Top British companies using Luxembourg tax avoidance scheme ‘like a magical fairyland’ to save billions

Some of the world’s largest firms including top British companies are using a Luxembourg tax avoidance scheme ‘like a magical fairyland’ to get out of paying billions of pounds, it emerged last night.

Leaked tax papers totalling nearly 28,000 pages connected to more than 1,000 firms show businesses used a long-winded process involving internal loans and interest payments to cut their tax bills, The Guardian reported.

The arrangements – used by top companies including vacuum cleaner company Dyson and drugs group Shire – were signed off by the European Union state and are all legal.

But the revelations are predicted to trigger more calls for politicians to work harder to stop firms taking advantage of international tax rules avoid their tax bills.

The Guardian reported last night that Dyson had set up companies in the Isle of Man and Luxembourg to put £300m of internal loans into its UK operations in 2011. The interest payments made on the loans were taxed at only around one per cent in Luxembourg – saving the firm millions.

The newspaper also said drugs firm Shire and city trading company Icap had also cut their tax bills with help from Luxembourg.

The Guardian said the leaked papers showed ‘Luxembourg was acting as a go-between, both enabling and masking tax avoidance, which always takes place beyond its borders’.

Stephen Shay, a Harvard Law School professor who has held senior tax roles in the US Treasury, said: ‘Clearly the database is evidencing a pervasive enabling by Luxembourg of multinationals’ avoidance of taxes [around the world].’

He described Luxembourg as being ‘like a magical fairyland.’

It comes as only last week Prime Minister David Cameron told business leaders he would not tolerate large multinational firms avoiding tax.

Cracking down: Last week Prime Minister David Cameron told business leaders he would not tolerate large multinational firms avoiding tax

+4

Cracking down: Last week Prime Minister David Cameron told business leaders he would not tolerate large multinational firms avoiding tax

Mr Cameron said: ‘We’ve cut the rate of corporation tax down to 20 per cent, we’re the most competitive place to come and start a business, but here’s the deal – if they have a low tax rate, those companies have damn well got to pay it.’

And George Osborne is next month expected to announce new measures to stop such businesses diverting its money offshore.

The new president of the European Commission, Jean-Claude Juncker – a former Luxembourg prime minister – this summer pledged to ‘try to put some morality, some ethics, into the European tax landscape’. He has also insisted the country was not a tax haven, The Guardian reported.

The newspaper said the findings were put to Shire, Icap and Dyson but all three declined to answer questions and instead issued statements saying they do not engage in tax avoidance and they pay tax in the countries where profits are made.

It was also reported last night that a joint venture between the Guardian Media Group and private equity group Apax Partners in 2008 also used a Luxembourg structure when it invested in magazine and events group Emap, now Top Right.

A spokesman for GMG said: ‘We partnered with a private equity company which regularly used such structures. A Luxembourg entity was used because Apax already had that structure in place. The fact that the parent company is a Luxembourg company does not give rise to any UK corporation tax savings for GMG.’

Executives including Justin King, the former chief executive of Sainsbury’s, have appeared to defend the multinationals.

Mr King, who left the supermarket giant in July, said the situation was ‘not black and white’ and that, if people did not like the tax methods used by a particular firm, they should shop elsewhere.

He said: ‘They are not loopholes. They are legitimate tax systems put in place by legitimate governments legitimately elected.

‘It is wrong to lay that at the door of companies operating their business in a structure… constructed by government.

‘The first thing you have got to do is hold governments to account for putting those structures in place; that we have seen in Ireland.

‘The Irish have come to the conclusion that the “double Irish” is not acceptable in their own parliament.’

Last month, it emerged that Facebook had not paid any corporation tax in the UK for a second year in a row, despite recording sales of £50million, after pushing much of its revenues through a complex scheme in Ireland.