Saturday, 15 November 2014

Luxembourg - A Euro Parasite

A parasitic worm lives in the guts of Europe. The rest of the continent does the hard job of catching and eating food, but digestion is shared with a parasite embedded deep in the gut of Europe - Luxembourg. From time to time the eggs of the parasitic worm turn up as unelected Euro officials to ensure that the continent goes easy on the vermicide - and Viviane Reding and Jean Claude Juncker are a couple of A grade double yolkers.

For sheer greed and hypocrisy, nothing beats the parasite or its egregious eggs. In return for giving the lazy burghers one of the richest lifestyles in Europe, global firms are offered cut-price tax deals that allow them to take full legal advantage of the single market. And what really grates is that the Luxembourg parasitic worm can't stand competition - when Ireland started to go down the same road there were howls of outrage from the eggs. It's not the fault of the firms who take advantage of the tax regime; that after all is what firms do, what they're supposed to do. No, the fault is solely parasite Luxembourg's - and most is the doing of the Walt that the EU have just appointed as their most senior unelected official, Jean Claude Juncker.


Anonymous said...

Parasitic? It's exactly what the UK sholuld be doing and the only thing wrong is that we're not........

Raedwald said...

Anon - there's a huge difference between competitive business tax rates that attract real inward investment and merely robbing your neighbours by taking advantage of open market rules.

Gordon the Fence Post Tortoise said...

Luxembourg's antics have long had me wondering "how can they can get away with it....?"

The answer that I keep returning to is that they are simply bent.

They have apparently the world's second highest GDP per capita after Qatar apparently - a situation that I think defies arithmetic when one looks at their industrial and agricultural economy.

So the answer lies elsewhere.

The grand duchy is home to The European Court of Auditors (yes ... the people who supposedly sign off the EU's accounts) erm.... which hasn't happened for how long?

The term parasite seems overly indulgent and generous.

Anonymous said...

> merely robbing your neighbours by taking advantage of open market rules.

Sorry, not understanding why. Can you elaborate?

(A different Anonymous to the first guy.)

Raedwald said...

Anon - for example

A firm makes €200m profit from its trading in France, €300m from its trading in Germany and €8m from its trading in Luxembourg. However, EU rules allow it to rent a room above a bar in Luxembourg and call it 'Head Office'. This then allows it to pay tax at Luxembourg rates on all €508m of profit, rather than French or German tax rates. And Luxembourg keeps all the tax - France and Germany hardly get a cent of the profit made on their soil.

This is exactly what firms do - and what they're obliged to do by law, to maximise benefits for their shareholders. If Luxembourg cuts its neighbours throats by offering absurdly low tax rates, firms are obliged to take advantage of them.

So the gut parasite is Luxembourg.

(clearly simplified - the EU tax manual is as thick as a housebrick, but the above is the effect of the rules)

Anonymous said...

First "Anon" back again....

Corporates don't pay tax. Their customers do in the form of higher prices, reduced employment and economic activity. So if corporates pay lower taxes we all benefit.

I completely agree the EU and its regulation of the single market is a complete bollocks, but to imagine that (for instance) the UK sees no tax from a company registered in Luxembourg is just plain wrong. Business rates, VAT, income tax from those employed...... all greater than corporate taxes and NOT dependent on being charged against profit.

The rules we've bought in to (rightly or wrongly) allow latitude on tax rates; Luxembourg simply uses the rules. So should the UK and if Lux doesn't like it, tough shit. WE'd all be better off.

Raedwald said...

Anon 1 - you assume that corporates will pass on the effects of savings in business tax to customers by restricting themselves to making 'normal' profits - when we all know quite well that this plays no part in their pricing decisions. The actual behaviour of firms taking advantage of this opportunity tends to be oligopolistic and the tax advantage is used to crowd-out domestic competition that cannot take advantage of the break, establish market dominance and introduce continent-wide price fixing.

It favours the global corporates over national independents and as such inherently skews the market.

Anonymous said...

Competition should take care of pricing just as it does with prices including tax; those seeking market advantage will pass savings on. Corporate taxation reduces choice, increases costs to us, the consumers, and like all Government regulatory behaviour provides a fat living for accountants and lawyers driving coaches and horses round Government intentions. Then we the taxpayers pay all over again to employ expensive civil servants (big salaries and pensions) to police the whole thing to find "tax dodgers".

I don't deny the need to tax but tax for tax's sake with the deadweight and policing costs is lunacy. What skews the market isn't lack of governance - it's the existence of governance!

Raedwald said...

Competition will NOT take care of pricing unless there is free access to the market, barriers to entry are low and there is free availability of choice. This simply doesn't apply to most of the oligopolies using the Luxembourg route.

And with net trading, with no physical shops or premises, few employees and which can take advantage of a continent wide distribution network for goods, the residual employment taxes, business rates etc are minimal in comparison with corporation taxes for those companies registered in Luxembourg.

And you completely miss the point that this is a scam that is only available to micro-nations such as Luxembourg with no alternative substantial corporate tax base; the UK simply could not do it and be better off than with £55bn corporation tax.

Yes, it's also my opinion that taxes are too high - but I'm not naive enough to believe that they are not required, or that tax on commerce should not balance tax on individual income or real estate.

auralay said...

You don't blame the companies for taking advantage of the rules. I agree.
I also think you can't blame Luxembourg for taking advantage, either.
So we have to blame the rules. The question then becomes what do we have to do to get the rules changed?
I feel disenfranchised, dis-empowered, disarmed and thoroughly dis-chuffed!

Anonymous said...

Anon 1 again, I'm afraid.

Auralay - agreed.

Raedwald (great topic by the way and not often I disagree with you as fundamentally as this) - UK Corporation Tax receipts are nothing like £55bn. In 2012-13 they were £39bn and have been declining for years. Earlier this year ICAEW reported the top 100 businesses in the UK paid £77bn in corporate taxes of which £6bn only was Corporation Tax.

So the effect may not be what you think. Also, the other slant on this is that you tax stuff you want less of - hence tax on fossil fuel to encourage eco-lunacy, and minimum wage legislation unavoidably producing less employment. Why do we want less corporate profit, or alternatively, more and more complex means of companies being creative with more and more complex allowances - creating an £8.5bn shortfall just by shuffling numnbers?

Raedwald said...

Anon - I think you're being mischievous! You know very well that if we reduced corporation tax to near zero all that would happen is that every plumber and minicab driver in the country would become a limited liability company. Which would be unsustainable.

And as SMEs and the Mittelstand are the drivers of economic growth, it would be perverse to cut tax for the sluggish, sclerotic global corporates and not for the hares and racers of the economy, surely?

And if you have income tax, as long as incorporation remains an option for the self-employed, you need a balance with corporation tax.

By all means offer incentives for inwards investment, and by all means maintain a genuine competitive advantage in corporation tax by running a low-tax economy generally, but to imagine we can succeed economically by adopting Luxembourg's crooked and distorted micro-nation tactics is surely delusional.

Anonymous said...

Raedwald, you are wrong about corporation tax and one man bands. One man bands incorporate to avoid employer's NI, not corporation tax. Small businesses get a CT offset against tax on their dividends, so a zero rate of CT would, I believe, have zero impact.

Umbongo said...


Why "unsustainable"? Why shouldn't a plumber or minicab driver incorporate and pay zero corporation tax? At some point, s/he'll have to get money out of the company in wages or dividends to pay the grocery bills and tax (income rather than corporation) would be payable accordingly.
For small companies - certainly "one-man" affairs - corporation tax is simply a payment on account of income tax payable by the owners or employees of the company. In other words, there would be no difference to the total tax take: only the routing of that tax to Mr Osborne would change.

Dan said...

Raedwald, imagine what would happen if the "parasite" was not present. What I imagine would occur is that countries across the EU would advance their tax rates to the far side of the Laffer Curve, to the detriment of businesses everywhere, especially local ones unable to compete.

With the "parasite" present (actually much more of a symbiote than anything else) the large businesses can escape punitive taxation, which generally dissuades regimes from trying to foist these taxes on businesses unable to pull the multinationals' tricks.

In short, Luxembourg is a good thing to have.

Budgie said...

Umbomgo, not so. If a plumber incorporates he will pay himself £152 a week, thereby paying neither income tax nor NICs, and then pay Corporation tax on his "profit" which he will take as dividends to make up his pay. In other words up to nearly £42k the Ltd Co plumber would be on a marginal tax rate of only 20% (CT), rather than 45.8% (IT + Employee NIC + Employers NIC).

Separately, for the anon commenters, take the example of two coffee house chains both operating in the UK, one with a low tax HQ in Luxembourg and one headquartered in the UK. The low tax chain can either undercut its rival, or at the same price point make more profit. If the low tax chain undercuts it will eventually drive out of business its higher tax paying UK rival, reducing competition, thereby being able to put up its prices again. Neither scenario is good for the UK or UK consumers.

Umbongo said...


The only tax saving through incorporation is in respect of national insurance. But that saving exists already and whatever the CT rate.

Whether or not he is incorporated, your plumber will not pay income tax on his £152 pw (= £7,900 pa) because that is within his personal tax allowance.

He will pay tax at the corporation tax rate (20% which is also the basic rate for income tax) on the rest of his profit whether or not they are distributed as dividends.

Given today's CT rate, you'd be unwise not to consider incorporation to minimise your NI contributions.

Furthermore, were NI melded into the "normal" tax system (with a great saving in bureaucracy and related costs) - NI is only another tax after all - there'd be no need for a plumber to incorporate (for tax purposes anyway) no matter what the CT rate.