EXPLANATORY MEMORANDUM

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Pursuant to Article 395 of Council 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 that 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 30 March of 2015, the Republic of Latvia (hereafter 'Latvia') requested authorization to continue to apply a measure derogating from Article 193 of the VAT Directive. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 18 May 2015 of the request made by Latvia. By letter dated 20 May 2015, the Commission notified Latvia that it had all the information it considered necessary for appraisal of the request.

The Latvian government asks to extend the validity of the current application of a reverse charge mechanism in relation to supplies of timber.

As regards the supplies of timber, Latvia was confronted with a considerable number of traders that failed to comply with their obligations. Businesses in this sector are frequently small resellers, which often disappear without paying to the tax authorities the tax they charged on their supplies but leaving their customers in receipt of a valid invoice for VAT deduction.

Under the reverse charge mechanism, by derogating from a general rule provided in Article 193 of the VAT Directive, the customer becomes liable for the payment of the VAT on domestic transactions.

This derogating measure had initially been granted by Council Decision 2006/42/EC of 24 January 2006. The application of the derogating measure for supply of timber was extended by Council Implementing Decision 2009/1008/EU of 7 December 2009 . A last extension of the derogating measure has been granted by Council Implementing Decision 2013/55/EU of 22 January 2013 .

From the report submitted by the Latvian Tax Authorities together with the request to continue to apply the derogating measure, the Commission understands that the situation, on which the initial derogation was based, continues to exist. Latvia claims that despite the fact that there has been a reduction in the number of cases of fraud involving VAT payments into the national budget and VAT evasion on the timber market since the introduction of the reverse charge procedure, the risk is not eliminated. One of the indicators which shows that the risk level is still high is the number of registered traders which the State Revenue Service (SRS) has designated as shell companies in this sector of the economy. These traders enter into artificial transaction schemes in order to reduce the amount of VAT payable into the national budget or increase the amount of VAT repayable from the national budget to other registered traders involved in these schemes. In the opinion of Latvia, it is therefore important to continue using the reverse charge procedure for the payment of VAT in Latvia on timber transactions.

On this basis, the derogation should be granted for another limited period.