Luxembourg Tax Alert 2022-11

The temporary VAT rate cuts included in the [anti-inflation] package adopted by the government (see our previous alerts 2022-08 and 2022-09 as well as the summary table below) and applicable in calendar year 2023 require businesses to review and address their impacts on their operations. Timely actions should minimize the risk of costly mistakes and may also trigger some cash-flow opportunities.

• System and process readiness: have you considered which systems will be impacted by the VAT rates change and determined which party (third party or internal) is responsible to update them?
  Beyond an implementation of new VAT codes in the accounting system, other tools (or modules of the existing ERP) are likely to be impacted such as your expense reporting or invoices generation systems. Businesses using a VAT return generation software will need to look out for the updated VAT return templates (already announced by the Luxembourg VAT authorities) which are likely to reflect the application of dual rates. These new templates will need to be implemented and mapped alongside the current templates which will remain in use for the 2022 VAT returns to file in 2023.
• How do you make sure invoices with incorrect VAT rates will be identified?  This requires knowing the tax/chargeability point of the transactions and make the finance/accounting team aware of those rules. Businesses with no or limited input VAT deduction right will want to avoid paying VAT applied at an incorrect higher rate since this constitutes a final cost.
• Tax/chargeability point: determining the tax/chargeability point of a transaction is key to know the VAT rate applicable, especially around the time of the rate change.
  Which VAT rate applies will depend on several factors, notably
  • The date of supply of the goods/services
  • The date a VAT invoice is issued (or should have been)
  • The date of receipt of early/down payment

For B2C supplies (i.e., where a VAT invoice is not required to be issued) the VAT rate to be applied is generally the rate in force at the time the supply of the goods/services takes place.

For B2B supplies (i.e., where a VAT invoice is required to be issued) the VAT rate applicable will generally be the one in force at the time the invoice is issued (or required to be issued). This applies even if the goods or services were supplied before the VAT rate change.

However, rules may differ in case of advances payments prior to the supply of goods or services or for cross-border supplies.

Examples

1) A Co purchases IT services from a Luxembourg supplier. The services are performed on 15 December 2022:

The provider issues its invoice on 26 December: the VAT rate applicable is the one in force in December 2022: 17%

The provider issues its invoice on 5 January 2023 (e.g., before the invoicing legal deadline): the 16% VAT rate should be applied (VAT chargeable at the time the invoice is issued based on the rate applicable on that date).

2) B Co provides translation services on 15 November 2022 to client 1, a private individual and client 2, a company established in Luxembourg.

Supply to client 1: no invoice required, the 17% rate should be applied (VAT chargeable when services are supplied).

Supply to client 2: invoice required (issued on 10 January 2023). The 17% rate should be applied even if the invoice is issued in January 2023 (VAT chargeable at the time the invoicing legal deadline – 15 December 2022 in this case – expired).

These 2 examples show that businesses must carefully review the tax chargeability rules to apply and make sure they paid the correct VAT rate. It also shows that purposedly delaying the invoicing to benefit from a reduced rate may not always lead to such outcome and might trigger penalties if invoices are issued after the invoicing legal deadline.

• Do existing contracts state prices on a VAT-exclusive or VAT-inclusive basis? This point is particularly relevant for retailers or business with limited or no input VAT recovery right. The rates change may however present some cost-saving opportunities for this category of taxpayers. Indeed, slightly adapting the timing of purchases already planned or simply making sure that the rules are correctly applied may generate reduction of unrecoverable VAT costs.

The impacts of a – seemingly straightforward – VAT rate change are not always simple to assess. Specific transaction types and timing of supply/invoicing need to be considered, and local teams trained.

Feel free to contact one of our VAT team members or your KPMG contact to find out how we can help you navigate and getting ready for these changes.