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Viewing cable 07LUXEMBOURG480, LUXEMBOURG HOLDS OFF PROPOSED VAT CHANGES

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Reference ID Created Released Classification Origin
07LUXEMBOURG480 2007-12-06 15:49 2011-08-25 00:00 UNCLASSIFIED Embassy Luxembourg
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