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Cablegate: Luxembourg Holds Off Proposed Vat Changes

VZCZCXRO5448
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHLE #0480 3401549
ZNR UUUUU ZZH
R 061549Z DEC 07
FM AMEMBASSY LUXEMBOURG
TO RUEHC/SECSTATE WASHDC 6154
INFO RUCNMEM/EU MEMBER STATES
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS LUXEMBOURG 000480

SIPDIS

SIPDIS

DEPT FOR EEB/IFD, EUR/WE, EUR/ERA
USEU FOR TREASURY ATTACHE MATTHEWS
TREASURY FOR ATUKORALA

E.O. 12958: N/A
TAGS: EFIN EINV PGOV EU LU
SUBJECT: LUXEMBOURG HOLDS OFF PROPOSED VAT CHANGES

REF: LUXEMBOURG 235

1. SUMMARY. At the 4 December Ecofin meeting, Luxembourg
won crucial concessions from other EU member states on a
proposal to change how the value-added tax (VAT) on services
is levied and protected its comparative VAT advantage as well
as a vital revenue source. These proposed changes would have
eliminated a GOL-estimated 220-270 million EUR yearly in tax
revenues. The concessions gained preserve for Luxembourg the
current VAT collection arrangement through 2014. There will
then be an extended phase in period over the course of 5
years. This decision is very good news for the GOL and
protects what PM Juncker has estimated to be nearly 1% of
Luxembourg's GDP. It is also good news for American
e-commerce companies established in Luxembourg. END SUMMARY.

2. Luxembourg lifted its "veto" at the 4 December EU
Economic and Finance (Ecofin) ministers' meeting clearing the
way for sweeping changes regarding how VAT is levied on
services in the EU. It lifted its veto only after it gained
key concessions on the proposal from other Member States.
Whereas previous proposals either went into effect
immediately or only allowed Luxembourg to keep reduced
amounts of VAT collected (Reftel), Luxembourg was able to
extract concessions which fended off any practical changes
until 2014. Thereafter there would be a phase-in period
where Luxembourg would retain 30% of the VAT receipts for
2015-2016, and then 15% for the period 2017-2018. The
changes would come into full effect on 1 January 2019.

3. An economic advisor to PM (and Finance Minister) Juncker
told Pol/Econ Chief that that the GOL was "delighted" with
the outcome and said Juncker's high standing among fellow EU
finance ministers was absolutely pivotal in winning the
concessions. He also said that these concessions establish
the "formal legal framework" that e-commerce companies
established or considering establishing themselves in
Luxembourg need to plan for the next decade.

4. In comments to Parliament on 5 December, Juncker himself
credited the efforts of Luxembourgish civil servants working
"in the background." He further described the compromise as
a "typical European compromise," containing "no special
treatment for Luxembourg." Juncker said that Luxembourg was
doing nothing illegal by establishing a 15% VAT rate and
pointed out that every other Member State could avail
themselves of this same low rate if they so desired. He said
that this compromise was very important to the Luxembourg
e-commerce sector and predicted that over the next eight
years (before the changes go into effect); Luxembourg would
continue to attract new companies. More importantly, he
predicted they would stay beyond 2015 "for other reasons."
Those Juncker cited were stability, location, labor market,
and quality of services found in Luxembourg.

5. COMMENT: The crux of the issue for Luxembourg regards how
VAT on services specifically effects the Luxembourg
e-commerce sector. For several years, the GOL has actively
marketed its advantage vis-a-vis VAT to e-commerce companies.
Many, almost exclusively U.S. companies, have established
themselves in Luxembourg as a result. The GOL has worked
hard to diversify its economy from financial services on
which it relies for the vast majority of its GDP (more than
30% of Luxembourg's GDP comes from the finacial services
sector). It has been extremely proud of its record in this
campaign, luring heavyweights such as iTunes, Skype, and
PayPal to Luxembourg. This agreement represents a near-best
case outcome for the GOL. It has forged an EU consensus,
preserved its comparative VAT advantage for the near-term,
and protected a significant source of revenue. END COMMENT
WAGNER

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