authorising the Republic of Malta to apply a special measure derogating from Article 287 of Directive 2006/112/EC on the common system of value added tax

EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (hereafter the 'VAT Directive'), the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to apply special measures derogating from the Directive in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance.

By letter registered with the Commission on 22 September 2017, Malta requested an authorisation to apply, as of 1 January 2018, a measure derogating from Article 287 of the VAT Directive, allowing Malta to exempt from VAT taxable persons whose economic activity consists principally in supplies of services with a high value added (low inputs) and whose annual turnover is no higher than EUR 20 000.

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 3 November 2017 of the request made by Malta. The Commission notified Malta by letter dated 7 November 2017 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 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 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. Malta joined the euro on 1 January 2008.

Under point 13 of Article 287 of Directive 2006/112/EC Malta, may exempt from VAT three categories of taxable persons: taxable persons whose annual turnover is no higher than EUR 37 000 if the economic activity consists principally in the supply of goods; EUR 24 300 if the economic activity consists principally in the supply of services with a low value added (high inputs); and EUR 14 600 in other cases, namely supplies of services with a high value added (low inputs).

Since its accession, Malta has made use of this provision to assist small businesses and to encourage new businesses to start operating. This has proved to be a useful simplification measure as it removes many of the VAT obligations for businesses operating below certain annual turnovers, which reduced the operating costs of these businesses. At the same time, the effect on revenue was insignificant. The Maltese government is committed to continue to apply measures to simplify the obligations of small operators, in line with the European Union’s objectives for small businesses, as laid out in the Commission Communication “Think small first” - a “Small Business Act” for Europe”.

For this purpose, Malta wishes to increase the current applicable threshold for the category with the lowest turnover, that is EUR 14 600, to EUR 20 000.

According to the Maltese Authorities, such increased threshold is expected to potentially increase the number of small operators registered under the simplification scheme for SMEs in the lowest category from 15,615 to approximately 16,504, an increase of about 5.3%. At the same time, it would enable the Maltese Revenue Authorities to allocate more staff to the fight against VAT fraud.

By raising the threshold for a person to be identified for VAT purposes from EUR 14 600 to EUR 20 000, it is anticipated that the administrative burdens on businesses eligible for the scheme, and in particular on micro-enterprises, will reduce as a result of the measure, by releasing them from many of the VAT obligations under the normal VAT arrangements, such as keeping VAT records or submitting VAT returns.

The Maltese Authorities have estimated that the increase in such threshold would lead to a potential reduction in VAT revenue of approximately 0.24% of total VAT receipts and therefore, has no significant impact on state revenues. It is expected that such insignificant reduction in revenue would be compensated through increased general enforcement and audits.

Persons whose turnover does not exceed the threshold will still have the option to be registered for VAT purposes.

•Consistency with existing policy provisions in the policy area

Similar derogations have been granted to other Member States. Belgium was granted a threshold of EUR 25 000, Luxembourg was granted a threshold of EUR 30 000, Poland and Estonia a threshold of EUR 40 000, Lithuaniaa threshold of EUR 45 000, Latvia and Sloveniaa threshold of EUR 50 000, Italy a threshold of EUR 65 000 and Romania a threshold of EUR 88 500.

Derogations from the VAT Directive should always be limited in time so that their effects can be assessed. Moreover, the provisions of Articles 281 to 294 of the VAT Directive on a special scheme for small enterprises are currently subject to review. As announced in the VAT Action Plan, and the 2017 Commission Work Programme, the Commission's proposal in the form of a comprehensive simplification package is due to be presented by the end of 2017.

It is therefore proposed to allow for the raising of the threshold of small enterprises, whose economic activity consists principally in the supply of services with a high value added, up to EUR 20 000 as of 1 January 2018 until the earliest of 31 December 2020 or the entry into force of a Directive amending the provisions of the VAT Directive on a special scheme for small enterprises.