Tax boom or false start?

By Stephen Evans

The latest global plans to combat corporate tax avoidance could result in a huge rise in income for the Luxembourg state. Reports by the International Monetary Fund (IMF) and Statec point to a potential for a near 40 per cent increase in the tax-take. However, these studies are based on several unknown factors, and this raises some fundamental questions about the tax reform plans themselves.

Solving Luxembourg’s housing crisis, defusing the pension timebomb, funding a high-speed train to Brussels… These are just some of the high-cost projects that Luxembourg could envisage if the country were to receive a €5.1bn annual increase in tax receipts. This figure was cited in a Statec study of the potential effects of the introduction of a global scheme designed to increase the tax on multinational corporations.

Uncertainty about €5.1bn

This estimate of a 38.5 per cent increase in the Luxembourg state’s tax-take featured in the national statistics office’s Note de Conjoncture publication which appeared at the end of last year. These calculations are broadly in line with a similar exercise conducted by the IMF in 2020, which estimated a €4.5bn tax income increase for the Grand Duchy.

"It's highly uncertain because it is so hard to anticipate how multinational companies and countries around the world will react to these measures", says Cathy Schmit, an economist with Statec who worked on the study. "I work in the unit that conducts macro-economic forecasts, and we could not decide whether this tax measure will have a positive or negative impact for Luxembourg’s economy", she adds. She notes that her Irish colleagues are working on the assumption that this measure would cut growth in Ireland.

Direct relevance to Luxembourg

The latest efforts by the OECD/G20 to increase taxation on multinational corporations received global political backing in 2021. These so-called Pillar 1 and Pillar 2 measures are of direct importance to Luxembourg and other international business hubs in Europe and across the world. Companies working cross-border use these hubs to streamline complex business arrangements, and in so doing often using global accounting rules to reduce their tax bills.

The Pillar 1 and 2 proposals are the latest attempt by global policy makers to respond to public unhappiness about this corporate tax avoidance. To date 141 countries have promised to implement these proposals, with the details currently being worked out at global level. Implementation in Luxembourg will be via EU legislation.

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