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Luxembourg's Frieden Seeks 'Credible' Financial Center

by Ulrika Lomas,, Brussels

11 February 2013

Luxembourg’s Finance Minister Luc Frieden has recently underlined the need to adapt the country’s financial sector to international developments, and to strengthen and improve the financial center to ensure that it remains "credible and competitive at global level."

Consequently, and in the spirit of growing international developments in combating tax evasion and encouraging information sharing, the Luxembourg Government plans to initiate discussions with the US regarding implementation of the Foreign Account Tax Compliance Act (FATCA), by the third quarter of the year at the very latest, Frieden explained.

It is clear that Luxembourg will have to redefine the principle of banking confidentiality, Frieden continued. He pointed out that, although it is essential to maintain confidentiality and to protect client information, it is also essential to guarantee an efficient cooperation with other tax administrations vis-à-vis the exchange of information in the fight against tax evasion.

Frieden explained that Luxembourg’s position has always been to encourage a wider debate on the different means with which to combat tax evasion. He noted that although an automatic exchange of information was championed, and a withholding tax system recognized in 2003, since then the world has changed significantly and trends have evolved in different directions.

In 2009, the international standard became an exchange of information on request only, while the withholding tax model has continued to gain in acceptance and has greatly influenced the debate, Frieden added.

The withholding tax model has proven highly successful and has been used by Switzerland as a basis for negotiating bilateral agreements with key partners in Europe to resolve longstanding tax disputes, namely by regularizing hitherto undeclared and untaxed foreign assets held in Swiss banks.

FATCA is another key parameter to integrate into these discussions, Frieden said.

Frieden conceded that Luxembourg’s decision to block the European Commission's plans to negotiate new and stronger savings tax agreements with third countries is a bid to initiate a deeper debate on the issue of combating tax evasion, insisting that an automatic exchange of tax information is not necessarily the only solution to the problem.

Although Luxembourg must naturally adapt to international developments in terms of regulation and tax compliance, the financial center must also become more competitive, Finance Minister Frieden explained. He highlighted the fact that the financial center is accepted as the engine of the country’s economy and that a third of gross domestic product and fiscal revenues flow from the financial sector.

While accepting the importance of diversifying the Luxembourg economy, the minister underlined the need to "develop and to strengthen the financial center" at the same time, stressing that the two approaches are clearly not mutually exclusive. The Government will endeavor to make every effort to ensure that the financial center is able to create new jobs and new revenues by making it more competitive in a changing international context, he said.

Frieden explained that Luxembourg must draw a series of lessons from the crisis, which should be gradually implemented to strengthen the financial center. Alluding to the fact that there is also the further challenge of new global competitors that were not present twenty years ago, such as Singapore and Hong Kong, Frieden pointed out that any changes must serve to improve the financial center to ensure that it "remains credible and competitive at a global level."

Frieden also took the opportunity to advocate the creation of synergies between the different markets and regions of the world to support growth for the benefit of all and promoting the center abroad together with the Luxembourg development agency Luxembourg for Finance, as part of a global strategy.

Frieden alluded to the need to conserve or to adapt other traditional strengths, namely rapid decision-making, the favourable climate for business development, and the implementation of international legislation. In each banking establishment, excellence and sustainable growth must become key concepts for developing high-quality products and services to enable Luxembourg to stand out from other financial centers, Frieden stated. He also noted that efforts must be made by both the public sector, in terms of economic management and promotion, and the private sector, in terms of excellence. He said maintaining these standards will lead to the future success of the financial center.

He expressed his wish that clients come to Luxembourg not to escape taxation but as the products and services available are "more international," in a context of "stability and predictability," and as a result of the country’s "excellence" strategy.

Concluding, Frieden stressed that his main aim is that the financial sector stakeholders work together to prepare the future of the country and the financial centre, by adapting to a new environment, by becoming more international and by excelling in the quality of services and products offered. It is an "ambitious objective" but not unrealistic, the minister ended.

TAGS: tax | investment | business | banking | international financial centres (IFC) | Luxembourg | offshore | agreements | legislation | banking secrecy | withholding tax | standards | regulation | Compliance

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