The State Administration of International Tax Avoidance


In November of 2014, hundreds of advanced tax agreement (ATAs) issued by Luxembourg’s Administration des Contributions Directes (Luxembourg’s Inland Revenue, or LACD) to multinational corporate taxpayers (MNCs) were made public. Using an original dataset generated from a hand-coded sample of 172 leaked documents, the Article explores LACD administrative practices in issuing ATAs. The analysis demonstrates how a jurisdiction can be made a tax-haven by administrative practices, rather than by state law. LACD cannot be reasonably viewed – as some have suggested in LACD’s defense – a passive player in MNCs’ tax avoidance schemes. Rather, LACD is best described as a manufacturer of tax arbitrage opportunities. Specifically, even when the tax laws of the jurisdictions of residence (i.e., investors) and source (i.e., investment) are harmonized, LACD produced regulatory instruments that were intended to artificially create legal differences between the tax laws of the source and residence jurisdictions. MNCs could then exploit the manufactured tax differences to their advantage. LACD collected a fee that was functionally linked to the amount of taxes avoided by MNCs in the other jurisdictions.

The findings contribute to our understanding of the role of tax havens in global economy, by adding an institutional dimension to the phenomena of international tax arbitrage. Specifically, tax administrators can function as intermediaries between residence and source jurisdictions the laws of which are harmonized, and provide taxpayers with synthetic arbitrage opportunities. Hence, international coordination efforts to combat abusive tax schemes by way of advancing harmonization of tax laws may not be as effective as hoped. The Article concludes that international efforts should systematically address arbitrage manufacturing. Namely, the targets of coordinated attempts to combat international tax arbitrage should be tax administrations, and not only taxpayers.


UC Irvine School of Law Research Paper No. 2015-95

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