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Luxembourg's Public Finances Sound, Despite VAT Revenue Plunge

by Ulrika Lomas,, Brussels
Wednesday, November 1, 2017

The Luxembourg Government's Budget came close to balance in the first three quarters of 2017 as revenue growth outpaced spending, despite a continuing sharp fall in value-added tax revenues following the introduction of new place of supply rules in the European Union.

Pierre Gramegna, Minister of Finance, told parliamentary finance committees on October 27 that revenues in the first three quarters of the year totaled just over EUR12.57bn (USD14.63bn) while government expenditure was EUR12.58bn over the same period.

As a result of strong revenue performance, the overall budget is close to balanced, and the deficit stood at EUR8.5m at the end of the third quarter.

Gramegna said that this was the best fiscal result in five years, and has been achieved despite the fact that VAT revenues from electronic services have fallen to just EUR72m this year, compared with EUR1bn in 2014.

Luxembourg is believed to be the member state most impacted by the recent change in the VAT place of supply rules for broadcasting, telecommunications, and electronic (BTE) services, which from January 1, 2015, sought to ensure taxation in the place of consumption rather than the place of supply.

The move eliminated the incentive for companies supplying goods and services in Europe to locate themselves in member states with low rates of VAT.

In previous years, e-commerce firms supplying services in the EU flocked to Luxembourg to take advantage of its VAT headline rate, which at 15 percent was the bloc's lowest.

However, since the change, Luxembourg has increased its rate of VAT to 17 percent.

In December 2014, it was reported that Luxembourg secured compensation worth USD1.375bn from the EU in return for its support for the change in the BTE place of supply rules.