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 15 March 2021, Germany requested authorisation to derogate from Article 193 of the VAT Directive regarding the person liable for payment of VAT in case of transfer of emission allowances traded in the national system under the Fuel Emission Allowance Trading Act (BEHG) of 12 December 2019. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 7 April 2021 of the request made by Germany. By letter dated 8 April 2021 the Commission notified Germany that it had all the information it considered necessary for appraisal of the request.

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

As a general rule, Article 193 of the VAT Directive stipulates that the taxable person supplying goods or services is liable to pay VAT.

Pursuant to Article 395 of the VAT Directive, Member States may apply measures derogating from the provisions of the VAT Directive to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance if they have been authorised by the Council.

Germany requested a derogation from Article 193 of the VAT Directive, in order to designate taxable persons receiving transfers of emission allowances under the Fuel Emission Allowance Trading Act (BEHG) of 12 December 2019 as liable for payment of VAT (the reverse charge mechanism).

Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community governs the greenhouse gas emission allowance trading scheme in the EU (EU Emissions Trading Scheme or EU ETS). The Directive allows Member States to maintain their own national trading systems in parallel.

Under the BEHG, Germany has created a legal framework for a national emissions trading scheme for the pricing of greenhouse gas emissions from fossil fuels, which do not fall under the EU Emissions Trading Scheme. The Act will help to achieve national climate targets, including the long-term target of net-zero greenhouse gas emissions by 2050, and the reduction targets under the EU Climate Regulation, as well as improving energy efficiency.

Experience in allowance trading has generally shown that this sector is highly vulnerable to turnover tax fraud. For this reason, the VAT Directive provides in Article 199a(1) for the possibility for Member States to apply the reverse charge mechanism to the transmission of certain allowances and certificates. Germany makes use of the possibilities provided for in Article 199a(1)(a) and (f) of the VAT Directive and applies the reverse charge mechanism to greenhouse gas emission allowance trading under the EU Emissions Trading Scheme and to trading in gas and electricity certificates. This has helped to reduce tax losses related to the transfer of such allowances and certificates.

Based on this experience, it must be assumed that trading in allowances for fuel emissions under the BEHG could also be exploited for fraudulent purposes and that losses in turnover tax are therefore to be expected in this field. One particular feature of emission allowance trading is that the allowances can be exchanged quickly, repeatedly and easily, without the expense required for the transport of goods for example. The corresponding supply chains are obscured by the frequent and rapid change of ownership, making it very difficult for the authorities to detect and hence to ensure that the proper amount of tax is levied.

It is also expected that the supply chain could involve ‘missing traders’ who, when discovered, have either disappeared already or no longer have any assets, so that the tax evaded can no longer be collected by the authorities. Under such scenario, the purchaser of the allowances in the supply chain declares the turnover tax shown in the supplier’s invoice as deductible input tax under Articles 167 and 168 of the VAT Directive, but the supplier does not pay the invoiced turnover tax to the tax authorities. Since the input tax deduction is not matched by any turnover tax revenue, the input tax represents a tax loss for the German tax authorities.

The application of the reverse charge mechanism for trading in greenhouse gas emissions pursuant to Article 199a(1)(a) and (b) of the VAT Directive is limited to allowances traded under the EU emission trading system. Therefore, Articles 199a(1)(a) and (b) of the VAT Directive do not provide legal basis for applying the reverse charge mechanism to the trade of allowances under national trading systems such as the BEHG.

Taking into consideration the vulnerability to fraud in the allowance-trading sector, and the impossibility to apply Articles 199a(1)(a) and (b) of the VAT Directive to transmissions of allowances under the BEHG, it is therefore proposed to introduce a special measure allowing Germany to apply the reverse charge mechanism to the abovementioned transmissions until 31 December 2024. Given the scope and novelty of the derogation, which refers to the trading of greenhouse gas emissions from fossil fuels, a sector prone to fraud, it is important to evaluate its impact. Therefore, if Germany would consider an extension of the special measure beyond 2024, it should submit to the Commission a request for an extension accompanied by a report on the application of the special measure by 31 March 2024 at the latest. This report shall include an assessment of the impact of the measure on the fight against VAT fraud and the number of traders and transactions affected by the measure.