LuxLeaks Probe Juncker, Schulz and the Stunted Tax Investigation

Martin Schulz, the German Social Democrat running for chancellor, rages against tax dumping. But while he was president of the European Parliament he blocked the investigation of the Luxembourg tax scandal. That helped his good friend, Jean-Claude Juncker.
European Commission President Jean Claude Juncker and former European Parliament President Martin Schulz.

Martin Schulz quickly found his main election theme: the struggle for tax justice. “If the little baker decently and dutifully pays his taxes and thereby funds our community, while the global coffee corporation does not and rather parks its money in tax shelters, then things are not just,” the Social Democrat candidate for chancellor fulminated recently.

Witticisms against multinationals that dupe the state have become part of Mr. Schulz's new vocabulary in the contest for the chancellery. In a very short time the 61-year-old has become the most popular politician in the country. Credibility is his biggest forte. But words are one thing, deeds something completely different.

In his former role as European Parliament president, the one-time mayor of the small town of Würselen near the city of Aachen hasn’t exactly covered himself with glory in the battle against the hated tax havens. Quite the opposite.

When it came to revealing the scandal about extreme tax discounts in the Grand Duchy of Luxembourg for big corporations like Amazon or Fiat, Mr. Schulz was more of a hindrance than a help. During the so-called “Luxleaks” scandal, sometimes it even looked as if he were less concerned about tax profiteers like Starbucks than about looking out for his close friend, the European Commission president, Jean-Claude-Juncker.

As finance minister and prime minister of Luxembourg for many years, Mr. Juncker was something akin to chief advisor for generous tax rulings on corporations – decisions known in those circles as “sweetheart deals.”

After the 2014 European Parliament elections Mr. Juncker and Mr. Schulz became leaders of a right-left grand coalition, where power politics possibly trumped investigating tax cheating. Much bitterness remains in Brussels, across party lines, about the role the German Social Democrat played in the tax justice issue.

He always had his foot on the brake when we were dealing with the Luxleaks scandal. Fabio de Masi, MEP, German Left Party

“Luxleaks was the European Parliament’s opportunity to take action against tax evasion in Europe. Schulz prevented a parliamentary inquiry, thereby weakening the parliament,” said Sven Giegold, deputy leader of the Greens in the European Parliament.

“I don’t believe Schulz is fighting for tax justice. He always had his foot on the brake when we were dealing with the Luxleaks scandal. I’ve never heard him clearly criticize the Luxembourgian tax rulings. He’s not usually lost for words,” commented Fabio de Masi, a European lawmaker representing the German Left Party.

“Schulz showed no enthusiasm whatsoever,” the German Free Democrat MEP, Michael Theurer, told Handelsblatt. Mr. Theurer had been the first to demand parliamentary action when the scandal first came to light in November 2014. A network of European journalists had revealed how Luxembourg favored certain corporations. They were allowed to artificially move profits back and forth between subsidiaries until they paid around 6 percent instead of the 30 percent they should normally have paid. The practice came to light after two staff members of the auditing firm PwC passed data on to the media. Like others, Mr. Schulz claims he first heard about the manipulations from the media.

Yet little happened in the European Parliament after the scandal broke and Mr. Theurer demanded action. That changed only after the Left Party and Greens energetically demanded a parliamentary inquiry. Defying expectations, the Greens managed to pull together the necessary quorum, 25 percent of MEPs. Some lawmakers from the Christian Democrat EPP group also signed on, much to the annoyance of the establishment.

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Christian Democrat MEP, Werner Langen, recalls Mr. Schulz “putting massive pressure on individual MEPs not to sign the call for an inquiry and some were so intimidated they didn’t sign.” Those close to Mr. Schulz reject these accusations on his behalf. Sources from his team say that he didn’t prevent an inquiry, and couldn’t have done so, anyway.

In actual fact the SPD leader, now unexpectedly a firebrand against tax injustice, in those days argued against a parliamentary inquiry in the “conference of presidents,” as the weekly Brussels meeting of parliamentary group leaders was called. He cited a legal opinion drawn up by Parliament’s legal service, which directly answers to the president of the Parliament. Mr. Schulz had commissioned the study and Freddy Drexler, head of this special department, produced it alone, i.e. without involving any other staff. Citing the study, Mr. Schulz argued at the time that there was no legal basis for an inquiry.

Instead, there was a vote and a special committee was formed. That lacks the political symbolic power of a commission of inquiry, which would have been dangerous for Mr. Juncker.

“That was obviously an obliging report,” commented Markus Ferber, an MEP from the Bavarian Christian Social Union, and deputy chairman of the European Parliament’s economics committee. “It was practically produced overnight.” Moreover the legal opinion had not followed lawful procedure for a committee of inquiry. “Both things were unusual,” Mr. Ferber told Handelsblatt. Sources close to Mr. Schulz insisted that it makes sense to engage the expertise of the legal service in such matters.

A counter legal opinion initiated by the Greens fell by the wayside. The renowned Bielefeld professor of law, Franz Mayer, a Social Democrat, contradicted the European Parliament’s legal service outright. He said the legal basis for a committee of inquiry was “sufficiently clear.”

Since the early 1990s many E.U countries had made tax deals with companies, Mr. Mayer argued, and in that respect the European Commission might have failed to fulfill its obligation to take action against illegal state aid via tax deals. Moreover, Luxembourg should have informed other member states about its "tax rulings,” as stipulated by an E.U.directive on exchanging information.

But such niceties were of no interest to anyone. Everything happened the way Mr. Schulz wanted. A “special tax committee” began its investigations, but they were limited to one year. Decisive documents of the E.U. Commission and Luxembourg remained sealed, important witnesses failed to turn up or could not be located, like the retired Luxembourgian tax official, Marius Kohl, who had signed more than 300 rulings as head of the “Sociétés6” office. “I could have said yes or no. My country definitely profited from my work, although possibly not in terms of reputation,” he said once.

One of the driving forces against exposing the LuxLeaks scandal was Martin Schulz. Burkhard Balz, German Christian Democrat MEP

Mr. Juncker’s appearance before the committee was postponed several times. It took until September 17, 2015 for the E.U. Commission president to appear. However he did not give a speech or answer questions for 75 minutes, as originally scheduled. Comrade Schulz – quite coincidentally, of course – had scheduled a plenary vote on refugee policy for just before the committee session.

Social Democrats were gentle when questioning Mr. Juncker, who deflected critical questions by others. “Luxleaks” was a misnomer, he said, after all, other E.U. states had also facilitated tax avoidance. “I never personally met with consulting firms.” That contradicts testimony by an Amazon manager who said Mr. Juncker personally offered to help him, saying the Luxembourg government had behaved “like a business partner.”

Green MEP Mr. Giegold recalls that Mr. Juncker’s appearance was “impossible.” “Juncker responded impertinently to all critical questioners and didn’t answer the questions.”

The special committee didn’t find out much but Mr. Schulz wanted to bury it anyway after a year. But then the German newsweekly Der Spiegel and French daily Le Monde revealed internal papers showing how Luxembourg, in cahoots with Belgium and the Netherlands, had sabotaged measures against unfair tax competition in the E.U.’s “Code of Conduct Group.” At that, not even Mr. Schulz and Mr. Juncker’s party colleagues were able to prevent an extension of the committee’s work. “One of the driving forces against exposing the LuxLeaks scandal was Martin Schulz,” recalls the German Christian Democrat MEP, Burkhard Balz.

People close to Mr. Schulz disagree. He had always criticized tax dumping, they say, regardless of who was doing it.

Generally speaking, that might even be true. But as soon as the focus was on Mr. Juncker, tax justice seemed of secondary importance to Mr. Schulz. The main concern was to shield his close friend Jean-Claude from harm.

That deal had already been made on the evening of the European election in May 2014. During a private conversation the two men forged an alliance. Election winner Mr. Juncker appears to have guaranteed Mr. Schulz political influence in return for Mr. Schulz assuring the Christian Democrat of the support of the European Parliament. This pledge is regarded as an open secret in Brussels – and the Schulz camp doesn’t deny it. All one is told is that no information can be given about private conversations.

“I’m certain that on election evening agreements were made that go far beyond pledges that Juncker was to become Commission President,” Markus Ferber, the CSU European Parliament member, said. The Schulz effect: Despite all denials, Mr. Schulz apparently functioned like a political bodyguard of the E.U. Commission boss.

In July 2016 the two of them chatted in a joint interview with Der Spiegel about their friendship. They said they telephoned each other between 7 a.m. and 8 a.m. every day. The mutual declaration of love peaked with Mr. Juncker’s suggestion that his friend should stay as president of the parliament until 2019. This despite the fact that the conservatives and Social Democrats had agreed that his tenure should end in 2017.

Now Mr. Schulz has landed in other, higher spheres. But in Brussels a protective wall has collapsed.

When Mr. Schulz was still the ringmaster, the Social Democrats in the European Parliament had always resisted recalling Mr. Juncker for more questioning on tax rulings. But now the comrades have changed their mind. The E.U. and its institutions had to offer citizens “the greatest transparency possible,” said the Social Democrat parliamentary group leader Gianni Pittella; all important actors should testify to the committee. “We believe Jean-Claude Juncker should be among them.”  No good friend can prevent that.


Ruth Berschens is Handelsblatt’s Brussels bureau chief. Hans-Jürgen Jakobs is a senior editor. To contact them: [email protected],  [email protected]