Increasing controls across the EU
With the rise of the EU single market in the nineties, the importance of verifying the effective VAT taxation of transactions became a focal point. The ‘VAT package’ that entered into force in 2010 has crystallised this need for control and cooperation between EU Member States through the generalisation of European sales listings for goods and services transactions occurring in the business-to-business context.
Now the European Union has initiated a series of measures to reinforce this control trend, as for instance “VAT in digital age” measures. This initiative notably aims at real-time reporting of VAT and will be implemented in coming years.
The differences in application and interpretation of some VAT provisions between EU Member States remains a vulnerability of the European VAT system. On this, the Court of Justice of the European Union is the guardian of the harmonised interpretation of VAT rules. Major concepts have been, and continue to be, clarified by the Court, helping to reduce the risks of non-VAT taxation or double VAT taxation. Recurrent topics are for instance interpretation of financial exemptions, VAT taxable status notably for Directors and fixed establishment.
Increase of Luxembourg VAT audits
Luxembourg VAT returns are amongst the most detailed forms in the European Union. These forms require you to clearly categorise the type of sales, purchases and exemptions to be applied (if necessary). Businesses must analyse all transactions performed and ensure to apply the correct VAT treatment for each of them. This exercise is usually done when preparing the monthly, quarterly and annual VAT returns. Once filed, the VAT Authorities may analyse them and initiate an audit.
VAT audits often start with a simple request of details for transactions reported through the annual VAT return. We see many examples of businesses that prepare ‘ready to disclose’ appendices detailing all transactions and reconciling figures reported in the annual VAT return with the annual accounts of the relevant year. Such appendices usually prove very valuable when responding to such first stage requests from the VAT Authorities.
In the context of cooperation between EU Member States, a VAT audit is also initiated when VAT Authorities are alerted about potential discrepancies between (i) transactions reported by suppliers in their European sales listings and (ii) those effectively reported by its Luxembourg client under the reverse charge mechanism. Discrepancies may have various causes and could be due to incorrect invoicing, differences in timing of reporting or difference of VAT treatment in the EU Member States involved. In most cases, these discrepancies may be traced and corrected jointly with the company and the supplier involved.
In addition to these two most common types of VAT audits, more in-depth VAT audits may be led by the VAT Authorities either via exchange of correspondences with the relevant company or through an on-site VAT audit. These VAT audits usually require the company to provide all invoices, relevant legal agreements and accounting details. Our preferred and tested approach for dealing with such audits is to be as pro-active and transparent as possible towards the VAT Authorities, even if this implies admitting the occasional error in reporting.
As to closing a VAT audit, the VAT Authorities have the following options:
· A bulletin d’information
The bulletin d’information is issued in line with the VAT return filed, i.e., no adjustment is needed. This document is still provisional and could be revised in case of new facts or elements noticed within the relevant statute of limitation (5 years).
· A bulletin de rectification or a bulletin de taxation d’office.
When VAT Authorities have doubts or disagree with VAT treatments applied in a VAT return, a bulletin de rectification or a bulletin de taxation d’office may be issued to the company. Those documents derive from the filed annual VAT return and either correct the VAT return in case of serious doubts or state for an automatic taxation. In case it is considered to appeal these decisions, companies should be aware that strict deadlines apply.
Be aware and prepare
For some months, the VAT Authorities increased the audits of companies. These audits, part of a normal business’ life, can be pro-actively driven seriously by the business. Being prepared and transparent with the VAT Authorities is key for completing such audits in the smoothest way possible. VAT advisers that are used to deal with such audits may help to provide with the preparation of documents to be provided to the VAT Authorities.
This article was first published by the Luxembourg Times.