VAT rules: all change in 2010
Ernst & Young has just published a handbook on the new VAT rules that came into effect at the beginning of January. The book is timely, since the new VAT package will affect all financial service providers in the financial centre.
Two Directives, one on the place of supply of services, the other on the VAT refund procedure, were adopted by the council of the European Union on 12 February 2008. The objectives pursued by the new rules are, on one hand, to ensure that VAT on services will accrue to the country of consumption and, on the other hand, to establish a faster and more efficient procedure for claiming VAT refunds.
During the 1980s and 1990s the European Commission attempted to apply the origin system, that is, to apply the VAT rates of the country where a good or service originated. Receipts were to be reallocated to the country of consumption. However, this system was never implemented because of the reluctance by Member States to give up fiscal sovereignty and accept the necessary harmonisation of VAT rates, to rely other Member States to collect a substantial portion of their VAT revenue or to trust the accuracy of the re-allocation figures.
However, in recent years the system has been evolving towards the taxation of transactions in the country of consumption. Already applicable in some areas (the sale of goods), from 1 January 2010 supplies of services to VAT taxable persons will be taxed in the country of consumption using the reverse charge mechanism. Suppliers will be permitted to discharge their VAT obligations using a “one stop shop” system which will enable them to register, declare and pay their dues in their home Member State. VAT revenue from these services will be transferred from the country where the supplier is located to that where the consumer is situated. The rate in the country of the consumer will apply.
It is hoped that taxation at the point of consumption, combined with reduction in the administrative burden for companies, will result in less competitive distortion between Member States and a reduction in VAT fraud.
What effect will this have on the Luxembourg financial centre?
Although there will be some losers (for instance, a Luxembourg holding company will now pay 15% VAT on a service provided by a US company, where formerly it was not liable) there will not be much impact on Luxembourg companies. Last year, already, companies were operating a system of auto liquidation by which VAT was not invoiced by foreign service providers: Luxembourg companies declared and paid to the Luxembourg tax authorities the sum due on services received. The real difficulty will be in adapting to the new reporting system which requires companies to know the current VAT rate for every service it renders to a customer in any Member State.
Ernst & Young’s book, “VAT package – New rules for 2010” by Yannick Zeippen and Jacques Verschaffel, can be bought at bookshops or ordered using the attached form.