Several high-profile Canadian companies including Bombardier Inc. are among firms whose tax arrangements in Luxembourg have been leaked amid a growing climate of global concern over corporate tax strategies that critics say result in billions in foregone government revenues.
A new batch of leaked documents released late Tuesday by the Washington-based International Consortium of Investigative Journalists (ICIJ) provides a glimpse into the complex structures used by many global corporate giants to move profits into subsidiaries in Luxembourg, one of several tax havens around the world. The consortium leaked a first package of documents last month.
The Bombardier document is a March, 2010, letter by Ernst & Young – acting on behalf of the Montreal-based company – that outlines plans for a two-phase restructuring of part of Bombardier's U.S. financing activities.
The complicated scheme involves a series of transactions and loans around the sum of $500-million (U.S.) and 11 Bombardier subsidiaries in eight countries.
Essentially, these types of dealings use so-called "hybrid mismatch arrangements" to play off different tax regimes in different countries in order to end up with a low or zero tax bill, said Laval University tax law professor André Lareau.
The Bombardier strategy outlined in the document appears to transfer funds to a Luxembourg-based subsidiary in exchange for mandatory redeemable preferred shares, which are treated as debt. All payments made by the Luxembourg-based company – which has only one part-time employee who is a Luxembourg resident – are treated as interest payments and thus deductible and not subject to withholding tax in the grand duchy.
Cash going back to the Canadian parent is in the form of dividends, which under a Canada-Luxembourg treaty are not taxed, Prof. Lareau said.
Bombardier said its structure is legal.
"Bombardier's worldwide corporate structure abides by all applicable laws, including tax laws," Bombardier spokeswoman Isabelle Rondeau said in an e-mail message on Wednesday.
Bombardier is not the only Canadian company singled out by ICIJ's investigation for allegedly using Luxembourg-based tax-avoidance strategies.
Others with Canadian links mentioned in the group's revelations in recent weeks include the European unit of Fairfax Financial Holdings Ltd., Brookfield Asset Management Inc. and Yamana Gold Inc. There are no allegations that these companies or Bombardier engaged in any illegal activities.
Among major U.S. companies in the latest trove of disclosures are Walt Disney Co. and Koch Industries Inc.
Brigitte Alepin, a tax policy expert and adviser and an outspoken critic of corporate tax avoidance practices, said multinationals facing intense global competition have little choice but to seek out the lowest tax rates they can find.
"It's not the multinationals' fault. It's the system," she said. "What happens is that a race to the bottom, towards a zero effective taxation rate, is triggered."
Dennis Howlett, head of a group called Canadians for Tax Fairness that has been campaigning for a crackdown on tax avoidance by corporations and the wealthy, says the complexity of many corporate structures is no accident: "It's deliberately set to be as complicated and confusing as possible to cover their tracks and make it difficult to enforce."
News of secret tax deals in Luxembourg has generated a massive controversy in Europe, where the European Commission has launched probes into the use of the Grand Duchy by large companies such as online retailer Amazon Inc.
The issue has also plagued the European Commission's new president, Jean-Claude Juncker, who was Luxembourg's prime minister as his country was offering extremely low tax rates to global companies.
Last year, the Group of 20 countries and the 34 member states of the Organization for Economic Co-operation and Development launched an initiative to design countermeasures to strengthen the ability of national tax authorities to crack down on aggressive tax schemes. The measures, which experts have described as sweeping, are due to be finalized next year. It remains unclear to what extent various governments would implement the new rules.