is a conviction; Transparency International, an anti-corruption group, called it “appalling”. Mr Perrin, who had published an article that drew on the leaked documents, was acquitted.

The “LuxLeaks” affair has highlighted the role played by certain European Union countries, including Ireland and the Netherlands as well as Luxembourg, in facilitating tax avoidance. Luxembourg is not a typical tax haven levying no or minimal income tax; its statutory rate is 29%. Instead, it is a haven “by administrative practice”, argues Omri Marian of the University of California, Irvine, who has studied LuxLeaks in detail. Its tax authority in effect sold tax-avoidance services to large firms by rubber-stamping opaque arrangements that helped them to cut their tax bills dramatically in both their countries of residence and their countries of operation.

The leaks helped propel multilateral efforts to overhaul international corporate taxation, led by the OECD. Its mostly rich members and a dozen developing countries agreed last year to a raft of reforms. These include increased country-by-country reporting by multinationals of profits, taxes paid and so on, and tighter rules on transferring intellectual property between subsidiaries as a means of parking profits in tax havens. Governments are now expected to make these proposals law.

In June the European Union agreed on an anti-avoidance directive that incorporates parts of the OECD’s agenda. The EU’s executive, the European Commission, has launched numerous probes targeting cushy tax deals offered by the bloc’s own members to firms such as Apple, Fiat and Starbucks. It argues these could amount to illegal state aid. The commission is expected to announce the results of its probe into Apple’s tax arrangements in Ireland in July. The firm could be forced to pay billions of euros to Dublin.

Apple denies breaking any laws. It has a point when it says the problem is not corporate illegality or immorality but disparities between national tax systems, which invite gaming. Hence the need for a multilateral approach. But that is hard to achieve. Countries guard their tax sovereignty jealously, even as they rail against tax minimisation. And they still disagree about a lot. America is unhappy with the commission’s investigations, which mostly target American companies. An American official complained recently that they are based on “expansive reinterpretations” of European competition law and have created an “extraordinary mess”.

Divisions are evident within the EU, too. Member states that like tax competition, such as the Netherlands and Britain (it has not left yet), have pushed to weaken anti-avoidance measures, including the new directive. Diarmid O’Sullivan, a tax-policy expert with ActionAid, a charity, says the directive was “a feeble compromise”. Proposed EU rules known as the “common consolidated corporate tax base”, which would remove many of the national differences that multinationals have exploited to pay less tax, have been diluted to make them more palatable.

Nevertheless, firms acknowledge that enthusiastic tax avoidance is becoming harder to get away with. Cosy deals with the taxman are under more scrutiny. Convicted criminals though two of them may now be, the LuxLeaks Three deserve praise for their role in bringing that about.