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Luxembourg Mulls Tax Rise To Avert Budget Disaster

by Ulrika Lomas,, Brussels

13 November 2013

Presenting an initial assessment of ongoing negotiations on the formation of a new Government in Luxembourg, formateur Xavier Bettel, tasked with leading the talks, underlined the parties' commitment to redressing the public finances, if necessary with recourse to the fiscal lever.

Given Luxembourg's role and image as a financial center, the very real prospect of reaching public debt of around 30 percent of gross domestic product (GDP) in 2016 is extremely "dangerous" for the Grand Duchy, endangering its highly prized triple A rating on the financial markets, Bettel explained. The incoming Government's aim is therefore to prevent public debt from exceeding this "red line," and to achieve a budgetary balance in the new legislative period, Bettel made clear.

According to negotiator Étienne Schneider of the Luxembourg Socialist Workers' Party (LSAP), savings of EUR1bn (USD1.3bn) and EUR1.4bn will be required in 2015 and 2016 respectively, to ensure that Luxembourg meets its European objective of a positive structural balance of 0.5 percent.

Underlining the importance of finding a balance between spending- and revenue-based measures, negotiator Claude Meisch of the Democratic Party (DP) warned that a rise in taxation could not be ruled out, even though this may not be the preferred option with which to restore order to the public finances.

Although Luxembourg is starting from a "relatively favorable" position in 2013, without a change in policy, the public finances are set to deteriorate from 2014. The state's finances are to be the most heavily impacted by changes to place of supply rules at EU level from 2015, which is expected to lead to a decline in VAT revenues, from approximately EUR1bn in 2014, to EUR338m in 2015.

From January 1, 2015, the supply of telecommunications, broadcasting and electronic services, real estate services and the distribution of tickets for entry to cultural, artistic, sporting, scientific, educational, entertainment and similar events will, in general, be taxed at the place where the customer is established or resides.

Presently, where the supplier is established within the EU and the customer is a non-taxable person, the supply is taxed at the place where the supplier is established. Luxembourg had secured significant business from ticket operators and similar businesses due to its offering of the lowest value-added tax rates in the European Union.

It has previously been suggested that an increase to Luxembourg's headline value-added tax rate, currently 15 percent, be considered to offset the EUR700m decline in annual VAT revenue.

TAGS: compliance | VAT rates | tax | business | value added tax (VAT) | VAT cross-border transactions | budget | Luxembourg | tax rates | trade | European Union (EU) | services | VAT compliance matters | Europe | Work

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