On 19 April 2019, the Luxembourg VAT authorities issued their annual activity report for the year 2018 and it is not surprising to read that VAT revenues have been boosted by almost 10% compared to the year 2017.
We believe that in the coming years VAT litigation will become a cornerstone of Luxembourg tax disputes, mainly due to three factors: (i) VAT is a major source of revenue for the Luxembourg government, (ii) the number of companies having a Luxembourg VAT number has continued to grow since 2010 and, very importantly, (iii) the VAT authorities are building larger and more specialized teams.
VAT wants to take its proper place within the Luxembourg tax system. Below we depict three main curiosities that one might not infer at first glance when reading the above-mentioned report.
1. VAT becomes the principal character
In 2017, OECD countries obtained a third of their tax revenue through consumption taxes such as VAT.1 Indeed, Luxembourg is not a remote island in the "VAT universe."
What is interesting in the case of Luxembourg is that, in 2018, VAT revenues grew by circa 7% in the first quarter and 1% in the second quarter whereas the growth rate rounded 15% in the third and fourth quarters. This gap might be partially explained by additional VAT audits carried out by the VAT authorities further to the implementation of article 80 of the VAT Directive2 into the Luxembourg VAT Law ("VAT Law"). Article 80 gives Member States the opportunity to – in specific cases wherein parties are also related – up or lower the taxable amount using the objective value for a VAT taxable transaction, instead of the subjective value agreed upon between parties.
The above may sound too simplistic an explanation. However, the report indicates that, by economic sector, VAT revenues from financial and insurance companies grew by more than 17% in 2018. For those of you who are not VAT specialists, financial companies and insurance undertakings are generally taxpayers with a quite limited input VAT deduction right. These taxpayers are specifically concerned by the laws dated 6 August 2018 and Circular 790 issued by the VAT authorities on 18 January 2019 which aim to avoid situations where a taxpayer artificially increases its input VAT recovery right or limits the amount of irrecoverable input VAT.
2. Every VAT has a silver lining
Indeed, it has to be mentioned that the Luxembourg VAT authorities continued to increase the refunds of VAT credits to taxpayers established in Luxembourg in 2018 although it was not as impressive as in 2017 (3% against 18%). In any case, it demonstrates that the recast of article 55 of the VAT Law several years ago represents a useful measure for relieving Luxembourg taxpayers of the economic burden of VAT. This measure has undoubtedly had a positive impact on the Luxembourg economy.
3. The VAT battle
In 2018, the appeals against decisions of the Luxembourg VAT authorities and case law did not substantially differ compared to the previous year. Nevertheless, the number of cases closed were more than six times higher.
As indirectly mentioned by the Luxembourg VAT authorities, it simply means an increasing appetite of Luxembourg taxpayers for litigation. This can be justified by the amounts of VAT at stake and/or the "recent"3 extended joint liability of managers involved in the management of their companies on a daily basis. They also acknowledged that the arguments developed by the parties become more and more complex.
Based on the above, the increasing importance of VAT is confirmed as a part of the revenues collected by the Luxembourg government. Such a role necessarily leads to more VAT audits and thus, more disputes between the Luxembourg VAT authorities and taxpayers.
In the event that the Luxembourg VAT authorities challenge the VAT position of your company, you should not consider that you are facing an insurmountable obstacle but neither should you think it is a piece of cake!
To make a big impression on the VAT inspector(s), it is essential to be compliant with Luxembourg VAT obligations and to be prepared on the basis of updated tax legislation.
Moreover, it also very useful to maintain appropriate supporting documentation for transactions declared in VAT returns — do not be confined to the documents mentioned in article 65 of the VAT Law.
Last but not least, discuss the VAT assessment(s) confirmed by the Director of the Luxembourg VAT authorities with your VAT expert about before bringing civil action.