Germany will next week lift its blockade on sweeping reforms to Europe’s sales tax regime in a move that threatens the e-commerce boom in Luxembourg, its tiny low-tax neighbour.
Companies such as Amazon, AOL and Skype have descended on Luxembourg in recent years to take advantage of the grand duchy’s low VAT rate to sell services across Europe.
Their tax shelter in the Ardennes seemed secure until Germany, holder of the rotating EU presidency, threw its weight behind moves to turn the sales tax system for e-commerce on its head.
Finance ministers will next week be asked to approve a plan to charge VAT on internet and telecoms services in the country where they are consumed, instead of the country where they are supplied.
Luxembourg is fighting a rearguard action to block the so-called VAT package, which would end the advantage enjoyed by local e-commerce companies. “Negotiations are going to be quite tough,” said a spokesman for Jean-Claude Juncker, Luxembourg’s premier and finance minister.
“These companies do their billing through Luxembourg and if this goes through we would lose quite a lot of tax revenue – about €300m ($403m, £204m) a year.”
Berlin blocked the VAT deal for months in protest at its failure to get European agreement on an entirely separate and ambitious plan to fight German tax fraud.
But Peer Steinbrück, German finance minister, is now ready to try to settle the issue at next week’s Ecofin meeting in Luxembourg after winning concessions on the tax fraud issue.
The fact that Germany recently increased its VAT rate from 16 per cent to 19 per cent – increasing the incentive for its e-commerce companies to move across the border to enjoy Luxembourg’s 15 per cent rate – may also have been a factor.
Luxembourg is not alone in opposing parts of the package, but its problem is seen as the most fundamental. France is concerned about the operation of new VAT one-stop shops, which are essential to make the new system work.
They would allow an e-commerce company to register for tax in its home state, which would arrange for tax to be transferred at the local rate to the country where the service was consumed.
Germany’s decision to push for a deal on the VAT package came when other member states told Mr Steinbrück this week they would consider allowing a pilot project to test his radical plan to fight VAT fraud.
A draft communiqué says the European Commission should consider “running a pilot project for a limited period of time” to test the “reverse charge” VAT model, where tax is charged at the end of the supply chain.
Austria, which also believes the method could cut fraud, is the likely guinea pig for any pilot project.