In the middle of the pack
Tax freedom day is the symbolic date on which the average taxpayer stops working for the state treasury and begins earning for himself. This year Luxembourg’s Tax Freedom Day falls on 21 May. In a study initiated by PwC Belgium, Luxembourg fares better than its neighbouring countries, but comes behind others such as Cyprus and the US.
Luxembourg’s Tax Freedom Day fell on 21 May 2013. On that day, all income that the average taxpayer has earned can be spent entirely on private expenditure. This symbolic date relates to the total taxes paid by the citizen as a percentage of their total income, and is calculated by dividing the total tax revenue of government by GDP. Wim Piot, partner and Tax Leader at PwC Luxembourg, underlines that “Luxembourg is clearly not the cheapest country in terms of taxes. Cyprus or the USA, for example, tops the list with lower tax burdens".
The Grand Duchy stands in the middle. “From a tax perspective, Luxembourg is cheaper than our three neighbouring countries Belgium, France and Germany. It is a good score but as published in our Total Tax Contribution study, Luxembourg’s effective tax burden stands at 24% on average. So labelling Luxembourg as a tax haven is totally wrong and inappropriate".
As for the Luxembourg results, not much has changed compared to the last few years. In 2012, Tax Freedom Day fell on May 20, in 2011 it was on May 10 and in 2010 it fell on May 16. Wim Piot calls our attention to the fact that: “if this date moves dramatically to a later date from one year to the next, this means that the government is attempting to tackle austerity by raising taxes. Consequently, this implies that the government is trying to finance a deficit more by raising revenue instead of cutting the budget and reducing spending".
From the Luxembourg perspective, it is important to offer stability to investors. “It is vital for entrepreneurs to know that there is stability, which for them is often more important than the tax level in itself. They need to know how much tax there is to be paid in case they set up an investment plan”.
Added to that, investors don’t only look at an attractive tax framework but a lot of other aspects play a role too. “Infrastructure is a very important point and Luxembourg’s are excellent. Soft factors like personal safety are also critical, and here Luxembourg comes out on top”.
Wim Piot thinks that the debate on tax competitiveness is a wrong one in many ways because in some parts of Old Europe compared to developing countries, economies suffer from structural problems because the general cost base is too high. “Companies that went to China or Eastern Europe did not do so because of tax reasons but because of labour cost. Germany has made some efforts in that area that’s why companies invest there. Intellectually speaking, the debate about taxes is very interesting and we should have a sound debate about it but we should not forget the real debate, which is about labour costs in the first place”.
Wim Piot argues that clarity is imperative on a number of more technical issues. Some tax authorities attack not only Luxembourg, but other countries too, when it comes to the substance of a company. PwC Tax Leader underlines that everyone uses this terminology but curiously there is no clear definition for it. The same could be said for beneficial ownership, which is not defined properly, either. But in order to hold a proper debate, those definitions are sorely needed.
“Journalists make a lot of fuss about these topics. They go knocking on the doors of holding companies and find nobody there. A holding company doesn’t need 25 people all day in the office; this is simply not realistic and unnecessary. What you need is a board of directors and adequately qualified staff who understand the risks of the company and prepare and make decisions in Luxembourg when necessary".
Stability is a crucial concept when it comes to maintaining a competitive tax environment. Still, there are some changes and reforms that need to be made to the international tax system. Wim Piot has a few reflections to share.
One relates to the fact that the whole tax system was designed in the early days of the last century and has been fundamentally based on an industrial economy with large factories. At the time, these companies did not have the possibility to move their factors of production around. “Today, we live in a different world where profit and profitability are generated by intellectual property and they are very mobile. Unfortunately most tax systems are not adapted to this environment”.
Policy makers have not noticed or realised too late that the economy has shifted from an industrial economy to a service economy, which requires a completely different international tax system. CW