Explanatory Memorandum to COM(2021)736 - Amendment of Implementing Decision 2009/1008/EU authorising Latvia to extend the application of a measure derogating from Article 193 of the VAT Directive

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dossier COM(2021)736 - Amendment of Implementing Decision 2009/1008/EU authorising Latvia to extend the application of a measure derogating from ...
source COM(2021)736 EN
date 30-11-2021


Pursuant to Article 395(1) of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive’ 1 ), the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to apply special measures for derogation from the provisions of that Directive, in order to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance.

By letter registered with the Commission on 4 April 2021, the Republic of Latvia (hereinafter Latvia) requested the authorisation to continue to apply a measure derogating from Article 193 of the VAT Directive, which determines the person liable for the payment of VAT. With the same letter, Latvia sent a report on the application of that measure.

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letters dated 9 August 2021, and Spain by letter dated 10 August 2021, of the request made by Latvia. By letter dated 10 August 2021, the Commission notified Latvia that it had all the information necessary to consider the request.

1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

As a general rule, Article 193 of the VAT Directive stipulates that the taxable person supplying goods or services is normally liable to pay VAT.

Pursuant to Article 395 of the VAT Directive, Member States may apply measures derogating from the provisions of the VAT Directive to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance if they have been authorised by the Council.

Latvia requested to continue to apply the reverse charge mechanism to timber transactions that entails to make the person to whom these goods or services are supplied liable for the payment of VAT.

The derogating measure for Latvia had been initially granted by Council Decision 2006/42/EC 2 until 31 December 2009 and by Council Implementing Decision 2009/1008/EU 3 until 31 December 2012. The authorisation to apply the derogation has subsequently been extended by Council Implementing Decision 2013/55/EU 4 until 31 December 2015, by Council Implementing Decision (EU) 2015/2396 5 until 31 December 2018, and by Council Implementing Decision (EU) 2018/2006 6 until 31 December 2021.

According to Latvia, the timber market, which is one of the most important sectors of its economy, is particularly sensitive to VAT fraud, because it is dominated by a great number of small local operators and individual suppliers, and because it is very difficult to trace the movements of materials and related transactions. The businesses active in the sector may be not due to fulfil recording obligations and this may lead to undeclared transactions with private individuals for the supply of timber. Thus, there is a significant risk that some operators could evade payment of VAT. The nature of the market and of businesses involved has generated VAT fraud, which the Latvian tax authorities have found difficult to control. In order to combat this abuse, they have introduced the reverse charge mechanism to timber transactions, which has proven to be very effective and has decreased VAT fraud in this sector significantly.

Moreover, this special measure does not have a negative impact on the total amount of VAT revenues collected at the final stage of consumption and thus, does not affect the Union's VAT own resources in a negative way, according to Latvia.

Derogations are in general granted for a limited period of time as to allow an assessment whether the special measure is appropriate and effective and in order to grant Member States time to introduce other conventional measures at national level to monitor the movement of materials, the payment of VAT, and the compliance of taxable persons which should tackle the respective problem until the expiry of the derogating measure, thus making an extension of the derogation redundant. A derogation allowing making use of the reverse charge mechanism is only granted exceptionally for specific fraudulent areas and constitutes a means of last resort.

Taking into consideration the unchanged legal and factual situation, it is therefore proposed to extend the derogating measure, allowing Latvia to continue to apply this derogating measure until 31 December 2024. Until the expiry of this derogation, Latvia should implement other conventional measures at national level to monitor the movement of materials, the payment of VAT, and the compliance of taxable persons which would underpin the fight and prevent the VAT fraud in the sector of timber.

• Consistency with existing policy provisions in the policy area

Similar derogations in relation to Article 193 of the VAT Directive have been granted to other Member States, Portugal 7 , Romania 8 and Lithuania 9 .

The proposed measure is, therefore, consistent with the existing provisions of the VAT Directive.

1.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY


• Legal basis

Article 395 of the VAT Directive.

• Subsidiarity (for non-exclusive competence)

Considering the provision of the VAT Directive on which the proposal is based, the subsidiarity principle does not apply.

• Proportionality

The Decision concerns an authorisation granted to a Member State upon its own request and does not constitute any obligation.

Given the limited scope of the derogation, the special measure is proportionate to the aim pursued.

• Choice of the instrument

Proposed instrument: Council Implementing Decision.

Under Article 395 of the VAT Directive, a derogation from the common VAT provisions is only possible upon authorisation of the Council acting unanimously on a proposal from the Commission. A Council Implementing Decision is the most suitable instrument since it can be addressed to an individual Member State.

3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

• Stakeholder consultations

This proposal is based on a request made by Latvia and concerns only this Member State.

• Impact assessment

The proposal for a Council Implementing Decision authorises Latvia to continue to apply the reverse charge mechanism to timber transactions. The situation, on which the initial derogation was based, continues to exist. Latvia claims that despite the fact that there has been a reduction in the number of cases of fraud involving VAT and VAT evasion on the timber market since the introduction of the reverse charge procedure, the risk is not eliminated.

The measure has previously been authorised in the 2003 Act of Accession 10 , in particular in Chapter 7, point 1(b) of Annex VIII thereto, and by Decision 2006/42/EC 11 under the then applicable Sixth Directive 77/388/EEC. However, over time, fraud in the timber sector has moved to include transactions that were not subject to the VAT reverse charge procedure. For instance, transactions relating to wood by-products. Accordingly, the scope of application of the VAT reverse charge procedure was further broadened, in order to reduce the number of opportunities for fraud. Furthermore, as of 1 January 2020, the recipient of timber must pay for the goods received, and the recipient of services for the services rendered, by means of non-cash payments. These modifications were made to standardise payment requirements in all cases where the reverse charge procedure is applied, in order to enhance the effectiveness of the measure aimed at combating VAT fraud.

Latvia submits that the extension of the derogating measure is necessary to fight fraud occurring in the timber sector. The timber market in Latvia is dominated by small and medium-sized traders and taxable persons, which buy or sell timber and provide or receive related services. The VAT reverse charge procedure is applied for domestic timber transactions and specific services only when the supplier and the recipient of the goods are both registered for VAT purposes in Latvia. According to the request, the timber sector is particularly vulnerable to VAT fraud, because it is very difficult to trace the movements of materials and related transactions. Initially the reverse VAT charge procedure was applied only to timber supplies. Gradually the risk of fraud grew due to the evolution of the timber market, therefore as of 1 April 2001 the reverse charge procedure was extended to certain services provided as part of timber transactions. However, over time, fraud in the timber sector has shifted to other related transactions that were not subject to the reverse VAT charge procedure, for instance, transactions relating to wood by-products. Accordingly, the scope of application of the VAT reverse charge procedure was extended to other supplies, thus reducing the number of opportunities for fraud.

According to the estimates included in the request, based on data provided by the Central Statistical Bureau for 2020, intermediate consumption in the sector accounts for 69% of products produced and related services rendered in the forestry and logging sectors (NACE Rev. 2, code 02). Exports account for 18.9%, while just 10.5% of production volume goes to household consumption. In the production of wood, wood and cork products, except for furniture (NACE Rev. 2, code 16), 59.9% are destined for export. 37.4% of products are used in intermediate consumption in the sector, and just 1.4% of products go to the final consumption of households. According to the information provided by experts in the sector, timber transactions subject to the reverse VAT charge procedure represent approximately EUR 2.0 billion.

As at 1 January 2021, there were 5 389 taxable persons (legal persons) registered in the timber sector, off which 3 418 persons were subject to VAT.

The extension of this measure will not have a negative impact on the total amount of VAT revenue collected at the final stage of consumption and thus, does not affect the Union's VAT own resources in a negative way.


4. BUDGETARY IMPLICATIONS

The proposal has no implication on the EU budget.

5. OTHER ELEMENTS

The proposal is limited in time.