A year in review: The biggest tax stories of 2021
Last year marked the successful negotiation of a historic, global tax agreement to tackle corporate tax avoidance, more allegations into Luxembourg's tax practices and the appointment of the first woman as the country's finance minister.
The Luxembourg Times reviews the three biggest tax stories of 2021.
A deal at last
Countries across the world had been scratching their heads about how to make multinational companies pay their fair share in tax for decades. In 2021, 136 jurisdictions, including Luxembourg, reached a deal to impose a minimum 15% tax rate on companies and to shift some of the profits back to the country where revenues were generated.
The agreement is designed to ensure Big Tech firms like Facebook, Alphabet and Apple pay a minimum tax rate and that they do so in countries where they make the bulk of their sales. The new rules are set to kick in in 2023.
The Organization for Economic Cooperation and Development (OECD), which has chaired the talks, said a minimum rate could ultimately raise government incomes by $150 billion (€130 billion) a year , while new rules would reallocate $125 billion (€108 billion) of profits to be taxed in nations where big corporations generate revenue but may have little physical presence.
Negotiations got turbocharged as the pandemic put pressure on countries' coffers, with governments supporting struggling companies and paying the wages of furloughed staff. In July, the OECD found that corporate rates in the last 20 years have fallen in 94 of the 111 countries and territories it monitors.
The impact of the new tax rules on Luxembourg is still unclear. A study conducted by the EU Tax Observatory, an EU-funded think tank, estimated in October that Luxembourg could take in an extra €5.8 billion under the OECD deal which would top up current corporate tax revenues by some 50%.
EU states on the whole are set to be the biggest winners of the tax agreement, gaining an extra €80 billion in tax revenue - just under a quarter of all their corporate tax revenue in 2017, the Observatory said.
More tax revelations
Following the LuxLeaks scandal in 2014 - when journalists uncovered secret sweetheart deals between Luxembourg's tax authorities and multinational companies to reduce their tax burden - a series of investigations on the Grand Duchy's tax practices dropped in 2021.
In February, the first such investigation - called OpenLux - alleged that the country has served as a safe haven for Italian mafia leaders, Russian mobsters and Venezuelan government officials to hide their cash. Germany's Süddeutsche Zeitung said that Luxembourg “continues to attract not only the rich and celebrities, but also questionable figures”.
OpenLux came a week after Prime Minister Xavier Bettel complained that court-enforced transparency may hurt the country's business appeal and the head of a lobby for industrial companies compared compelling the government to disclose contractual details with private companies to the conduct of dictatorships.
The government denied all allegations of the OpenLux investigations. Finance Minister Pierre Gramegna responded by saying that criticism of the Grand Duchy was born out of jealousy. “Our financial sector is successful, also after Brexit, and people think we have cheated because we are so successful", he said in a speech in parliament.
In July, investigative journalists put the spotlight on Luxembourg's tax practices again when they broke the LuxLetters revelations. They claimed that letters to the tax administration can help create advantageous tax conditions similar to those of the tax rulings that were at the centre of the LuxLeaks revelations.
The newspapers alleged that some tax advisory firms send a letter to the tax administration on behalf of their clients – such as a company or an investment fund – laying out the tax rate they suggest the company should pay. But if the tax administration does not respond, the advisory firm considers the authorities are not contesting the rate and therefore consider it agreed.
Luxembourg's finance ministry denied the allegations. In December, the EU Commission shelved the inquiry into LuxLetters. Gramegna himself had refused to give testimony to the EU Parliament's tax sub-committee on two separate occasions.
In October, Luxembourg was mentioned in yet another effort by investigative journalists to shine a light on how companies, the rich and world leaders shift their assets to avoid taxes.
People mentioned in the new investigations dubbed Pandora Papers included then-Czech Prime Minister Andrej Babiš, Jordan King Abdullah II and Azerbaijan’s ruling Aliyev family. The investigation did not necessarily accuse mentioned individuals of any crimes, but highlighted how they used international tax structures to lower their tax bill, the International Consortium of Investigative Journalists (ICIJ) said.
The Grand Duchy played no central role in the so-called "Pandora Papers", according to the Reporter website, which had exclusive access to the documents. But with some 100,000 of the investigation's 11.9 million documents mentioning Luxembourg, according to Reporter.lu, the scope for new revelations when the journalistic consortium publishes the documents is material.
The successive allegations came as the Grand-Duchy is still fighting to shake off its reputation as a tax haven. In 2019, the EU parliament voted in favour of declaring Luxembourg, Malta, the Republic of Ireland and four other member states tax havens after a report from the parliament's special tax committee concluded that the seven members "display[ed] traits of a tax haven and facilitate aggressive tax planning".
The Parliament has no say over the EU's official tax haven black list. But Gabriel Zucman, a French economist who became the first head of the EU Tax Observatory, had earlier raised the prospect of excluding Luxembourg from the EU over its lax tax policies.
Luxembourg's new finance minister
History was also made in Luxembourg when the governing Liberals nominated the first-ever woman for the powerful post of finance minister in December after Pierre Gramegna's shock resignation.
Yuriko Backes, a career diplomat and former advisor to both Prime Minister Jean-Claude Juncker and Xavier Bettel, will take the helm of the finance ministry in January from Gramegna who will leave politics for family reasons.
Backes, who holds degrees from the London School of Economics and the School of Oriental and African Studies, was Luxembourg's head of the representation of the European Commission for four years before becoming chief of the Grand Ducal household last year.
She previously also worked as counsellor at the Ministry of Foreign Affairs as well as permanent representative of Luxembourg to the United Nations in New York and deputy chief of mission for the Luxembourg Embassy in Japan.
Gramegna, aged 63, unexpectedly announced his resignation as he wants to spend more time with his family, he said. He has been in charge of the country's purse strings since 2013 and oversaw the Grand Duchy's fiscal response to the pandemic and faced off several revelations that Luxembourg is a shelter for multinationals and rich individuals to avoid taxes.
Like Gramegna, Backes will not be an elected member of parliament when she takes over the second most powerful office of state. She only joined the Liberal party the week of her nomination.
She does not have experience in finance, she said at her unveiling on 3 December. "I am not from the finance sector," Backes said. "I didn't grow up in the finance sector. But I will commit myself to this task".
Luxembourg's new finance minister is expected to stand in the 2023 general election as a candidate for the Liberals, but was tight-lipped on the issue when asked by various media outlets.