A recent article by Financial Times columnist, Vanessa Houlder, on Luxembourg’s tax regime covered at length the current scrutiny faced by the Grand Duchy over allegations of “secret tax deals” extended to large, multinational corporations.
As reported, the EU Commission is investigating Luxembourg for the “serious distortions of competition” over the 3% rate of VAT it charges Amazon and other ebook retailers. The low VAT rates have made Luxembourg an ecommerce hub but it reportedly, now stands to lose €800 million of revenues under European tax rules.
Another threat for Luxembourg derives from OECD’s determination to combat “treaty shopping” which is reportedly expected to affect Luxembourg’s finance and holding companies currently owning assets worth over $2 trillion in total.
Truth be told, Luxembourg is not a low-tax jurisdiction for businesses; at least not on the outset. Plenty of other countries have corporate income tax rates lower than Luxembourg’s 29.2%. As reports show, Luxembourg’s tax system allows numerous deductions and exemptions that lower the effective tax rate by creating profits, known as “white” income, that completely escape tax.
In her article, Houlder highlights what she calls “straightforward exemptions” that include the “IP Box Regime Rules” applicable in Luxembourg since 2008, exempting from tax up to 80% of income from copyrights, patents, trademarks and other intellectual property. As Houlder also adds, finance companies can be set up so the overwhelming majority of the interest income they receive is booked in an untaxed or low-tax foreign branch.
More “complex” exemptions, Houlder suggests, include the treatment of so-called “hybrid” instruments (recently the subject of reform in the EU parent-subsidiary directive), which are treated as loans in Luxembourg but equity elsewhere, offering multinationals a tax-efficient way of taking profits home, or routing them to havens such as Bermuda.
Luxembourg’s popularity with US multinationals, including Amazon, Caterpillar and Microsoft, has increased dramatically in recent years, increasing their profits from 19% of its GDP in 1999 to 141% by 2011, according to the US Bureau of Economic Analysis.
It appears that Luxembourg’s tax system is in need of a major overhaul in order to preserve its appeal to foreign corporations, once OECD initiatives and EU Commissions’ amendments to relevant tax laws have been implemented. Luxembourg’s government has promised to reform the system by 2017, but for the moment, it appears the Grand Duchy’s tax system is in for a rocky way ahead.