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Alternative calculations of the input VAT deduction right - 17/05/2013


Circular 765 issued by the Luxembourg VAT Authorities on 15 May 2013 introduces changes in respect of the methods to be used to compute the input VAT deduction right.

Current practice

According to the principles of VAT, the deductibility of input VAT incurred by a taxable person on the goods and services it purchases depends on the effective use of these goods and services, i.e. the relation with the various activities the taxable person performs.

Until now, the Luxembourg taxable persons performing activities both entitling and not entitling to deduct the input VAT incurred on their costs, had the possibility to use three methods to calculate their input VAT deduction right.

The “general prorata” method, based on which the input VAT deduction right is computed as a percentage of the turnover allowing input VAT deduction to the total turnover, has been by far the method used by the Luxembourg taxpayers.

Nevertheless, some of them have been already, whether in addition or alternatively to the “general prorata” method, using the “direct allocation” (allocation of the costs that can be directly linked to either their activities allowing or these not allowing input VAT deduction) and/or “special prorata” (any method based on various objective and accurate allocation keys, depending on the activities performed) methods.

Introduced changes

The Luxembourg VAT Authorities consider that the use of a “general prorata” as a standard method does not allow to meet the objective to ensure the neutrality of the VAT system. Therefore, as of 2013 the taxpayers must switch to an alternative method based on appropriate objective allocation keys, whether it is the “direct allocation” or the “special prorata” method. The “general prorata” method remains applicable only in relation to overhead expenses that cannot, by nature, be allocated to any activity in particular.

Furthermore, although in the circular the VAT Authorities give examples of possible allocation keys, they make clear that it remains the sole responsibility of the taxpayer to determine and implement the most appropriate analytical accounting technics, in order to accurately allocate the costs and the corresponding input VAT. In case of questions from the Authorities, the taxpayers should be in the position to justify the methods and allocation keys applied, and the consistency of the results obtained.

Impact in Luxembourg

Although it might appear that the circular addresses only the financial sector, it in fact affects Luxembourg businesses in almost all sectors, such as: banking and insurance, investment management, private equity and real estate, etc. It creates a challenge for the taxpayers as it enforces a more detailed approach of calculating the input VAT deduction right. But at the same time it is also a good opportunity to review the methodologies used until now and their accuracy for the activities performed, which may in certain cases substantially improve the effective input VAT deduction rate.

Even though the change is applicable as of 2013, it does not prevent the VAT Authorities from continuing to review the methods used by the taxpayer for the previous years. This, however, should not come as a surprise, as Article 51 of the Luxembourg VAT Law already allows to enforce the above mentioned methods in case the “general prorata” method creates distortions in the application of VAT.

In a period full of regulatory changes, the consequences of this circular should definitely be part of the budget discussions that will soon start in a lot of companies.




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