December 11, 2018

Luxembourg Leaks All Over EY’s Tax Planning

Last month, we learned about a trove of documents that revealed a creative tax planning strategy on the part of PwC. Now, we're learning the Luxembourgian manuevering wasn't limited to just one Big 4 firm. From The Center for Public Integrity:

A new leak of confidential documents expands the list of big companies seeking secret tax deals in Luxembourg, exposing tax-saving maneuvers by American entertainment icon The Walt Disney Co., politically controversial Koch Industries Inc. and 33 other companies.

Disney and Koch Industries, a U.S.-based energy and chemical conglomerate, both created tangles of interlocking corporations in Luxembourg that may have helped them slash the taxes they pay in the U.S. and Europe, according to the documents obtained by the International Consortium of Investigative Journalists.

Gasp!

The first set of Luxembourg tax deals, published by ICIJ and its media partners on Nov. 5, was arranged through the accounting giant PricewaterhouseCoopers. The latest set of documents reveal that the aggressive tax structures are being brokered not only by PwC but also by Luxembourg-based law and tax firms and the other “Big 4” accounting firms: Ernst & Young, Deloitte and KPMG.

All 4 firms declined to answer detailed questions about their tax agreements, but EY did throw ICIJ one half of a juicy bone:

“EY professionals provide independent tax advice to clients in accordance with national and international law,” Ernst & Young spokesman Will Brewster said in a statement emailed to ICIJ. “This includes advice on compliance with tax regulations in the territories in which they operate.”

At the middle of EY's part in the Lux Leaks is Walt Disney's tax scheme. It's complicated (because of course it is, that's the point) but the gist here is that a finance arm made loans to subsidiaries at high interest rates. Here, read:

At the center of the new structure is a third company, a finance arm initially called Wedco Participations SCA.

The internal bank made loans to many of the subsidiaries at high interest rates, draining profits from those companies that were often in high-tax countries back to Luxembourg in the form of interest payments.  In addition, a Cayman Islands subsidiary, which legally owns at least 16 Disney companies in Europe and Australia, sent its profits to Luxembourg in the form of annual dividends.

The Luxembourg internal lender, whose name was later changed to Wedco One (Luxembourg) S.à.r.l. Participations SCA, reported profits for the four years ending September 2013 of more than €1 billion and paid €2.8 million in income tax in Luxembourg, according to the companies’ public accounts reviewed by ICIJ. That works out to a tax rate of just over a quarter of 1 percent.

The documents show Disney used this internal bank as an intermediary for two loans totaling €75 million to its French subsidiary, Walt Disney International, France, SAS. Disney charged Wedco Participations just 0.42 percent interest; Wedco went on to charge Disney’s French subsidiary 5.7 percent.  

The transaction may have allowed Disney to reduce its French taxes because the French company paid more than €16 million in interest to the Luxembourg company from 2009 through 2013. Further, Disney received so little in interest payments from Wedco that it would have incurred little tax on its U.S. interest income from the transaction.

There's more to it but that's enough for you to get the idea. Oh, and this:

All together, the three Disney companies established by the tax deal crafted by Ernst & Young recorded more than €2.8 billion in profits from 2009 through September 2013, yet they share a grand total of one employee, according to the tax agreement.

You can read the whole 34 page advance tax agreement drafted by EY in 2009 here but fair warning, it's in French.

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