Luxembourg Vulnerable To International Tax Developments, Says IMF
International tax developments could have a negative impact on Luxembourg’s tax revenues and economy, the International Monetary Fund (IMF) has said in its latest Luxembourg country report.
The report, published on April 3, warns Luxembourg that a number of external tax events are likely to have “important implications” for Luxembourg, including EU Directives to enhance corporate tax transparency and reduce tax avoidance, the findings of the European Commission’s state aid probes, and tax reform in the United States.
The reported notes that greater corporate transparency, US tax reform, and further anti-avoidance measures could reduce incentives to locate multinational assets in Luxembourg following a large increase in foreign direct investment by special purpose vehicles in recent years. These international developments could, the report said, “diminish incentives to conduct business through Luxembourg and affect corporate taxes and economic activity.”
IMF staff have estimated that tax revenue of up to 1-1.5 percent of GDP could be at risk from greater corporate tax transparency and tax avoidance measures.
The report also highlights potential risks of Brexit to the Luxembourg economy, with the United Kingdom being a major trading partner, especially in financial services.
The report recommended that the Government should prepare for “potentially sizeable and permanent revenue loss” by increasing currently low rates of real estates taxes and by enhancing environmental taxes.
In its response to the report’s conclusions, the Government, while generally agreeing with the IMF’s projections, said that Luxembourg, given its existing comparative advantages, “would benefit from a more level international taxation playing field” and that the revenue impact of these measures would be “limited.”
The report acknowledged Luxembourg’s preparations to transpose the EU Anti-Tax Avoidance Directive (ATAD) I into law by end-2018, including with the creation of controlled foreign corporations rules, in addition to its plans to transpose the ATAD II, covering interactions with non-EU countries, by the end of 2019.
However, the IMF also noted Luxembourg’s opposition to a recent proposal to tax the revenues of internet firms in the EU to mitigate tax-avoidance practices.
“Luxembourg authorities (among others)… consider it important to first achieve a level global playing field in taxation of the digital economy,” the report said.