The two most influential people in international tax matters are the head of Tax Affairs at the OECD, Pascal Saint-Amans, and the EU Tax Commissioner, Pierre Moscovici. The two are working together towards an unprecedented convergence of OECD and EU tax policy—especially in international tax, but also with an impact on national tax laws—both for individual taxes (in terms of reporting and transparency) and for corporate taxes (in terms of reducing aggressive tax planning). Whilst there is no doubt that transparency and exchange of information for individual taxpayers is the way to go (bearing in mind that this information must be properly safeguarded), the field of corporate taxation is more complex. Problematically, the lawmakers' approach is almost exclusively aimed at cracking down on aggressive tax planning, and while this sounds quite good in terms of its intention, the lawmakers have not included any tools to incentivise investments, financing, or research in the EU. The lack of these elements poses a real danger for the future of the EU economy.
Another movement in the current EU tax discussions involves the country-by-country tax report that big corporate organisations must prepare: namely, there is a clear move towards making such reports available to the public. This again might sound reasonable at first thought, but the problem is that public documents are public to everyone—including non-EU commercial and financial groups. These groups would be glad to use the information for their own financial benefit meaning that the EU's overall competitiveness would end up eroded. Having a level playing field worldwide for this type of reporting system would be nice, of course, but such a system is years away, no matter what the EU is able to do now. Passing this law would mean voluntarily damaging the EU's competitiveness worldwide; and yet, the EU has a clear aim to head down this road.
Fair taxation: a many-sided puzzle
More generally, however, the OECD's and EU's work in tax matters will unfortunately miss its ultimate goal: fair taxation. Here's what I envision happening: international organisations will, following these changes, no doubt pay more tax (thereby lowering the profits of private individuals and pension funds that have invested in them), but these additional corporate taxes will represent only minor additional revenue for countries and their respective national budgets. So, in reaction, most countries will have to compete in order to attract new investors and foreign direct investments. They will probably do this by lowering corporate tax rates, and also by other means such as subsidies and advantages for individuals (visa regimes, offering cheap land to plants or offices, expatriate tax regimes, and so on).
National competition on corporate tax matters is thus likely to intensify and complexify, so that ultimately the most acceptable tax tool countries will use to attract new investors will be having a low corporate tax rate (such as the UK's 17% or Ireland's 12.5%). The revenue losses following this reduction in corporate tax rate is meant to be offset by broadening tax bases. This is a fine plan, and I support it—but I'm concerned at the same time that, as experience has shown, broadening the tax base probably won't be enough. What will happen if the deficits coming from the fall in corporate tax rate are not compensated by a larger tax base?
The answer is that many countries would struggle to balance their annual budgets, and their first reaction will likely to be to compensate by increasing indirect taxes, such as VAT or GST. Some small and agile countries like Ireland (and maybe Luxembourg) may succeed in attracting a disproportionate portion of new investors to fill the gap, but the global trend will be a hike in these indirect taxes—which will come out of the pockets of individuals.
Thus, these discussions need to happen carefully. A reduction in corporate tax rates would be a necessary reaction for countries—they need to stay competitive, after all. But forcing countries to go down this road in the first place means that our two lawmakers need to be sure that broadening the tax base is enough to compensate revenue losses. Experience has shown that it may not be, which is why the proposed BEPS measures could have a negative impact not only on international groups via increased tax charges, but also on individual taxpayers acting as consumers (the "man in the street") via increased VAT rates.
Where Luxembourg fits into this galaxy
After having increased its VAT rate from 15% to 17% (even though this is more connected to offsetting the negative impact of recent changes on VAT e-commerce rules than to BEPS actions), Luxembourg announced a 3% reduction of its corporate tax rate (from 29% to 26%). This will trigger an annual loss for the national budget of approximately €150 million. It will probably be a net loss for the State, as Luxembourg is unlikely to tempt many investors with such a minor reduction, and as the proposed offsetting measures (for example those reducing the use of losses generated after 1 January 2017 to 80% of one's income) will only have a progressive budgetary impact a few years down the road.
The Luxembourg business community has, for a long time, been pleading for an alternative course of action: namely that the net worth tax be reduced or abolished, as it is an obsolete tax that hinders Luxembourg's capacity to attract investors in areas such as intellectual property and, more importantly, treasury activities. If it is important to ensure that investment vehicles can be supported by sufficient substance, qualified people, and a variety of functions, then it is doubly important that we find ways to attract more treasury activities to Luxembourg and reduce the negative impact of the net worth tax. We are not yet there.
There will come a time when the Luxembourg authorities will need to consider taking more "investment decisions", i.e. avoiding their requirement that a reduction of one tax be immediately compensated by an increase of another. The authorities need to put in place the measures necessary to attract new investors in greater numbers. This would be possible through broadening the tax base while reducing the corporate tax rate to a global (state and municipal) rate ranging between 15% and 20%. And the municipalities should be part of this effort, contrary to what is happening right now.
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