Big four audit firms behind global profit shifting

AFR

Big four audit firms behind global profit shifting
PUBLISHED: 0 HOUR 40 MINUTES AGO | UPDATE: 0 HOUR 40 MINUTES AGO

MICHAEL HUDSON, SASHA CHAVKIN AND BART MOS
International PwC tax schemes exposed
Why IKEA’s profits are mostly tax free
Lend Lease’s liking for Luxembourg
How a European duchy makes tax bills disappear

For more than a decade, tax gurus at PricewaterhouseCoopers helped Caterpillar, the American heavy equipment maker, move profits produced by its lucrative spare-parts business from the United States to a tiny subsidiary in Switzerland.

Little changed except the bookkeeping. Parts were still shipped from suppliers to a warehouse in Morton, Illinois, then shipped from the warehouse to independent dealers. But the profits were booked by the Swiss subsidiary, which paid corporate taxes of less than 6 per cent a year, far lower than Caterpillar’s 29 per cent rate in the US.

By 2008, partners at the “big four” accounting firm worried the strategy might be threatened by Caterpillar’s decision to move some managers from Switzerland to the US, a shift that would underline the parts business’s small footprint in the mountain-peaked tax haven.

Thomas F. Quinn, a PricewaterhouseCoopers partner who helped design the tax savings plan, wrote to a PwC colleague that if they wanted to keep the strategy alive, they needed to “create a story” that “put some distance” between the managers and the spare-parts business.

“Get ready to do some dancing,” Quinn said.

The colleague, managing director Steven Williams, replied: “What the heck. We’ll all be retired when this . . . comes up on audit. Baby boomers have their fun and leave it to the kids to pay for it.”

In a congressional hearing this spring, US Senator Carl Levin blasted the email exchange and the profit-shifting strategy as exercises in the art of creating “unreality”. An investigation led by Levin revealed that the accounting firm exploited legal loopholes to help Caterpillar shuffle $US8 billion ($9.3 billion) in paper profits from the United States to Switzerland, reducing the equipment maker’s US tax bill by $US2.4 billion.

The flare-up over the Swiss strategy that PwC orchestrated for Caterpillar is among the latest in a series of investigations and legal clashes that shine a light on the murky role that the world’s four largest audit firms – PwC, KPMG, Ernst & Young and Deloitte – play in the offshore financial system.

A review of court cases, government records and secret offshore files unearthed by the International Consortium of Investigative Journalists reveals that the big four firms are central architects of the offshore system – and key players in an array of cross-border transactions that raise legal and ethical questions.

In Luxembourg, internal company documents reviewed by ICIJ show, PwC helped Pepsi, IKEA and other corporate giants from around the world embrace inventive profit-shifting strategies that allowed them to collectively slash their tax bills by billions of dollars.

In the US, authorities charged, KPMG peddled offshore tax shelters that created billions of dollars in fake losses for rich clients, then misled the Internal Revenue Service about how the shelters worked.

In Dubai, anti-corruption advocates claim, EY’s helped the Middle East’s largest gold refiner obscure practices that may violate international standards aimed at combatting trafficking in “conflict gold”, which comes from regions where competition for the mineral breeds bloodshed.

In New York, authorities charged, Deloitte helped a British bank violate sanctions against Iran, submitting a “watered down” report to regulators that omitted information about how the bank might be evading money-laundering controls.

“These firms are supposed to be built on honour and integrity and being a watchdog, but they’re so big now it’s all about making money,” says Francine McKenna, an accountant who has worked for PwC and KMPG and now writes a blog, re: The Auditors, about big accounting firms’ misbehaviour. “They’re not worried about reputation, because all of this stuff has not affected their ability to get bigger and bigger and bigger.”

Big four firms deny their practices are skewed by bottom-line considerations. EY told ICIJ that it “operates strictly within the law and has exhaustive controls” that ensure it follows legal and regulatory rules. KPMG and PwC said they had strict codes of conduct for everyone working under their banners worldwide. Deloitte didn’t answer questions for this story but has laid out its views in various public statements.

In cases when they’ve run into trouble, the big four have generally blamed rogue employees or said that their actions have been misunderstood or taken out of context. During April’s Senate hearing on PwC’s work for Caterpillar, for example, Quinn said he’d made “a very poor choice of words” in his email exchange with Williams, and Williams said he’d made an inappropriate “attempt at humour”. A top PwC executive told Levin that the Swiss strategy designed by the firm was simply intended “to eliminate the unnecessary middleman”.

“We do not invent artificial business structures,” the executive testified.

GLOBAL CLOUT
The big four are worldwide operations. Among them they employ more than 700,000 people and pull in revenues of more than $US100 billion a year, more than the annual economic output of Ecuador.

The accounting giants have their roots mostly in alliances formed in late 19th and early 20th centuries by US and UK accounting firms. Their continuing Anglo-American flavour and their global clout is a reflection of Wall Street and London’s dominance within the world’s financial system. The firms are structured as decentralised alliances of local partnerships in different countries, but much of their top leadership is based in the United ­States and Britain.

Legal battles over the past decade have raised questions about whether governments see the major accounting firms, like major banks, as “too big to fail”. This unwritten policy, anti-corruption campaigners say, has discouraged real reform at the big audit firms because they know authorities will only go so far in punishing bad behaviour.

The big four have also gained clout and inside knowledge by helping governments write the laws that establish the offshore system’s rules of engagement, and by lobbying heavily to keep the rules to their liking. Austin Mitchell, a member of the UK Parliament, has gone so far as to call the big four “more powerful than government”.

As the flow of money into tax havens has become an increasingly hot issue, financial transparency advocates fear the big audit firms will use their expertise and influence to undermine efforts to reform the offshore system. The firms have lobbied, for example, against proposals that would give national tax authorities more power to demand information on global corporations’ activities around the world.

Critics say big four accountants shuttle back and forth between the accounting industry and government so often in Europe and other regions that it undermines authorities’ efforts to police the industry and enforce tax laws.

“You have got this revolving doors thing, where gamekeepers – if they are any good – get bought by poachers,” UK House of Lords member Trevor Smith said during a parliamentary debate in 2013.

OFFSHORE PLAYERS
Big four partners are embedded throughout the offshore world. A 2011 study by the Financial Mail found that between them the big four operate 81 offices in offshore havens.

Deloitte, for example, employs roughly 150 people in the tiny English Channel islands of Jersey and Guernsey, two of the world’s busiest offshore havens.

Confidential documents obtained through ICIJ’s Offshore Leaks investigation show that big four firms had a close relationship with Portcullis TrustNet, a Singapore-based offshore services firm that sets up hard-to-trace offshore companies for clients around the world. PwC, for example, helped incorporate more than 400 offshore entities through TrustNet for clients from mainland China, Hong Kong and Taiwan, the records show.

Another stash of confidential documents reviewed by ICIJ show that between 2002 and 2010 PwC helped hundreds of global companies obtain confidential tax deals from authorities in Luxembourg, allowing Amazon, Abbott Laboratories and others to book profits in the tiny European duchy and shrink their taxes at the expense of national treasuries around the world.

The documents reveal, for example, that PwC helped three major Latin American banks use Luxembourg’s accommodating tax regime to claim write-offs for “intangible assets” that allowed them to sidestep nearly €70 million ($102 million) in taxes between them in Brazil, an analysis by ICIJ’s reporting partner, Brazilian daily Folha de S.Paulo, calculated.

Luxembourg’s tax deals are legal in Luxembourg, but may be subject to challenges by tax authorities in other countries who view them as allowing companies to avoid paying their fair share of taxes.

US Tax Court cases show that big accounting firms are aware that the offshore profit-shifting and tax-savings arrangements they create can be at risk of being labelled illegal by courts or tax authorities.

In one instance documented by a US Senate investigation, a senior KPMG professional urged the firm to ignore IRS rules on registering tax shelters. He “coldly calculated”, a Senate report said, that the penalties for violating the law would be no greater than $US14,000 per $US100,000 in fees that KMPG would collect.

“For example,” he wrote, “our average . . . deal would result in KPMG fees of $US360,000 with a maximum penalty exposure of only $US31,000.”

DEATH IN THE FAMILY
Before there was a big four, there was a big five, a big six, even a big eight.

Membership in the elite club began shrinking in the 1980s and 1990s as the mega-firms began swallowing each other through mergers.

In 2002, Arthur Andersen, the largest of what was by then known as the big five, came under fire after investigators found evidence that high-level firm executives had ordered underlings to shred sensitive internal documents at Texas-based Enron, the energy and trading conglomerate that blew up amid reports of massive fraud. Andersen had been Enron’s auditor as Enron had used offshore vehicles in the Channel Islands to hide its debts and book fake profits.

US authorities indicted the accounting firm on obstruction of justice charges. Private lawsuits also targeted Andersen’s links to accounting frauds at Worldcom and other US companies. Many analysts concluded that rapid growth had changed a firm once known as a beacon of integrity. “Over time, greed corrupted Andersen,” the Chicago Tribune said in an editorial. “Its leaders became more devoted to collecting hefty fees than keeping books straight.”

A jury convicted Andersen, ensuring the death of the 89-year-old firm. By the time the US Supreme Court threw out the conviction – ruling that the trial judge had improperly instructed jurors – it was too late. The firm was out of business. KPMG, Deloitte and EY bought up the remains of much of Andersen’s American operations.

The big five was now the big four. The legacy of Andersen’s death would have ramifications that continue today.

QUICK HITS
For much of their lives, the biggest accounting firms operated with an aura of sobriety. They didn’t solicit business. They waited for clients to come to them for help. By the turn of the new century, that had changed. Big four accountants were expected to be more than accountants. They had to be salesmen.

At KMPG, partners and other professionals were pressured to sell wealthy clients an alphabet soup of tax shelters with acronyms like FLIP, BLIPS, TEMPEST and OTHELLO. The shelters were designed to generate paper losses that would slash clients’ tax bills. For example, OPIS – short for offshore portfolio investment strategy – relied on transactions routed through the Cayman Islands and other offshore locales.

The effort had all the trappings of a mass marketing campaign usually associated with stock brokerages and other ventures that rely on aggressive sales pitches. KMPG had a call centre in Indiana stocked with telemarketers who cold-called prospective clients to try to sell them the firm’s tax products.

Internal emails trumpeted the firm’s new “sales opportunity centre”, invited partners to a meeting to “discuss our ‘quick hit’ strategies and targeting criteria” and talked up “tax minimisation opportunities for individuals” that would produce “a quick revenue hit for us”.

“We are dealing with ruthless execution – hand-to-hand combat – blocking and tackling,” one executive explained to his colleagues.

Employees were instructed to use sales psychology and “misleading statements” to pitch KPMG’s products, according to a 2003 US Senate report. The firm distributed sales scripts that employees could use to bring around reluctant customers – suggesting a variety of mind games and bluffs, such as a “get-even approach” (pitching to clients just after the deadlines for tax payments to the government) and a “Beanie Baby approach” (playing on clients’ fear of missing out on a big thing by pretending the firm would soon put a cap on its shelter sales).

KPMG’s salesmanship won it thousands of clients and millions of dollars in fees. It also made it a target for the US Department of Justice.

TOO BIG TO FAIL
In June 2005, top KPMG executives and their lawyers met with a gaggle of prosecutors to discuss the Justice Department’s criminal probe into the firm’s tax shelter business. The government claimed KPMG had lied to the IRS about how its shelters were put together and that OPIS and other KPMG shelters were shams which used shell companies and bogus loans to generate at least $US11 billion in paper losses that cost the US Treasury $US2.5 billion.

As the meeting began, a top prosecutor noted that the government hadn’t ruled out filing criminal charges against the firm. But the discussion quickly turned to mutual agreement, according to a memo written by one of KPMG’s lawyers. Neither the government nor KPMG wanted to see a criminal prosecution that might put the accounting firm out of business. What had happened to Arthur Andersen three years before was on everyone’s minds.

Robert Bennett, the powerful Washington lawyer who represented President Clinton during the Monica Lewinsky scandal, did most of the talking for KMPG. He said the firm understood it would have to pay “a lot” and suffer “a lot of pain”. It could probably survive a tax fraud charge, but an obstruction charge “would kill us”, Bennett said.

In the end, the government charged the company with a single count of tax fraud, then quickly dismissed the charge under a “deferred prosecution” agreement that allowed KPMG to put the criminal case behind it by paying $US456 million in penalties.

The case made it clear, anti-corruption activists say, that a “too big to fail” philosophy discourages authorities from getting too tough with big audit firms.

Similar questions arose in the Netherlands after KPMG partners were accused of helping a Dutch construction firm hide bribes used to help the builder win billions of dollars in contracts in Saudi Arabia. In December 2013, KPMG agreed to pay a settlement of almost $US10 million to head off criminal charges against the audit firm.

Officials with KPMG’s member firm in the Netherlands placed the blame on three partners who now face criminal prosecution, saying they were “shocked by the facts that have emerged from this case”.

Some legislators complained the case should have been taken into court so the public could learn the full story of the accounting firm’s conduct.

“There is no word about the guilt of KPMG in this affair,” Jan de Wit, a member of the Netherlands’ Parliament, said. “It seems to be a cover-up.”

The Netherlands’ justice ministry defended the deal, saying that the bribes and cover up had taken place many years ago, and that the KPMG had co-operated with prosecutors and taken steps to prevent similar problems. As a result of the case, KPMG officials say, they’ve put in new procedures that “focus on quality and integrity as absolute priorities”.

‘WHITEWASH’
In recent years the big four have expanded their reach and revenues beyond corporate audits and tax shelters by marketing themselves as jack-of-all-trades watchdogs that can help companies discourage bribery and other misconduct.

Through their consulting businesses, they act as anti-money-laundering experts, internal investigators and stand in for government as monitors in regulatory actions.

Early this year, an EY partner quit his job and went public with claims the firm had helped a gold refiner in Dubai downplay the buying and selling of “conflict gold”.

According to a report by the anti-corruption group Global Witness, records provided by the ex-partner indicated the firm had toned down an audit report submitted to Dubai regulators, cutting explicit findings that the refiner failed to report billions of dollars in suspect transactions.

EY’s member firm in Dubai said it had acted properly, telling ICIJ that it “refutes entirely the suggestion that we did anything but highly professional work” in the matter. All examples of rule violations by its client were reported to regulators, and there was no evidence that conflict gold moved through the client’s refinery, the firm said.

Two other big four firms have also been accused of softening reports to regulators, as a result of the work with banks doing business in New York.

New York state regulators concluded that Deloitte helped UK-headquartered Standard Chartered cover its tracks by yielding to pressure from bank officials to keep quiet about suspect money transfers. A Deloitte partner explained in an email to a colleague that the transactions were “too politically sensitive” to include in a report to regulators. “That is why I drafted the watered-down version,” he said.

Deloitte denied wrongdoing. It called the reference to a watered-down report “an unfortunate choice of words that was pulled out of context”.

US authorities eventually concluded Standard Chartered had hidden thousands of transactions totaling more than $US250 billion by banks controlled by the government of Iran, which is under US and international sanctions related to its nuclear program and support for terrorist groups.

In 2013, New York’s banking superintendent, Benjamin Lawsky, punished Deloitte for its role in the Standard Chartered affair by fining the firm $US10 million and suspending it for one year from doing consulting work for banks overseen by New York regulators.

In August of this year, in a case involving questionable transfers of cash through the Bank of Tokyo-Mitsubishi UFJ, Lawsky hit PwC with a $US25 million penalty and a two-year suspension from taking consulting engagements with banks regulated by his agency. He said PwC had given in to pressure from the bank to “whitewash” a report to regulators.

For example, Lawsky said, PwC deleted a section revealing the bank had used hashtags and other “special characters” to prevent automatic filters from flagging wire transfers involving sanctioned nations.

SUDAN, for instance, became SUD#AN.

In a statement, PwC said its report “disclosed the relevant facts” and that the firm was “proud of its long history of contributing to the safety and soundness of the financial system”.

PAPER DRAGONS
Questions about how far big four firms will go to help their clients avoid government oversight have also come up as they have pushed into a new market: China.

China is emerging as an important mover in the offshore world, with most offshore professionals predicting it will become the greatest source of new business over the next five years, according a recent industry survey.

Over the past decade, the big four have gained a foothold in China by auditing Chinese firms that hope to sell shares in the US. In order to roll out a US public offering, Chinese businesses need the approval of the US Securities and Exchange Commission. The big four provided the gloss of respectability that Chinese executives needed to win over American regulators and investors.

In many cases, the seal of approval from big accounting firms didn’t mean the companies were safe bets for investors. In 2012, the Pittsburgh Tribune-Review found that dozens of Chinese companies peddling their shares in US have been accused of fraud by investors or the SEC.

As the SEC began investigating suspect Chinese firms, the big four’s member firms in China refused to turn over documents to the agency. The firms argue that if they provide documents to US law enforcers, they’ll run afoul of Chinese corporate secrecy laws.

It should be up to the US and Chinese governments to resolve the standoff, the firms say. “We’re just piggy in the middle,” the partner in charge of compliance for PwC in Greater China, told Reuters.

In January, US Administrative Law Judge Cameron Elliot sided with the government, suspending the big four’s Chinese units for six months from auditing US-regulated companies.

If the big accounting firms “found themselves between a rock and a hard place”, the judge said in his ruling, it was “because they wanted to be there. A good faith effort to obey the law means a good faith effort to obey all law, not just the law one wishes to follow.”

With Stefan Candea and Fernando Rodrigues

International PwC tax schemes exposed
PUBLISHED: 6 HOURS 14 MINUTES AGO | UPDATE: 0 HOUR 0 MINUTES AGO


Special investigation
NEIL CHENOWETH
Why IKEA’s profits are mostly tax free
Lend Lease’s liking for Luxembourg
How a European duchy makes tax bills disappear
Search the #luxleaks database

Tax Commissioner Chris Jordan is pursuing a global investigation of inter­national and Australian companies exposed by one of the biggest leaks of tax information ever for using Luxembourg to shift profits and avoid tax.

The Future Fund, AMP, Macquarie Group, Lend Lease, Goodman Group and dozens of other Australian com­panies negotiated secret tax deals with Luxembourg to reduce their taxes by routing profits through tax havens, according to the tax-leak information The Australian Financial Review shared yesterday with Mr Jordan.

Nearly 28,000 pages of leaked documents reveal how 343 Australian and foreign corporations used accounting firm PwC to slash their tax bills to nearly zero in some cases.


The companies used hybrid debt structures, total swap returns, royalty payments and intra-group loans to reduce taxes. While not illegal, reducing tax avoidance by big companies using these techniques is one of the objectives of the Group of 20 leaders summit in Brisbane next week.

The ability to move profits around the world purely by paperwork in return for what seems a minor fee to Luxembourg is a recurrent feature in the leaked tax agreements.

A 2010 agreement by the Future Fund appears to limit any income tax on trades in specific distressed debts to $136,000 a year, no matter how large the profits from a $500-million portfolio in Europe.

The Washington-based Inter­national Consortium of Investigative Journalists, which has led a review of the documents by more than 80 ­journalists in 26 countries, is releasing 548 Luxembourg tax agreements dating from 2002 to 2010 on its website at icij.org. They are available at afr.com.

Mr Jordan told the Financial Review the Tax Office was looking at the data to make sure companies paid their tax.

“We will be checking the data that has been published and if we see discrepancies from what we have been told, we will take audit action,” he said.

“I have written to our tax treaty ­partners, inviting their collaboration in joint investigation of this data to understand any tax risks and to explore opportunities for joint com­pliance approaches.”

Future Fund managing director David Neal said the fund’s Luxembourg structure “is commonly used by insti­tutional investors and external investment managers”.

“The structure is predominantly about providing operational efficiency and effective risk management.

“Indeed, as a sovereign investor, had the Future Fund directly invested in the underlying loans it would have ended up in substantially the same tax position.”

BUSINESS IN EUROPE, PROFITS IN THE CAYMANS
The fund’s guidelines state: “The Future Fund’s activity is not about avoiding tax but rather avoiding duplication of tax. The investment returns remain taxable in the underlying source country and in the investor home country.”

But the Future Fund’s 2010 Luxembourg agreement appears to sidestep almost all tax. The deal was organised through TowerBrook Capital Partners and approved by the tax official who handled all foreign companies in Luxembourg, Marius Kohl, on June 4, 2010.

The Fund was to spend up to €350 million ($500 million) on distressed debt in Europe. The debt would be traded by a Luxembourg company, HayFin Opal LuxCo 1 Sàrl, and two subsidiaries, funded by interest-free and convertible interest-free loans.

Under a “total swap return” agreement, any Luxembourg profits would go to a Cayman Islands company, ­Hayfin Opal Holdings, in return for a fixed fee that covered any losses.

Thus, while the Future Fund through its investment advisor appeared to be doing business in Europe, the reality was that the profits would be recorded in the Caymans.

Luxembourg “clipped the ticket” with a proviso that the Cayman company would pay a sliding fee to HayFin Opal Luxco 1 Sàrl, which would be 0.09375 per cent of the proposed €350 million invested. This sum, equivalent to $468,750, would be taxable in Luxembourg.

At Luxembourg’s 29 per cent tax rate the income tax would come to $136,000. The Future Fund’s profit could be many millions, but that profit would be in the Caymans, with Luxembourg’s tax take stuck at that flat $136,000, although other deductions could reduce this.

“Income derived from the structure is taxable and has been taxed in ­Australia, albeit the Future Fund is ­ultimately able to secure a refund based on its legislated non-taxable status,” Mr Neal said.

Accountants questioned if the tax-free status of a sovereign fund in Europe would extend to running an active business such as trading distressed debt.

The Future Fund agreement, like all of the 548 documents released on Thursday, are copies of correspondence by PwC partners in Luxembourg who lodged applications for advance tax agreements with Mr Kohl.

French journalist Edouard Perrin first reported on several of the files for France 2 television.

A 2009 management buyout of European assets of Babcock & Brown International was set up through five Luxembourg companies. When Goodman Group wanted to develop a large site in Poland in partnership with Goodman European Logistics Fund, it was through Luxembourg. (A spokesman said the company did not consider this to be a type of loan transaction targeted by the OECD.)

AMP, PWC MAKE THE MOST OF LUXEMBOURG
Rubicon Group in 2008 used a sequence of profit participating loans to finance four Austrian properties. PPLs, as they are known, allow profits to be repatriated as capital repayments rather than dividends.

AMP Capital Investors in 2009 allocated $1 billion to invest in Babcock & Brown and Macquarie projects including Kemble Water, MGN Gas, Angel Trains and Thames Water.

AMP’s Luxembourg structure involved twin chains of companies – one funded by profit-participating loans. The other loans received interest of just more than 1 per cent.

The PPLs allowed AMP to realise profits tax-free in Luxembourg, while the interest-bearing loans left a margin of 0.0625 per cent of the total, which became the income that was taxable for Luxembourg at 29 per cent.

AMP, which was paying about $190 a year for every $1 million invested, denied it sidestepped tax.

“AMP Capital does not use hybrid loans and does not employ base erosion profit shifting [BEPS] arrangements,” a spokeswoman said.

PwC’s Luxembourg arm, which earned €288 million last year ($413 million), is one of the grand-duchy’s biggest employers, with a reported 2900 employees.

An American lawyer for PwC Lux­embourg wrote to International Consortium of Investigative Journalists members on Tuesday, warning that further dissemination of the information would “violate money laundering, detention and concealment laws in Luxembourg”.

In a statement, PwC Luxembourg said the leaked documents “if authentic, were taken unlawfully by a former employee of the Luxembourg firm who then selectively provided them to the media”.

It called the material dated and open to misinterpretation without a full set of documents or a complete understanding of the structures involved. “We are prohibited from commenting on specific client matters but we reject any suggestion that there is anything improper about the firm’s work,” it said.

A spokeswoman for PWC Australia said all of its tax advice and assistance was “given in accordance with applicable local, European and international tax laws and agreements and is guided by a PwC global tax code of conduct”.

Luxembourg’s Ministry of Finance said advance tax decisions are “well established in many EU member states, such as Germany, France, the Netherlands, the UK and Luxembourg” and they don’t conflict with European law as long as “all taxpayers in a similar situation are treated equally”.



The Australian Financial Review

BY NEIL CHENOWETH
Neil is a multiple Walkley Award winning investigative journalist.

Why IKEA’s profits are mostly tax free
PUBLISHED: 6 HOURS 13 MINUTES AGO | UPDATE: 0 HOUR 37 MINUTES AGO

NEIL CHENOWETH
International tax schemes exposed
Lend Lease’s liking for Luxembourg
How a European duchy makes tax bills disappear
Search the #luxleaks database

Despite reporting decades of miserable results, Swedish furniture company IKEA’s Australian arm has earned an estimated $1 billion in profits since 2003, and almost all of it has been exported tax-free to Luxembourg and the Netherlands.

Documents submitted by accounting firm PwC to Luxembourg officials help unlock one of the mysteries of Australian retailing – how the flat-pack giant could lift its sales here by 500 per cent while its profits barely budged.

The Luxembourg documents detail secret advance tax agreements in 2009, and identify IKEA entities that have received hundreds of millions of dollars from the Australian operation – including franchise fees, interest payments and fees for a “risk agreement” that to date has cost $260 million.

In contrast to the offshore profits, IKEA reported losing money here every year from the mid-1980s until 2002, when accumulated losses stood at $67 million.



It was not until 2013, after a decade of small profits, that IKEA finally wiped out the accumulated losses to put its Australian arm in the black after 30 years of booming sales.

But the real secrets of the operation lie in Europe. The finances of the privately owned IKEA group, founded by Ingvar Kamprad in Sweden in 1943, are tightly guarded.

When Mr Kamprad moved back to Sweden last year from Switzerland,­ he announced that he was worth ­only 750 million ­Swedish kronor ­($116 million).

Outside estimates say the two sides of Kamprad’s empire holds €38 billion ($55 billion) in capital, while the value of the business ­is put as high as ­€66 billion.

Mr Kamprad says none of it is his: in 1982 he gave it all away to charity, in this case a charity in the Netherlands called the Stichting Ingka Foundation, (dedicated to safeguarding the future of furniture) while other entities in Luxembourg link back to Switzerland, the Netherlands Antilles and ­ultimately, the Interogo Foundation in Lichtenstein.

Ingka has donated $430 million over the last four years to benefit children in poor countries. This is 2.4 per cent of the $17.5 billion that the charity has earned in net profits over that time.

For decades Mr Kamprad, now 88, was described as living frugally in his villa in Switzerland. A 2012 Swedish television program reported he received a cheque in the mail every month for the Swedish aged pension.

While IKEA’s auditor is KPMG, when the group wanted a new tax agreement with Luxembourg it turned to PwC because of its close relationship with Marius Kohl, the Luxembourg bureaucrat who until last year made all decisions about foreign-owned companies in the duchy.

In its November 2009 correspondence with Mr Kohl, PwC emphasised that there were two separate parts to IKEA: “The IKEA Group of companies and the Inter IKEA Group of companies are independent and there is no common ownership or common management. The two perform different activities.”

The International Consortium of Investigative Journalists has led a review of the documents by more than 80 journalists in 26 countries. French journalist Edouard Perrin first reported on several files for the France 2 television channel.

The documents describe how IKEA Group owns and operates 264 IKEA stores in 24 countries including Australia, and owns the exclusive rights to develop the IKEA product range. As designer of the products it holds the intellectual property and thus can charge a mark-up when it sells the products to stores via IKEA Supply AG.

It works like this. From 2002 to 2013, IKEA Supply AG charged the Australian arm $2.67 billion as the cost of products. These were sold in the Australian stores for $4.76 billion. After other costs IKEA ended up with total pre-tax profits of $103 million for the period, on which it paid $31 million in tax.

AN HONEST 10 PER CENT
To put this into perspective, the worldwide IKEA Group prides itself on maintaining a minimum 10 per cent profit margin on sales each year.

In Australia, that would mean it must have earned $460 million in profits from 2003 to 2013.

For IKEA to maintain its 10 per cent margin on sales, it must have factored in a profit margin of at least $360 million into the cost it charges the Australian stores for its products.

There is nothing noteworthy in this, except that it appears IKEA doesn’t pay a great deal of tax on it.

Apple has iPhones manufactured in China and adds a hefty mark-up in the price by the time its products reach Australia, taking its profit well before the Australian Tax Office goes anywhere near it.

But that’s all Apple does whereas IKEA’s tax minimisation strategy has just begun.

It’s an expensive process running a major retail operation while at the same time developing a string of new mega-stores, as IKEA has done.

But alongside these understandable expenses, between 2002 and 2013 another $532 million was paid offshore.

Almost all of these payments appear to end up with the other part of Kamprad’s empire, Inter IKEA Holding SA, in Luxembourg.

While the IKEA Group holds the intellectual property for IKEA products, Inter IKEA Systems BV holds the intellectual property on the stores.

It is “the owner of the IKEA concept and ensures that IKEA concept know-how is continuously developed, transferred and made available to all IKEA franchisees,” the PwC Luxembourg documents say.

“The purpose of the [Inter IKEA] Group is to secure independence and longevity, and through Inter IKEA Systems BV control, safeguard and develop the IKEA concept. We seek to contribute to the IKEA vision to create a better everyday life for the many people [sic].”

Inter IKEA Systems BV charges 3 per cent of the retail price of every IKEA product, no matter how cheap, to pursue this noble aim. So in 2008, when IKEA global sales totalled €22.49 billion, €747 million flowed in franchise fees to Inter IKEA Systems BV, virtually all of it tax-free.

In Australia, from 2002 to 2013, franchise fees totalled a more modest $159 million. IKEA meanwhile was funding its ambitious building program for new stores.

From 2006 it began including under “financial expenses” a figure for “Payment under Risk Agreement”. That amount was $312,000 in 2006, but by 2008 it had grown to $54 million.

INTERCOMPANY LOANS
This coincided with rises in intercompany loans that replaced bank funding. IKEA Group has huge cash reserves, but from 2002 to 2013 it paid $114 million in interest and $260 million for the Risk Agreement.

As it happens, in addition to charging franchise fees the Inter IKEA Group provides finance for the IKEA Group. And this is where the problem arose that led PwC to write to Luxembourg’s Marius Kohl on November 11, 2009.

The company at the heart of IKEA’s finance operation was a Netherland Antilles company, Inter IKEA Holding NV, which in turn loaned money to a Belgian company, Inter IKEA Treasury SA, and to Inter IKEA Finance in Luxembourg.

The Australian intra-company interest payments would eventually find their way into this structure, as virtually tax-free income.

But, under pressure from the Economic Union, both Belgium and Luxembourg had been forced to make changes to tax laws which would ­­close the loopholes for finance companies that IKEA had exploited, with effect from January 1, 2010.

PwC’s solution for IKEA was a subtle transformation. Inter IKEA Finance Holdings SA would be turned into a “Société de Participations Financières” as the new centre of financial activities with tax advantages, after opening a branch of Inter IKEA Finance in Switzerland.

Under Luxembourg law, PwC stressed that no interest expenses paid in Switzerland could be claimed against Inter IKEA Finance’s Luxembourg income. Of course, profits in Switzerland could not be taxed in Luxembourg either.

Over time the Belgian company would forward up to €6 billion to Inter IKEA Finance Holdings SA – though to the Swiss branch, with only €6 million remaining in Luxembourg.

While it appeared from the outside that Inter IKEA Finance was a Luxembourg company enjoying all the benefits of an EU-member country, in effect it was now Swiss.

There were a few ends to be tidied up. Inter IKEA Finance’s balance sheet showed assets of €229 million.

It had another look at the investments and decided to revalue them – by €5 billion. It now proposed to pay out the €5 billion to its unnamed shareholders as a “repayment of fiscal capital”, which was tax free and did not attract a withholding tax.

HAPPY ENDING?
How did this all work out for Inter IKEA Finance? Pretty well, actually.

The Luxembourg documents show the company’s 2011 tax return, when it paid “wealth tax” of €199,170, and income tax of only €1,575.

What did this mean for Australia? It was pretty much business as usual.

A spokeswoman for IKEA Australia said it was not the company’s policy to comment on transactions and payments. “In Australia, two stores, in Perth and Adelaide, are operated by a non-IKEA Group company,” she said.

These also pay franchise fees, which presumably would boost overall returns beyond those calculated here.

The three payments by IKEA Pty Ltd – franchise fees, interest and the risk agreement – total $532 million from 2002 to 2013.

They are separate from the 10 per cent margin that IKEA Group targets because the Inter IKEA group of companies that benefit as previously noted are independent with “no common ownership or common management”.

Together with the pre-tax profits here, the Australian earnings for IKEA have been close to $1 billion. With negligible tax paid offshore the $30.7 million of Australian tax paid represents a tax rate of 3 per cent.

Meanwhile the group has earned operating cash flow over that time of $600 million.

In 2013 alone the operating cash ­flow was $118 million. ­IKEA has become a ­money pump.





The Australian Financial Review

BY NEIL CHENOWETH
Neil is a multiple Walkley Award winning investigative journalist.

@NeilChenoweth

Lend Lease’s liking for Luxembourg
PUBLISHED: 3 HOURS 43 MINUTES AGO | UPDATE: 1 HOUR 7 MINUTES AGO


NEIL CHENOWETH
Why IKEA’s profits are mostly tax free
International tax schemes exposed
How a European duchy makes tax bills disappear
Seach the #luxleaks database
Australian companies with property interests found Luxembourg particularly useful, according to the leaked tax documents.

The ability to move a business across borders became critical for Lend Lease in mid-2003 after what it told shareholders had been “a challenging year”, as it dealt with fallout from an unsuccessful attempt at becoming a global integrated real estate business.

“[T]o be frank, the organisation took on too much too quickly,” Lend Lease chairman David Crawford said in the annual report.

In May 1999, Lend Lease had set up Lend Lease Global Properties and Lend Lease Asia Properties, which held $US1.5 billion in assets.

Now Lend Lease said it was in talks to exit the investment. But where would the lucrative management fees on these funds go?

The fees were 1 per cent of the $US1.5 billion of gross assets, plus incentive fees as a percentage of gross profits above a given rate.

On July 30, 2003, PwC wrote to Duchy bureaucrat Marius Kohl to set out a management buyout scheme for the two Luxembourg companies that earned the management fees.

At the end of the process two new Bermuda companies owned 85 per cent of the business in Luxembourg. Lend Lease retained 15 per cent, but were still entitled to 75 per cent of the profits.

The management rights had been passed from two original Luxembourg companies, to Bermuda, and then subcontracted right back to Europe, to a company called Lend Lease ­Luxembourg Services Sarl.

‘HIDDEN CONTRIBUTION’
Luxembourg regarded these fees as a “hidden contribution” from the Bermuda company, so 90 per cent of the Luxembourg earnings should rightly be assigned to Bermuda. Only 10 per cent of the profit would be taxed in Luxembourg. This alone would cut the tax rate to less than 3 per cent.

Today Lend Lease has no active companies in Luxembourg. The group “consciously seeks to establish an open and respectful relationship with all tax authorities”, a spokeswoman said.

Macquarie Group bought Lend Lease out of the business, now renamed Macquarie Global Property Advisors (Lux) Sarl, and interposed two Malta companies, funded by interest-free and profit participating loans.

In 2006 the Luxembourg parent reported receiving advisory fees of $US27.1 million, before paying fees to related companies of $US20 million and $US1.9 million in Luxembourg expenses. That left a profit of $US5.2 million, of which only 10 per cent was taxable in Luxembourg.

By 2009 MGPA (as it was now named) was managing $US9 billion in funds. The fees – 1 per cent of gross assets plus incentive fees – could well have topped $200 million.

Macquarie’s accounts report that it held a 56 per cent interest in MGPA in Bermuda. It sold to US funds manager BlackRock last year for what was reported to be between $150 million and $200 million.

“The business was located outside Australia, and was neither controlled nor established by Macquarie,” a spokeswoman said. “Macquarie returns all of its income in accordance with [Australian global] provisions and complies with the taxation provisions of the international jurisdictions in which it operates.”

SOME DOCUMENTS INCOMPLETE
Some of the leaked PwC documents are incomplete – a 2008 application for Lend Lease International Distressed Debt Fund Holding Company II Sarl Lend Lease only has the cover page.

Prudential Assurance’s Asia Property Fund in July 2008 began by referring to an Australian real estate investment which it held through a chain of three Australian trusts, owned by a trust in the British Virgin Islands.

But tantalisingly, the remaining pages are missing.





The Australian Financial Review

BY NEIL CHENOWETH
Neil is a multiple Walkley Award winning investigative journalist.

@NeilChenoweth

EU moves on ‘illegal’ Apple tax deal coincided with AFR revelations
PUBLISHED: 02 OCT 2014 00:05:24 | UPDATED: 02 OCT 2014 04:55:35

EU moves on ‘illegal’ Apple tax deal coincided with AFR revelations
Apple is facing new tax bills. Photo: Reuters
NEIL CHENOWETH
KEY POINTS
June 2013: the EU opens an investigation into ASI’s tax agreements with Ireland.
June 2014: the EU releases its initial report saying state aid was illegal.

A report by The Australian Financial Review in March that revealed a decade of results for Apple’s key operating company in Ireland, coincided with a critical phase in the European Community’s investigation of Apple’s Irish tax arrangements.

The European Union on Tuesday released a preliminary finding that the Irish government had provided illegal state aid to Apple, through tax agreements it granted in 1991 and 2007 linked to saving jobs in Apple plants in Ireland.

If the initial finding is confirmed, Apple is facing new tax bills which could run to billions of dollars for three of its Irish companies, covering the years from 2004 to 2013.

One of these, Apple Sales International (ASI) earned $US81 billion ($92 million)from 2004 to 2012, while paying less than $US67 million tax in Ireland. It is thought to have earned at least another $US65 billion in the two years since.

The Financial Review revealed on March 6 that Apple had moved more than $8.9 billion in untaxed profit from its Australian operations to ASI in the last decade. The story revealed obscure corporate filings that Apple had made in Australia, including full operating results for ASI from 2000 to 2009. It was the first time that detailed financial figures had been obtained for the secretive ASI, which sources all Apple products outside the United States and China.

MINUSCULE TAX RATE
ASI’s minuscule tax rate was revealed in a scathing report by the US Senate’s Permanent Subcommittee of Investigations on May 21 2013, which cited brief headline figures for ASI’s earnings and tax paid from 2010 to 2012.

The EU opened an inquiry three weeks later, asking Ireland on June 12 2013 to provide information on any tax rulings it had made in favour of the three top Apple companies in Ireland.

By October the EU was seeking more documents about Apple, but by January 2014 the pace had slowed with the EU pressing Ireland for more information. The AFR’s story revealing the ASI filings was already published on the internet when Ireland finally replied to the EU on March 5 (local time).


In the letter, Ireland for the first time provided turnover figures for the three companies.

The Financial Review story on March 6 sparked interest around the world, and prompted questions in the Irish parliament. Within a day an Irish paper had obtained copies of the ASI files from Australia.

On March 7, the EU wrote to Ireland, saying that it was investigating whether tax agreements it made with Apple in 1991 and 2007 constituted state aid, and asking again for any additional information, noting with some apparent asperity, “the commission had already requested, in its request of 21 October 2013, all essential elements underlying the tax rulings”.

NO SURPRISES
On March 13 Organisation for Economic Co-operation and Development tax director Pascal Saint-Amans said he was not surprised by the AFR’s report.

“At the same time a person in Queensland or NSW will look at this and say ‘I pay more taxes yet Apple doesn’t pay anything and they have stashed $100 billion in Bermuda; and they have not paid taxes in Australia on that profit and they have not paid taxes in the US on that profit,” he said. “It’s just wrong. And if you don’t address it you have political issues. And if you don’t address those political issues, you undermine the compliance and the confidence in that tax system by the taxpayers.”

The EU wrote to Ireland on June 11 setting out its preliminary finding that Apple’s open-ended tax agreements with Ireland were illegal state aid. It also asked for annual returns of the three Irish companies from 2004.

Ireland’s department of finance issued a statement denying the claims: “Ireland is confident that there is no breach of state aid rules in this case and has already issued a formal response to the commission earlier this month.”

The Australian Financial Review

BY NEIL CHENOWETH
Neil is a multiple Walkley Award winning investigative journalist.

@NeilChenoweth

Stories by Neil Chenoweth

I don't get it, biz making money, just pay the biz tax lah! why run away?!!

(06-11-2014, 03:38 PM)brattzz Wrote: I don't get it, biz making money, just pay the biz tax lah! why run away?!!

Buddy,

It might be a case of a small dose of greed but a larger part of trying to beat the status quo.

" Can do anything but don't get caught "

Richard Goyder fears tax complications as companies defend arrangements
THE AUSTRALIAN NOVEMBER 07, 2014 12:00AM

Leo Shanahan

Reporter
Sydney
Annabel Hepworth

National Business Correspondent
Sydney

THE head of the business forum to partner the G20 has warned against further complicating the tax system through a global crackdown, as Australian companies that have been named in a trove of documents exposing tax-minimisation schemes in Luxembourg defended their arrangements.

A review of almost 28,000 leaked confidential documents by the International Consortium of Investigative Journalists found companies such as Pepsi, Ikea and FedEx appeared to have channelled funds through Luxembourg to minimise tax bills, while maintaining only a slight presence in the small European state.

Although not illegal, the process revealed in the leaked documents from work by accounting firm PwC shows some companies enjoyed an effective tax rate of less than 1 per cent on profits funnelled into Luxembourg.

The documents name several large Australian companies including the Future Fund, AMP, Macquarie Group and Lend Lease.

Tax evasion via offshore schemes will be a focus of the G20 political leaders’ meeting in Brisbane next week.

B20 chairman and Wesfarmers chief executive Richard Goyder noted that work was being done on base erosion and profit shifting, and cautioned against tax regimes becoming too complex.

“One thing about tax though is we don’t want to get too complicated on this because that will ­become a nightmare in itself, and become a barrier as well,” Mr Goyder said yesterday.

“To me there needs to be some simple principles. Where individuals and corporates are rorting the tax system, then that needs to be dealt with, and can be dealt with.”

While tax commissioner Chris Jordan has vowed to investigate whether the information corresponds with tax office records, Greens leader Christine Milne has demanded a Senate inquiry into tax avoidance investigate the documents and the companies.

Future Fund chairman Peter Costello did not comment on the fund’s arrangement in Luxembourg, but a spokesman said the “G20 has not nominated this structure as an area of concern”.

Lend Lease said in a statement the company no longer had “active operations” in Luxembourg and the reports related to “legitimate structures which were considered non-core assets from more than a decade ago”.

AMP Capital said it did not use hybrid loans nor employ base erosion profit shifting arrangements. “We are supportive of the OECD BEPS project,” it said.

Macquarie Global Property’s Europe Fund is shown in the documents organising transfers of funds between Bermuda and Malta as well as Luxembourg in a bid to minimise tax. A spokesman for Macquarie did not comment.

While PwC yesterday said all “advice and assistance is given in accordance with applicable local, European and international tax laws”, in a recent interview the firm’s tax partner Tom Seymour said it was a “dangerous position” to advise clients to do what is “right” in relation to tax. “We have got to provide advice to our clients to follow the law. Some will argue that you shouldn’t do that, you should advise people on what you think is right. But that is a very dangerous position to put anyone in society in,” he said.

Additional reporting: Andrew White, Jared Owens

Firstly we need to understand the difference between tax evasion and tax avoidance.

Tax evasion is the illegal evasion of taxes by individuals, corporations and trusts.

Tax avoidance is the legal usage of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. Tax sheltering is very similar, and tax havens are jurisdictions which facilitate reduced taxes.

Being the professionals, I don't think that auditors would like to involve in tax evasion that risks against their licenses even rewards are great. Furthermore auditors, especially those in Singapore, are mostly kiasu and kiasi type due to stringent regulations by monitoring authorities globally.

However, if the auditors are involved in the tax avoidance cases, chances for them to get into troubles is impossible, unless the regulator interprets it as a tax evasion instead in accordance to laws and legislations. If it is a tax avoidance, the only thing regulator can do successfully is to implement changes to the existing laws to cover these loopholes.

It is not only auditors are involved in these "global profits shifting", but I personally deal with lawyers which are also expert in these areas. Bottom line is that these professional have to be careful in playing the games, otherwise licenses kena suspended any time.

How hidden billions flow through Luxembourg
PUBLISHED: 7 HOURS 6 MINUTES AGO | UPDATE: 3 HOURS 18 MINUTES AGO

How hidden billions flow through Luxembourg
Prime minister of Luxembourg from 1995 to 2013, now European Union commission chief Jean-Claude Juncker: ‘No one has ever been able to make a convincing case to me that Luxembourg is a tax haven.’  Photo: AFP
NEIL CHENOWETH
ATO could lose out in OECD tax crackdown
OECD tax chief says avoidance a ‘fact of life’
International PwC tax schemes exposed

Picture a public servant in his late 50s, dapper with a ponytail and beard, ­sitting in a glass-fronted office near a railway station in central Europe.

He leans forward to sign the document in front of him. The signature is well practised: two tiny loops and a long downward slash that implausibly are supposed to connote his name, Marius Kohl.

It’s a done deal. Kohl, inspecteur principal of Sociétés 6, the Luxembourg tax office that oversees 50,000-odd foreign-owned companies in the grand duchy, has just signed another tax agreement. These set out how much tax a foreign company will pay.

They’re eye-wateringly dense and filled with arcane company ­structures illustrated by diagrams which should only be viewed with smelling salts handy.

Kohl had a staff of 50 but in the end he was “Monsieur Ruling”, as they referred to him. He was the sole arbiter on deals that channel more than $US120 billion ($140 billion) a year of profits by foreign companies through Luxembourg.

On a good day he would sign up to 39 of these tax agreements with foreign companies. In a 12-hour day, that’s one signature every 18 minutes.

And with that signature, hundreds of billions of dollars of profits disappeared from the radar of tax authorities across Europe, North America, Asia and Australia.

THE BIG LEAK
The massive leak this week of 348 of these tax agreements, after a global review led by the International Consortium of Investigative Journalists in Washington, has caused consternation around the world. This is a publicly funded organisation run by former Fairfax journalist Gerald Ryle.

The documents, which run to almost 28,000 pages, are formal applications that accounting firm PricewaterhouseCoopers made to Kohl for advance tax agreements, as they are called. French journalist Edouard Perrin has previously covered several files for France 2 television network.

All of the big four accounting firms have Luxembourg offices, but PwC, with some 2900 employees, has long enjoyed the best access to Sociétés 6.

Less than a third of the tax agreements included money sums, but those that did totalled $US230 billion.

Australian companies in Luxembourg, which AFR Weekendhas been studying in a five-month project with the ICIJ, include Macquarie, Lend Lease, the Future Fund, Goodman Group, Babcock & Brown, ­Rubicon and Allco.

They include a string of foreign multinationals using Luxembourg to cut taxes in Australia including Procter & Gamble, Vodafone, Imperial Tobacco, mining companies and pharmaceutical giants.

ATO INVESTIGATES
Tax commissioner Chris Jordan has moved aggressively to investigate. He told The Australian Financial Review that the Australian Tax Office was analysing the documents “and if we see discrepancies from what we’ve been told we will take audit action”.

“I have written to our tax treaty partners, inviting their collaboration in joint investigation of this data to understand any tax risks and to explore opportunities for joint compliance approaches,” Jordan said.

Jordan’s concerns have been echoed around the world, but the most strident protests have come from PwC and Luxembourg. They are outraged over the leak because at heart these agreements between foreign companies and Luxembourg were supposed to be secret. While the rest of the European Union agreed in the late 1980s to share details of any advance tax agreements they negotiate, Luxembourg and Ireland have declined to share information.

A US lawyer for PWC Luxembourg wrote to ICIJ members and partner media groups including the Financial Review this week, warning that reporting on the documents “violate[s] money laundering, detention and concealment laws in Luxembourg”.

PWC Luxembourg has said the documents were obtained by a former employee and were the subject of a criminal investigation in the grand duchy. It called the material dated and open to misinterpretation without a full set of documents or a complete understanding of the structures involved. “We are prohibited from commenting on specific client matters but we reject any suggestion that there is anything improper about the firm’s work,” it said.

What makes the documents so troubling outside of Luxembourg is that, while the tax agreements are perfectly legal, they underline the way this tiny duchy has promoted global tax avoidance on an industrial scale.

Luxembourg kept its tax at 29 per cent. It’s just that not paying much turned out to be so easy.

IKEA FLAT-PACKS PROFITS
There was IKEA, the world leader in disassembled furniture, which has masterfully managed to flat-pack its own profits from local markets.

From 2002 to 2013, IKEA’s Australian arm has reported $103 million in taxable profits here. But on closer scrutiny, IKEA’s real profits are estimated to be $1 billion.

The income on products and intellectual property is mostly booked to entities registered in Europe. Buy an easy to assemble book case in Australia and the earnings are boxed and sent express freight to two separate groups of IKEA companies in the Netherlands and Luxembourg. The income is tailor-made to be unpacked and reassembled in low-tax jurisdictions.

Then there are the anatomically implausible positions the giant US online retailer Amazon.comn effortlessly seems to adopt, in the process of smoothly transferring profits made outside North America (apparently including Australia) to its Luxembourg companies, on the way to Gibraltar and other tax havens.

Amazon doesn’t spell out where the profits go. But based on the 2009 accounts in the Luxembourg documents, the money trail goes a little like this: when you press on the one-click-buy button on Amazon’s website, at least 25 per cent of the price goes to Amazon. More specifically, it goes to a company in Luxembourg called Amazon EU.

From that 25 per cent, out of every $100, Amazon pays $26 to ship the books to you, then another $8.30 on marketing and commissions. There are other costs–bank and credit card fees, office costs and suchlike, that come to $4.40. Staff salaries make up 80¢ from the $100 (perhaps a little more if you count the end-of-year bonus).

That leaves $35, which would be profit, except that Amazon pays $7 to other Amazon companies as “service fee expense”. That appears to end up in a tax haven.

Another $28 goes to a Luxembourg limited partnership, Amazon Europe Holding Technology, as a payment for intellectual property – for example for the software for the one-click-buy button you just used.

Amazon Europe has already bought the rights to use the IP from another Amazon company, in Nevada but it only paid $5.60 for it. So Amazon Europe has a $22.40 profit, which it sends tax-free to Gibraltar. With the inter-company fees, that’s $29.40 tax free.

Sounds easy, right?

The IKEA and Amazon deals, as well as the Future Fund and Macquarie and AMP transactions were only possible because of two men.



 

THE DEALMAKERS
Kohl, now aged 62, ran Sociétés 6 from August 1988 until he resigned last year (and was replaced by six people). But it was a tandem act with the man who was appointed finance minister of Luxembourg in 1989. That was Jean-Claude Juncker.

As prime minister from 1995 to 2013, Juncker enacted many of the tax loopholes that foreign companies now use – laws which make finance company earnings tax free, for paper devaluations of assets to count as tax deductions, making 80 per cent of royalty payments tax-free, it’s a long list of accomplishments for Juncker, who took office this week as president of the European Commission, which is investigating Luxembourg’s treatment of Fiat and Amazon.

While Juncker has said he will not intervene in the investigations, recently he told German television: “No one has ever been able to make a convincing and thorough case to me that Luxembourg is a tax haven. Luxembourg employs tax rules that are in full accordance with European law.”

The US Bureau of Economic Analysis reports that US companies made profits totalling $US95 billion in Luxembourg in 2012. They paid Luxembourg $US1.04 billion in tax: an effective tax rate of 1.1 per cent.

Many of the tax agreements carry a certain air of unreality. In 2010 when the Future Fund wanted to trade in distressed debt, TowerBrook Capital Partners helped set up a structure where the Fund invested up to $500 million in the Caymans, which then loaned the money in a series of interest-free and profit-participating loans to Luxembourg companies to buy and trade the debt.

The Luxembourg companies would enjoy all of the benefits of operating in an EU country, protected by Luxembourg’s many double tax treaties.

But when it came to making profits, they were all whisked to the Cayman Islands under a total return swap agreement. The swap was that the Cayman’s company would pay all the cost of the Luxembourg companies and in return get all the profits tax-free.

There was one tiny exception. The costs paid to the Luxembourg companies would include an extra payment, a sliding scale which on the Future Fund’s $500 million was 0.09375 per cent of the total or $468,750.

That would be taxable income, attracting all of Luxembourg’s high 29 per cent tax rate. The Future Fund’s tax bill would be $136,000 every year. Even if it made millions of dollars in profit, the tax would be the same.

This is a tax, but it looks more like a flat fee – a straight charge by Luxembourg for the right to operate a tax-free trading business in Europe. Like a fund manager, Luxembourg is clipping the ticket.

When AMP Capital investors in 2009 allocated $1 billion to invest in Babcock & Brown and Macquarie infrastructure deals in Europe, it set up a linked series of paired Luxembourg companies, on one side featuring no interest or micro-interest loans and on the other side, profit-participating loans.

That meant AMP had tax-free profits in return for paying tax to Luxembourg of $190 a year for every $1 million invested. Again, it looks more like a fee than a tax.

“AMP Capital does not use hybrid loans and does not employ base erosion profit shifting [BEPS] arrangements,” a spokeswoman said.

Luxembourg’s Ministry of Finance said advance tax decisions are “well established in many EU member states” and they don’t conflict with European law as long as “all taxpayers in a similar situation are treated equally”. A spokeswoman for PWC Australia said all of its tax advice and assistance was “given in accordance with applicable local, European and international tax laws and agreements and is guided by a PwC global tax code of conduct”.

THE CONSEQUENCES
The question is, will anything be done? The Future Fund says such structures are part and parcel of international investing. Using Cayman Island companies may even cost more because of the lack of bilateral tax treaties (the fund may be being unduly pessimistic here).

The fund’s guidelines state: “The Future Fund’s activity is not about avoiding tax but rather avoiding duplication of tax. The investment returns remain taxable in the underlying source country and in the investor home country.”

Double taxation is a legitimate concern. But the reality is that many investors and many companies now routinely avoid paying any income tax anywhere. The mantra that everyone does it is no longer convincing.

Treasurer Joe Hockey said on Friday tax loopholes were a political issue for G20 countries. Ugly though the revelations are, they give the Treasurer a new chance at a moment in the sun. His attempts at G20 consensus on growth struggled for traction. Now he has an unarguable issue. Member nations were determined, he said, to close loopholes. All he has to do is achieve it.

The Australian Financial Review

BY NEIL CHENOWETH
Neil is a multiple Walkley Award winning investigative journalist.

@NeilChenoweth