Jos van Bommel: headline rates are just one factor
(Photo: Mike Zenari)
What is a corporate tax haven? A new report shows that large, medium-sized and small countries use tax arrangements to attract international firms. Few are as attractive as Luxembourg.
Over half of international executives questioned in a recent survey, “The home for business? Assessing the competitiveness of the UK”, said Luxembourg had one of the three most competitive tax regimes in the world. This put the country level with the UK and ahead of Ireland, the Netherlands, Switzerland and the US. Even France and Germany were mentioned.
These results came from a survey of 65 businesses based outside the UK conducted by the British operation of the consultancy KPMG. The firm also surveyed UK companies and their foreign subsidiaries. Ireland and the UK came top in this poll, but with Luxembourg and the Netherlands also having significant renown.
Small, rich, suspicious?
All these countries face criticism in the international press for the way they treat businesses’ tax affairs, but the quality of criticism of Luxembourg tends to feel sharper. Somehow commentators feel it is more indecent that a small country should engage in tax competition. Incidentally, the countries leading this list are all relatively rich, but being larger perhaps gives the impression that this is due to organic growth.
Professor Jos van Bommel, an economist at the Luxembourg School of Finance, part of the University of Luxembourg, thinks that Luxembourg is simply better at enacting policies that other larger countries are trying to follow. “Due to its small size, Luxembourg is indeed faster in adapting itself to the needs of the business world,” he said, adding that tax is just one part of the equation with regulation, corporate governance and infrastructure all important. “But there is an additional advantage of being small: instant recognition and awareness [amongst professionals],” van Bommel added. He reckoned “this is a huge advantage for marketing, creating awareness, and attracting international talent.”
Tax competition is increasing, and there were murmurings in Luxembourg when the UK announced it would be cutting its headline corporate tax rate to 17% in 2020. The equivalent figure here is set to fall to 26.01% by 2018. Van Bommel is not concerned, as the headline rate is just one part of the overall assessment made by international businesses.
Indeed, as the KPMG report pointed out, “companies place more importance on the simplicity, stability and predictability of a tax regime than on headline rates.” It added that “political and macro-economic stability are particularly appealing features.”
“Luxembourg should not be worried about tax competition. It should however be worried about tax harmonisation,” said van Bommel. “The risk of Luxembourg losing its strong tax competitiveness does not lie in London, but in Brussels.”
Prospects of this appear dim at the moment. A global effort to reduce tax optimisation, called the Base Erosion and Profit Shifting scheme, appears to be having a beneficial effect for the Grand Duchy. This move is prompting companies based here to beef up their operations, or in the jargon increasing “substance”.
“I do, anecdotally, see a small and steady growth of multinationals ‘adding substance’,” van Bommel said. He added this was good for the economy as a whole as it “draws in international talent, and therefore makes the country more international and diverse, which is of course also good for business.”
This article was first published in the May 2016 issue of Delano magazine. Be the first to read Delano’s articles on paper before they’re posted online, plus read exclusive features and interviews that only appear in the print edition, by subscribing online.