A federal Canadian pension and sovereign wealth funds for Australia and Abu Dhabi were revealed in a major document leak to have set up networks of Luxembourg-based vehicles for European investment deals.
These structures—arranged by PricewaterhouseCoopers (PwC)—have ignited a flurry of accusations of tax dodging against Canada’s Public Sector Pension (PSP) Investment Board and the Australian Future Fund.
Both funds are Crown corporations operated independently from their respective governments and exempted from domestic taxation. However, domiciling investment vehicles in Luxembourg often allows foreign entities to avoid European taxes.
Australia’s tax commissioner has called for an investigation into the information leaked by the International Consortium of Investigative Journalists, according to the Sydney Morning Herald.
The Future Fund's head of communications told CIO the structures it uses are "well tested" and standard across the industry. "We go to great lengths to ensure that our approach to taxation is appropriate for a sovereign fund both in terms of respecting all laws and regulations and as regards to protecting our legitimate entitlements to sovereign immunity for tax purposes," the spokesperson said.
Politicians in Canada have called the revelations “deeply troubling,” but no official action has commenced. PSP—one of Canada’s largest and least transparent pension funds—manages roughly C$94 billion ($82 billion) for federal civil servants, police, and members of the military.
In 2009, PwC submitted an outline of PSP’s plan for “Project Felicity”: A Berlin real estate portfolio routed through layers of Luxembourg holding companies and financed with loans from PSP. The document requests approval of the tax structure from Marius Kohl, the head of Luxembourg’s corporate taxation agency. Kohl is famous for his business-friendly approach, which has led to the nation of 550,000 domiciling roughly 50,000 holding companies.
“The income received by JP Residential entities”—five investment vehicles containing 69 Berlin buildings—“qualify as income from immovable property according to Article 4 of the Germany-Luxembourg tax treaty and will therefore be exempted from corporate and municipal business tax in Luxembourg,” PwC wrote to Kohl. “We respectfully request that you confirm the tax treatment of the situation described above.”
Reached by CIO for comment, PSP maintained it has complied with all laws, followed recognized business practices, paid all taxes legally required, worked transparently with foreign authorities, and “received no tax advantages” in the Berlin real estate deal.
A European corporate tax specialist briefly reviewed PSP’s statement, forwarded by CIO, and felt it by-and-large accurate. “Absolutely nothing strikes me as not in compliance with the rule of law,” he said, and described these sorts of structures as “extremely common.”
The only point on which the expert expressed skepticism was that PSP had no tax-based incentive to invest via Luxembourg holding companies. “It could be that the seller of this did receive tax advantages, and then passed on the advantages to PSP,” he said. The pension fund “could have agreed to buy these assets directly, which may have had tax consequences for the seller. And they obviously chose not to do that.”
PSP argued that “it is widely recognized in our business that it is much easier to sell a European corporation holding European assets than it is to sell a Canadian corporation holding European assets… In that regard, using a Luxembourg subsidiary gave PSP Investments greater flexibility in case of an eventual sale of the whole portfolio of assets.”
However, as the tax expert pointed out, PSP could simply sell the assets themselves as opposed to a multi-layered holding company that owns the buildings.
Still, he said, “if I were a stakeholder in PSP, I would want it to maximize its post-tax returns according to the rule of law.”
View the leaked documents at the International Consortium of Investigative Journalists’ public database.
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