Thought leadership from ATOZ experts

VAT changes 2015: No regrets

Last week, the OECD Global Forum on VAT met in Paris to discuss International VAT/GST Guidelines, focusing heavily on VAT treatment of international trade in services and intangibles, with an aim to level the playing field among countries.

When the VAT reforms for 2015 were announced, many media outlets expressed concern that Luxembourg would lose its coveted status as a hub for e-commerce firms. As the year winds to an end, we can now draw our own conclusions about what has changed and what has stayed the same.

It’s clear that Luxembourg is ahead of the curve; the 2015 changes to VAT brought the country closer to meeting proposed global standards and complying with BEPS recommendations. But what were the real consequences of these changes? And how can we be best prepared for a ‘new normal’ in VAT?

No mass exodus of e-commerce firms

Despite the doomsayers dire warnings about a mass exodus of e-commerce companies in Luxembourg, this has not happened. It is also worth noting that some of the pessimistic predictions came from our neighbors – and competitors, also vying for e-commerce business.

Luxembourg is still a logical choice for e-commerce

Luxembourg’s advantages extend beyond a few percentage points of VAT. Big names in e-commerce may have been attracted by a business-friendly environment, but they will stay in Luxembourg for reasons that cannot be voted away. E-commerce companies are choosing Luxembourg as their European HQ. As recently as last month, an online lingerie store, moved its headquarters to Luxembourg, citing multicultural and multilingual teams as an attractive feature. IT infrastructure, central location and transportation/logistics are also often pointed out as reasons why a company, e-commerce or otherwise, would choose to set-up operations in the country.

VAT gaps mean a hunt for revenue

Due to the inevitable VAT losses, the State’s books remain unbalanced – and this may become an issue for companies. As expected, the 2% increase in VAT at the beginning of the year has not compensated for the loss of e-commerce revenue, there is a disparity of 80 million euros in 2015. Even more, the European commission report from 2015 points to 187 million euros of VAT which should have been received by the State in 2013, a gap which has been widening each year. The tax authorities are more equipped than ever to deal with increased audits, in part with help from an additional means of control – standard electronic audit files or FAIA. This electronic format leaves no room for error and businesses must be sure that there are no accounting discrepancies on their books.

It’s not too late for Luxembourg companies to react

Although e-commerce companies have undergone the most drastic tax changes in the last year, tax authority auditing will focus mainly on the core business of Luxembourg. This means that financial holding companies like the soparfi, the #1 source of revenue for the State, should be extra vigilant. However all Luxembourg companies can adapt to the ‘new normal’ by adopting a proactive strategy consisting of carefully reviewing their 2015 VAT flows for missed opportunities while giving VAT compliance full attention. It’s apparent that indirect tax has not been overlooked by the government in their planning strategies; for that reason, it should not remain an afterthought for your business.

By Christophe Plainchamp