authorising the Republic of Estonia 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 18 May 2016, Estonia requested an authorisation to apply, as of 1 January 2018, a measure derogating from Article 287 of the VAT Directive, allowing Estonia to exempt from VAT taxable persons whose annual turnover is no higher than EUR 40 000.

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 4 October 2016 of the request made by Estonia. The Commission notified Estonia by letter dated 5 October 2016 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(8) of the VAT Directive, Estonia may exempt from VAT taxable persons whose annual turnover is no higher than the equivalent in national currency of EUR 16 000 at the conversion rate on the day of its accession. Estonia joined the euro on 1 January 2011.

By raising the threshold for a person to be identified for VAT purposes from EUR 16 000 to EUR 40 000, 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.

Moreover, there will also be a reduction in the workload for the tax authorities.

According to the Estonian authorities, the measure will have no significant impact on the total amount of VAT revenue collected at the final consumption stage.

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 and Luxemburg were granted a threshold of EUR 25 000, Poland a threshold of EUR 40 000, Lithuaniaa threshold of EUR 45 000, Latviaand Sloveniaa threshold of EUR 50 000, Italy and Romaniaa threshold of EUR 65 000.

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 up to EUR 40 000 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.

•Consistency with other Union policies

The measure is in line with the Union's objectives for small businesses, as laid out in Commission Communication "Think small first" – a "Small Business Act" for Europe" which calls on the Member States to take account of the special features of SMEs when designing legislation and, therefore, to simplify the existing regulatory environment.

2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY