The time is ripe for reform
If Luxembourg wants to remain competitive, it has to focus on high added value service industries. This is the message of Georges Bock, who takes over the helm as managing partner of KPMG Luxembourg on October 1st .
If Luxembourg wants to remain competitive, it has to focus on high added value service industries. This is the message of Georges Bock, who takes over the helm as managing partner of KPMG Luxembourg on October 1st. He is well aware of the country’s traditional strengths, but he also sends a message to political decision makers to undertake solid reform in order to prepare the country for coming generations.
International investors perceive Luxembourg as a stable country. Has it suffered a lot from the Eurozone’s negative press?
The real question for us is the following: can we, as a small country, still find a region in the world that that is willing to do major business with us? If Malaysia is prospering, this doesn’t mean much to juggernaut countries like the US and Germany; but if we can manage to attract business from Malaysia, our economy prospers, even though the Eurozone is in turmoil. Unfortunately, if you travel to regions like Asia or Latin America, they see the whole Eurozone as a catastrophe because of the bad news in the press.
We, as Europeans, can weigh the debate around the future of the Eurozone and measure its nuances, but from the outside, press coverage gives the impression that every country wants to leave the Eurozone. That is definitely not of help to Luxembourg.
Apart from its stability, what are the particular assets that make Luxembourg attractive to foreign companies and investors?
If we want to sustain our way of life, we have to focus on high added value service industries, and certainly not manufacturing. One big engine that we have in the service industry is everything that is linked to the investment fund industry, such as the structuring of investments in private equity, real estate and hedge funds. There is a whole business infrastructure that is sustained by this engine, be it the domiciliation companies, the accountants, auditors, lawyers and all the other financial centre professionals (PSF’s) that are needed in the framework of reporting, communication of data etc.
Why is Luxembourg competitive in this area?
First of all, because we have a government that cares about the investment fund industry and listens carefully to the needs of its practitioners. Secondly, Luxembourg has achieved critical mass due historically to its first mover advantage in adopting the UCITS Directives. Our success is certainly not due to tax reasons, because a lot of European counties don’t tax investment funds at all, while we do so.
Thirdly, we are a very attractive centre for promoters wishing to distribute investment funds globally. If all the laws around the world on fund distribution were to go up in smoke, one day, I believe that in Luxembourg we would be able to reconstruct a good part of it because we have people that are knowledgeable on every aspect of this business.
You recently said in an interview that Luxembourg was at a crossroads. What challenges does the country face?
A crisis is a symptom of long standing structural problems in a society. The crisis started in 2008 and a lot of people thought that after a short rainy period the sun would come out again. The government hasn’t been able to convince the population of Luxembourg that something needs to be done to guarantee the pensions of the future generations. One of the crucial questions to ask is whether this country can be reformed.
If you asked me the question right now, I would be more likely to say no than yes. This crisis clearly shows that for the last twenty years Europe as lived beyond its means, because governments have spent more money than they received. In the long run, our attitude in Europe has to change in order to prepare a sustainable future for our children.
So far, the 27 EU- countries have not reached an agreement on giving a mandate to the European Commission to open negotiations with so-called third countries on the taxation on savings income. What would an automatic exchange of information mean for the Luxembourg financial centre?
Our three neighbouring countries France, Belgium and Germany all apply a system that gives their residents reasonable protection against banks communicating personal data around. As soon as the same individuals cross the border, they have to suffer the consequences. This is a far cry from equal treatment; it is discrimination by the system. As long as this situation persists, I do not feel comfortable with the automatic exchange of information, because the same rules are not applied everywhere.
Should Luxembourg join the countries willing to sign a bilateral agreement with the US to exchange FATCA information?
Qualified intermediary (Q.I.) was the first generation of FATCA. Right from the start, Luxembourg understood the key messages of the Q.I. regime: the US was moving in the direction of making sure that it collected information about US taxpayers. If we didn’t have these huge implementation costs, FATCA would be close to a non-event. It is the industry, and to a certain degree the customer, that will have to pay for US compliance.
Though FATCA will not drive Luxembourg out of business, it is an important issue for us, because we have an international financial centre. We cannot afford to be a black spot on the FATCA map.
Is the government in charge of FATCA implementation, or the finance industry?
If we can really be sure that implementation costs will fall by adopting an intergovernmental arrangement, then the Luxembourg authorities will sign a bilateral agreement with the US. I am optimistic that there is something in it for a small country like Luxembourg and that the government will bring value to the table by clearing up, in bilateral negotiations, a host of complex issues that exist in a financial centre like ours that serves the world.
In international media reports, Luxembourg is, from time to time, represented as a tax stealer. Where do these clichés come from?
In the European Union and elsewhere around the world there exists the principle of free establishment of a company. It is clear that these rules, which are complicated, are not easy for the average citizen to understand. However, it is easier to understand that if the State has huge budget deficits and a colossal public debt, then you need to find a scapegoat .
It is also more popular to make somebody else responsible for your shortcomings than to admit one’s own mistakes, so that is where the clichés on Luxembourg come from. The climate on international taxation becomes rougher at times when there are a lot of governments with debt and deficits.
Luxembourg does nothing other than apply EU directives and that is our right. Participation exemptions, for instance that are based on EU-directives were not created to produce tax holidays but to avoid double taxation. Saying that we are stealing money makes no sense. CW