Luxleaks tax disclosures serve the public interest – prosecuting the source does not

More than 70 politicians and tax transparency campaigners have signed a letter to the Guardian deploring Luxembourg’s decision to bring criminal charges against a former PwC employee believed to have passed to the media confidential rulings awarded by Luxembourg tax authorities.

As The Guardian noted last night, 20 news organisations around the world have published detailed investigations into the tax affairs of several multinationals based on leaked tax rulings that PwC obtained in Luxembourg for some of its clients.

The reports were timely. The G20/OECD project to tackle base erosion and profit shifting (BEPS) among multinational groups of companies has gained widespread, if qualified, support among tax authorities, business and campaigners. There is an ambitious timetable but the rate of progress to date reflects a sense of urgency, and there is a real chance to close at least some of the gaps in the international tax system.

The current, outdated system rewards “tax competition” and big business, but it fails governments and smaller businesses who complain of an unlevel playing field. There is a real sense of injustice, four years after a Financial Times editorial spoke of “the scandalous tax treatment of multinationals in the rich world”.

What surprised me about Luxleaks was the scale of the aggressive – albeit legal – schemes to minimise corporate income tax liabilities by means of huge payments into Luxembourg companies, often in the form of interest or royalties. The money doesn’t leave the group but a company in the UK or the US, for example, obtains a significant tax deduction while the Luxembourg company pays very little tax on the money it receives. Some multinationals have been avoiding hundreds of millions of pounds of tax in this way, securing a massive advantage each year over smaller businesses.

As the letter’s signatories say, the Luxleaks disclosures have exposed the “industrial scale” of this activity and have “forced senior Luxembourg politicians, past and present, to admit there is an urgent need to reform the way multinationals are taxed”. They add:

“The revelations have also transformed the international tax debate, prompting the finance ministers of France, Germany and Italy to write to the European Commission calling for urgent action. In their words: ‘It is obvious that a turning point has been reached in the discussion on unfair tax competition … Since certain tax practices of countries and taxpayers have become public recently, the limits of permissible tax competition between member states have shifted. This development is irreversible.’”

They also note that the EU’s competition commissioner is treating the LuxLeaks papers as “market information” and is actively reviewing the rulings in relation to possible breaches of state aid rules, and they write:

“While we understand and agree the rule of law must be observed, we note that Luxembourg prosecutors are required to have in mind whether or not the public interest is served by pursuing a criminal prosecution. We believe there is no public interest in prosecuting an individual suspected of bringing the LuxLeaks papers to the attention of the world.”

The authors are absolutely right.

There is a huge, legitimate public interest in this issue and an urgent need for lasting reform.

The Luxleaks papers have drawn public attention to the scale of the problem, something that was known only to Luxembourg and the businesses and tax advisers directly involved.

If the BEPS project is largely successful, the beneficiaries will include the many multinationals, and tax professionals, who don’t engage in aggressive avoidance but are concerned that their reputation is being adversely and unfairly affected by the ongoing debate. Luxleaks will have contributed to that success by illustrating the size of the problem.