2009: registration on the OECD gray list

Let us put ourselves in the context of the time.

Since 1929, the development of the Place has had as its foundation a policy of offshoring and use of niches of sovereignty. Let us remember what Pierre Dupong, Minister of Finance, said at the time of the adoption of Holdings 29: “If the bill were not passed, these companies would move away from our borders, to establish themselves in countries where they are given greater advantages. What will we gain from it? Absolutely nothing…”

Let us also remember what Pierre Werner, the spiritual son of Pierre Dupong, said at the time of the birth of the eurodollar market – a market circumventing the American tax rules of the time – and eurobonds: “Investors do not find the advantage of a regime of favors or freedom in Luxembourg would easily find it elsewhere.” It was the time of the creation of financing holding companies, legal vehicles allowing international groups to structure their bond issues in an attractive fiscal framework. The securities of these loans were exempt from withholding tax.

Let us still remember the Investors Overseas Services scandal. Buried without flowers or wreaths. Just like the cases of Banco Ambrosiano in 1982 and BCCI in 1991.

The offshore model, this model where the niches of sovereignty guarantee prosperity, was at the heart of the political and social consensus. The adoption of bank secrecy will be the culmination of this slice of history.

In 2009, in the hot seat, banking secrecy was being dismantled.

A well-negotiated dismantling. But maybe a little too late. And slow. Its abolition had been on the EU agenda since the Feira European and Ecofin Councils of June 2000. A gradual abolition through the establishment of a withholding tax supposed to protect the privacy of bank customers while satisfying the demands of the tax authorities of origin of said customers.

The problem is that after 2008 and the collapse of Lehmann Brothers, state budgets need to be bailed out and the fight against fraud and tax evasion becomes the unifying credo for governments and public opinion. national. Public opinion always impatient. With the consequence of accelerating the regulatory dynamic and closing the holes in the system by strengthening legal cooperation.

50 shades of gray

First warning shot: the inclusion of Luxembourg – among 38 other countries – on the gray list on international tax cooperation of the OECD, on April 2, 2009. This “grey” list stigmatized the States which, according to the OECD, had undertaken to respect the framework convention of the OECD on banking and tax transparency, but which did not substantially apply the criteria. Specifically the adoption of a number of double taxation agreements with third countries.

This registration aroused the ire of the political leaders of the time – Jean-Claude Juncker, Prime Minister, Luc Frieden, Budget Minister and Jean Asselborn, Deputy Prime Minister – who accused the OECD of being exploited by the big European countries and in particular the “Franco-German Board”. The absence from the list of Delaware, the US Virgin Islands, Hong Kong, Macao or the Channel Islands – recognized tax havens – supported the hypothesis. Just like the extremely violent attacks of the German finance minister at the time, Peer Steinbrück.

The 2009 list also included Switzerland, Belgium and Austria. States adhering to banking secrecy. This is not trivial in the context.

The country will come out of this list in three months by concluding the double taxation agreements with third countries requested by the OECD to reach the number of 12.

This does not mean that the pressure will fall.

Second alert

In 2010, it was the FATF (Financial Action Task Force, an intergovernmental organization for the fight against money laundering and the financing of terrorism) that put Luxembourg on the index. Following his visit in 2010, the conclusions of Luxembourg’s mutual evaluation report on the fight against money laundering and the financing of terrorism are bad for the financial centre. In summary, the GAFI criticizes the Grand Duchy, in addition to its banking secrecy, for being too little repressive and points to the lack of powers of the CSSF and the small size of the financial intelligence unit.

Criticisms that raise fears of a new registration on the OECD gray list.

To avoid this, the government is playing the reform card thoroughly and adopting a number of laws. Including the famous project 6163, the full title of which clearly shows the all-out ferment of the legislator to comply with the wishes of the FATF: bill to strengthen the legal framework in the fight against money laundering and the financing of terrorism, to organize checks on the physical transport of cash entering, transiting through or leaving the Grand Duchy of Luxembourg, relating to the implementation of United Nations Security Council resolutions and acts adopted by the European Union containing prohibitions and financial restrictive measures against certain persons, entities and groups in the context of the fight against the financing of terrorism. Project which modifies 21 laws and some Grand-Ducal regulations.

This burst of energy will bear fruit and the FATF will put an end to the procedure for registering Luxembourg on the gray list.

Paradigm shift

The respite will be short-lived. November 23, 2013, following the 6th World Tax Forum, which was held in Jakarta under the aegis of the OECD to assess the tax transparency of 50 countries by a rating system between States. If the legal and regulatory framework has been deemed to comply with the standards of the organization to allow real cooperation and transfer of tax information, it is the practices that are singled out. And more specifically the following four points: determination of the real economic beneficiary, access to tax information, cooperation instruments allowing the exchange of information as well as respect for the rights of taxpayers and third parties.

Succeeding Luc Frieden at the post of the Ministry of Finance (CSV), it will be up to Pierre Gramegna (DP) to put the Place back in the nails and in the right state of mind, that of fiscal transparency, of the end of the easy money and the pre-eminence of ethics over legality. What he will do in two years with as highlights the abandonment of banking secrecy in 2014, the approval of the convention on mutual administrative assistance in tax matters dating from 2013, the adoption of a new regulation of shares bearer shares, the adoption of the procedure applicable to the exchange of information on request and the signing of the Berlin declaration on the introduction of the automatic exchange of information on the basis of the new standards established by the OECD .

From now on, Luxembourg wants to appear as the good student and to be among the early adopters of tax reforms. This was particularly the case for the question of the taxation of the profits of multinational firms.

This march towards transparency and a more consistent image will experience a few hitches. As in November 2014 the LuxLeaks affair and its replies such as the Panama Papers, the OpenLeaks or the accusations of the European Observatory of taxation. This will not prevent the country from leaving the OECD gray list a second time on October 30, 2015. This time it took almost two years.

And tomorrow? The FATF is expected on the Market for a new mutual evaluation on November 2. And a certain anxiety is palpable among the actors of the financial center.

To be continued.

2009: registration on the OECD gray list