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Luxembourg Eyes VAT Rise In 2014 Budget

19 April 2013   (0 Comments)
Posted by: Author: Ulrika Lomas
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Source: Ulrika Lomas

Luxembourg's Prime Minister Jean-Claude Juncker has unveiled details of Government plans to consolidate the public finances to the tune of between EUR250m (USD328m) and EUR300m, within the framework of the country's 2014 Budget, primarily by means of a rise in value-added tax (VAT). The Government intends to continue fiscal consolidation in 2015 and 2016.

In view of the latest growth forecast and the fact that VAT revenues from electronic commerce will decline by EUR700m annually from 2015, the Government needs to readjust the public finances, Juncker explained. Growth is currently expected to stand at just 1% in 2013, 2.3% in 2014, 1.9% in 2015, and 3.8% in 2016. The Government will not therefore be able to maintain its initial aim of balancing the public finances by the end of 2014, due to the "extremely weak economic growth," Juncker stressed.

To meet its new target of balancing the public finances in 2016 or 2017, the Government intends to offset the lower VAT revenues from electronic commerce with a rise in VAT. Alluding to the fact that VAT rates have remained unchanged in Luxembourg since 1993, Juncker emphasized that any rise will ensure that VAT rates remain the lowest in Europe. Juncker revealed that the planned VAT reform will form part of a more comprehensive overhaul of taxation, underscoring that the changes will not be implemented before 2015. However, rise in VAT will not be sufficient in itself, Juncker warned.

The Government plans to maintain corporate social security contributions at their current level until 2016, and plans to maintain investment at 2013 levels, to protect growth and employment. The Government will revise state aid in the housing sector, and will increase the taxation of capital gains realized on land. There will also be a review of the financing of long-term care insurance; contributions may rise if expenditure control proves insufficient. Finally, the Government will continue reducing state operating costs.

Taking an even longer-term view, Luxembourg's Finance Minister Luc Frieden has conceded that a raft of "substantial changes" will need to be implemented in Luxembourg over the course of the next five years, to compensate for diminishing and therefore unsustainable levels of tax revenues. In an interview with Forum, Finance Minister Frieden admitted that there are a number of huge challenges currently facing the country.

Referring to the country's financial center activities, Frieden said that the Government would have to await findings of the forecast committee before ascertaining whether or not revenues from this sector are sustainable. The committee is due to present its prognosis for the coming three years shortly, Frieden added. The Luxembourg Finance Minister nevertheless explained that economic developments in Europe are adversely affecting fiscal income from financial center activities. He underlined the "absolute necessity" to further diversify the Luxembourg financial center and to ensure that the center increases its international focus to benefit from economic growth in other regions of the world. This strategy will serve to stabilize financial center revenues over the course of the coming years, Frieden argued. He underscored the importance of protecting the future of the financial center by constantly keeping in mind Luxembourg's assets and by permanently striving to be better than competitors.


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