Explanatory Memorandum to COM(2018)298 - Amendment of the VAT Directive as regards application of the reverse charge mechanism for products susceptible to fraud and of the Quick Reaction Mechanism against VAT fraud - Main contents
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| dossier | COM(2018)298 - Amendment of the VAT Directive as regards application of the reverse charge mechanism for products susceptible to fraud and ... |
|---|---|
| source | COM(2018)298  |
| date | 25-05-2018 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
The purpose of the current proposal for a Directive amending Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax 1 (hereafter the VAT Directive) is to prolong: 1) the possibility for Member States to apply the reverse charge mechanism 2 to combat existing fraud in supplies of goods and services included in Article 199a(1) of the VAT Directive and 2) the possibility to use the Quick Reaction Mechanism (QRM) to combat fraud.
Article 199a 3 of the VAT Directive allows Member States to optionally use the reverse charge mechanism for payment of VAT on supplies of pre-defined goods and services, which are susceptible to fraud, and in particular, to Missing Trader Intra-Community (MTIC) fraud.
If a Member State would like to apply the reverse charge mechanism to other supplies than those listed in Article 199a of the VAT Directive, a derogation can be granted based on Article 395 of the VAT Directive in order to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion and avoidance. However, the adoption of the derogation based on this article requires a proposal from the Commission and unanimous adoption by the Council, a process which takes up several months (up to a maximum of 8 months according to Article 395 of the VAT Directive). In cases whereby a Member State is suddenly confronted with massive fraud, the duration of the procedure for obtaining a derogation based on Article 395 could result in important losses of VAT receipts. The QRM included in Article 199b 4 of the VAT Directive contains a faster procedure for allowing Member States, under certain strict conditions, to introduce the reverse charge mechanism, thereby providing Member States with a more adequate and effective response to sudden and massive fraud.
The purpose of the measures foreseen in Articles 199a and 199b is to allow Member States to quickly tackle problems of the MTIC fraud: Article 199a by an option of applying the reverse charge mechanism for listed supplies and Article 199b by offering a faster procedure for the introduction of the reverse charge mechanism in case of sudden and massive fraud. Both Articles expire on 31 December 2018 5 .
The MTIC fraud occurs when a trader acquires goods, transported or dispatched from another Member State, by means of a supply exempt from VAT and sells them on including VAT on the invoice to the customer. After having received the VAT amount from the customer such trader disappears before paying the VAT due to the tax authorities. At the same time the customer, acting in good faith or not, can deduct the VAT he paid to the supplier through his VAT return. The optional reverse charge mechanism based on Article 199a of the VAT Directive appears to be a useful and precautionary tool for Member States to fight this type of fraud in the pre-defined sensitive areas when it occurs on their territory. Once the trader is obliged to use the reverse charge mechanism for such domestic supplies, he cannot charge VAT on its invoice. He will subsequently not receive the VAT amount from his customer and as a result he cannot disappear with the amount of VAT received. The QRM of Article 199b is an exceptional measure allowing Member States to quickly introduce a temporary reverse charge mechanism for supplies of goods and services in sectors where sudden and massive fraud occurred and which are not listed in Article 199a of the VAT Directive. Using this mechanism Member States can bridge the period required for obtaining the normal derogation under Article 395 of the VAT Directive.
As required by the VAT Directive, the Commission presented a Report on the effects of the mechanisms included in Articles 199a and 199b of the VAT Directive 6 . For the preparation of this Report, Member States were invited to provide their experience and assessment of the measures. To ensure that the feedback from business is taken into account, business stakeholders were requested, via the VAT Expert Group 7 , to provide their views. Member States and consulted stakeholders generally consider the reverse charge mechanism included in Article 199a of the VAT Directive an effective and efficient, temporary tool in fighting VAT fraud. Regarding the QRM included in Article 199b of the VAT Directive, although it was never effectively applied, most Member States consider that it remains a useful tool and a precautionary measure for exceptional cases of VAT fraud.
The Commission presented lately two legislative proposals which aim at tackling VAT fraud more fundamentally. The first is a proposal for administrative cooperation and fighting fraud in the field of VAT 8 , which would strengthen cooperation between Member States to efficiently combat cross-border fraud.
The second is the proposal outlining the cornerstones for a simpler and fraud-proof definitive VAT system for intra-Union trade 9 . A two-step approach will be followed for the implementation of these cornerstones. As a first step, the Commission will present in the first semester of 2018 a proposal containing the detailed provisions for the operation of the definitive arrangements for intra-Union Business-to-Business (B2B) supplies of goods.
These arrangements, which should enter into force on 1 July 2022, provide a fundamental response to MTIC fraud. Since VAT would be effectively charged on intra-Union supplies, a trader can no longer acquire goods, transported or dispatched from another Member State, exempt from VAT which is at the root of the MTIC fraud. Only trustworthy taxable persons that obtained the status of certified taxable person will be able to obtain goods transported or dispatched from another Member State without the VAT having been charged by the supplier.
It appears from the above that the measures included in Articles 199a and 199b of the VAT Directive have been useful as temporary and targeted measures. Their expiration on 31 December 2018 would deprive Member States of an efficient tool to fight fraud.
It is therefore appropriate to prolong the measures included in Articles 199a and 199b until 30 June 2022, the date on which the definitive regime for intra-Union B2B supplies of goods should enter into force.
According to Article 199a(1) of the VAT Directive, Member States may apply the reverse charge mechanism for a minimum period of two years. The requirement of a minimum of two years for the application of the measure proved to be an impediment to a few Member States wishing to introduce the reverse charge mechanism in the course of 2017 to fight newly discovered cases of VAT fraud in the supplies of goods and/or services included in the list of Article 199a. The Member States concerned ultimately had to file the request for a derogation based on Article 395 of the VAT Directive and according to the procedure included in this Article resulting in delaying the reaction of the Member States to the fraud problem. Consequently, it is proposed to remove the requirement of minimum period of two years from the provision.
• Consistency with existing policy provisions in the policy area
The current proposal is without prejudice to the Commission's proposal as regards the temporary application of a generalised reverse charge mechanism 10 which would provide Member States that are particularly affected by fraud with the possibility to introduce a general (and not sector specific) reverse charge mechanism for domestic supplies of goods and services provided strict conditions are met. The scope and conditions proposed for the application of the general reverse charge mechanism are different from the conditions of Articles 199a and 199b of the VAT Directive.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
The Directive amends the VAT Directive on the basis of Article 113 of the Treaty on the Functioning of the European Union.
As the proposal prolongs the application of certain provisions of the Directive, an amendment of the VAT Directive is necessary.
• Subsidiarity (for non-exclusive competence)
According to the principle of subsidiarity, as set out in Article 5(3) of the Treaty on European Union, action at Union level may only be taken if the envisaged aims cannot be achieved sufficiently by the Member States alone and can therefore, by reason of the scale or effects of the proposed actions, be better achieved by the Union.
The objective of fighting fraud via the application of the reverse charge mechanism and the possibility to use the Quick Reaction Mechanism to fight sudden and massive fraud is best achieved at Union level and finds its specific legal basis in the VAT Directive. Therefore, the prolongation of these measures requires an amendment to the VAT Directive.
• Proportionality
Because of the optional and temporary character of the prolonged measures, the proposal is proportionate to the aim pursued which is to combat fraud in certain supplies of goods and services and help Member States to tackle cases of sudden and massive VAT fraud.
• Choice of the instrument
A Directive is proposed in view of amending the VAT Directive.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Stakeholder consultations
The feedback from Member States and stakeholders was presented in the Commission's Report on the effects of Articles 199a and 199b of the VAT Directive on combatting fraud.
As set out in the Report, Member States generally consider the reverse charge mechanism included in Article 199a of the VAT Directive an effective and efficient tool in fighting VAT fraud. Due to the introduction of the reverse charge mechanism the fraud decreased significantly or disappeared in the defined sectors. This view is also shared in the replies received from the consulted business stakeholders who consider the reverse charge mechanism as an efficient, temporary measure for combatting fraud.
Regarding the Quick Reaction Mechanism in Article 199b of the VAT Directive, although it has never been used, most Member States consider that it remains a useful tool and a precautionary measure against exceptional cases of sudden VAT fraud.
• Collection and use of expertise
The VAT Expert Group was consulted regarding the effects of the measure included in Article 199a of the VAT Directive. The feedback indicates that the reverse charge mechanism for given supplies is considered an efficient, temporary tool for fighting fraud.
In general, the optional reverse charge mechanism has been assessed in earlier studies. According to a recent study on the assessment of the optional reverse charge mechanism 11 , the reverse charge mechanism implies an increase by 43% of compliance costs to businesses. An assessment of a general reverse charge mechanism (also comparing to the sectorial reverse charge) on the internal market has been carried out in the impact assessment accompanying the proposal on the temporary application of a generalised reverse charge mechanism 12 . Given its limitation in scope and time, the targeted reverse charge mechanism does not appear to have major detrimental consequences.
• Impact assessment
The initiative prolongs the measures included in Articles 199a and 199b to support Member States in tackling VAT fraud until a more in-depth reform of the VAT system will be in place.
Given the Commission's on-going work on the definitive VAT regime and its expected impact on the fight against fraud, it would not be useful for the moment to evaluate beyond the recent Report or revise the measures as any conclusions would be transitional and would need to be reassessed once the definitive regime enters into force.
4. BUDGETARY IMPLICATIONS
The proposal will have no negative implications for the Union's budget.
5. OTHER ELEMENTS
The proposal is limited in time.