Explanatory Memorandum to COM(2019)618 - Amendment of Implementing Decision 2013/677/EU authorising Luxembourg to derogate from Article 285 of the VAT Directive - Main contents
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| dossier | COM(2019)618 - Amendment of Implementing Decision 2013/677/EU authorising Luxembourg to derogate from Article 285 of the VAT Directive. |
|---|---|
| source | COM(2019)618  |
| date | 28-11-2019 |
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 2 May 2019, Luxembourg requested an authorisation to continue to exempt from VAT taxable persons whose annual turnover is below a certain threshold, as provided for in Article 285 of the VAT Directive, and to increase this threshold from EUR 30 000 to EUR 35 000.
In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 21 June 2019 of the request made by Luxembourg. By letter dated 24 June 2019, the Commission notified Luxembourg 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 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 the VAT on their inputs.
The possibility of applying special VAT rules including exemptions or graduated tax relief to small undertakings was first introduced by Article 14 of Council Directive 67/228/EEC 2 . Member States which did not make use of the option provided for under that provision were allowed subsequently, according to Article 24(2)(b) of Directive 77/388/EEC 3 now recast as the first paragraph of Article 285 of the VAT Directive, to only exempt from VAT taxable persons whose annual turnover is no higher than EUR 5 000 or the equivalent in national currency. Pursuant to the second paragraph of Article 285 of the VAT Directive, those Member States may also grant graduated tax relief to taxable persons whose annual turnover exceeds the ceiling fixed by them for its application.
Until the end of 2012, Luxembourg exempted from VAT taxable persons whose annual turnover was no higher than EUR 10 000. In parallel, Luxembourg made use of the option pursuant to the second paragraph of Article 285 of the VAT Directive by granting graduated tax relief to taxable persons whose annual turnover was between EUR 10 000 and EUR 25 000.
Subsequently, Luxembourg requested and obtained a derogation pursuant to the first paragraph of Article 285 to apply a turnover threshold of EUR 25 000 as regards the exemption scheme for small businesses whilst at the same time abolishing the application of the graduated tax relief. Council Implementing Decision 2013/677/EU 4 authorised Luxembourg to apply the derogating measure mentioned above until 31 December 2016.
Council Implementing Decision 2017/319/EU 5 authorised Luxembourg to extend the expiry date of the derogating measure to 31 December 2019 and, at the same time, increase the threshold from 25 000 to EUR 30 000.
The present request from Luxembourg to prolong further the expiry date of the derogation while increasing the threshold from EUR 30 000 to EUR 35 000 is based on the same grounds as those presented in the previous requests. In particular, Luxembourg maintains that the derogating measure reduces the administrative burden for small businesses and tax administration alike. In this regard, the derogating measure simplifies the procedure for collecting tax and hence falls within the objectives of the first subparagraph of Article 395 (1) of the VAT Directive.
Luxembourg stresses that the derogation requested is in line with the philosophy of the 2018 Commission proposal on new simplification rules in respect of VAT for small businesses 6 , insofar as the proposal allows Member States to set to no higher than EUR 85 000 (or the equivalent in national currency) the annual turnover threshold required for an exemption from VAT.
According to Luxembourg, the special measure pursued would only have a negligible effect on the overall amount of VAT revenue collected at the stage of final consumption (not more than 0.1%), as required by the second subparagraph of Article 395(1) of the VAT Directive.
More specifically, it is reported that in 2017, 105 taxable persons with a turnover of between EUR 10 000 and EUR 30 000 made use of the exemption (against 64 in 2015 and 73 in 2016). For that year, this number corresponds to 0.14% of taxable persons registered for VAT. Luxembourg estimates the maximum loss of VAT revenue due to the exemption at EUR 271 525.60. This amount represented 0.01% of the total amount of VAT receipts for 2017. Luxembourg expects that an increase of the threshold to EUR 35 000 could affect 1106 taxable persons, which would account for 1.5% of taxable persons registered for VAT in 2017. In the hypothesis that none of those taxable persons opted for normal VAT treatment, the revenue loss resulting from an increase of the exemption threshold from EUR 30 000 to EUR 35 000 should not exceed 0.1% of the total VAT revenue.
Based on the information provided by Luxembourg, it appears that the aim of the request to extend 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 and the auditing of small businesses. This could allow the tax administration to focus its control activities towards larger taxable persons. The derogating measure is thus in accordance with 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. In this context, it is noted that the measure is and will remain optional for taxable persons.
As demonstrated by Luxembourg, the derogating measure is not expected to affect significantly the overall amount of its tax revenue collected at the stage of the final consumption. Likewise, it is not expected to adversely affect the Union’s own resources accruing from VAT. Therefore, the derogating measure is 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 the request be granted.
Luxembourg’s request does not indicate a deadline for the derogation sought. However, derogations from the VAT Directive should normally be limited in time so as to allow for an assessment of their effectiveness and appropriateness. Moreover, as mentioned earlier, the provisions of Articles 281 to 294 of the VAT Directive on the special scheme for small enterprises are currently subject to review. The 2018 proposal 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 30 June 2022 at the latest.
It is therefore proposed to extend the expiry date of the derogation until 31 December 2022. In the event that a directive is adopted amending Articles 281 to 294 of the VAT Directive on a special scheme for small enterprises and, as a consequence, the relevant national provisions take effect from 1 July 2022, namely before the expiration of the period of validity of the derogating measure on 31 December 2022, this Decision shall cease to apply.
• Consistency with existing policy provisions in the policy area
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; Poland 9 , Estonia 10 and Latvia 11 have been granted a threshold of EUR 40 000; Croatia 12 and Lithuania 13 a threshold of EUR 45 000; Slovenia 14 a threshold of 50 000; Italy 15 a threshold of EUR 65 000; and Romania 16 a threshold of EUR 88 500.
The measure is also consistent with the 2018 proposal on simpler VAT rules for small and medium-sized enterprises, which is based on the VAT action plan 17 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.
Derogations from the VAT Directive should always be limited in time so that their effects can be assessed. In the light of the requirements of the 2018 proposal on simpler VAT rules for small enterprises, it is proposed to extend the expiry date of the derogation until 31 December 2022 or the date from which Member States are to apply any national provisions that they are required to adopt in the event that a directive is adopted amending Articles 281 to 294 of the VAT Directive on a special scheme for small enterprises.
The proposed measure is therefore consistent with the provisions of the VAT Directive.
The measure is in line with the 2017 Commission Work Programme 18 , which pointed 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, it is consistent with the 2015 single market strategy 19 , 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.
Finally, the measure is in line with EU policies on small and medium-sized enterprises, as set out in the 2016 Start-Up Communication 20 , and the 2008 Communication 'Think small first' – a 'Small Business Act' for Europe" 21 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.
• 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 Luxembourg 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 35 000. This could have a potential positive impact on the reduction of administrative burden for 1106 taxable persons (which would represent 1.5% of the taxable persons registered for VAT in 2017) and, subsequently, on the tax administration. The budgetary impact in terms of VAT revenue is estimated by Luxembourg at not more than 0.1% of VAT revenue collected.
• 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 Luxembourg will carry out a compensation calculation in accordance with Article 6 of Council Regulation (EEC EURATOM) 1553/89.