In September I suggested that one way to diversify the economy could be through a lower total corporate income tax (CIT) rate in my blog “Using fiscal policy to diversify Luxembourg’s economy.” In November, our ATOZ TaxTrends surveyshowed that among decision makers in Luxembourg, 73% felt that lowering the CIT to 15% would be an important incentive for businesses. It appears that the majority of the decision makers also agree that the Luxembourg total CIT (currently 29.22%) should be lower, and after some research and analysis, I think that the facts agree as well.
Fact #1: CORPORATE INCOME TAX IS A VOLATILE AND UNRELIABLE SOURCE OF INCOME, UNLIKE PERSONAL INCOME TAX
In ten years (2003-2013), the growth rate of corporate tax resources has totaled 18% while the growth rate of corporate tax payers has totaled 70%. Compared to personal income tax, the past decade has seen a 145% increase in resources while the growth rate of individual tax payers has only been 44%. Luxembourg cannot count on corporate tax resources when so little is received relative to the number of companies in Luxembourg (many of which are holding companies benefiting from the EU parent subsidiary Directive). However, the job growth (both direct and indirect) generated by the addition of new businesses to Luxembourg brings a steady stream of revenue to the budget in the form of personal income tax.
Fact #2: THE CORPORATE INCOME TAX RATE IS APPEALING TO HIGH-LEVEL DECISION MAKERS
When a CEO or a CFO of a multinational is deciding on a country in which to locate, he or she is relying on summaries and notes provided by staff or advisers. At this level, the subtlety of nominal v. effective rate is lost and an easy to compare figure, such as the CIT, can make a big difference and influence decisions. Despite all political announcements and media coverage, countries will continue to compete by using fiscal policy to attract business to their soil. On paper at least, both Ireland and the UK seem more competitive than Luxembourg with Corporate Income Tax rates of 12.5 and 17%, respectively. Multinationals already in Luxembourg could take advantage of a lower CIT by shifting existing business or creating new business in the Grand Duchy. BEPS may act as a booster in their decision making process.
Fact #3: LUXEMBOURG CAN AFFORD TO LOWER ITS CORPORATE INCOME TAX
Luxembourg is in a unique position of having very little public debt. In fact, the public debt only represents 23.5% of Luxembourg GDP whereas in neighboring countries such as France and Belgium, this number can be close to or over 100%. Luxembourg is a small country whose budget has been managed well over the past decades. Moreover, any losses which may occur due to a lower CIT can be mitigated by implementing the decrease over a 2 or 3 year period. This would attract new businesses in Luxembourg, implying an increase of taxable base that could potentially immediately offset and even exceed the potential corporate tax loss from existing Luxembourg taxpayers. There are precedents, studies and models that show that rate reductions can be self-financing. For example, from the Irish Department of Finance’s 2014 report on the economic impact of corporate tax policy: “Evidence based on a wide number of countries indicates that a 10 per cent reduction in Corporation Tax could have anywhere between a 0.6% and 1.8% effect on economic growth rates.” On a similar note, a 2013 study by HMRC found that “a one percentage point decrease in the Corporation Tax rate (UK) would lead to an increase in the size of the tax base of 0.83 per cent.”
The playing field is not and never will be level. Luxembourg, as a small country, will never have the same competitive advantages as bigger European countries. These countries certainly do not hesitate to leverage their advantages when it comes to rendering their environments more hospitable to businesses, so why should Luxembourg hesitate to make full use of the tools at its disposal?