In Luxembourg, tax avoidance is officially seen as good for the state - nothing new there. His past as the country's premier could be a problem for the chief of the European Commission head, says DW's Bernd Riegert.
Everyone knew. For many years, Luxembourg offered companies the opportunity to push their tax burden to close to zero by taking advantage of particularly lackadaisical tax legislation. That's the business model of the tiny duchy that enjoys a good reputation in financial circles, and has done so for decades.
On its website, the international business consultancy Price Waterhouse Coopers (PWC) officially praises the good cooperation with government offices that are very "innovative" in coming up with extraordinary strategies to avoid taxation. The firm has 2,000 employees in Luxembourg, and they aren't in the country for the duchy's lovely scenery or cultural treasures. Luxembourg is home to dozens of similar consultancies, and hundreds of international companies have followed their call. All of the European politicians who are now pointing a finger at Luxembourg and its former Prime Minister Jean-Claude Juncker know that.
EU member states compete against one another with their tax shelter schemes and tax laws. Internationally, some are regarded as veritable tax havens. The Netherlands, Ireland, Britain, Malta, Cyprus also offer such services to companies and investors. The new disclosures, dubbed "Luxembourg Leaks", once more shine a light on the practices.
Tax avoidance, or tax organization, according to Luxembourg legislation is legal. In a globalized world, international firms seek the best model, shamelessly taking advantage of the competition beetween different countries. Efforts to clip these models on an international level in the framework of the OECD or the G20 are still in the early stages. Recently, 50 states agreed to exchange tax and bank data, but that's aimed at disclosing tax evasion, a criminal offense, unlike tax avoidance, which is not punishable.
It's morally objectionable because the states that work along those lines lose billions in taxes. The ActionAid development aid organization has long pointed out that international enterprises use the model to avoid taxation in developing countries. The amount saved in taxes exceeds what is paid in state development aid. So actually, the scandal is that these states, not just Luxembourg, condoned and supported the practice for decades.
Last year, the European Commission, led now by Jean-Claude Juncker, started to investigate various tax avoidance models in its member states, including Luxembourg. They could be looking at illegal state assistance. Tax legislation, however, is a national matter that hasn't been harmonized in Europe. A credible currency union in Europe would also require a tax union with standardized tax rates and standardized regulations - all of which is a long way off.
The question remains whether Jean-Claude Juncker is the right man at the head of the inquiry.
He pledged to take a tough stance on the issue against all member states, including his native Luxembourg. As prime minister, he was responsible for the decisions now under investigation. Can he really stay neutral? Can he remain credible? Perhaps he should at least assert his bias and avoid contact with the ongoing investigation. He is still defiant, but he must make an announcement soon if he doesn't want to ruin his reputation as an independent guardian of the European Aaccords - the EU Commission president's job. The Juncker Commission is facing a glaring false start.