LUXEMBOURG: Luxembourg remains key enabler of tax avoidance, report says

Luxembourg remains a key facilitator of tax avoidance and is part of an axis of countries responsible for more than a third of all tax losses suffered by nations worldwide, according to a report by the Tax Justice Network.

The Grand Duchy was ranked tenth in a global list of states which “most help multinationals avoid paying corporate tax”, in the latest annual report entitled Tax Justice: State of Play 2024 published last week by the Tax Justice Network.

Luxembourg was one of four European countries in the top ten, coming after Switzerland (4th), the Netherlands (7th) and Ireland (9th). The ranking is dominated by the British dependencies, with the British Virgin Islands in top spot, followed by the Cayman Islands and Bermuda.

A host of countries, including the Grand Duchy, the Netherlands, Switzerland, the UK and its dependent territories, is responsible for 36% of all tax losses suffered by countries worldwide, the report said, amounting to a total cost of more than $177 billion (€168 billion) in lost taxes each year.

“For every dollar collected by one of these tax havens, the world’s governments – and thus their citizens – lose more than $5 (€4.75),” the report noted. “The continued tolerance of this corporate tax abuse is grossly inefficient on a global scale and results in a significant transfer of wealth from people and workers around the world to corporate giants and their shareholders and the world’s wealthiest households.”

Global revenue losses due to cross-border tax abuse amount to $492 billion (€468 billion) per year, according to the NGO’s report, with the trend showing an “increase”.

Abusive practices
This loss is due to two practices, the report said: a very large part is due to corporate tax avoidance by multinationals, which represents $348 billion (€331 billion) in tax losses per year. The rest – $145 billion (€138 billion) per year – is due to offshore tax evasion by wealthy individuals and their undeclared offshore assets.

Tax evasion by multinationals includes different practices, according to the report, with criminal tax evasion on one hand and, on the other hand, the use of practices which are technically legal but “nevertheless contribute to the discrepancy between the location of the real economic activity of companies and the location where their profits are declared for tax purposes”.

A chart showing the 20 jurisdictions most responsible for enabling global corporate tax abuse as of October 2024, according to the Tax Justice Network
A chart showing the 20 jurisdictions most responsible for enabling global corporate tax abuse as of October 2024, according to the Tax Justice Network 
Through these practices, multinationals transfer an average of $1.42 trillion (€1.35 trillion) in profits to tax havens, according to the NGO’s calculations, with an ultimate loss of $348 billion (€328 billion) in direct tax revenue per year.

However, three-quarters of this sum is lost in tax havens whose effective tax rate is less than 10%, the authors of the report point out, including Luxembourg, but also the United Kingdom, the Cayman Islands, Singapore, the Netherlands, Hong Kong, Bermuda, Puerto Rico and Jersey.

More specifically, the “tax evasion axis”, as the Tax Justice Network describes it, is responsible for 33% of corporate tax losses. A total of $469 billion (€445 billion) in profits are transferred by multinationals each year to this “axis”, which costs the world $115 billion (€109 billion) in lost taxes due to corporate tax abuse, according to the report.

Luxembourg alone contributes 2.6% of global tax losses to third parties due to corporate tax abuse, according to the report. In Europe, only Ireland (9.9%), Switzerland (5.4%) and Denmark (3.3%) have a higher share.

Offshore tax evasion
In the area of offshore tax evasion by wealthy individuals, Luxembourg is among the key enablers, the report claimed. The axis of several countries is responsible for 43% of the losses, which costs the world $62.7 billion (€59.5 billion) in lost taxes.

Luxembourg alone represents 5.6% of the total losses, second in Europe behind the United Kingdom (14.6%), but ahead of Ireland (4.5%), the Netherlands (3%) and Switzerland (1.3%).

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A United Nations proposal for a global tax convention, which could be adopted by 2027, offers hope in clamping down on tax avoidance, the NGO noted.

“The world is on the verge of a fundamental reform of international tax governance,” the Tax Justice Network said.

However, among the OECD countries, the EU, including Luxembourg, initially opposed the initiative with a vote of rejection in 2023, before changing its position by abstaining in August 2024.

Eight countries are still firmly opposed to the initiative: the United States, the United Kingdom, Australia, Canada, Israel, Japan, New Zealand and South Korea. These eight countries and their dependencies are home to only 8% of the world’s population, but are collectively responsible for 34% of global tax losses due to corporate tax abuse, the Tax Justice Network said.