Skype dragged into LuxLeaks tax scandal

Skype used Luxembourgish and Irish subsidiaries to avoid paying corporation tax for five years, according to a Guardian report.

The newspaper, which analyzed confidential documents obtained by the International Consortium of Investigative Journalists, reported late Tuesday that Skype was one of the many companies that had used Luxembourg’s extremely light-touch tax regime to get out of paying significant amounts of tax.

Legally speaking, the issue here isn’t so much the actions of the companies themselves – there’s no suggestion that they broke the law as such — but the establishment of sweetheart deals by relatively small European nations that meant more tax revenues for themselves, but the demolition of tax revenues in other European countries.

The European Commission is finally cracking down on such behavior by claiming such deals amount to illegal state aid, and is also now trying to sew up the loopholes. Awkwardly, however, the Commission is now led by Jean-Claude Juncker, who was in charge of Luxembourg’s government for many years and was proudly boasted about the environment he had helped set up.

The Guardian report quoted Juncker as both insisting that the “Luxembourg model” did not exist, and saying: “Skype will remain based here … this is partly because of the favourable fiscal environment we’ve created here in Luxembourg.”

Tuesday’s revelations mark the second tranche of companies to be identified in the “LuxLeaks” scandal, with others including Disney and Koch Industries. The first caused tremendous embarrassment to Juncker and, according to reports on Wednesday, the European Commission may now force the companies involved to publish their tax agreements.

Amazon is already embroiled in an EU investigation into similar arrangements. Here’s how it worked in the case of Skype. The Luxembourgish Skype Communications company would take in SkypeOut revenues, then pay large intellectual property royalties to another Luxembourgish company, Skype Technologies, which owns an Irish company called Skype Limited.

As the Guardian described it:

Because Skype Technologies owns 100% of Skype Limited, it asks the Luxembourg tax man to treat that as though it had in fact paid licence fees and then received that money back as a dividend from Skype Limited. This imagined structure wins Skype Technologies a 95% tax break on its licence income from Skype Communications.

This 2005 deal covered a period when Skype was owned by [company]eBay[/company]. It’s not clear whether the arrangement is still in force, but [company]Microsoft[/company], Skype’s current owner, said in a statement:

Microsoft’s acquisition of Skype was finalized in October 2011, so we can only speak to activities after that date. Post-acquisition, we reviewed and modified Skype’s business model as part of the integration process. As a global business, Microsoft adheres carefully to the laws and regulations of every country in which we operate.