No measures that harm global economy
Learning from the financial crisis, the United States has passed tougher laws regarding the finance industry. Luxembourg’s finance minister Luc Frieden is not opposed to the new US legislation in its principle but against the manner the goals are achieved. During a visit in Washington, he had several meetings with US officials to discuss these topics. He briefed the local press on the outcome of these discussions.
FATCA, Foreign Account Tax Compliance Act, in the United States aims at ensuring that all US taxpayers with accounts abroad and using foreign entities are reporting their foreign earned income and paying their taxes in the USA according to US tax rules. This law has an extraterritorial effect, thus goes beyond the US territory. This means that Luxembourg based companies would have to comply with US legislation which is in contradiction with Luxembourg law and with the double tax treaty signed with the United States.
Luc Frieden gives explanations: “We certainly share the objectives of this law, meaning that clients must pay taxes in their home country. We are not against this law in principle, but we object to the manner this goal is achieved. Why? Because the automatic exchange of information is contrary to our legislation”.
Besides, it is not in European law either. Minister Frieden expressed his worries to US officials and discussed ways of how this can be applied differently. But it will be difficult to find a solution as the law has already been voted.
But there is hope, because US authorities are ready to negotiate bilaterally with Luxembourg. They are also in dialogue with the European Union, as this topic does not only concern Luxembourg.
The Big Five
Luc Frieden insisted that FATCA is a huge problem for Luxembourg, “because of our diplomatic relations with the United States and the importance of the US for our funds industry. In light of this, the key question for Luxembourg is to know how far and to what extent we want to move towards an automatic exchange of information.”
In this context, minister Frieden questioned the solidarity between EU member states: “ We were surprised that despite the fact that the European Union was negotiating with the US, the 5 biggest EU countries had already reached a political agreement to exchange information with the US before we visited the country.”
Minister Frieden added that the discussions with the US counterparts were constructive, but it is hard to draw a conclusion as the law has been adopted already. In the coming weeks he will discuss the different options for Luxembourg with the Luxembourg banking and fund industries.
Another topic mentioned by minister Frieden at his press conference was the Dodd–Frank Wall Street Reform and Consumer Protection Act, in particular the Volcker Rule. This is a specific section proposed by former US Federal Reserve Chairman Paul Volcker. The goal of this rule is to restrict United States banks from making certain kinds of speculative investments that do not benefit their customers.
Luc Frieden insisted on the fact that contrary to what was said in the press, Luxembourg is not opposed to the objectives of this rule because a number of speculative activities do need to be better regulated. But the problem lies elsewhere. “The European fund industry and especially regulated funds such as the UCITS products for retail investors are discriminated against compared to US funds. You know that Luxembourg is the biggest fund centre in Europe, that is why we insist that European well-regulated and supervised funds are treated the same way than similar US domiciled funds.”
In his discussions with Mrs Shapiro, President of the Securities and Exchange Commission (SEC), minister Frieden had the feeling that Luxembourg’s arguments have been noted with great interest. “Giving an advantage to one continent over another would harm the global economy and would be counterproductive”, he said.
Black cat, white cat
During his visit to the Senate, Frieden discussed drafts that put Luxembourg on a black list. Strangely enough, many Senators were not aware of the fact that Luxembourg fulfils all international standards in terms of regulation. What’s more, he explained that besides the fight against money laundering and the financing of terrorism, Luxembourg had also signed a new double tax treaty with the United States. The goal is a better cooperation between tax administrations in individual cases. As a result of this, US senators indicated that they could no longer see Luxembourg featuring on a list of non-cooperative jurisdictions. CW