Luxembourg: Towards A Circular Economy: VAT And The "Resell Model"

Last Updated: 14 November 2017
Article by Georges Bock

Most Read Contributor in Luxembourg, October 2017

In our last article, we talked about the role tax can play in a circular economy: specifically, how we can shift away from an economy that taxes humans and towards an economy that taxes (material) resources. A next important step is to understand if and how circular business models actually affect the taxes paid by businesses and consumers, and the taxes received by the State: impacts that, à priori, can manifest themselves through changes in the amounts as well as the timing of taxes paid.

"In the future it is of critical importance to look in detail at the role of tax and how current rules incentivize companies to favor the linear model over a more circular business approach," says Dr Jeannot Schroeder, circular economy expert, managing director of +ImpaKT, and co-president of the Circular Economy working group formed for the TIR study.1

In order to explore the impacts of changes in taxation approaches, we decided, together with Dr Schroeder, to dedicate parts 2 and 3 of this blog series to the modelling of the fiscal impacts of real-life circular business models.

The present article focuses specifically on the VAT impacts of the resell model, and also discusses what VAT incentives can be used to encourage circular business models.

Taxation in a linear vs. a circular supply chain

For historic reasons, approaches to taxation today are perfectly adapted to a linear economy. In a linear system the value captured by products is lost when their usage period has ended (waste generation), whereas a circular economy is designed to preserve the value embodied in products and components, and to capitalise on the full potential of resources.

In a linear economy, a supply chain has a finite number of stages and the added value is taxed at each stage of the supply chain.2 In this scenario, there is no accumulation of taxes because of deduction rights – the final customer pays the tax. In a circular economy, the supply chain becomes a supply loop and is, in theory, never ending. Therefore taxing the added value will, again in theory, result in an accumulation of taxes on the same asset.

VAT implications for the resell model

One possible business model in a circular economy is the resell model – reselling used goods again and again. In this example, a business that sells books to consumers agrees to buy the books back from the consumers and then sells them again. The following graph illustrates the VAT implications of such a resell model on the different stakeholders (business, consumer, State). Assuming a VAT rate of 10 percent, the VAT flows look as follows:

*Simplification (realistically, this would be 37c and 28c because the buy-back price includes a fictional VAT of 30c/20c)

On the left side (t0-t1), we have the baseline scenario – a classic sales model. The business buys the book from a publisher for €5 and sells it to a consumer for €10 (excl. VAT). For the business, the transaction is VAT neutral. It needs to pay a VAT of 50 cents on the purchase of the book and collects a VAT of €1 from the consumer when selling the book. To simplify: of this €1, the business keeps 50 cents because it is in a tax credit position from the previous purchase, and the remaining 50 cents go to the State. As mentioned above, the transaction is always VAT neutral for the business because of deduction rights. The total VAT is always assumed by the final customer.

Starting from t2, the resell model starts. A resell business buys back the book from a consumer for €3 and resells it to another consumer for €7, buys it back again for €2 and resells it again for €5. This is where we would assume that the accumulation of VAT on the same book takes place. Let's look at the transactions in detail.

The buy-back transaction from Consumer to Business is not VAT-taxable, since private individuals are not VAT registered. This means that the resell business has a cash flow advantage, as there is no VAT to finance at the purchase. Additionally, since the business pays no VAT on this purchase, no deduction rights are applicable in the following transactions.

Concerning the resale transactions (t3 and t5), the EU "margin scheme," designed to avoid an accumulation of taxes on the same asset, comes into application. In Luxembourg, the applicable piece of legislation is Article 56ter VATL for second-hand goods. The used book in our example falling under the definition of a "second-hand good" and the business being a "taxable reseller," the VAT applies not to the whole sales price but only to the gross margin (sales price minus buy-back price). As a result, the VAT paid in the first resale transaction (t3) amounts to 40 cents (=(7€-3€)*10%) instead of 70 cents (=7€*10%). In the second resale transaction (t5), the consumer pays a VAT of 30 cents instead of 50 cents.3 This means that the VAT on the material resources included in the book is only paid once, and subsequent VAT is only applied to the added value created, i.e. the margin.

This example illustrates the desired principles of the tax scheme in action, i.e. the avoidance of an accumulation of tax on the same asset, and therefore the avoidance of repeated and significant increases of the purchase price of an asset for the final consumer as goods circle through the economy. To the extent that lower prices constitute incentives to buy, it could be argued that the existence of this tax scheme may encourage consumers to buy second-hand goods and, as a result, favour a more circular economy. It is of course very difficult to make definitive statements on cause and effect in this context, or on the motivations of consumers for purchasing one good over another, so generalisations are fraught with difficulty. But as the simple example shows, the fiscal framework in place relating to VAT for second hand goods does at least not appear to create negative incentives, incentives which would harm efforts towards a more circular economy.

However, the existing fiscal framework, in a more realistic setting, is incomplete. Indeed, to really move towards a more circular economy, we need to push our little thought experiment further and consider that the prolonged usability of goods requires repeated value preservation activities, i.e. maintenance and repair work, to enable circularity to happen in practice. And this is where the current fiscal framework does fall a little short. To correct this, and to further incentivise the reuse and resale of assets, we could therefore imagine a measure to extend the "margin scheme" so as to apply the VAT on the net margin (sales price minus buy-back price minus operating expenses linked to reselling the product) instead of the gross margin. This would allow potential costs for maintenance and repair to be taken into consideration, especially for goods more complex than a book, thereby really encouraging a circular economy.

As Jeannot Schroeder states, "this example shows that a detailed analysis of the tax impacts on a case by case situation is necessary in order to get a complete understanding of what needs to be changed to promote different circular business models."

VAT rates as incentives

Another immediately obvious candidate area for using VAT to create a more circular economy is that of VAT rates themselves. A country which is often cited as exemplary in this context is Sweden, where a reduced VAT rate is applied to the repair of clothes, bicycles, leather goods, shoes, and linen. It needs to be noted however that Luxembourg has already introduced the same measure many years ago, applying a reduced VAT rate of 8% instead of 17%, and so have other EU countries. So far, no results on the effectiveness of this incentive are known to us.

In addition to perhaps making this measure more widely known, it could also be taken further. A super-reduced rate or an exemption on all services that are value-preserving and labour-intensive, like collection, maintenance, repair, remanufacturing, refurbishment, recycling, and upgrade of goods, could be considered.

In addition to a VAT rate reduction, (a part of) the labour costs for these kinds of services could be made tax deductible. In Sweden, 50% of labour costs for repair of large household appliances are tax deductible up to a certain limit,4 and Austria is planning a similar measure.5 This promises to have an even stronger effect on consumption behaviour than a reduced VAT rate, as long as the tax cuts are passed on to consumers (by lowering prices). However, since the measure in Sweden came into force only in January 2017, it is too early to talk about results.

Another way to stimulate consumer demand, aside from value-preserving services, would be to lower VAT rates applicable to circular products consisting of recycled/upcycled materials, products with a positive impact, and generally to cradle-2-cradle certified products. To avoid greenwashing, consistent criteria and checks need to be introduced of course.

Conclusion

As the above analysis and examples have shown, VAT is an area in which there exist a lot of possibilities to encourage a more circular economy. In our next article, we will take this analysis further, and look at a more complex circular business model – the product-as-a-service model – and analyse the fiscal implications (VAT and direct tax) on the different stakeholders.

Footnotes

1 http://imslux.lu/eng/news/66_study-on-third-industrial-revolution-unveils
2 Except in certain cases at the sourcing of raw materials and at the disposal stage, because no remuneration is paid.
3 The resell VAT amounts of 40 cents and 30 cents are a slight simplification. Technically, the buy-back price (€3/€2) is subject to a fictional VAT (30c/20c) which is never charged. However this fictional VAT will also be subtracted from the "gross margin VAT," which therefore amounts to 37c/28c instead of 40c/30c.
4 https://www.theguardian.com/world/2016/sep/19/waste-not-want-not-sweden-tax-breaks-repairs
5 http://www.rreuse.org/wp-content/uploads/RREUSE-position-on-VAT-2017-Final-website_1.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
21 Nov 2017, Conference, Luxembourg, Luxembourg

We are proud to be a sponsor of this year’s PE & RE Conference where our tax partner Giuliano Bidoli will be a speaker

23 Nov 2017, Seminar, Luxembourg, Luxembourg

The ACA Insurance Day brings hundreds of insurance, finance and public sector professionals together.

30 Nov 2017, Other, Luxembourg, Luxembourg

We are proud to sponsor this conference on Luxembourg’s global TA & Distribution operations operating model

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.