Agefi Luxembourg - janvier 2025

AGEFI Luxembourg 8 Janvier 2025 Economie / Banques By Guy ERTZ, Chief Investment Advisor, BNP Paribas Wealth Management S tockmarkets recorded again a very strong performance in 2024. TheUS stock index S&P500 pos- ted a total return of 25%while Euro- peanmarketswere closer to 10%.A large part of this performance can be justifiedby resilient eco- nomic growth, falling in- flation and central bank rates. Traditional va- luation ratios such as the price-to-earnings (PE) (1) ratio have reached high levels especially in theUSbut are still below the extreme levels reached in the dotcombubble. Le- vels aremore extreme in the US tech sector but in general the conclusion remains the same. Using the price-to-earnings ratio to evaluatewhether equities are overvalued has however several draw- backs. The main one is that it does not consider that somecompanieshavehighergrowthrateofearnings. To do so, we can use the so-called PEG ratio. It was initiallymentionedbyMarioFarina (2) andlaterpopu- larizedbyPeterLynch (3) .Itissimplytheprice-to-earn- ings ratio divided by the expected growth rate of earnings (in real terms). Generally speaking, a com- pany with a PEG ratio of 1 is broadly considered as fair valued. A higher PEG ratio suggests a highervaluationandviceversa.APEGratio isstillasimplisticapproachusingimportant assumptions andshouldbeused incombi- nationwithother valuation tools. The logic of the PEG ratio can be useful to monitor early signs of bubbles. As men- tioned above, this ratio suggests that the PE ratioshouldbebroadlyinlinewiththe expected growth rate of earn- ingstokeeparatioaround1. Before the burst of the 2000 dotcombubble, PEratios in the tech sector started to in- crease rapidly and reached levels above 100 for some companies. Thatobviously implied unrealistic ex- pected growth rates. In- deed,highgrowthratesare difficulttomaintainascom- paniesgrow.Indeed,ifacom- pany profit doubles over time, keeping a growth rate of 50% for example becomes much harder simply from an arithmetical point of view.Alsonotethatinacompetitivemarketeconomy, highprofits shouldget competed away over time. PE ratios in the US have risen a lot over the last two years but are still lower compared to the peak of the dotcombubble, even in the tech sector. The PE ratios sawan extreme rise in the last fewmonths before the burst of the bubble in 2000. For example, using the MSCIUStechnologysector,thePEreachedalmost50 atthepeak.Todayitiscloseto30.Afurthersharprise wouldwarrantmore caution. Another dimension to keep a close eye on is the weight of big tech stocks like the magnificent 7, in broadequity indices suchas the S&P500or theMSCI World. Indeed, such indices are not attributing fixed equal weights to the members of the index but use a market weightedmethodology. This implies that in- dividualstocksincreaseinweightastheyoutperform the othermembers of the index. A lot of asset managers use such market weighed benchmarks, and this pushes them to buy more of those stocks as they increase in price. In otherwords, the more the price of US big tech stocks goes up, the more investor buy them to stay close to their bench- markwhatever the valuation. This can obviously in- creasetheprobabilityofbubbles.TheweightoftheUS tech sector in the S&P500 is now close to the level reachedthepeakofthedotcombubble.Alsonotethat, today 2 US big tech stocks represent around 20% of the S&P500. Other signs of bubble formation are linked to the ex- tremeoutperformanceof theUSequitymarkets rela- tive to other countries. This is obviously linked toUS bigtechandthehighweighttheyhaveintheS&P500 but not only. The argument of “US exceptionalism” has been attracting a lot of flows into the US equity markets. This exceptionalism refers to the growing competitive advantage linked to the innovation and deregulationpotentialandhasbeenfueledbytheelec- tionof DonaldTrump. Fewwoulddoubtthatthereissuchanadvantage,but the key is to what extend that is already reflected in the valuation of US stocks relative to the rest of the world. The new president will come to office on 20 January 2025 and it will take a fewmonths to have a clearer picture on the policies he will put in place. A further sharp rise in the weight and the valuation of USequitiesrelativetoothermarketscouldbeafurther warnings signal. Another useful indicator of bubbles is the sentiment of investors. A typical example is the US Bull-Bear ratio of the American Association of Individual In- vestors Sentiment Survey (4) . Duringbubbles, the ratio reachedextremelyhigh levels ina relativelyshort pe- riod of time suggesting extreme relative optimism. Oneway tomeasure suchextrememoves is tomeas- uretheratiointermofdeviationsfromthemean.Dur- ing the dotcom bubble, the index broke above +2 standarddeviations inDecember 1999. Currentlywe are still below +1. Breaking again +2 standard devia- tionscouldbeconsideredasasignofexcessoptimism. In summary, we discussed 4 key bubble indicators tomonitor: (1) the earnings growth of US tech com- paniesthatisneededtomatchthePEratioifthisratio rises further, (2) the weight of US tech sector in the S&P500, (3) the valuation and the weight of US stocks relative to the rest of world and finally (4) the sentiment of equity investors as measured by the Bull-Bear ratio. There are certainlymore relevant in- dicators, but this would go beyond the purpose of this short article. 1)Bydefault,werefertotheforwardprice-to-earningsratio–i.e. thepricedividedbytheexpectedearningspershare. 2) Mario V. Farina, “A Beginner’s Guide to Successful Investing intheStockMarket”,Investors’Press,1969. 3) Peter Lynch, “One up onWall Street: How to Use What You AlreadyKnowtoMakeMoneyintheMarket”,NewYork:Simon &Schuster,1989. 4) We use the following ratio: “Bullish” – “Bearish” divided by thetotal. Some lessons from the 2000 dotcom bubble for equity markets in 2025 By Brice ROUSSEL, VATDirector, PwCLuxembourg T he approval of the “VAT in theDigi- talAge” (ViDA) proposal on 5No- vember 2024, marks a pivotal moment for ValueAddedTax (VAT) com- pliance in the EuropeanUnion (EU). This ambitious reform, designed tomodernise VATprocesses and align themwith the demands of a digital economy, is set to significantly impact bu- sinesses operatingwithin the EU.Among its three pillars, the 1st—Digital ReportingRequirements (DRR) andmandatory e-in- voicing—stands out as a transformative change for accounting, finance, and tax departments. In short, the 2nd Pillar aims to modernise VAT rules to ensure a consistent taxation of services provided through digital platforms, such as accommodation and transportation, by clarifying the responsibilities of platforms for collecting and remittingVAT. The 3rd Pillar focuses on the introduction of a single EU VAT registration allowing businesses to manage their VAT obligations across all Member States through a centralised One Stop Shop system (al- though subject to many exclusions and conditions). Thisarticleexploreswhatthe1stPillarentails,itstime- line, and its practical implications for businesses. What changes are coming? Pillar1introducestwomajorreforms:themandatory implementation of electronic invoicing as the default invoicing system and the replacement of the current VAT European Sales Listings (ESLs) with real-time digital reporting requirements. These reforms arenot merelytechnicalupdatesbutrepresentafundamental transformationof howVAT compliance ismanaged. Mandatory e-invoicing Electronic invoicing will soon become the norm for cross-bordertransactionswithintheEU.Avalide-in- voice, compliant with the European standard (EN16931) (1) , will become amaterial requirement for VAT deduction. Invoices to be issued will also have to include new elements such as the IBAN number of the supplier’s bank account, the date of payment, and a unique sequential invoice number for correc- tions. Additionally, the timeline for issuing invoices is being drastically tightened. Currently in most cases in Luxembourg, businesses generally have until the 15th of themonth following the supply to issue their invoices. Under ViDA, this windowshrinks to only 10 days fromthe date of the chargeable event. This accelerated timeline will re- quirecompaniestostreamlinetheirinvoic- ing processes significantly as both the is- suer (seller) and receiver (customer) will have tobeable to issue/receive, readand store these invoices. Digital Reporting Requirements (DRR) Currently, when supplying services or goods to a business established in another EU Member State, the supplierisrequiredtoobtainthe VAT number of its clients. The VATnumberisusedasevidence todemonstratethatthecustomer is a “taxable person” froma VAT perspective and that the supply is therefore deemed to be taxable in the Member State of the recipient (or arrival of the goods). If such VAT numbers have been obtained, the sup- plier should in principle file an ESL. Such listing in- cludes the country, VAT number and amount supplied to eachof these clients and enables the au- thorities to confirm that the services/goods are deemed to be taxable outside of Luxembourg. Oth- erwise, in the absence of a valid VAT number, the supplierwouldgenerallybe required to applyLux- embourg VAT on its supplies. Currently inLuxembourg, such returnmust befiled either on a monthly or quarterly basis and always by the 15thof themonth following the reportingpe- riod. Inpractice, this timeframe is too long to enable the authorities to efficiently identify and stop VAT fraud schemes. The DRR will replace these ESLs and will require real-time reporting of invoice data. DRR will cover Business to Business (B2B) cross-border supplies of goods and services (like theESLs) but canalsobe ex- tended by theMember States to cover: -B2Bcross-borderacquisitionsofgoodsandservices; -Domesticsupplies(forbothsuppliersandrecipients). For suppliers, thismeans submittingdata at the time of issuanceof the invoiceorwhen the invoice should have been issued. Buyers, in cases of self-billing or other scenarios, will have to report the transactions within 5 days of the invoice date. Unlike the current system, this shift to real-time reporting represents a significant leap in complexity and reactiveness. A reliable e-invoicing system is needed for the DRR obligationtowork.Inpractice,asupplierwillhaveto issueane-invoicewithin10daysofthesupply(rather than by the 15th of the following month). Failure to dosocouldresultinpenaltiesandaffectthesupplier’s VAT recovery. Simultaneously with the issuance of the e-invoice, the supplierwill have to file theDRR. The client, on the other hand, must ensure that the receivede-invoicemeets thenewstandards to claim VAT deductions. If its Member State of establish- ment introduces it, the client might have to report thepurchase in its ownDRRwithin5days of the is- suance of the e-invoice by the supplier. Considering the risk for the client in terms of VAT recovery, this will requireupdatingcontracts to includeprovisions for compliance with e-invoicing standards and es- tablishing clear procedures for handling invoices. Timeline and implications for businesses Although a formal approval is expected in early 2025, the changes introducedunder Pillar 1will take effect from 1 July 2030. Member States that already announcedor haddomestic real-time reporting sys- tems inplace before 1 January 2024will have until 1 January2035 toalignwith thenewEU-widemodel. This phased approach aims to accommodate exist- ing national systems while ensuring convergence toward a standardised framework. The transition tomandatory e-invoicing andDRR introduces several hurdles and challenges for businesses across various functions, including fi- nance, accounting, IT, and legal departments. These include: - Systemand process upgrades: Adapting to struc- tured e-invoicing formats compliant with EN16931 willrequiresignificantinvestmentintechnologyand infrastructure. Businesseswill need to replace tradi- tionalinvoiceformatssuchasPDFsorpaperinvoices with fully structured electronic invoices. Ensuring compatibility with customer and supplier systems —manyofwhichmaybeat different stagesof readi- ness—addsanotherlayerofcomplexity.Theimple- mentation of real-time reporting also requires substantial system upgrades. Existing accounting and ERP systems must be equipped to process and transmit data in real-time while maintaining robust data security. This integration is not only a technical challenge but also a resource-intensive process that demands careful planning and execution. - Stricter compliance timelines: The new 10-day deadline for issuing e-invoices for cross-border transactions requires a fundamental rethink of in- voicingworkflows.Delays in issuing invoices could lead to compliance breaches, penalties, andVAT re- covery issues. Businesses with complex supply chains, particularly those engaged in international trade, will face heightened pressure to meet these tighter timelines. In addition, theDRRwill imposes a level of detail and immediacy far exceeding the current ESLs. -Contractual andoperational adjustments: The re- quirement for valid e-invoices as a condition for VATdeductionnecessitates a reviewof existingcon- tracts and Terms of Business (ToBs). Companies must ensure that agreements with suppliers and clients explicitly address compliance with the new invoicing standards. Failure to do so could result in disputes or challenges from tax authorities, poten- tially jeopardising VAT recovery. Moreover, busi- nesses must prepare for the increased likelihood of errors in invoicing and reporting, which could lead todisputeswithcounterparties. These situations are already a reality with the current ESLs system and will only increasewithDRR. Robust procedures for detecting and correcting errors will be essential to mitigate risks. - Coordination across departments: Implementing these changes will require close collaboration be- tween IT, finance, legal, and operational teams. IT teamsmust ensure systemreadiness, while finance andaccountingdepartmentsneed toalignprocesses with the newrequirements. Legal teamswill play a crucial role inupdatingcontracts andensuringcom- pliancewith revised regulations. Effective cross-de- partment coordination will be critical to minimise disruptions and ensuring a smooth transition. Steps to prepare for the changes Given the scale and complexity of the changes under ViDAPillar 1, businesses should take proac- tive steps to ensure compliance andmitigate risks: 1. Conduct an initial assessment: Begin by evalu- ating how the new requirements will impact your current processes, systems, and workflows. Iden- tify gaps and areas requiring improvement; 2. Monitor legislativeupdates: Stay informedabout further developments, guidelines, and clarifications fromtheEuropeanCommissionandMemberStates. Regular updates will ensure you remain ahead of compliance requirements and deadlines; 3. Seek expert advice: Consult VAT experts or ad- visors to navigate the technical and legal aspects of the new and/or local requirements. Their insights canhelpyoudevelop a comprehensive compliance strategy tailored to your business needs; 4. Invest in technology: Upgrade your invoicing and reporting systems tomeet the requirements for structured e-invoicing and real-time reporting. En- sure the accuracy and integrity of your data through robust validation processes; 5. Revise contracts and ToBs: Review and update contracts with suppliers and clients to include pro- visions for compliance with e-invoicing standards and reporting obligations. Clearly outline respon- sibilities and procedures to mitigate disputes; 6. Train staff: Educate employees on the new re- quirements and their implications for day-to-day operations. Focus on building awareness and tech- nical proficiency in handling e-invoicing andDRR. While the transition to mandatory e-invoicing and DRR presents significant challenges, it also offers potential benefits. Standardised and automated processes can enhance efficiency, reduce fraud risks, and simplify VAT reporting. By investing in the necessary infrastructure and processes, busi- nesses canposition themselves to capitalise on these opportunities while ensuring compliance. The shift to a digital VAT framework under ViDA represents a turning point for businesses operating within the EU. Preparing early and adopting a proactive approach will be key to navigating this complex transformation successfully. 1) The European standard EN 16931 establishes a common semantic data model for electronic invoices, ensuring interoperability across EU member states. This standard is used currently for the issuance of invoices for B2G transactions in Luxembourg. ViDA: The future of VAT reporting - a game changer?