3rd June 2020
Despite COVID-19 dominating the news agenda for some time now, recruiters placing contractors abroad cannot afford to lose vigilance when it comes to tax, as international bodies are continuing to carry out stringent measures to prevent non-compliance.
As it stands, nothing has changed in the way that compliance is being managed and enforced by authorities around the world. Whether it be the OECD, EU, or UN – these groups have been extremely active in reducing tax evasion over the last couple of years, and this will only continue as the global economy is hit hard by COVID-19.
Toward the end of May, news emerged that the European Commission had launched legal proceedings against Luxembourg, a popular contracting hotspot, over its failure to implement laws to prevent money laundering and tax avoidance. Here’s what recruiters need to know about the EU tax crackdown in Luxembourg.
EU tax crackdown: Luxembourg under fire
The EU rules in question – which were approved in May 2018 – were initially introduced to step up scrutiny of financial assets controlled by politicians and company owners, while also clamping down on money laundering. However, Luxembourg is among the few states that are not yet fully applying them, according to the Commission.
As a result, the body has urged the nation to change its laws that allows companies to cut their tax burden beyond what is permitted under EU rules, since it leads to reduced tax revenues in other member states. If ignored, Luxembourg could face extensive fines.
A history of evasion
This is not the first time Luxembourg has faced pressure from the EU, and a delay in applying a previous revision of money laundering rules approved in 2015 forced the Commission to take a legal case all the way to the EU’s top court in 2018 – the most serious stage of the EU’s procedures against states that do not comply with common legislation.
However, after this initial intervention, Luxembourg swiftly adopted new legislation that requires disclosure of the owners of companies and trusts, stronger powers against money laundering and stricter checks on banks, lawyers and accountants.
The country, which has long been famed as a ‘tax haven’, hosts as much foreign direct investment (FDI) as the United States and much more than China according to data cited in an International Monetary Fund report last year. In fact, the report estimated that the FDI in the Grand Duchy is worth a staggering $4 trillion, a 10th of the global figure.
A large part of that money is parked in shell companies set up by multinationals, with no real business activities in Luxembourg, IMF research said, adding that favourable tax treatment is one of the main reasons for creating these financial vehicles.
EU Tax Crackdown: The blacklist
On the whole, the EU has been extremely active in its crackdown on tax crime in recent years, with its actions towards Luxembourg just one of many steps taken to target non-compliance.
One of the most effective methods the EU has implemented to get countries to adhere to regulations is its blacklist. Started back in December 2017, this has pressured numerous countries to change their tax systems. In addition to the blacklist, the ‘grey list’ of nearly 50 countries that have committed to making reforms has also shown results.
For example, in December 2018, the Cayman Islands published three new bills in an attempt to stay off the blacklist. Liechtenstein also ended long-standing damaging tax practices in direct response to being ‘grey listed’. In fact, last year this tactic proved so successful that it seemed that even the USA would potentially end up on the ‘grey list’ of jurisdictions that are failing to take appropriate action on tax fraud.
Many other international bodies are also taking a stricter approach to compliance and introducing a number of methods aimed at helping nations recoup lost revenue. For example, the Common Reporting Standard (CRS), the OECD’s information standard for the automatic exchange of financial information between countries, has seen widespread adoption throughout the international community with 96% of authorities that have committed to the CRS already passing the required domestic laws to implement it.
Luxembourg’s recent actions
As it continues to face pressure from the EU tax crackdown, Luxembourg has recently been taking a number of steps to fall in line with global tax standards. After the LuxLeaks scandal in 2014, a controversy initiated after group of journalists leaked confidential information about Luxembourg’s tax rulings, the destination has been taking concerted action to implement changes.
For example, recent reports have shown that the amount of financial information requests received by Luxembourg in the past ten years has jumped from 832 to 2,309 since the G20 ended bank secrecy.
The country’s government has also laid down draft legislation to enact the second EU Anti-Tax Avoidance Directive into domestic law. This aims to combat current avoidance practices which mitigate the tax liability for transactions both within and outside of the EU.
And in 2017, there was a landmark EU ruling against Amazon in Luxembourg, which from 2006 to 2014, allegedly reduced Amazon’s taxes by a whopping €250 million through funnelling profits into the company. This meant that during this eight-year period, the business effectively paid a total tax rate of just 7.25% in Luxembourg.
Contractors need to be aware
Despite the effects of the coronavirus, authorities are continuing to proceed with the global compliance crackdown, and it’s clear that the legal landscape when placing contractors abroad is set to become even more complex.
Recruiters cannot afford to be complacent when it comes to international compliance, as the EU’s tax crackdown on Luxembourg is just one of many examples of the increasing scrutiny that firms will face when doing business abroad.
With the introduction of legislation such as the Criminal Finances Act 2017, firms can now be held fully liable for non-compliant behaviour of anyone associated with the company, even contractors. However, this shouldn’t stop you doing business abroad, and by investing in an expert contractor management service, you can rest assured that any risk is managed for you, allowing you and your team to focus on the job at hand.