EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of valued added tax (‘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 17 May 2022, Bulgaria requested an authorisation to apply, until 31 December 2024, a measure derogating from Article 287 of the VAT Directive, allowing Bulgaria to exempt from VAT taxable persons whose annual turnover is no higher than the equivalent in national currency of EUR 51 130.

In accordance with Article 395(2), second subparagraph, of the VAT Directive, the Commission informed the other Member States by letter dated 26 July 2022 of the request made by Bulgaria. The Commission notified Bulgaria by letter dated 27 July 2022 that it had all the information necessary to consider 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 taxable persons do not have to charge VAT on their supplies and, consequently, they cannot deduct the VAT on their inputs. Under Article 287 of the VAT Directive, particular Member States which acceded after 1 January 1978 may exempt taxable persons whose annual turnover is no higher than the equivalent in national currency of the amounts at the conversion rate on the day of their accession as specified in that provision. Under point (17) of Article 287 of the VAT Directive, Bulgaria may exempt from VAT taxable persons whose annual turnover is no higher than the equivalent in national currency of EUR 25 600. An authorisation to raise the threshold of annual turnover from EUR 25 600 to EUR 51 130 would significantly simplify the administrative burden on businesses eligible for the exemption and would stimulate the development of such small businesses by releasing them from the VAT obligation under normal VAT arrangements, such as keeping VAT records or submitting VAT returns. Further, the introduction of such a special measure would result in a smaller burden on the tax administration by lowering the requirement to manage and inspect taxable persons with a turnover under the threshold. In addition, there would be a positive effect on the general level of compliance with VAT obligation for these taxable persons. The special measure is fully optional for taxable persons. Therefore, small businesses whose turnover does not exceed the threshold would still have the possibility to exercise their right to apply the normal VAT arrangements. According to estimates provided by Bulgaria, the introduction of the special measure would lead to a decrease in VAT revenue collection of approximately 1 % and would therefore not significantly affect the total amount of revenue from VAT or the overall amount of tax revenue collected at the stage of final consumption. More specifically, Bulgaria reported that, in 2020, out of 319 666 registered taxable persons, 32 619 (i.e. 1 %) taxable persons had an annual turnover between EUR 25 600 and EUR 51 130 and could have benefited from the special measure. The special measure, simplifying the obligations of small operators, is in line with the objectives set out by the European Union for small businesses. Given the positive impact on the reduction of administrative burden for businesses and the tax administration without a major impact on the total VAT revenue, it is appropriate to authorise Bulgaria to apply the special measure until 31 December 2024.

•Consistency with existing policy provisions in the policy area