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 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 16 February 2017, the Italian Republic requested authorisation to continue to derogate from Articles 206 and 226 of the VAT Directive with regard to value added tax (VAT) payment and invoicing requirements for supplies of goods and services made to public authorities. Italy also requested to broaden the scope of the authorisation and apply the derogation from Articles 206 and 226 of the VAT Directive for supplies of goods and services to companies controlled by central and local public authorities and a list of companies listed on the stock exchange. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 15 March 2017 of the request made by the Italian Republic. By letter dated 16 March 2017, the Commission notified the Italian Republic that it had all the information necessary to consider the request.

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Following the introduction of a system of statistical checks, Italy discovered considerable VAT fraud in relation to supplies of goods and services to public authorities. To put an end to these practices Italy requested in 2014 that, for supplies to public authorities, the VAT due would no longer be paid to the supplier, but to a separate and blocked bank account of the tax authorities.

The derogation was authorised by Council Implementing Decision (EU) 2015/1401 until 31 December 2017. It authorised Italy to derogate from Article 206 of the VAT Directive regarding VAT payment and from Article 226 of the VAT Directive regarding the invoicing rules.

The derogation was requested by Italy for a limited period allowing it to organise and implement adequate control policy measures and to fully benefit from the data available via electronic invoicing. The implementation of the obligation of electronic invoicing for supplies to public authorities, allowing the possibility of real-time control of individual transactions and the exact amounts of VAT which public authorities are due to pay on their purchases, should allow Italy to audit the sector concerned on the basis of conventional control techniques without the need to derogate from the VAT Directive.

According to information submitted by Italy, the introduction of electronic invoicing for supplies to public authorities provided tax authorities considerable information regarding the flow of invoices allowing the control of transactions and corresponding VAT amounts. However, another element of the effective control system – the obligation to communicate data of all invoices issued and received to the tax authorities – was only introduced as from 1 January 2017. It is still much in the start-up phase and more time is required for the measure to be effective and to effectively induce taxpayers to improve their compliance with tax obligations. Consequently, Italy will not be in a position to finalise the organisation and implementation of adequate control policy measures before the expiry of the current derogation measure, i.e. 31 December 2017. By letter registered with the Commission on 16 February 2017 Italy requested to prolong the current derogation from Articles 206 and 226 of the VAT Directive on supplies to public authorities until end of 2020.

Additionally, Italy discovered tax evasion in the sector of supplies to companies controlled by public authorities and to a small group of 40 companies that are listed on the stock exchange. In order to fight this tax evasion and to ensure no further VAT losses for public revenues, Italy, by letter registered with the Commission on 16 February 2017, requested to broaden the scope of the derogation from Articles 206 and 226 of the VAT Directive to supplies of goods and services made to the above mentioned entities which are considered by Italy as reliable as public authorities. These entities are both companies controlled by central and local public authorities and a list of around 40 companies listed on the stock exchange adding up to a total of around 2.400 companies. Italy expects that extending the split payment measure to these companies will tackle tax evasion in the form of non-payment of VAT by the suppliers to the entities concerned and consequently will increase the VAT revenues.

In June 2016, Italy presented a report in accordance with Article 3(2) of the Council Implementing Decision (EU) 2015/1401. According to this report, the split payment measure introduced in Italy increased VAT revenues and this increase was higher than the estimates made at the time of the introduction of the measure. Furthermore, the report stated that the measure had no negative impact on the VAT refunds of the suppliers. It has, according to Italy, proven to be an effective measure to radically tackle any form of tax evasion resulting from the non-payment of the VAT by suppliers to public authorities.

According to information submitted by Italy, as from 1 January 2017, additional control measures are applied in Italy. These are the optional accounting system known as 'electronic invoicing' and an obligation of reporting to tax authorities of invoices issued and received which will apply to companies for which the broadening of the scope of the derogation is requested and to their suppliers. They will allow the Italian tax authorities to cross-check the different operations declared by the operators and monitor the payments of VAT made. However, these control measures are in a start-up phase and more time is required to assess their effectiveness in inducing taxpayers to comply with their tax obligations. In the subsequent years the effectiveness of these measures will be assessed by Italy, as well as the need for a continued application of the derogating measure.

One of the effects of the measure is the fact that suppliers being taxable persons are not able to offset the VAT paid on their input with the VAT received on their supplies. They may constantly be in a credit position and may need to ask for an effective refund of this VAT from the tax administration. On the other hand, under certain conditions Italy authorises these suppliers to offset the VAT they did not receive from their customers with other taxes due in Italy, thus limiting the cash flow problem that otherwise may arise for businesses liable for paying their taxes in Italy.

At the time of application for the existing derogation, Italy reformed its system of VAT refund. In the report presented in June 2016 as required by Article 3(2) of the Council Implementing Decision (EU) 2015/1401, Italy states that its system of VAT refunds works properly and that although it is not possible to accurately estimate the average duration of the refund procedures, it can reasonably be said that the average period for VAT refunds does not exceed 3 months. Moreover, according to information provided by Italy, suppliers to public authorities are covered by a priority procedure in which case the period of refund is even shorter. According to Italy, the new rules that have been in force are expected to properly manage any possible increase of VAT refunds.

Given the broader scope of the derogation and the concerns of businesses in respect of the VAT refunds, it is important to ensure the necessary follow-up within the framework of this derogation and in particular the impact of the measure on the level of VAT fraud and on the situation of VAT refunds for the taxable persons covered by the derogation. Italy is therefore requested to provide a report on the VAT refund procedure with regard to the situation of suppliers (taxable persons) covered by the derogation fifteen months after its entry into force. This report should, in particular, provide statistics as regards the average time needed to effectively refund the VAT to these taxable persons and outline particular problems that might have occurred in this context. This report should also indicate the effectiveness of the measures installed in combatting the tax evasion for the supplies covered by the derogation.

It is proposed to authorise the derogation as from 1 May 2017 until 30 April 2020.

•Consistency with existing policy provisions in the policy area

According to Article 206 of the VAT Directive, the taxable person liable for payment of VAT must pay the net amount of the VAT when submitting the VAT return. By requesting that VAT on the supplies made is paid by customers (public authorities, entities controlled by central and local public authorities and companies listed in the stock exchange), it is necessary to derogate from this Article. It is also necessary to derogate from Article 226 of the VAT Directive regarding the maximum invoice details that can be requested from taxable suppliers as to allow the introduction of a special additional mentioning on the invoice indicating that the amount of VAT has to be paid to that separate account and not to the supplier.