In February last year, Swiss voters sent their government back to the drawing board by rejecting a proposal that would have overhauled the corporate income tax system in the country.

In an effort to maintain good relationships with the European Union and the Organisation for Economic Co-operation and Development, and to avoid ending up on any tax-have grey or black lists, Switzerland’s government recommended ending very low corporate income tax rates for large multinational companies.

It was subsequently opposed by both the political left – which believed that a loss in revenue would be offset by spending cuts in public services – and the political right, which believed increased taxation would lead to an exodus of companies.

The conversation in Switzerland sounds oddly similar to an ongoing one in the Grand Duchy. As tax ruling practices continuously come under fire for being unfair, consecutive governments have struggled to find a long-term solution.

Unsurprisingly, socialist parties and the far-left are pushing for higher corporate income taxation, as a means of funding outlandish spending projects that would otherwise be unsustainable. But even the left would have to recognise that such a massive transfer payment can only be funded if someone actually creates wealth. Since they don’t for now, one wonders if they’re being wilfully ignorant in the light of the upcoming elections on Sunday.

Bigger army diplomacy

Tax rulings in themselves are not problematic: fruitful negotiations between tax administrations and companies are good for the country and should actually be welcomed by those who argue for spending on welfare and infrastructure. Our neighbouring countries, such as France, agree on tens of thousands of tax rulings each other, so the Grand Duchy is hardly alone here.

However, international organisations such as OECD will only allow so much from a country that does not hold up in the international court of what you could call “bigger army diplomacy”, and Luxembourg will eventually need to find a more long-term solution. Ridding itself of tax rulings and going straight to a corporate income tax rate between 20% and 30% would be disastrous for the country’s image, even if effective tax rates are known to be lower.

What Luxembourg should do is implement a low-tax regime, in the image of countries such a Estonia. Taxes on distributed profits in the Baltic country are 14-20% and hardly disputed within the EU.

In fact, a 10% flat tax on corporate profits would reduce bureaucracy for companies and satisfy those on the political left who have been arguing for higher taxation of multinational companies. And it would be a highly competitive rate within both the EU and the OECD, who’d have full transparency on Luxembourgish tax practices.

This article was first published by the Luxembourg Times.

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