Luxembourg may lose tax haven status

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BRUSSELS -- European Union ministers have agreed sweeping changes to the way satellite television and e-commerce services are taxed, which could see an end to Luxembourg's status as a tax haven.

Luxembourg, which has one of the lowest sales tax or value-added tax rates in the EU at 15%, is already the home of broadcasters such as RTL. But in recent years it has attracted scores of Internet companies to the country, and it hosts the European headquarters of Apple's iTunes, Skype, PayPal, eBay, AOL and Amazon.

Luxembourg Prime Minister Jean-Claude Juncker had warned that the reform could cost his country €220 million ($325 million) a year in lost revenue, equal to 1% of output.

But EU finance ministers, meeting in Brussels, agreed on new rules that apply the tax in the country in which services are consumed rather than the location of the company that sells them. To end Luxembourg's opposition, the ministers agreed to push back the application of the reform to 2015 from 2010 and to phase it in gradually by 2019.

The rules were only agreed upon after a long debate about how the EU should adapt its tax regime to a world in which more services are bought and sold in cyberspace. With its low rates of sales tax, Luxembourg has attracted many of the biggest names in online sales.

In order to adapt to the changing times, the European Commission -- the EU's executive authority -- had proposed that VAT for e-commerce, telecommunications and satellite television services be applied in the country where the consumer is.

Under the compromise, a member state where a service provider is located will be able to keep 30% of the VAT revenues as of 2015, with the amount gradually being lowered to zero by 2019.

In recent years, VAT has also been a battleground for the film and music industry, which had lobbied the EU for a cut in the rate on sound recordings. However, finance ministers have gradually moved to harmonize rates across the EU, and there has been little support from the governments to offer an exemption to CDs, DVDs and videos.
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