Explanatory Memorandum to COM(2020)292 - Amendment of Implementing Decision (EU) 2017/1855 authorising Romania to derogate from Article 287 of the VAT Directive - Main contents
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| dossier | COM(2020)292 - Amendment of Implementing Decision (EU) 2017/1855 authorising Romania to derogate from Article 287 of the VAT Directive. |
|---|---|
| source | COM(2020)292  |
| date | 07-07-2020 |
Pursuant to Article 395(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax 1 (‘the VAT Directive’), 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 14 January 2020, Romania requested an authorisation to continue, after 31 December 2020, to exempt from VAT taxable persons whose annual turnover is no higher than the equivalent in national currency of EUR 88 500.
In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 18 February 2020 of the request made by Romania. By letter dated 19 February 2020, the Commission notified Romania that it had all the information it considered necessary for the appraisal of the request.
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
Chapter 1 of Title XII of the VAT Directive allows for the possibility for Member States to apply a special scheme for small enterprises, which includes the possibility to exempt from VAT taxable persons below a certain annual turnover. Taxable persons falling under this exemption do not have to charge VAT on their supplies and, consequently, cannot deduct VAT on their inputs.
Under Article 287(18) of the VAT Directive, Romania may exempt from VAT taxable persons whose annual turnover is no higher than the equivalent in national currency of EUR 35 000.
By Council Implementing Decision 2012/181/EU 2 Romania was authorised until 31 December 2014 to exempt from VAT taxable persons with annual turnover not exceeding the equivalent in national currency of EUR 65 000 at the conversion rate on the date of its accession to the European Union. Council Implementing Decision 2014/931/EU 3 authorised Romania to continue to apply until 31 December 2017 the special measure derogating from Article 287(18) of the VAT Directive. Romania was subsequently authorised by Council Implementing Decision (EU) 2017/1855 4 to increase the exemption threshold to the equivalent in national currency of EUR 88 500 and to extend the expiry date of the derogating measure until 31 December 2020 or until the entry into force of a directive amending the provisions of Articles 281 to 294 of the VAT Directive, whichever date was the earlier. The measure has an optional character, allowing small businesses to opt for the normal VAT arrangements.
The present request from Romania to prolong further the expiry date of the derogating measure, without increasing the current threshold of EUR 88 500, is based on the same grounds as those presented in the previous requests.
Romania maintains that the prolongation of the derogating measure as well as the current exemption ceiling are justified, taking into account the structure of the national economy. Small and medium-sized enterprises bear disproportionate VAT compliance costs in comparison with large enterprises. The exemption from VAT significantly reduces small businesses’ VAT obligations, while relieving the tax authorities of the burden of having to monitor the collection of a small volume of revenue from small and medium-sized enterprises with an annual turnover of less than EUR 88 500.
In this regard, Romania estimates that in 2019 the amount of VAT paid to the state budget by taxable persons registered for VAT purposes with an annual turnover of less than EUR 88 500 represented 2.52% of total VAT revenue and 1.09% of total State budget revenue. For the same year, taxable persons with an annual turnover above EUR 88 500 (representing 42.85% of the total number of taxable persons registered for VAT purposes) made a contribution of 97.48% to total VAT revenue. Thus, it appears that the impact of the derogating measure on tax revenue collected at the final consumption stage will be negligible, whereas its impact will be significant in terms of simplifying both the tax obligations of the taxable persons concerned as well as the procedure for collecting VAT for the tax administration.
Based on the information provided by Romania, it is clear that the aim of the request to prolong the derogating measure is to release small businesses from many of the VAT obligations under the normal VAT arrangements as well as to reduce the burden of the tax administration in terms of tax collection, thus making it more efficient, while saving administrative resources and reducing tax evasion. The derogating measure is thus in line with the objectives of the first subparagraph of Article 395(1) of the VAT Directive, which allows Member States to introduce special measures derogating from its provisions in order to simplify the procedure for collecting VAT or to prevent tax evasion. In this context, it is reiterated that the measure is and will remain optional for taxable persons, which are allowed to opt for the normal VAT arrangements.
As demonstrated by Romania, the derogating measure is not expected to either affect significantly the overall amount of its tax revenue collected at the stage of the final consumption. Therefore, the derogating measure appears to be in accordance with the second subparagraph of Article 395(1) of the VAT Directive.
In the light of the above, and given that the EU legal framework and the factual situation remain unchanged, the requested extension of the expiry date of the derogating measure appears to be justified. Hence, it is proposed that Romania’s request be granted.
Derogations are normally granted for a limited period to allow an assessment of whether the derogating measure remains appropriate and effective. Moreover, the Council adopted on 18 February 2020 a directive amending the provisions of Articles 281 to 294 of the VAT Directive on the special scheme for small enterprises 5 . The new directive on simpler VAT rules for small enterprises requires that Member States adopt and publish the laws, regulations and administrative provisions, which are necessary to comply with the new rules, by 31 December 2024 at the latest. Member States will have to apply those national provisions from 1 January 2025.
It is therefore appropriate to authorise Romania to continue to apply the derogating measure until 31 December 2024.
• Consistency with existing policy provisions in the policy area
The derogating measure is in line with the philosophy of the abovementioned directive amending Articles 281 to 294 of the VAT Directive on a special scheme for small enterprises, adopted on 18 February 2020, which resulted from the VAT action plan 6 , and aims to create a modern, simplified scheme for those businesses. In particular, it seeks to reduce VAT compliance costs and distortions of competition both domestically and at EU level, reduce the negative impact of the threshold effect, and facilitate business compliance as well as monitoring by tax administrations.
Similar derogations, exempting from VAT taxable persons whose annual turnover is below a certain threshold, as provided for in Article 285 of the VAT Directive, have been granted to other Member States. Malta 7 has been granted a threshold of EUR 20 000; the Netherlands 8 a threshold of EUR 25 000; Luxembourg a threshold of EUR 35 000 9 ; Poland 10 , Estonia 11 and Latvia 12 have been granted a threshold of EUR 40 000; Croatia 13 and Lithuania 14 a threshold of EUR 45 000; Hungary a threshold of EUR 48 000 15 ; Slovenia 16 a threshold of EUR 50 000; and Italy 17 a threshold of EUR 65 000.
As already mentioned, derogations from the VAT Directive should always be limited in time so that their effects can be assessed. The extension of the expiry date of the derogating measure until 31 December 2024 is aligned with the requirements of the new directive on simpler VAT rules for small and medium-sized enterprises. That directive provides for 1 January 2025 as the date on which Member States will have to apply the national provisions, which they are required to adopt to comply with it.
The proposed measure is therefore consistent with the provisions of the VAT Directive.
The Commission has been consistently stressing the need for simpler rules for small enterprises in its annual work programmes. In this regard, the 2020 Commission Work Programme 18 refers to “a dedicated SME Strategy that will make it easier for small and medium-sized businesses to operate, scale up and expand”. The derogating measure is in line with such objectives, as far as fiscal rules are concerned. It is notably consistent with the 2017 Commission Work Programme 19 , which referred specifically to VAT, pointing out that the administrative burden of VAT compliance for small businesses is high and that technical innovations pose new challenges for effective tax collection, and stressed the need to simplify VAT for smaller companies.
Likewise, the measure is consistent with the 2015 single market strategy 20 , where the Commission set out to help small and medium-sized businesses grow, inter alia by reducing the administrative burdens that prevent them from taking full advantage of the single market. It also follows the philosophy of the 2013 Commission Communication ‘Entrepreneurship 2020 Action Plan: Reigniting the entrepreneurial spirit in Europe’ 21 , which underlined the need to simplify tax legislation for small businesses.
Finally, the measure is in line with EU policies on small and medium-sized enterprises, as set out in the 2016 Start-Up Communication 22 , and the 2008 Communication ‘"Think small first" – a 'Small Business Act' for Europe’ 23 which called on the Member States to take account of the special features of SMEs when designing legislation and simplify the existing regulatory environment.
• Legal basis
Article 395 of the VAT Directive is the only possible legal basis.
• Subsidiarity (for non-exclusive competence)
Considering the provision of the VAT Directive on which it is based, the proposal falls under the exclusive competence of the European Union. Hence, 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, i.e. to simplify tax collection for small taxable persons and for the tax administration, save administrative resources and reduce tax evasion.
• Choice of the instrument
The instrument proposed is a Council Implementing Decision.
Under Article 395 of the VAT Directive, a derogation from the common VAT rules is only possible upon authorisation by the Council, which is 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
No stakeholder consultation has been conducted. The present proposal is based on a request made by Romania and concerns only this particular Member State.
• Collection and use of expertise
There was no need for external expertise.
• Impact assessment
The proposal for a Council Implementing Decision aims at extending a simplification measure which removes many of the VAT obligations for businesses operating with an annual turnover no higher than EUR 88 500 or the equivalent in national currency. This could have a potential positive impact on the reduction of administrative burden for 241 417 small businesses representing 57.15% of the total number of taxable persons registered for VAT purposes and 17.79% of the total number of active taxable persons in Romania for 2019 (until 31 October). Likewise, the derogating measure could significantly reduce the burden of the tax administration in terms of tax collection, thus making it more efficient, while saving administrative resources and reducing tax evasion. The derogating measure is and will remain optional for taxable persons. Taxable persons will still be able to opt for the regular VAT arrangements in accordance with Article 290 of Directive 2006/112/EC. The budgetary impact in terms of VAT revenue for 2019 is estimated by Romania as negligible.
• Fundamental rights
The proposal does not have any consequences for the protection of fundamental rights.
4. BUDGETARY IMPLICATIONS
The proposal will not have a negative impact on the EU budget because Romania will carry out a compensation calculation in accordance with Article 6 of Council Regulation (EEC EURATOM) 1553/89.