{"id":2509,"date":"2025-03-20T13:58:20","date_gmt":"2025-03-20T13:58:20","guid":{"rendered":"https:\/\/www.improof.lu\/?p=2509"},"modified":"2025-03-20T13:58:20","modified_gmt":"2025-03-20T13:58:20","slug":"tax-justice-for-workers","status":"publish","type":"post","link":"https:\/\/www.improof.lu\/en\/articles\/tax-justice-for-workers\/","title":{"rendered":"Tax justice for workers: Luxembourg\u2019s role in the global fight for fair taxation"},"content":{"rendered":"

Corporate tax avoidance undermines public services, increases inequality, and shifts the financial burden to workers. Luxembourg, a major hub for multinational profit shifting and part of the “axis of tax avoidance,” exemplifies the challenges of curbing harmful tax practices. As the dominance of financial activities deepens socioeconomic disparities, Luxembourg’s current model may primarily benefit a privileged few. A major beneficiary from the G20\/OECD global tax deal in the short run, Luxembourg\u2019s model is likely to be increasingly challenged by tax justice campaigns across the world. Global labour movements are advancing calls for fairer corporate tax practices, including unitary taxation, raising minimum tax rates, and promoting greater transparency. Recent wins show that progress is possible, even if incremental. Engaging a reflection on Luxembourg\u2019s long-term economic future is therefore crucial.<\/p>\n

Why Corporate Taxation Matters for Workers<\/h2>\n

Corporate taxation is essential for funding public services, promoting fairness, and ensuring economic justice. When multinational corporations (MNEs) reduce their tax contributions through complex tax arrangements, governments face difficult choices\u2014such as finding alternative revenue sources or cutting essential services. This can lead to greater pressure on individual taxpayers and public budgets, making it harder to maintain the quality of services that workers and their families depend on.<\/p>\n

The implications for workers are significant. Reduced public revenues can translate into underfunded services, such as healthcare and education, or higher indirect taxes that disproportionately affect lower-income households. These challenges are shared across many countries, highlighting the importance of ensuring that corporate taxes reflect real economic activity and contribute to society.<\/p>\n

For the labour movement, advocating for fair corporate taxation is about protecting the economic security and well-being of workers. Stronger corporate accountability and fair tax practices can help ensure that public services remain well-funded and accessible to all, contributing to a more equitable and sustainable economy.<\/p>\n

The scale of tax losses<\/h2>\n

The scale of global tax abuse is staggering, with $492 billion lost annually<\/em><\/span><\/a>. Two-thirds ($347.6 billion) is attributed to multinational corporations shifting profits offshore, while the remaining one-third ($144.8 billion) is lost to wealthy individuals hiding their wealth in offshore accounts. These practices drain governments of resources needed to fund public services and exacerbate inequality worldwide.<\/p>\n

The latest State of Tax Justice<\/a><\/em><\/span> report highlights the disproportionate impact on public health budgets. On average, higher-income countries lose taxes equivalent to around 7% of their public health budgets annually, while developing nations face even greater proportional losses, given their higher reliance on corporate tax revenues.<\/p>\n

Luxembourg\u2019s role as part of the “axis of tax avoidance,” alongside the UK, the Netherlands, and Switzerland, exemplifies the global challenge. Luxembourg attracts $36.8 billion<\/a><\/em><\/span> in shifted profits annually but experiences a yearly outward flow of $83 billion in shifted profits. The net result is an annual tax loss of $20.7 billion\u2014equivalent to more than seven times<\/a><\/em><\/span> its education spending and over four times<\/a><\/em><\/span> its health spending.<\/p>\n

The OECD\u2019s Pillar Two and Luxembourg\u2019s response<\/h2>\n

Faced with the prospect of ever-increasing tax avoidance due to the growing digitalisation of the economy, and in the wake of the pandemic, which placed a huge strain on public budgets, the G20 endorsed a global tax deal in 2021. Negotiated within the OECD headquarters, this deal comprises two pillars: Pillar One, which seeks to introduce an additional taxing right on the largest and most profitable MNEs, and Pillar Two, which establishes a global minimum tax, a measure of particular relevance to Luxembourg.<\/p>\n

Pillar Two sets a global minimum effective corporate tax rate of 15%. It allows jurisdictions to impose a \u201ctop-up\u201d tax on profits taxed below this threshold in other countries. Pillar Two marks some progress, notably the belated recognition that corporate tax competition should be curbed. However, several weaknesses and concessions to corporate lobbies and low tax countries undermine its effectiveness.<\/p>\n

At 15%, the minimum rate falls significantly below the global average effective tax rate of 21%\u201325%<\/a><\/em><\/span>, leaving room for tax avoidance. Revenue raising prospects are further limited through various carve-outs which reduce the tax base. Most importantly for Luxembourg, the OECD has introduced a so called \u201cqualified domestic minimum top up tax\u201d (QDMTT). Countries which decide to implement this option are the first ones entitled to collect the 15% on undertaxed profits worldwide, before the country of headquarters.<\/p>\n

In simple terms, an MNE that books its profits in a tax haven\u2014despite having little to no workforce or assets there\u2014can continue to do so. The tax haven would raise its effective tax rate close to 15%, but only on the portion of profits included in the Pillar Two calculations, while keeping very low rates for the rest. If it did not raise the rate to 15%, the headquarter country could impose the top-up tax itself. To maintain its attractiveness, the tax haven would then introduce creative tax incentives that fall outside the scope of Pillar Two, effectively reimbursing the tax paid.<\/p>\n

Labour movements have strongly advocated<\/a><\/em><\/span> in favour of a global minimum tax which should be set at 25%, a level that aligns with the global average effective tax rate and could generate significantly higher revenues. Furthermore, the very design of Pillar Two is flawed because it continues to rely on the existing weaknesses of the international tax system. Rather than allowing MNEs broad discretion in where to book their profits, profits (and thus taxing rights) should be allocated to countries in proportion to real economic activities. This should be measured using objective indicators such as workforce presence, assets and actual sales. For a global minimum tax to be truly effective, the current transfer pricing system must be eliminated and be replaced with a unitary taxation approach.<\/p>\n

Luxembourg\u2019s Disproportionate Gains\u2014and Why That\u2019s a Problem<\/h2>\n

The European Union transposed the OECD model rules into a European Directive<\/a><\/em><\/span> in December 2022, requiring member states to implement the global minimum tax by the end of 2023. Luxembourg acted swiftly, incorporating the QDMTT into national law by December 2023. As a result, Luxembourg can levy a 15% top-up tax, ensuring that these revenues remain within the country rather than being claimed by other jurisdictions.<\/p>\n

According to the EU Tax Observatory<\/strong><\/a><\/em><\/span>, Luxembourg could collect up to \u20ac12.5 billion annually<\/strong> through the QDMTT, far more than most other EU countries.\u00a0 To put this into context, Germany, despite having a far larger economy, is estimated to collect only \u20ac5.5 billion<\/strong> under the QDMTT. France would collect just \u20ac200 million<\/strong>, while the Netherlands, another key tax hub, stands to gain \u20ac14.1 billion<\/strong>\u2014close to Luxembourg\u2019s figure but still exceptional compared to most other countries.<\/p>\n

Luxembourg benefits disproportionately due to its role as a recipient of vast corporate profits\u2014far exceeding those of countries like Germany or France, despite them actually hosting MNE headquarters. The QDMTT enables Luxembourg to collect top-up taxes on this foreign investment, even though it generates little real economic activity within the country.<\/p>\n

Rather than incentivising long-term investment or job creation, the current Pillar Two model reinforces Luxembourg\u2019s financialised economy, where profits flow in on paper but do not translate into tangible benefits for local workers or the broader economy.<\/p>\n

Luxembourg\u2019s ability to benefit so disproportionately from the QDMTT is not coincidental. It reflects the country\u2019s long-standing tax strategy of keeping effective tax rates well below the statutory rate through targeted incentives and deductions.<\/p>\n\n\n\n
Box 1: How the Global Minimum Tax is Applied \u2013 Order of Priority<\/strong><\/p>\n

The OECD\u2019s Pillar Two<\/strong> establishes a global minimum corporate tax rate of 15%<\/strong>, enforced through three interconnected rules:<\/p>\n

    \n
  1. Qualified Domestic Minimum Top-up Tax (QDMTT) \u2013 Applied first<\/strong>, this allows the jurisdiction where the profits are formally declared by the MNE<\/strong> to impose a top-up tax<\/strong> on pockets of undertaxed profits.<\/li>\n
  2. Income Inclusion Rule (IIR) \u2013 Applied second<\/strong>, this allows the jurisdiction of the ultimate parent entity (UPE)<\/strong> to collect a top-up tax<\/strong> if the undertaxed income was not taxed under the QDMTT.<\/li>\n
  3. Undertaxed Profits Rule (UTPR) \u2013 Applied last<\/strong> as a backstop, this allows other jurisdictions where the multinational enterprise operates<\/strong> to impose the tax if neither the QDMTT nor IIR were applied. It distributes the tax based on the group\u2019s employees and tangible assets in each country.<\/li>\n<\/ol>\n

    Since most countries are adopting the QDMTT, the UTPR\u2019s application will likely be limited.<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    Luxembourg\u2019s falling statutory and effective tax rates<\/h2>\n

    Luxembourg\u2019s corporate income tax (CIT) rates have been steadily declining over the past two decades. This reduction in nominal corporate tax rates is part of a longer trend that began in the early 2000s. Between 2000 and 2019, the top nominal corporate tax rate fell from 37.45% to 24.95%<\/a><\/em><\/span>, and it further declined to 23.87% by 2025. By 2025, the maximum CIT rate is expected to reach 16%, while the minimum rate will fall to 14%, further narrowing the tax base.<\/p>\n

    The falling statutory rates reflect Luxembourg\u2019s effort to maintain its competitive edge as a business-friendly jurisdiction. However, estimates<\/a><\/em><\/span> suggest that Luxembourg\u2019s effective tax rate (ETR)\u2014the rate companies actually pay after deductions and exemptions\u2014remains significantly below both its statutory rates and the EU average. Recent estimates place Luxembourg\u2019s ETR between 17-18%<\/a><\/em><\/span>.<\/p>\n

    The decline in CIT rates is not just a nominal adjustment. Luxembourg\u2019s CIT revenues as a percentage of GDP have also dropped, declining from around 8% in the early 2000s to approximately 4.75% in recent years. This decrease is driven not only by lower nominal rates but also by extensive tax incentives that erode the tax base.<\/p>\n

    These mechanisms include deductions for intra-group financing, preferential tax treatment for intellectual property income, and participation exemptions on capital gains and dividends.<\/p>\n

    The introduction of Pillar Two will not eliminate these advantages. Luxembourg is likely to continue using compliant strategies\u2014such as R&D tax credits and sector-specific subsidies\u2014to maintain attractiveness without breaching the OECD\u2019s model rules.<\/p>\n

    This persistent gap between statutory and effective tax rates underscores a critical issue: while Luxembourg remains attractive to global corporations, it limits its own ability to fund public services. The lost revenue could otherwise be directed toward healthcare, education, and infrastructure, which are vital for the country\u2019s long-term social and economic well-being.<\/p>\n

    Meanwhile, taxes on labour income in Luxembourg have moved in the opposite direction. Between 2000 and 2023, the tax burden on wages\u2014taking into account personal income tax and social security contributions\u2014rose from 35.8% to 41.3% of total labour costs<\/a><\/em><\/span>, making Luxembourg one of the highest-taxed countries for labour in the OECD. By 2023, an average single worker retained only 66.8% of their gross wages after taxes and benefits, compared to the OECD average of 75.1%.<\/p>\n

    Ways countries can work around Pillar 2 rules<\/h2>\n

    This reliance on maintaining low effective tax rates is not unique to Luxembourg. Across the globe, other countries are already adopting similar strategies that comply with Pillar Two\u2019s rules while ensuring corporations continue to enjoy reduced tax burdens.<\/p>\n

    Ireland<\/strong> has positioned itself as a global hub for tech and pharmaceutical companies through its R&D tax credit system<\/strong>, which allows companies to significantly lower their tax liabilities. Refundable tax credits, such as Ireland\u2019s R&D credits and the UK\u2019s Research and Development Expenditure Credit (RDEC)<\/strong>, are fully compliant with Pillar Two and can even result in cash refunds for qualifying companies.<\/p>\n

    The Netherlands<\/strong> and Switzerland<\/strong> focus more on direct subsidies and grants<\/strong>, particularly for sectors such as green energy, biotechnology, and financial services. These subsidies mirror the effects of tax incentives without technically falling within Pillar Two\u2019s scope.<\/p>\n

    Barbados has introduced a Qualified Job Credit that allows companies in fintech, wholesale distribution, and R&D sectors to claim refundable payroll tax credits of up to 300% of payroll costs<\/strong>. In addition, a 50% R&D tax credit further reduces taxable profits. These credits enable companies to significantly lower their tax liabilities while remaining compliant with Pillar Two.<\/p>\n

    Given its history of flexibility in adapting tax rules (doing so again at the close of 2024<\/a><\/em><\/span>), Luxembourg could easily adopt similar strategies in the future, introducing new incentives that align with Pillar Two\u2019s requirements while preserving its competitive advantage.<\/p>\n

    The limits of Luxembourg\u2019s tax model for workers and economic justice<\/h2>\n

    Luxembourg\u2019s tax model prioritises financial transactions over real economic activity, which has profound implications for workers and the broader economy. Approximately 95% of foreign investments<\/a><\/em><\/span> in Luxembourg flow through entities focused on holding or intra-group financing activities. These financial flows do little to generate substantial local employment or drive productive investment. While the financial sector accounts for nearly 30% of Luxembourg\u2019s GDP<\/a><\/em><\/span>, it provides only 11% of total employment, reflecting a stark disconnect between economic output and job creation.<\/p>\n

    The dominance of financial activities also exacerbates socioeconomic disparities. High salaries in the financial sector contribute to a housing market that is increasingly unaffordable<\/a><\/em><\/span> for lower-income households, deepening inequality.<\/p>\n

    This financialisation of Luxembourg\u2019s economy has broader implications. The gap between the country\u2019s GDP and Gross National Income (GNI)<\/a><\/em><\/span>, estimated at 30% of GDP, reflects the extent to which wealth generated within Luxembourg is extracted by multinational enterprises and repatriated to other jurisdictions. This gap highlights that while Luxembourg benefits from inflows of foreign investment and financial transactions, these do not translate into local economic activity, jobs, or public revenues. Instead, much of the economic value created in Luxembourg bypasses its local economy, leaving residents with limited benefits.<\/p>\n

    The international taxation landscape: A turning point for Luxembourg<\/h2>\n

    The international tax landscape is shifting rapidly, with upcoming reforms that promise to transform how multinational corporations (MNEs) are taxed. These changes will fundamentally challenge the tax models of financial hubs like Luxembourg, which have long relied on fragmented rules and complex intra-group pricing structures to attract multinational subsidiaries.<\/p>\n

    Proposals for Unitary Taxation are at the forefront of this change. This shift is unavoidable in the long run. It will eliminate the opportunity for profit shifting to tax havens and represent a groundbreaking step toward fairer global taxation.<\/p>\n\n\n\n
    Box 2: What is unitary taxation?<\/strong><\/p>\n

    Unitary taxation is a proposed alternative to the current system of taxing multinational corporations (MNEs). Under the current framework, each subsidiary of an MNE is treated as a separate entity for tax purposes, with intra-group transactions priced according to the arm\u2019s length principle\u2014as if the subsidiaries were independent companies. This fragmented approach makes it easy for MNEs to manipulate internal transactions and shift profits to low-tax jurisdictions or tax havens.<\/p>\n

    Unitary taxation eliminates these loopholes by treating MNEs as single global entities rather than a collection of independent subsidiaries. The tax base is calculated at the corporate group level, and taxing rights are distributed to individual jurisdictions using a formula that reflects real economic activity. This approach is known as formulary apportionment, where profits are allocated based on factors like:<\/p>\n