The Grand Duchy’s government has called for the continuation of “competition” between states on tax matters. “Countries have different interests and therefore different tax policies,” the finance ministry said in a public position paper published Monday evening.

“We must have tax competition in order to encourage growth”, the document quotes finance minister Luc Frieden (photo, right) as saying last month when he signed the Convention on Mutual Administrative Assistance in Tax Matters, which is administered by the rich world economic club OECD.

In recent months, multinational corporations including Amazon, Apple, Google, Starbucks and Vodafone have been accused by EU and US officials of unfairly shifting revenues to shell subsidiaries in lower tax jurisdictions such as Ireland and the Grand Duchy to aggressively cut down on payments to national and local treasuries.

In its position paper, the government re-iterated points that it has frequently made, noting that Luxembourg is home to regional and global corporate headquarters that have the “necessary substance” to run firms, including legal, financial, marketing, logistics, R&D and intellectual property management functions.

Companies are attracted to the Grand Duchy because of its “highly qualified workforce comprised of multicultural and multilingual specialists, who are able to perform high value added tasks and represent a precious resource”, according to the finance ministry stated.

European common market

The government painted the tone of the fiscal debate as un-European and as a threat to the type of pan-EU operations that have thrived in Luxembourg. The fight against tax evasion and tax fraud “should not be hijacked to renationalise the [EU] common market or put into question to the concept of multinationals’ activities and hubs from which the entire [EU] common market can be served on a cross-border basis”, the ministry stated.

“It is essential that the four freedoms of the single market, free movement of people, goods, services and capital, are observed among the 27 member countries of the European Union.”

The Grand Duchy’s government also argued that stronger economic growth would boost tax takes. “The EU and OECD action plans should address the interdependence between tax revenue and economic activity.” Luxembourg’s finance ministry called for “a certain level of equality at a global level”, saying that OECD members should develop policies that help reduce the likelihood that firms will relocate to other tax jurisdictions.

At the same time, the Grand Duchy’s government said “we should preserve a certain degree of competition” within the EU including “on tax matters”.

Competitiveness

While agreeing tax policies and systems should be “transparent”, the finance ministry paper posited that “a total harmonisation of tax systems would have negative effects in terms of competitiveness”.

“Indeed the loss of competitiveness of European financial markets compared to their competitors in the world would lead to a loss in liquidity and an increased cost of investment that Europe will need to restore growth.”

The ministry also noted that Luxembourg’s tax regime follows both OECD and EU rules, as well as numerous bilateral tax agreements.

“We must assess the tax system of a country as a whole (all its taxes) and it is essential that each country remains sovereign in the decision to direct its tax policy,” the memo argued.