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Pierre Jean Estagerie |
Xavier Martinez Aldariz |
Does Luxembourg need tax amnesty? As with any country that applies a certain level of tax pressure on capital and work income, there are several reasons why taxpayers might omit the declaration of part of their income.
One reason is that the legitimacy of income tax is underpinned by the services provided to taxpayers by the state (construction, use, and maintenance of public property such as schools, motorways, social services, among others). Taxpayers therefore agree to pay tax for this purpose provided they consider it fair and equitable, yet the concept of a 'fair tax rate' is inherently subjective. There is in fact a limit beyond which all taxpayers believe that the value they obtain from their contribution is zero, or even negative. This feeling may lead some to try and limit their contribution and consequently neglect to declare certain types of income. This argument has also been the subject of economic modelling (the infamous Laffer curve), which demonstrates that when the tax rate reaches a certain threshold, any increase in that rate leads to a fall in state revenue.
A second reason is that some people consider tax avoidance to be acceptable given market practices. There is a sentiment that: "If my neighbours do it, I can do it and it would even be non-sensical not to do likewise". Therefore, what could be fairer than not declaring income? As Nietzsche said: "One is always wrong, but with two, truth begins". This human truth does not, however, apply to taxes.
A final reason, closely linked to the second, is the sense of freedom exhibited by taxpayers who have a selective memory when it comes to completing their tax returns. Such people have always managed to slip through the net, a fact that is especially relevant in Luxembourg. Given certain banking secrecy laws in Luxembourg, the Direct Tax Authorities have only limited supervisory powers. Following reforms in international taxation (undeniable movement towards greater levels of information exchange, through the Common Reporting Standard, and other initiatives), certain practices have since become obsolete. What was inconceivable just five years ago is now becoming a reality: global fiscal transparency.
To return to our initial question: yes, Luxembourg does need tax amnesty. This policy has been adopted with some success in other countries such as Belgium, Italy, Germany, Spain, France, the Netherlands, and the UK; it is also being discussed in Switzerland.
In concrete terms, the legislation applies to both property and business income. It also applies to fees paid by self-employed taxpayers into a foreign bank account, and which remained undeclared in Luxembourg.
This is therefore a unique opportunity for taxpayers who want to get their tax affairs back on track at a low financial cost, notwithstanding the moral costs.
The penalties applicable over and above the tax due are in fact extremely low (10% of the amount of tax evaded if a tax return is filed spontaneously in 2016, 20% in 2017) compared to those imposed for tax fraud (a one- to five-month prison sentence and a maximum of 10 times the amount of the tax evaded).
In addition, this regularisation must be comprehensive and not only limited to income and assets from abroad. The wording of the Bill in no way excludes Luxembourg bank accounts. In this respect, the total disappearance of Luxembourg's banking secrecy laws, as mentioned previously, is no longer an idle threat. What would happen, in that scenario, if undeclared income was discovered in Luxembourg bank accounts?
The tax regularisation train will run in 2016. It would be a great pity and disadvantageous to the taxpayers concerned if they missed it. We advise them to contact their bank as soon as possible.
Pierre Jean Estagerie (pjestagerie@deloitte.lu) and Xavier Martinez Aldariz (xmartinezaldariz@deloitte.lu)
Deloitte Luxembourg
Tel: +352 45145 4940 and +352 45145 2132
