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Luxembourg must diversify to build resilient financial sector, says OECD

Luxembourg has been warned that it has to diversify its economy and reduce the reliance of its financial sector on providing financial functions for multinational companies if it is to survive any campaign on international tax avoidance.30 Mar 2015

International economic co-operation body the Organisation for Economic Cooperation and Development (OECD) said in an economic survey of Luxembourg that the country has weathered the global economic crisis well, but that it has work to do to establish a strong, resilient financial sector in the face of international tax reforms.

"There is a risk that in the near future Luxembourg could face lower revenues from multinational enterprises as a consequence of the ongoing evolution of international tax regulations that necessarily trigger changes of tax rulings," the report said 

"Luxembourg is one of the most prosperous countries in the OECD, with enviable levels of income and well-being largely driven by the performance of the financial sector," said OECD secretary-general Angel Gurría.

"But securing high living standards for future generations will require more economic diversification, backed by structural reform. Strengthening the education system, boosting innovation, and raising female labour force participation should be important elements of Luxembourg’s long-term strategy," he said.

Financial services and insurance are an important source of Luxembourg's income, and the "value added share" of this sector is worth about 27%, compared to 8.25% in the UK or 10.5% in Switzerland. Luxembourg is now the world's second largest investment fund centre after the US, the OECD said.

Product diversification into investment funds, wealth management and insurance is underway, the OECD said. However, changing financial market regulation in Europe, increased international transparency requirements for banking, and heightened international competition pose challenges, it said.

The financial sector may "have reached a size where its contribution to GDP growth might fade, and high dependence on one sector poses medium-term risks," it said.

In December 2014, Luxembourg agreed to "fully comply" with European Commission requests for information on its tax rulings practice.