authorising the Republic of Latvia 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 (‘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 3 July 2017, Latvia requested an authorisation to continue the application of the measure derogating from Article 287 of the VAT Directive allowing the exemption from VAT of taxable persons with an annual turnover not exceeding a specific threshold. After a reassessment of the application of the previous threshold, Latvia requests to decrease the exemption threshold from EUR 50 000 to EUR 40 000.

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letters dated 13 September 2017of the request made by Latvia. By letter dated 14 September 2017, the Commission notified Latvia 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 or her supplies and, consequently, he or she cannot deduct VAT on the inputs.

Under Article 287(10) of the VAT Directive, Latvia may exempt from VAT taxable persons whose annual turnover is no higher than the equivalent in national currency of EUR 17 200 at the conversion rate on the day of its accession. By virtue of Council Implementing Decision 2010/584/EU Latvia was authorised to apply a higher threshold and thus to exempt from VAT taxable persons with an annual turnover not exceeding EUR 50 000. This measure was extended by Council Implementing Decision 2014/796/EU, which expires on 31 December 2017. Latvia requests to extend the measure as of 1 January 2018 and, at the same time, to decrease the exemption threshold from EUR 50 000 to EUR 40 000.

From the information provided by Latvia, lowering the VAT threshold from EUR 50 000 to EUR 40 000 would result in an increase of around 650 registered VAT taxable persons, mainly in the sectors of providing legal and accounting services, retail trade operators excluding cars and motorcycles and taxpayers engaged in crop and animal production, hunting and related service activities.

The input tax of VAT payers whose annual turnover was no greater than EUR 40 000 in 2015 generally exceeded the VAT payable into the national budget, so the cost to the State of collecting VAT from these persons would exceed the expected amount of revenue to be received.

Moreover, as Latvia's current threshold of EUR 50 000 is rather higher than in all benchmark countries, in particular compared to neighbouring countries (EUR 45 000 in Lithuania and EUR 40 000 in Estonia) the VAT thresholds have been re-evaluated. Gains from reducing tax administration and compliance costs were carefully assessed against the competitive distortions stemming from the difference in treatment among taxpayers on both sides of the VAT threshold.

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

Considering that Latvia has been authorised to exempt from VAT taxable persons with an annual turnover not exceeding a threshold of EUR 50 000 for seven years and that it has re-evaluated the situation, a lower threshold seems to be acceptable. It is therefore proposed to allow Latvia to lower the exemption threshold for SMEs from EUR 50 000 to EUR 40 000 until the earliest of 31 December 2020 or the entry into force of a Directive on the annual turnover thresholds below which taxable persons may be exempt from VAT.

•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, Sloveniaa threshold of EUR 50 000 and Italy a 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 extend the measure until 31 December 2020 or until 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.