Carte blanche: Luxembourg needs a drastic reduction in corporate tax rates to remain competitive, but that will not negatively impact households, says Georges Bock.
The term “reforms” is often thrown around in a casual manner. However it is not a series of minor measures that Luxembourg requires when considering tax reform--planned to take place in 2017--but rather an ambitious recasting of its taxation system in order that the system be more easily understandable, more modern and more coherent. It is imperative that we put aside biased political preoccupations and take a long hard look in the mirror.
International economic competition--including fiscal competition--has doubtlessly never been as great as it is today. In Ireland the corporate taxation rate dropped from about 50% in 1987 to 12.5% since 2003. The UK has gradually reduced its rate to 20% from the 28% rate which applied in 2011, and an additional drop to 18% is expected by 2020. The Netherlands recently announced that it wanted to follow suit.
By comparison the overall taxation rate paid by companies in Luxembourg--29.22%--is far from being the most advantageous. A significant reduction in this rate is thus vital. But let us get this straight. A reduction of a few percentage points would have little or no impact on the investment decisions of large international players. For Luxembourg to be competitive again it has to reduce the global tax rate to below 20%.
The taxation of companies in the Grand Duchy must additionally be simplified by merging the national and municipality-based taxes. Modernisation also notably means abolishing the tax on the wealth of companies, which constitutes a sad Luxembourgish curiosity. Net wealth tax, when it comes to firms at least, is not widely accepted at international level. This is a fact.
Is it possible to reduce the taxation of companies to such a large extent without negatively and drastically affecting the budgets of the state and of municipalities? Yes. A hundred times yes. The international fiscal environment is being reformed by both the OECD and the EU. The international trend will be to lower the tax rates and broaden the tax base. This means that the taxable income of Luxembourg companies will be increased, compensating the possible loss of tax revenues from the lower corporate income tax rates. Would doing so be unfair on households? No, absolutely not. Companies that are doing well are companies which contribute to the development of the national economy, notably by hiring people and by providing their employees with better pay.
If the right decisions are taken, then the Luxembourgish economy has the capacity to convert the challenges which it faces in the coming years into opportunities. The time has thus come to take the bull by the horns, to put political dogma aside and to decide--as of now--what the new Luxembourgish fiscal landscape of the future will be, in the long-term interests of the country.