INVISIBLE MONEY 2: VOYAGE TO LUXEMBOURG
Invisible Money 2
In Which We Voyage To Luxembourg
And Discover Many Curious Things
With the inner workings of so many corporations and individuals laid bare in Perrin's documents, with all of what the English like to call the "juicy bits" on display, the question is where to begin. Where to start with the various entities who employ the tender mercies of Luxembourg authorities in their tax-avoidance schemes? Ground Report is an anglophone site, so we begin with a company based or operating in either the U.S. or the U.K., and preferably both. Further, there should be the use of Luxembourg not just as a tax haven or fiscal paradise but the conscious evasion of at least one country's laws. It wasn't hard to find.
Two notes before we begin. One, in 2003 Carl Levin, Senator from the great state of Michigan, held hearings on the tax shelter industry. That was some time ago. Things have advanced considerably since then but Levin managed to make some headway in the dark forest of tax secrecy. One of the things he discovered is that the international accounting firm of KPMG made cold calls to many companies whose message was, in effect, "All your competitors are doing it" - that is to say, your competitors are moving their money overseas, to tax havens and fiscal paradises. KPMG's competitors in the Big Four accountants were employing the same tactic and the message got through. What we have seen since then is massive capital flight in search of sweet tax deals. Individuals, companies, even U2's Edge has been moving the band's money in search of "revenue enhancement." (His words.) Things have grown so topsy turvy in the business world that, in Perrin's words, companies "would be stupid or irresponsible to their shareholders if they didn't do it." Pity the poor CFO at a corporation, faced with the glaring tax advantages of cheating vis a vis his competitors. He's damned both ways.
All this discussion of finances leaves out the ethical or moral dimension of these high crimes and financial hijinks. That's another series entirely. Whatever handbook of an "ethical guide to business" ever existed - has been shredded. The strips of paper are easy to find if you don't mind getting your hands dirty sorting through dumpsters.
Two, although Luxembourg is hoist on the end of a petard in this series, that country is not the final destination for most of the money discussed here. A certain amount resides in Luxembourg's banks and the country's tax assessors are careful to claim their share, but the whole nature of modern finance, what James T. Henry calls "the dark side of globalization," is that money is relentlessly moving from haven to haven. It is loaned, subdivided, counted as securities or equities, hedged against future trades - but it does not sit still. Banking is virtual now, and "offshore" is no longer a location.
Tracking any one of these funds is difficult, and not just because of secrecy. This despite all the bright noise from the G20 and other international bodies about cracking down on "financial blackholes" since the beginning of the current crisis. Clearly, austerity applies only to some.
This article could be called How It Works. It is only part of one case history.
As they helpfully note on their website, Pearson plc is "The world's leading learning company. We have 36,000 people in more than 70 countries helping people of all ages to make progress in their lives..." The list of companies Pearson owns would fill a page or more. They are both the world's largest publishing house and the world's largest education company. Divided into Pearson International and Pearson North America (education publishing and services), they own Penguin, the Rough Guides, the Financial Times and all its services, as well as a 50% stake in The Economist (UK). They are heavily involved in educational testing and on-line learning, especially in the United States (SATs, teacher certification, textbooks, etc.). In 2009, Pearson had sales of £ 5,624 million and an operating profit of £ 858 million. They buy and shed companies with alarming rapidity.
Of Pearson's 36,000 employees, it is hard to say how many of them work behind the door on the second floor of 17 Rue Glesener, which is where Pearson Luxembourg No 2 sarl, FBH Inc sarl and the Luxembourg branch of Embankment Finance Ltd., among other financial entities, are located. Even with a long list of companies on the mailbox for a medium-size apartment, we can hazard the guess that there aren't very many people working inside. Perrin, his cameraman and Richard Brooks of Britain's Private Eye magazine found only one man, and he threatened them with the police if they didn't vacate premises toute de suite.
Pearson's Luxembourg branches are a fig-leaf for tax avoidance. They are part of the international game called "Move the Money." They exist - or rather the handful of employees, their desks, computers and fax machines exist to give Luxembourg tax authorities cover to declare Pearson a legitimate business in that country. Decisions are made elsewhere.
Pearson went through Luxembourg in order to avoid taxes in both the U.S. and the U.K. Based on the documents in Perrin's possession, it was chillingly easy.
Here's how it works. On April 21, 2010, Price Waterhouse Cooper, in their capacity as Luxembourg accountants for Pearson plc, met with Luxembourg authorities to discuss "the tax treatement applicable to the transactions foreseen by our client." On June 24, PWC wrote to Mr. Marius Kohl to confirm details of the April meeting with him.
Kohl is the head of the Administration de Contributions Directes, Bureau d'imposition Sociétés VI - the corporate tax officer. The man in charge.
The PWC document is stamped as received by Kohl's office the same day, so perhaps those fax machines are actually plugged in in Luxembourg.
As an earlier November 2009 Price Waterhouse Cooper document spells out, Pearson wanted to loan $587 million to its U.S. educational outfit, Family Books at Home. Embankment Finance in the UK was ready - to loan the money to a Luxembourg subsidiary. Approval by Luxembourg authorities required a certain amount of corporate reorganization if the most minimal taxes were to be paid.
To quote from the PWC letter: "A.5 Family Books at Home Inc. ("FBH"), a US company, will be transferred under PLN2, then will migrate its central administration to Luxembourg and will take the form of a Luxembourg company incorporated under the form of a limited liability company (société à responsibilité limitée)."
Moving corporate headquarters is easy these days. One simply migrates - on paper. The American company would now be headquartered in Luxembourg.
With approval, the $587 million was then passed from Pearson in the UK to Pearson Luxembourg No 2 sarl, in exchange for shares. It in turn loaned the money to the American company through FBH Inc sarl. The U.S. branch then got a tax break on interest payments it owed on the loan and no one paid taxes on the $587 million, which, from the UK revenue and IRS's point of view... disappeared.
To backtrack a bit and paraphrase Richard Brooks in Perrin's documentary, the same entity cannot lend itself money - and claim tax benefits. That is the very first red light that goes off. The loan of $587 million between branches of what PWC's document makes a special effort to call a fiscal unity is not legitimate. It is shuffling money around and calling it different names. Marius Kohl thought otherwise. Perhaps he should explain his reasoning on that and a few other matters.
Here is another jaw-dropper from PWC's quickly-approved proposal: "B.3.9 Given the absence of significant risks on this activity, a minimum profit margin reflecting the financing activity of the Luxembourg entities should amount to 2/32% of the outstanding amount on-lent. Such margin will be subject to Luxembourg corporate income tax and municipal business tax."
Yes, you read correctly: the $587 million will be taxed by Luxembourg authorities at a rate of 2/32%. This what PWC proposed and Kohl approved it. In other words, even lower than Mitt Romney's tax schedule. While I was recovering from that sweet shock, Perrin explained that 2/32% was high for Luxembourg. If Pearson had invested more in the Duchy, they would have received the optimal rate: 1/64%. In such a way does Luxembourg punish the small timers.
There is much more in this single document, about the further tax benefits of migration to Luxembourg and the endless shifting of monies between the various Pearson entities. Here's a good example:
"B.7 Net wealth tax 22. Lux branch and PLN2 will close their accounts on June 30, 2010. Their net wealth as at June 30, 2010 will be taken into consideration to calculate their unitary value for the purpose of 2011 net wealth tax." Translation: empty accounts by transferring funds and pay nothing or next to it in taxes. Another Luxembourg "entity" disappears in broad daylight.
Pages 8 and 11 of the document in Perrin's possession cover the exact shape of the corporate restructuring in Leggo format - neat boxes that indicate how corporate entities as such in Luxembourg can vanish in the course of a single communication.
How does one become a bonafide Luxembourg business? Again, let's quote the letter directly. Requirements are as follows: "An office space and a Luxembourg address, telephone number which will be listed in the public phonebook, the branch name which will be displayed at the premises, its own Luxembourg bank account, all necessary material to carry out its activities (e.g., desk, fax, etc.), and separate accounting records of Luxembourg branch. A manager will be appointed for Lux branch and will be in charge of its daily management..."
That would the man who met Perrin and Richard Brooks at the front door of Pearson's Luxembourg front, the one who threatened them with the cops. His name is Barker, appropriately enough, and he manages even more than Pearson from the second floor flat. He takes care of other companies' business as well.
It must be demanding work keeping that fax machine humming with all the latest monetary shuffles.
Luxembourg is full of faceless modern apartment rows, whose individual mail boxes contain a long list of names of corporate entities, of the same scale as Pearson, all operating out of apartments that might house three university students on a budget.
Quite a good game, isn't it?
As noted in the first part of this series, Luxembourg and Switzerland were the only two OECD countries to abstain from the 1998 decision that "All members' tax authorities must communicate when signing Advance Tax Agreements." If they did, deals such as that given Pearson and outlined above would be impossible. Luxembourg remains a member in good standing of the OECD.
Pearson's $587 million is not small change, especially in the United States, where Republicans campaign simultaneously for lower corporate taxes and cutbacks to essential services. The money would be more heavily taxed in the UK than in the U.S. but it was, as of 2010, essentially untaxed in Luxembourg. It is hard to get a handle on the total amount of tax evasion represented in Perrin's cache of papers but if Pearson's deft movement of money is any indication, we are talking about billions of dollars. How many other files there are, we don't know. So this is just a snapshot of the collusion between one country, one very large company and an aggressive accounting firm.
Part 3 of Invisible Money will take a close look at another player in the casino Duchy of Luxembourg. And this time, the money is in the billions
Bing can be contacted through this site.
This work is licensed under a Creative Commons Attribution 3.0 License.