VAT is just one source, but at 15-20% of government revenue, it is an important source. Most of it will be generated by business that physically happens in the country, and is unambiguously taxed there, but more and more of business is moving online.
Selling from low-VAT countries is a problem because it is a fictional accounting move. If you buy a product from Amazon.co.uk, delivered from an UK warehouse to an UK address - or from Amazon.de, delivered from a German warehouse to a German address - then it is still billed through Luxembourg. Even though by all non-accounting measures it is business happening inside the UK and Germany. The only reason for choosing Luxembourg is tax rate optimisation, not because there's an actual place of business there.
It's understandable that most countries in the EU would want to keep taxes on business that happens in their country to themselves. If VAT exists at all, then it makes sense not to gift it to Luxembourg. So the rules were changed to remove this accounting trick.
Selling from low-VAT countries is a problem because it is a fictional accounting move. If you buy a product from Amazon.co.uk, delivered from an UK warehouse to an UK address - or from Amazon.de, delivered from a German warehouse to a German address - then it is still billed through Luxembourg. Even though by all non-accounting measures it is business happening inside the UK and Germany. The only reason for choosing Luxembourg is tax rate optimisation, not because there's an actual place of business there.
It's understandable that most countries in the EU would want to keep taxes on business that happens in their country to themselves. If VAT exists at all, then it makes sense not to gift it to Luxembourg. So the rules were changed to remove this accounting trick.