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IMF Supports Higher VAT Rates For Luxembourg

by Ulrika Lomas, Tax-News.com, Brussels

13 May 2014


The International Monetary Fund has backed Luxembourg's planned value-added tax hikes, and suggested that the government should consider increasing the yield from property taxes.

Luxembourg will lose VAT revenues as a result of changes to European Union (EU) place of supply rules, under which VAT revenues will accrue to the country of residency of the consumer rather than the service provider. The change affects business to consumer supplies of telecommunications, broadcasting, and electronic services. Local authorities estimate that the loss of revenue will amount to EUR800m (USD1.1bn) in 2015 – revenues worth 1.5 percent of gross domestic product (GDP). From 2019 onward the loss is expected to reach 2 percent of gross domestic product.

To compensate for these losses the government has decided to increase VAT rates from January 1, 2015, to raise an additional EUR350m of revenue. From the beginning of next year, the standard rate of VAT, which the IMF pointed out is the lowest in the EU at 15 percent, will rise to 17 percent, while the reduced rates of 12 percent and 6 percent will increase to 14 percent and 8 percent, respectively. The super reduced rate, in place on basic commodities, including food, children's clothing, books, and entry tickets to cinemas, theaters, and museums, will remain unchanged at 3 percent.

Another option for raising revenue in the near-term is to increase recurring taxes on immovable property, the IMF said. Luxembourg's income from such taxes is very low by international standards. The territory raises less than 0.1 percent of GDP through those taxes, while the average euro area stands at 0.7 percent of GDP.

The IMF noted that increasing real estate taxes would also help address supply constraints in the housing market as it would raise the cost of holding unused land and housing properties. Such a tax is considered less distortionary to productive decisions and harder to evade than other taxes.

Raising direct taxes could also be an option, but would have to be carefully weighed against its impact on Luxembourg's competitiveness, the IMF said. Luxembourg already relies on direct taxes to a significant extent, including via the solidarity taxes paid by both individuals and businesses.

The IMF made these comments in a report released upon the conclusion of its 2014 Article IV consultation with Luxembourg.

TAGS: individuals | VAT rates | tax | business | value added tax (VAT) | property tax | accounting | gross domestic product (GDP) | International Monetary Fund (IMF) | Luxembourg | food | European Union (EU) | Europe

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