Explanatory Memorandum to COM(2016)811 - Amendment of the VAT Directive as regards the temporary application of a reverse charge mechanism in relation to supplies of goods and services above a certain threshold - Main contents
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| dossier | COM(2016)811 - Amendment of the VAT Directive as regards the temporary application of a reverse charge mechanism in relation to supplies of ... |
|---|---|
| source | COM(2016)811  |
| date | 21-12-2016 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
On 7 April 2016, the Commission adopted the VAT Action Plan 1 which presents objectives and measures to modernise the EU VAT system. It builds on the work carried out since the Communication on the future of VAT 2 that followed the large consultation process initiated by the Commission with its Green Paper on the future of VAT 3 .
The creation of a robust single European VAT area is one of the key actions announced by the Commission in its Action Plan. It will require the setting up of the definitive VAT system for intra-EU business-to-business (B2B) cross-border trade in order to replace the current system which was intended to be transitional.
As agreed by the European Parliament and the Council, this definitive VAT system will be based on the principle of taxation in the country of destination of the goods (the so called “destination principle”) whereas the current system is based on exemption of supplies of goods in the Member State of departure. Therefore, the Commission announced its intention to present a legislative proposal in 2017 for the definitive VAT system for cross-border trade based on this “taxation” option.
However, since preparing, adopting and implementing such a major change is likely to take some time, the Commission recognized the need to work in parallel on other initiatives, in particular on urgent measures to tackle VAT fraud and, subsequently, the VAT gap, the difference between the expected VAT revenue and the VAT actually collected by tax authorities. This VAT gap has reached an alarming level of nearly EUR 160 billion 4 of which cross-border fraud accounts for about EUR 50 billion of revenue loss each year 5 .
As one of these urgent measures, the Commission considered, upon request of certain Member States, the possibility of allowing these Member States to implement a temporary generalised reverse charge mechanism (GRCM) that would derogate from one of the general principles of the VAT Directive 6 , which is the fractionated payment. To that end, the Commission agreed to thoroughly assess the political, legal and economic implications of such a temporary GRCM before presenting its conclusions.
This in depth analysis at technical level of a GRCM, with an invoice threshold of EUR 10 000, has been carried out and presented during the ECOFIN meeting of 17 June 2016. In the context of a political agreement on the overall anti-fraud policy within the EU, the Commission made the following statement to the ECOFIN Minutes: 'The Commission commits to present, before the end of the year, a legislative proposal allowing individual Member States to derogate from the common system of value added tax so as to apply a generalised reverse charge mechanism to domestic supplies above a defined threshold and preserving the Internal Market.'
• Consistency with existing policy provisions in the policy area
The purpose of the legislative proposal is limited in scope and in time and is without prejudice to the development of the definitive VAT system based upon the taxation of cross-border supplies.
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.
Because of its derogation from the fundamental principle of the fractioned payments, a specific legal basis for such a temporary application of a GRCM to goods and services above a certain threshold is the best way forward and is in line with the VAT Action Plan.
• Subsidiarity (for non-exclusive competence)
According to the principle of subsidiarity, as set out in Article 5(3) of the Treaty on European Union (TEU), action at EU 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 EU.
Member States could not act individually since the application by individual Member States of a GRCM cannot be considered as a normal derogation within the meaning of Article 395 of the VAT Directive as it entails a fundamental change to the VAT system. Therefore, the possibility for individual Member States to apply a GRCM requires a proposal by the Commission to amend the VAT Directive in order to allow for such a derogating system. The proposal still leaves a high degree of subsidiarity to Member States as the application of the mechanism is voluntary and each Member State can decide whether to request the derogation or not, provided the criteria are fulfilled.
• Proportionality
Because of its optional and temporary character, the measure is proportionate to the aim which is to combat fraud in certain Member States who do not have the administrative capacity to effectively tackle it or are confronted with a strong increase of VAT fraud. The granting of the GRCM is subject to pre-defined criteria aiming to limit the scope of the measure to Member States which are particularly affected by carousel fraud. In this context, a VAT gap excess of 5 percentage points above the EU median and a carousel fraud level within a Member States' total VAT gap of more than 25% are considered as reasonable and representative criteria in order to identify those Member States which are more than averagely affected. In addition, because of the uncertainty of the effects of the measure as regards fraud shifting, a Member State having a common border with a Member State that applies the GRCM, should also be authorised to apply the GRCM under certain conditions.
However, the impact on the internal market should be closely monitored. To that end, in a safeguard clause the Commission should be empowered to repeal, without retroactive effect, derogations in case the impact on the internal market would be negative.
• 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
No particular stakeholder consultation was carried out.
The open public consultation on the Green Paper on the future of VAT - Towards a simpler, more robust and efficient VAT system" COM(2010)695), which resulted in around 1700 contributions, provided the Commission with a clear understanding of the problems and possible solutions, including on the aspects of reverse charge. Further details are set out in Annex 2 of the impact assessment.
Tax administrations and business representatives have discussed the issue during a meeting of the Group on the Future of VAT (GFV) and the VAT Expert Group (VEG) in February 2016 which provided the Commission with a comprehensive view of the opinions on the possible implementation and application of such a system.
• Collection and use of expertise
The VEG, which assists and advises the European Commission on VAT matters in view of the preparation of legislative acts and other policy initiatives, was, as mentioned, consulted in February 2016.
In its opinion of 28 June 2016 the REFIT Platform called for a simpler and more basic VAT regime in the EU, highlighting in particular the barriers to the internal market and regulatory burden created 7 .
Many opinions adopted by business federations and scientific publications were taken into account.
• Impact assessment
The impact assessment was submitted to the Regulatory Scrutiny Board for a first time on 27 September 2016 and a meeting took place on 26 October 2016. On the basis of the opinion of the Board, a new draft was submitted to the Board which gave a positive opinion on 28 November 2016 with recommendations, notably to include a best case and worst case scenario 8 (see also annex 1 of the impact assessment accompanying this proposal).
The impact assessment identified, as preferred option, a derogation to apply the GRCM by certain Member States fulfilling pre-defined criteria, on a voluntary basis and to all goods and services with an invoice threshold of more than EUR 10 000. This option offers a short term solution to Member States particularly affected by carrousel fraud. It minimises negative impacts on the internal market by limiting fraud shifting between Member States. A safeguard clause is foreseen in case of negative impacts on the internal market.
4. OTHER ELEMENTS
The proposal includes a sunset clause.