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Luxembourg Leaks: Is Tax Competition So Bad?

2017-01-11 04:04:26

If you've been following the progress of the Luxembourg Leaks, you'll have noticed that things have taken a turn for the worse recently.

If you don't know what the Lux Leaks are, they were a result of a journalistic investigation by the International Consortium of Investigative Journalists into international tax avoidance in Luxembourg. The country has very competitive tax structure compared to other EU and other world nations, making it a haven for multinationals wishing to minimise their tax obligations.

The problem has now come down to whether there needs to be "harmonisation", where a climate is created that minimises such tax competition or some other alternative. But the MEPs in favour of tax-harmonisation have deliberately confused illegal tax evasion with tax avoidance, as is often the case according to tax accountants Alexander & Co.

They believe that these low tax rates provide a convenient loophole for businesses to pay less tax than they should while benefiting from doing business in higher-tax jurisdictions. After all, it doesn't seem fair that Amazon can be based in Luxembourg simply for tax purposes but sell the majority of its products elsewhere.

This is the strange grey area of aggressive tax "planning" that most people agree needs tackling head on.

It's not necessarily productive to penalise multinationals however. There is a good argument for states having control over their own tax rates so that they can remain competitive in the EU and globally. Competition is what drives a capitalist system. And Luxembourg, being low on all sorts of resources, are making the most out of their situation. Competition also drives investment and job creation.

And alternative to harmonising and raising taxes - imagine we all had a rate of 25% like Sweden for example! - is that the whole tax system is made less complex so that it doesn't take a team of accountants and tax planning advisors to find loopholes. Imagine there was no need to pay accountancy fees every month because the system was transparent from the get-go.

There would be plenty of obstacles to harmonisation however. Taxation is something that can be vetoed in the EU and the UK, and there are plenty of nations that would be opposed to changing their tax regulations. The main issue as with any large-scale transformations is that it would be such a difficult process to "harmonise" the tax systems of so many countries.

It will remain to be seen whether pro-harmonisation MEPs will have any effect with their anti-tax avoidance campaigning and whether they can sneak in changes through the backdoor. For the time being, no matter what anyone says tax competition is still here for the foreseeable future.

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