Explanatory Memorandum to COM(2020)599 - Amendment of Implementing Decision (EU) 2017/1768 authorising Croatia to derogate from Article 287 of the VAT Directive - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2020)599 - Amendment of Implementing Decision (EU) 2017/1768 authorising Croatia to derogate from Article 287 of the VAT Directive. |
|---|---|
| source | COM(2020)599  |
| date | 30-09-2020 |
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 18 May 2020, Croatia 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 45 000.
In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 6 June 2020 of the request made by Croatia. By letter dated 11 June 2020, the Commission notified Croatia 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 special schemes for small enterprises, including the possibility of exempting taxable persons below a certain annual turnover. This exemption implies that a taxable person does not have to charge VAT on his supplies and, consequently, he or she cannot deduct the VAT on his inputs.
Under Article 287(19) of the VAT Directive, Croatia may exempt from VAT taxable persons whose annual turnover is no higher than the equivalent in national currency of EUR 35 000 at the conversion rate on the day of its accession. By virtue of Council Implementing Decision (EU) 2017/1768 2 Croatia is authorised to apply a higher threshold and thus to exempt from VAT taxable persons with an annual turnover not exceeding EUR 45 000. This Decision expires on 31 December 2020 and Croatia requested to prolong its application.
According to the Croatian authorities, the measure facilitates VAT collection, enabling Croatia to simplify administrative procedures for small enterprises and thus reduce the administrative burden on them. Moreover, the measure also reduces the workload for the tax authorities.
Further, the Croatian authorities observed that in the last years the increase of the threshold did not lead to the reduction of state budget revenues.
The measure has an optional character. Therefore, small businesses whose turnover does not exceed the threshold will still have the possibility to exercise their right to apply the normal VAT arrangements.
Derogations are normally granted for a limited period to allow an assessment of whether the derogating measure remains appropriate and effective. Moreover, the provisions of Articles 281 to 294 of the VAT Directive on the special scheme for small enterprises have recently been reviewed. Council Directive (EU) 2020/285 3 , laying down 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 Croatia 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 Directive (EU) 2020/285 amending Articles 281 to 294 of the VAT Directive on a special scheme for small enterprises, which resulted from the VAT action plan 4 , 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.
Moreover, the threshold of EUR 45 000 is consistent with Directive (EU) 2020/285, insofar as it allows Member States to set the annual turnover threshold required for an exemption from VAT at a level no higher than EUR 85 000 (or the equivalent in national currency).
Similar derogations, exempting from VAT taxable persons whose annual turnover is below a certain threshold, as provided for in Articles 285 and 287 of the VAT Directive, have been granted to other Member States. Malta 5 has been granted a threshold of EUR 20 000; the Netherlands 6 a threshold of EUR 25 000; Italy 7 a threshold of EUR 30 000; Luxembourg 8 a threshold of EUR 35 000; Latvia 9 Poland 10 and Estonia 11 have been granted a threshold of EUR 40 000; Lithuania 12 a threshold of EUR 45 000; Hungary 13 a threshold of EUR 48 000; Slovenia 14 a threshold of EUR 50 000; and Romania 15 a threshold of EUR 88 500.
As already mentioned, derogations from the VAT Directive should always be limited in time so that their effects can be assessed. The inclusion of an expiry date of the special measure until 31 December 2024, as requested by Croatia, 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.
• Consistency with other Union policies
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 16 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 17 , 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 18 , 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’ 19 , 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 20 , and the 2008 Communication ‘”Thinks 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.
• 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 the tax collection for small taxable persons and for the tax administration.
• Choice of the instrument
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 the tax collection for small taxable persons and for the tax administration.
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 Croatia 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 increases the threshold of annual turnover below which taxable persons may be exempted from VAT. It therefore extends the scope of the simplification measure which removes many of the VAT obligations for businesses operating with an annual turnover no higher than the equivalent in the national currency of EUR 45 000.
Persons whose taxable turnover does not exceed the threshold will not have to register to be identified for VAT purposes, and thus the administrative burden on them will reduce as a result of the measure, since they will not need to keep VAT records or submit a VAT return. There will also be a reduction in the workload for the tax authorities. This will have a potential positive impact on the reduction of administrative burden for taxable persons currently registered for VAT in Croatia, and subsequently on tax administration.
The budgetary impact in terms of VAT revenue for Croatia has not led to the reduction of the national revenue budget.
4. BUDGETARY IMPLICATIONS
The proposal has no implication for the EU budget because Croatia will carry out a compensation calculation in accordance with Article 6 of Council Regulation (EEC EURATOM) 1553/89.
5. OTHER ELEMENTS
The proposal includes a sunset clause.