Richard Cornelisse

VAT Rate Increase Results In Extra Saving

In Audit Defense, Business Strategy, EU development, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, Tax News, Technology, Training, VAT planning on 14/02/2012 at 5:26 pm
By Richard Cornelisse

Mark Houtzager’s VAT newsletter discusses in his February issue amongst others:

  1. Proposed VAT rate increase in France
  2. Online services and VAT in the EU and change of law per January 1, 2015

The combination of these topics is interesting.

The newsletter mentions the political debate in France about the proposed increase of the standard VAT rate from 19.6 % to 21.2%. Increase of VAT/GST rates is a trend as government are trying to balance their budgets.

For an overview of VAT rate changes or proposals: EU VAT Rates | TMF.

Increase VAT Rate Born By Final Consumer Or Supplier

In a VAT system the end consumption is taxed. It would make sense that any increase of VAT rate is born by a private individual as businesses normally shift this burden via increasing their sales prices. That perception could be wrong. The reason might be that prices are contractually fixed for a certain period of time, but more interesting is the situation when the supplier has the flexibility to adjust prices. What are exactly the parameters for price determination in a competitive market? Does a business have a choice if – in comparison to his competitor – production costs are equal, both operate in the same local market, but his competitor is not suffering a VAT rate increase? The only flexibility might be to lower your profit margin or even take a loss if market position is important for other profitable offerings. The best strategy might be to change your supply chain in a similar way to gain the same advantages.

VAT increase Results In Extra Saving

Is it possible that same supplies are treated differently from a VAT perspective?

That is possible if the place of supply outcome is different when services are supplied domestically or from abroad.  In case the country abroad has a lower VAT rate, a local market increase of VAT has no impact.

The newsletter discusses online services and amongst others the change of the place of supply rule per January 1, 2015 with regard to online services to private individuals (B2C). Examples of online (e-business activities) are downloadable software, music, games (etc), broadcasting services, telecommunication, internet services, paid dating and games sites. For these services VAT should be charged in the country of establishment of the supplier until January 1, 2015. As resident of Europe if you buy services from Apple via the iTunes store no local VAT is due unless you are a resident of Luxembourg. The supply is subject to Luxembourg VAT. No surprise that Apple and Microsoft and many others run both their European operations from Luxembourg.

It might still be interesting – especially as VAT rates are increasing – to move the B2C e-business to countries with low VAT rate(s). Luxembourg has a 15% standard VAT rate and for certain supplies reduced rates of 3%, 6% or 12%. Cyprus has also 15% standard VAT rate but will increase its VAT rate to 17% per March 1, 2012.

Calculation Of The Saving

Assume that France – as mentioned in the newsletter – has already increased its VAT rate to 21.2% (planned for October 2012). The standard VAT rate in Luxembourg is still 15%. That means at least a VAT saving of 6.2% per transaction. “At least” as lower reduced VAT rates might be applicable (e.g. 3%).  The total saving will be 6.2% times net “French allocated” turnover from moment of implementation until January 1, 2015 minus of course any implementation costs. That could be substantial and even higher if you also operate in Denmark (standard rate 25% since 1992: 10% saving) or Hungary (standard VAT rate of 27% per January 2012: 12% saving) etc. What is the companies current profit margin in relation to these savings? Do your  competitors supply from low rate countries? For companies that already moved to Luxembourg such an increase in France would result in an extra “saving” of  1.6% if you compare positions with local operating companies.

Risk Management And Other Topics Of Attention

Are there any risks that need to be managed?  A permanent establishment for VAT purposes has to be avoided. That means that any new contract must be closed directly with Luxembourg as binding locally is no longer an option. Moving an existing business from one country to another can be argued by the Tax Administration of departure in case substance is lacking (substance over form). As part of tax risk management fact based prove re place of establishment has to be available, documented and ongoing monitored.

What about the Business to Business (B2B) services? These services don’t benefit from the VAT planning as the place of supply is always taxed in the country where the consumer is established. That is indeed true but looking beyond indirect tax, centralization in general might fit the company’s overall business objectives: reducing costs via increasing efficiency and effectiveness. It could support extra prove of substance from a tax risk perspective.

Note that transfer of location to Luxembourg has impact on corporate income tax planning and needs to be planned as well.

Last but not least during feasibility it is important to take already into consideration the possibilities of an exit strategy re January 1, 2015. You might not need it but it is all about spotting in time any gaps between current and future state and knowing your various options. The earlier you know your level of flexibility, the easier it is to manage proactively any future changes (i.e. change of law or business model). It all should be incorporated in your ‘Indirect Tax Strategic Plan’.

Richard Cornelisse is CEO of the KEY Group and worked previously as Big4 Partner in the Tax Performance Advisory and Indirect Tax Practice and blogs on Tax Function Effectiveness and Tax Control Framework developments.

  1. […] more about the possibilities and conditions in the blogs “VAT Rate Increase Results In Extra Saving“, “Luxembourg Below Tax Budget” and “The Reputation Of A Tax […]

  2. […] more about the possibilities and conditions in the blogs “VAT Rate Increase Results In Extra Saving“, “Luxembourg Below Tax Budget” and “The Reputation Of A Tax […]

  3. […] VAT Rate Increase Results In Extra Saving by Richard Cornelisse: “As resident of Europe if you buy services from Apple via the iTunes store no local VAT is due unless you are a resident of Luxembourg. The supply is subject to Luxembourg VAT. No surprise that Apple and Microsoft and many others run both their European operations from Luxembourg.” […]

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