Luxembourg blocks EU sales tax shake-up

(BRUSSELS) - Luxembourg blocked on Tuesday EU plans to shake up sales tax on electronic commerce over fears the package would undermine the Grand Duchy's role as a hub for e-trade, officials said.

The failure of EU finance ministers, who were meeting in Brussels, to reach an agreement on the reform could scupper their efforts to reach a deal on the package as intended by the end of the year.

Luxembourg Prime and Finance Minister Jean-Claude Juncker opposes the reform because VAT revenues on e-commerce currently bring in 220 million euros (321 million dollars) a year to the state coffers, equal to one percent of output.

"No finance minister would give up one percent of his gross domestic product to make others happy," Juncker told his counterparts, according to officials at the meeting.

As with all issues regarding tax harmonization in the EU, member states have to unanimously accept the package, which aims to shift the application of VAT from the country of a service supplier to the country of consumption.

Although in most cases service suppliers and consumers are in the same country, the emergence of electronic trade has encouraged Internet and telecoms companies to set up shop in countries with the lowest VAT rates.

Luxembourg, which already blocked the reform in June, and the Portuguese island of Madeira have in particular benefited from the current system.

At 15 percent, Luxembourg has the lowest VAT rate normally allowed in the EU while Madeira enjoys a rate of 13 percent under a special arrangement.

Luxembourg has seen scores of Internet and technology companies flock to the country in recent years and now hosts the European headquarters of Apple's iTunes and Skype.

Meanwhile, despite its remote location off the coast of Morocco, Madeira has emerged as a hub recently for Internet services.

ECOFIN Council / Eurogroup, 13 November 2007