EUROPEAN COMMISSION Brussels, 21.12.2016 SWD(2016) 457 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Generalised reverse charge mechanism Accompanying the document Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax as regards the temporary application of the generalised reverse charge mechanism in relation to supplies of goods and services above a certain threshold {COM(2016) 811 final}

{SWD(2016) 458 final}



Contents 1.Introduction and policy context 1.1.Common system of value added tax 1.2.Scope of the proposed initiative: the generalised reverse charge mechanism (GRCM) 1.3.Comparison of initiative with existing legislation in the area of reverse charge mechanism 1.4.Context of the initiative 1.4.1.Medium term measure to tackle the VAT gap 1.4.2.Urgent measures to tackle the VAT gap 2.What is the problem and why is it a problem? 2.1.The problem 2.1.1.VAT fraud affecting more specifically certain Member States 2.1.2.Derogating measures to individual Member States can affect the integrity of the internal market 2.2.Problem drivers 2.2.1.Driver 1: Endemic weakness of current intra-EU VAT system 2.2.2.Driver 2: Different (weak) tax collection and control capacity of certain Member States 2.3.Problem tree 2.4.Evolution of the problem without action at EU level 3.Why should the EU act? 4.What should be achieved?

4.1.General objectives 4.2.Specific objectives 4.3.Consistency with other EU policies and with the Charter for fundamental rights 5.What are the various options to achieve the objectives? 5.1.Scope of the changes proposed – concept of “person liable for payment of VAT” 5.2.Option 1: Baseline 5.3.Discarded option: Derogation to apply a GRCM without any threshold 5.4.Option 2: derogation to apply a GRCM above a certain threshold only for preselected Member States 5.4.1.Option 2a: reverse charge mechanism applies to any domestic supplies of goods and services. 5.4.2.Option 2b: reverse charge mechanism applies to all domestic supplies of goods and services 5.4.3.Discard of option 2a 5.5.Option 3: derogation to apply a GRCM above a certain threshold for any Member State fulfilling certain pre-defined criteria 5.5.1.Option 3a: reverse charge mechanism applies to any domestic supplies of goods and services. 5.5.2.Option 3b: reverse charge mechanism applies to all domestic supplies of goods and services 5.5.3.Discard of option 3a 6.What are the impacts of the different policy options and who will be affected? 6.1.Methodology 6.2.Analysis of the impacts of each of the options 6.2.1.Option 1: baseline 6.2.2.Option 2b: derogation to apply a GRCM to all domestic supplies of goods and services above a certain threshold only for preselected Member States

6.2.3.Option 3b: derogation to apply a GRCM to all domestic supplies of goods and services above a certain threshold for any Member State fulfilling certain pre-defined criteria 6.2.4.Common explanations to option 2b and option 3b 7.How do the options compare? 7.1.Summary assessment of the impacts 7.2.Identification of the preferred option 7.2.1.Overall assessment of the options and selection of the preferred option 7.2.2.Benchmark 8.How would actual impacts be monitored and evaluated? 8.1.Monitoring by the Member States applying the reverse charge mechanism 8.1.1.Reporting obligations 8.1.2.Interim and final report 8.2.Monitoring by the Member States not applying the reverse charge mechanism 8.3.Monitoring by the Commission – Operational objectives 9.Annexes 9.1.Annex 1: Procedural information concerning the process to prepare the impact assessment report and the related initiative 9.2.Annex 2: Stakeholder consultation 9.3.Annex 3: Who is affected by the initiative and how? 9.4.Annex 4: Methodology 9.5.Annex 5: short term measures to enhance tax compliance and strengthen the fight against vat fraud 9.6.Annex 6: Replies from Austria and the Czech Republic to the questionnaire sent by the Commission

9.7.Annex 7: Summary table on the new forms of fraud linked with reverse charge mechanism 9.8.Annex 8: Meeting report of the ISSG on a temporary application of the VAT reverse charge mechanism 1.Introduction and policy context 1.1.Common system of value added tax The common system of value added tax (VAT) is a major and growing source of revenue in the European Union (EU), raising almost EUR 1 trillion in 2014, which corresponds to 7% of EU GDP or 17.5 % of national tax revenues, including social contributions. One of the EU’s own resources is also based on VAT (13% of EU budget in 2014). As a broad-based consumption tax, it is considered as one of the most growth-friendly forms of taxation. However, huge sums of VAT are being lost each year due to tax fraud and evasion. Research shows that the overall difference between the expected VAT revenue and the amount actually collected (the so-called 'VAT Gap') amounted to nearly EUR 160 billion in the EU in 2014. About EUR 50 billion out of this would be due to carrousel fraud (see further explanations below, in particular box 6). This illegally deprives Member States’ public budgets of money but also creates unfair competition between compliant and non-compliant businesses. VAT is governed by the VAT Directive . It ensures that the principles underlying the functioning of this tax apply consistently in all EU Member States in order to prevent distortions of competition and allow free movement of goods and services within the EU. VAT is assessed on the value added to goods and services that are bought and sold for use or consumption in the EU. VAT is collected fractionally by businesses and, as a consumption tax, is borne ultimately by the final consumer. This system of partial payments allows the collection of the tax at each stage in the production and distribution chain and ensures the self-policing character of this tax (see box 1 below).



Box 1: Current VAT system based on fractionated payments On each supply made by a business, VAT is charged to its customers at the rate applicable. This business then deducts from the VAT collected from its customers the amount of tax it has paid to other businesses on purchases for its own business activities. Where the customer is also a business, this system is replicated until it reaches the final consumer. At this last stage of the supply chain, the VAT is no more deductible and the tax is definitively vested to the Treasury. Example: VAT rate is 10% A, B, C and D are businesses, i.e. taxable persons with right to deduct input VAT A sells goods to B for 100 and charges 10 VAT which is paid over to the Treasury. B supplies these goods for a total amount of 220 (including 20 VAT) to C. B deducts its input VAT of 10 from the 20 received from C and pays the difference of 10 to the Treasury. C sells these goods on for 330 (including 30 VAT) to D. C deducts its input VAT of 20 from the 30 received from D and pays the difference of 10 to the Treasury. Finally, D sells the goods for 440 (including 40 VAT) to a final consumer. D deducts its input VAT of 30 from the 40 received and pays the difference of 10 to the Treasury. At each stage, VAT is paid to the Treasury on the added-value; i.e. the difference between the VAT received from the buyer and the price paid to the supplier. The self-policing character of the VAT system is linked to the need for each customer to pay the VAT to its supplier and to hold an invoice to be allowed to deduct the VAT paid to its supplier who, in turn, is discouraged from evading taxes (as it has issued an invoice). In case of fraud by the retailer or a supplier in the chain, 10 € is lost, but not the total amount of 40 €. 1.2.Scope of the proposed initiative: the generalised reverse charge mechanism (GRCM)

The proposed initiative, which is the subject of this impact assessment, aims at allowing individual Member States to derogate, under certain circumstances, from the common VAT system so as to apply another arrangement for the collection of the tax with a view to better tackle tax fraud, in particular the typical intra-EU cross-border fraud, better known as “carrousel fraud”. This derogation consists of the so-called “generalised reverse charge mechanism” (GRCM) implying that the tax due on all business-to-business (B2B) transactions is no more collected via partial payments (as explained under box 1 above) but is instead collected only at the final stage of the supply chain (see box 2 below). Reverse charge allows concentrating the collection and control of the tax on a particular person (e.g. the customer). It can therefore be useful in sectors highly sensitive to fraud, involving transactions of a huge amount and in which there are mostly B2B transactions. It is particularly useful in situations where purchases are made VAT-free (see notably further explanations on carrousel fraud under box 6 below) or where the input VAT of a business is far lower than its output VAT. This is because the reverse charge mechanism prevents the supplier from collecting the VAT and not remitting it to the Treasury. The VAT Directive already allows Member States to apply a reverse charge mechanism but only to particular sectors and under well-defined circumstances (see sectorial reverse charge mechanism under box 3 below). Indeed, such a mechanism constitutes a breach to the fractionated payment system and, as will be developed further on, entails new challenges to tax administrations and businesses in terms of tax collection monitoring. Box 2: Generalised reverse charge mechanism (GRCM) Under a GRCM, the payment of the VAT that would be due on the supplies made between businesses is suspended and the VAT is only due at the last stage of the supply chain on the total amount of the value of the final supply. The final supply is either a supply made by a business to a final consumer or a supply made by a business to another business but for an amount that is below a certain threshold. Example: VAT rate is 10% A, B, C and D are businesses, i.e. taxable persons with right to deduct input VAT A supplies goods to B for 100, no VAT is charged and, therefore, no VAT is actually paid over to the Treasury. In the same way, B charges a price of 200 to C without VAT. Again, no actual payment of VAT takes place. C supplies to D for 300, again with no VAT paid to the Treasury. Finally, D supplies for 440 (including 40 VAT) to a final consumer (or to another business but for an amount below a certain threshold) in which case the VAT has to applied. In this situation, the collection of the VAT takes place at the end of the supply chain and for the total amount of VAT due (10% of 400). Since no VAT is paid between businesses, VAT cannot in principle be evaded. However, in case of fraud by the retailer or the business supplying under the threshold (business D), 40 € is lost, i.e. the total amount of VAT due. 1.3.Comparison of initiative with existing legislation in the area of reverse charge mechanism As mentioned above, the VAT Directive already gives the Member States the possibility to apply a reverse charge mechanism under well-defined circumstances (see further explanations in the box 3 below). However, a generalised reverse charge mechanism means that all kind of supplies (in goods and in services) made between businesses (and possibly above a certain threshold) within a Member State would be subject to this mechanism. As will be explained further on, such a “generalised” system avoids that fraud stopped in one sector shifts to another sector. However, this would equate to applying de facto a totally different tax collection system, comparable to a sales tax. Box 3: Reverse charge mechanism currently applicable under certain circumstances (sectorial reverse charge mechanism) As a rule, the supplier of a good or a service is considered for VAT purposes as the person liable to pay the VAT to the Treasury (Article 193 of the VAT Directive). Under a reverse charge mechanism this obligation is moved to another person, in general the customer, in which case we refer to a “reverse charge”. The VAT Directive already gives the possibility to Member States to apply a reverse charge mechanism to a limited number of transactions under specific conditions. The reason is either to simplify the tax collection (tax can under certain circumstances be more easily collected from another person, e.g. the customer, the retailer) or the need to prevent fraud in some sectors that are more sensitive (secure the tax by collecting it directly from the person who pays for it). The Member States may apply a reverse charge mechanism in the following sectors: - for certain transactions such as construction works, immovable property supplies, used material or waste supplies (Article 199 of the VAT Directive); - on a temporary basis for specific supplies such as the transfer of allowances to emit greenhouse gases, mobile phones, integrated circuits, game consoles or cereal supplies (Article 199a of the VAT Directive). In cases of imperative urgency, Member States may also, under certain conditions, be allowed to apply the reverse charge mechanism to particular supplies of goods or services. This is known as the Quick Reaction Mechanism (QRM) foreseen by Article 199b of the VAT Directive, aimed to combat sudden and massive fraud liable to lead to considerable and irreparable financial losses.

Finally, Member States can ask for a derogation to apply a reverse charge mechanism to particular sectors on the basis of Article 395 of the VAT Directive. However, according to the case law of the Court of Justice of the European Union (CJEU), measures taken in application of Article 395 of the VAT Directive in order to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance, have to be necessary and appropriate for realising the specific objective which they pursue and have as little effect as possible on the objectives and principles of the VAT Directive . A detailed description of the sectors to which the reverse charge mechanism applies in each Member State is available in a study carried out for the Commission and further explanations are provided under point 2.1.1.3 below. 1.4.Context of the initiative 1.4.1.Medium term measure to tackle the VAT gap The Action Plan on VAT (Action Plan) adopted on 7 April 2016 by the Commission sets out the objectives and measures envisaged by the Commission to modernise the EU VAT system. It builds on the work carried out since the Commission Communication on the future of VAT on 6 December 2011 that followed the large consultation process initiated by the Commission with its Green Paper on the future of VAT. The creation of a robust single European VAT area is one of the key actions announced by the Commission in its Action Plan. It will require the setting up of the definitive VAT system for intra-EU B2B cross-border trade (see box 4 below). As agreed by the European Parliament and the Council, this definitive VAT system will be based on the principle of taxation in the country of destination of the goods (the so called “destination principle”) (see explanations in box 4 below). On the basis of this confirmed objective to implement a definitive VAT regime based on the destination principle, the Commission proceeded with in-depth technical work and broad-based dialogue with the Member States and businesses with a view to examine in detail the different possible ways to implement the destination principle, including the implementation of a GRCM. Preparatory work for the impact assessment on the implementation of this destination principle is ongoing but preliminary results show that taxing intra-EU transactions comes out as the best option when taking into account the reduction in VAT fraud and compliance costs. Therefore, the Commission announced its intention to present a legislative proposal in 2017 for the definitive VAT system for cross-border trade based on this “taxation” option (see box 5 below). During its meeting of 25 May 2016, the Council took note of this intention. This initiative is not subject of this impact assessment. However it is referred to its preliminary results because of its close connection with the initiative that is here being assessed. 1.4.2.Urgent measures to tackle the VAT gap Although preliminary results on the above mentioned taxation option are very promising, preparing and adopting such a major change is likely to take some time. The definitive VAT system would notably require more trust and cooperation between tax administrations. The efficiency in collecting VAT and fighting fraud between tax administrations would therefore need to be aligned to the highest level. In order to ensure a smooth transition for businesses and allow all Member States to reach higher levels of cooperation and administrative capacity, the Commission recognized the need to work in parallel on other linked initiatives, in particular on urgent measures to tackle the VAT gap between expected revenue and revenue actually collected. These include so-called “conventional measures” (points 3.1 to 3.4 of the Action Plan) as well as a temporary derogation for Member States (point 3.5 of the Action Plan). 1.4.2.1.Conventional measures The Commission announced 20 measures meant to take urgent action on the following fronts in 2016 and 2017: Improving cooperation within the EU and with non-EU countries; Towards more efficient tax administrations; Improving voluntary compliance and tax collection. In order to help the Member States concerned to improve their tax collection and inspection capacity, the Commission also declared to be prepared to provide specific technical assistance. A summary of how such a technical assistance could be organised and what it should aim at is annexed (see Annex 5). In this context, the adoption of the Commission proposal for a Directive on the fight against fraud to the Union's financial interests by means of criminal law to cover serious EU-wide VAT fraud and the proposal for a Regulation on the establishment of a European Public Prosecutor's Office may also play a significant role. 1.4.2.2.Temporary derogation for Member States Some of the above-mentioned “conventional measures” are expected to improve VAT collection in all Member States in the short term. However, part of these measures would need legislation to be adopted unanimously at EU level, which means their implementation might take some more time. As will be shown further on, some Member States are more heavily affected by carrousel fraud and therefore the Commission recognised the need to find practical and short-term solutions that would take into account the specificities of the Member States in question. In particular, it accepted to examine in detail the requests from Austria and the Czech Republic, to be granted a temporary derogation to the VAT Directive to apply a GRCM. It has to be recalled that the application of a GRCM on the basis of Article 395 of the VAT Directive has been the subject of previous requests from Austria, Bulgaria, the Czech Republic and Slovakia, requests that were rejected on legal grounds following the Communication from the Commission to the Council.

As announced in its Action Plan, and further to discussions at the ECOFIN meeting of 25 April 2016, the Commission assessed the political, legal and economic implications of such derogation and presented its conclusions at the ECOFIN meeting of 17 June 2016. These conclusions were not overwhelmingly positive as risks were identified as regards new forms of carousel fraud, shift of fraud towards other Member States or to the retail level and increased burden on business. Concerns on all these issues were also raised by stakeholders, including respondents to the Green Paper consultation (see Annex 2) and in particular in the context of the REFIT platform. The Stakeholder group, notably business representatives, opposed to the application of an optional GRCM, arguing that it cannot solve VAT fraud and that it creates instead barriers to the internal market and increases regulatory burden. However, as argued by a group of Member States in the GFV and in the Council, the Commission acknowledged that a temporary derogation might be useful in the short term, provided that it does not disproportionally hamper the proper functioning of the internal market. In addition, it was made clear that the granting of such derogation should be without prejudice to the proposals for the implementation of the definitive VAT system to be presented by the Commission. In the context of a global political agreement on the Anti-Tax Avoidance Directive proposal (ATAD), the Commission therefore made the following statement to the ECOFIN minutes of 17 June 2016: "The Commission commits to present, before the end of the year, a legislative proposal allowing individual Member States to derogate from the common system of value added tax so as to apply a generalised reverse charge mechanism to domestic supplies above a defined threshold and preserving the Internal Market." This political commitment of the Commission forms the basis of the content as well as the timing of the legislative initiative to which the present impact assessment is linked. For the reasons explained above, it is to note that the purpose of the legislative proposal is limited in scope and in time, as work shall continue in building the definitive VAT system. The initiative is meant to be a temporary measure aiming at helping individual Member States in their fight against fraud, as announced in the Action Plan, pending the implementation of a definitive VAT system. Box 4: Transitional and definitive VAT system - Origin-based and destination-based definitive VAT system At the time the common system of VAT was established , the commitment was made to establish a definitive VAT system operating within the European Union (EU) in the same way as it would operate within a single country. The need to abolish physical borders between Member States by the end of 1992 made it necessary to reconsider the way in which trade in goods was taxed in the EU. The goal was that goods would be taxed in the country of origin (Member State of departure of the goods), so that the same conditions that apply to domestic trade would apply to trade within the EU, perfectly reflecting the idea of a genuine internal market. Since the political and technical conditions were not ripe for such a system, transitional VAT arrangements were adopted. These arrangements split the cross-border movement of goods into two different transactions: an exempt intra-EU supply and an intra-EU acquisition taxed in the country of destination. This system is de facto based on the taxation in the Member State of destination of the goods (Member State of arrival of the goods). These rules were regarded as temporary (initially 4 years) and present an important drawback: allowing goods to be bought abroad free of VAT increases the opportunity for fraud. Since the basic requirements for an origin-based system have proved not to be achievable more than 20 years later, despite several attempts in that direction, the Commission, in agreement with the European Parliament and the Council, decided to work on implementing the destination principle for intra-EU supplies of goods. After having examined in detail the possible options for implementing the destination principle, the Commission announced its intention (see Action Plan), and the Council took note of it, to present a legislative proposal in 2017 for the definitive VAT system for cross-border trade based on the best scoring option, i.e. the so-called “taxation” option. This option consists in taxing all intra-EU transactions (while still tracking the flow of the goods), just like would be the case for domestic transactions. This option is meant to put an end to carrousel fraud. To note that the European Parliament is currently examining the VAT Action Plan but has not adopted a resolution on the text yet. Box 5 – Intra-EU transactions: current transitional VAT system and definitive VAT system In a cross-border B2B transaction (in the graph transaction between C and D), C in Member State A sells goods to D in Member State B without VAT being added, because cross-border transactions are exempt from VAT (the fractioned payment taking place in the preceding stages, A-B-C, is interrupted between C and D). The VAT is paid to the Treasury of Member State B when the product has been sold to the final consumer. This VAT system is open to fraud, e.g. where the ‘retailer’ in Member State B could buy the goods VAT free then charges VAT to the final consumer, but does not pay the VAT to the Treasury. This is the typical EU cross-border fraud (carrousel fraud) linked to the current transitional VAT system. In a cross-border B2B transaction (in the graph transaction between C and D), C in Member State A sells goods to D in Member State B. D in Member State B pays the supplier the sale price + VAT at the rate applicable in Member State B (the fractioned payment taking place in the preceding stages, A-B-C, is no more interrupted between C and D). This VAT is collected by the Treasury of Member State A and transferred to the Treasury of Member State B. This system reduces carrousel fraud linked to goods being purchased VAT-free. 2.What is the problem and why is it a problem? 2.1.The problem 2.1.1.VAT fraud affecting more specifically certain Member States Tax fraud affects all Member States but the specific problem that the present initiative intends to tackle is that some Member States are more heavily affected than others, in particular by carrousel fraud.

2.1.1.1.Current VAT gap, carousel fraud and domestic fraud The size of the VAT fraud is difficult to measure but the VAT gap offers a useful indicator. The overall EU VAT gap is estimated at almost EUR 160 billion revenue loss each year, out of which about EUR 50 billion would be due to carrousel fraud alone. The carrousel fraud portion of the VAT gap ranges from 12% in Bulgaria to 39% in France (see Figure 1 below on share of carrousel fraud in VAT gap). On average (weighted average), it is estimated that 24% of the overall VAT gap proportion is considered to be due to carrousel fraud. The rest of the VAT gap is attributed to losses of revenue due to domestic fraud and evasion, tax avoidance, bankruptcies, financial insolvencies, as well as miscalculations. Figure 1 – Share of carrousel fraud in VAT gap (source "Own calculations" based on EY, 2015 study) The VAT gap varies considerably between Member States. The smallest gaps are observed in Sweden (1.24%), Luxembourg (3.80%), and Finland (6.92%). The largest Gaps are registered in Romania (37.89%), Lithuania (36.84%) and Malta (35.32%). Overall, half of the EU-27 Member States record a gap below 10.4% (see Figure 2 below). Figure 2: VAT Gap as a percent of the VAT Total Tax Liability (VTTL) in EU-27 Member States, 2014 and 2013 (source CASE, 2016) 2.1.1.2.Evolution of the VAT gap and carrousel fraud in individual Member States Monitoring at EU level of VAT collection by individual Member States is relatively recent as the first study on the VAT gap dates back from 2009. Methodology has been continually improved and the annual updates of the study always included the latest revised figures. Although the Commission is working on methods to extract data on fraud from the VAT gap, this information is still not available today. The above estimations on carrousel fraud were provided by one specific study and, contrary to the VAT gap study, no further data on its trend evolution is available. The trend of the VAT Gap over the period 2009-2013 is shown in Figure 3 below. Member States have tended to slightly reduce their gap compared to the beginning of the period (at the depth of the recent recession). For the EU-26 as a whole, the VAT gap declined by 4 percentage points, from 19 to 15 percent. Information on the VAT gap and on carrousel fraud for the period 1993-2009 (the period that followed the entry into force of the present intra-EU system put in place at the time the internal borders were dismantled) is not available, although it is likely that carrousel fraud (which finds its roots in the way this system is designed) has taken a few years to appear and to develop. Figure 3 – VAT Gap in the EU-26 countries, 2009-2013 (source CASE, 2015) In 2013, the VAT Gap in individual Member States ranged from a minimum of 4 percent in Finland, the Netherlands and Sweden, to a maximum of 41 percent in Romania (see Figure 4 below). Over the period 2012-2013, overall, 15 Member States decreased their VAT Gap, with the largest improvements noted in Latvia, Malta and Slovakia. 11 Member States saw an increase in the VAT Gap, generally of small magnitudes, with the highest deteriorations in Estonia and Italy. Figure 4 – VAT Gap in the EU-26 countries, 2012-2013 (source CASE, 2015) In 2014, the VAT Gap reached 14% on average. Compared to 2013, changes in the rank of the Member States were, in general, not large. Estonia experienced the largest change in the EU-wide rank (from 14th to 7th place in 2014 – see Figure 2 above). The VAT gap decreased in 18 Member States, with the largest improvements noted in Greece, Estonia and Hungary (see Figure 5 below). However 8 out of the 26 Member States, namely the United Kingdom, Luxembourg, Finland, Austria, Slovenia, France, Romania, and Bulgaria, saw an incline in their share of the VAT Gap, with the largest deteriorations in Romania and Bulgaria (see Figure 2 above and Figure 5 below). Figure 5: Percentage Point Change in VAT Gap (2014 over 2013) (source CASE, 2016) 2.1.1.3.Efficiency of the measures to combat fraud - Sectorial reverse charge mechanism

The year 2014 saw numerous changes in tax enforcement and monitoring which contributed to reducing the VAT gap in several Member States, such as anti-smuggling measures, electronic reporting functionalities and limits on cash transactions. Although the VAT gap shows an encouraging downwards trend, it is still a staggering figure (EUR 160 billion) and individual performances of Member States vary enormously when it comes to VAT compliance. Taking stock on sectorial reverse charge mechanism In about half of the Member States (16), the currently applied reverse charge mechanism represents between 1% and 4% of their respective overall economy i.e. GVA. There are however some exceptions such as Hungary, Austria and Italy where the application of the reverse charge mechanism are wider. This brings the average for the countries covered to 2.17% (see Figure 6 below). Figure 6: Importance of the applied reverse charge mechanism in all Member States compared to the overall economy based on the 2011 available data (source EY, 2014) In 2014, the reverse charge mechanism has been extended to new sectors in 6 Member States, namely Denmark, Germany, Italy, Hungary, Austria and Romania. A small decline in the VAT gap was observed in Denmark, Germany, Italy (1 percentage point) and a larger one in Hungary (4 percentage points). A slight increase in the VAT gap was observed in Austria (1.2 percentage points) and a larger one in Romania (4 percentages points). On this basis, it is difficult to draw conclusions on the efficiency of the extension of the application of the reverse charge mechanism, in particular because other anti-fraud measures have been implemented by those Member States at the same time. The significant improvements in Hungary are linked to the introduction of numerous measures to fight VAT fraud and evasion (e.g. reclassification of a number of goods subject to reduced rates, increased powers of VAT inspectors). In Romania, despite the application of the reverse charge mechanism in several sectors (supply of energy, for green certificates and in the wood industry) and a good economic environment, the VAT gap increased greatly and is still the highest in the EU. Experience with the sectorial reverse charge mechanism has shown that fraudsters immediately adapt to changes in legislation and therefore switch fraudulent activities from one sector to another (e.g. from supply of greenhouse gas emission certificates to supplies of gas and electricity, from mobile phones to tablet PC, from cereals to metals). It has even happened that fraud in a sector has shifted to other Member States. For instance, the application of the reverse charge mechanism in Romania led to a shift of fraud to Hungary as regards certain cereals. Also, the application of reverse charge on greenhouse gas emission allowances in France led to a shift of this fraud to Belgium and the application of reverse charge on mobile phones in the United Kingdom led to this fraud shifting to the Netherlands and Germany. Tax administrations may not have the possibility to adapt so quickly because of the current constraining legal framework. The list of goods and services to which reverse charge can apply (Article 199 of the VAT Directive) has been amended twice in order to add products. The possibility for Member States to apply derogations limited in time has also been introduced (Article 199a of the VAT Directive) in order to curb fraud in new sectors (greenhouse gas emission allowances, gas and electricity, microprocessors, etc.). The problem is that these lists of products are “static”, i.e. Member States can chose to apply them but cannot extend the list to other products. Specific derogations (based on Article 395 of the VAT Directive) can also be granted by the Council. However, the granting of such derogations takes time to be adopted (8 months). The “Quick Reaction Mechanism” (QRM) introduced in 2013, allows Member States to apply reverse charge on specific products in case of imperative urgency (sudden and massive fraud leading to considerable and irreparable financial losses). Although this mechanism is quick, it nevertheless needs to fulfil some very strict legal requirements. For the time being, only one request has been received by the Commission (from Hungary) but did not fulfil the basic legal criteria in order to enable the application of the QRM. Even if the reverse charge mechanism would be applied to all possible sectors under the current law, the importance of this mechanism would range between 2% and 7% in the majority of the Member States (23). The average of all Member States is at 4.99% (see Figure 7 below). Figure 7: Importance of the reverse charge mechanism if applied to all sectors in all Member States compared to the overall economy based on the 2011 available data (source EY, 2014) The fact that Member States face different levels of VAT fraud shows that the application of the common VAT system presents different national challenges in terms of tax collection and might therefore indicate that not only EU-wide solutions may be required. Even if reverse charge can currently help Member States to stop fraud arising in a particular sector, this fraud can quickly shift to another sector or even to another Member State. 2.1.2.Derogating measures to individual Member States can affect the integrity of the internal market The second problem that needs to be tackled is to avoid negative impacts of individual measures to tackle VAT fraud on the integrity of the internal market.

Concretely, two types of risks need to be addressed: -The risk of having anti-fraud measures affecting negatively compliance costs to businesses. As will be detailed further on, the GRCM is indeed always accompanied by new reporting obligations compensating the fact that VAT is no more collected on certain supplies. -The risk of having anti-fraud measures in one Member State shifting fraud to neighbour Member States. As will be detailed further on, the GRCM means the possibility to buy goods "VAT free" in the Member State applying the GRCM. These goods can then notably end up on the black market of other Member States as there are no border controls within the EU. 2.2.Problem drivers VAT fraud can have multiple causes. It represents a continuous challenge for Member States as fraudsters have the potential to quickly adapt to changes in, for instance, trade patterns, technology, legislation framework, audit methods, etc. However, two main causes have been identified. The first one is more general and has an EU-wide dimension as it is made of typical EU cross-border fraud (carrousel fraud) linked to a loophole in the current VAT legislation. The other one is more specific and linked to individual Member States’ tax administration control capacities. 2.2.1.Driver 1: Endemic weakness of current intra-EU VAT system On average, slightly less than one quarter of the overall VAT gap proportion is considered to be due to carousel fraud. Carousel fraud finds its roots in the endemic weakness of the current VAT system, which was meant to be transitional (see further explanation in box 4 above), that allows for goods being able to be bought cross-border VAT-free. The current VAT system splits every cross-border sale of goods between businesses into an exempted supply in the Member State of departure and a taxable acquisition in the Member State of arrival (see further explanation in box 5 above). It is like a customs export-import scheme, but lacks equivalent border controls and is therefore the root of carrousel fraud (see box 6 below). Such fraud occurs when a supplier pretends to have transported the goods to another Member State but the goods are in fact consumed VAT-free locally or especially when a client of a cross-border transaction purchases goods or services VAT-free and charges VAT without remitting it to tax authorities while his/her customer can deduct it. The Commission and also the Member States are fully aware of this flaw in the current VAT system. In order to address carrousel fraud, the Commission intends to establish the principle of taxation to all cross-border transactions just as is the case for domestic supplies. A proposal will be made to this purpose by the end of 2017. However, reaching an agreement in Council and implementing such a change will only happen in the medium to long term. Although a series of short time measures will be proposed by the Commission, it might take time until these measures are agreed and implemented so that they might not provide for an urgent solution, in particular in those Member States with the highest VAT gap. Box 6: Carousel fraud VAT carousel fraud occurs in many different ways and the schemes become more difficult every time and include both goods and/or services. What they have in common is that they exploit situations in which goods and/or services can be bought free of VAT by purchasers. The basic and simplified mechanism usually contains the following transactions (see scheme below; VAT rate is 20%): - Company A (so-called “conduite" company), registered in Member State 1, makes an exempted intra-community supply to company B (so-called “missing trader”) registered and located in Member State 2. VAT is accounted for on the acquisition but deducted in the same VAT return so that no actual payment of VAT has to be made to the tax authorities. - Company B subsequently makes a domestic supply to company C (so-called “buffer”). Company B charges VAT on the invoice sent to company C, collects it but does not pay the VAT to the treasury of Member State 2. Company B will rapidly disappear. - Company C is usually used as an intermediary company to distort VAT investigations (in a three-company carrousel there is no buffer company). - Company C resells on the domestic market the goods to company D (broker) which will deduct the VAT charged on its purchases. D will eventually make an intra-community supply to company A in Member State 1 in order to ask for the refund of the VAT charged on its purchases. In most cases there are more than one company in this position of the carrousel. Following the scheme, the missing trader will not declare and/or pay the charged VAT to the Treasury.

At the end of the chain, the broker company will claim a refund because he makes an intra-community supply to another Member State. At this moment money leaves the Treasury that was not received from the missing trader earlier in the chain. The loss of VAT receipts can be unlimited, and the profit of the fraudulent chain can be easily shared between all the participants even if the real VAT loss does not occur where the conduite company is located. In practice this simplified scheme can be combined with all possible MTIC VAT fraud (missing trader intra-community fraud) mechanisms and developed over the borders of several Member States and eventually third countries. 2.2.2. Driver 2: Different (weak) tax collection and control capacity of certain Member States VAT fraud does not affect all EU Member States equally. As already mentioned before, the VAT gap varies from 1.24% to 37.89%. The difference in the VAT gap between Member States finds its roots in very diverse collection and control capacities of the tax administrations. In the framework of the European Semester, in which the Commission undertakes a detailed analysis of EU Member States’ economies and provides tailored advice to Member States, special attention is paid to the fight against tax evasion and avoidance and to improving tax administration. Some Member States (Bulgaria, Poland and Romania) were specifically recommended in 2016 to improve their tax collection by fighting against tax fraud and evasion (notably in VAT) and the shadow economy but also by improving tax compliance. Although some progress has been made in some Member States, high tax evasion and low levels of tax compliance remain a challenge for several other Member States (the Czech Republic, Italy, Latvia, Romania and Slovakia). 2.3.Problem tree The problems, problem drivers and effects are summarised below. Concerning the budget impact on Member States, it is to note that VAT fraud does not impact the overall level of the EU budget. Although VAT fraud reduces the Member States' VAT contribution to the EU (one of the EU own resources is based on VAT), since the EU budget must be in balance, expenditure not covered by amounts yielded from other revenues must be offset by contributions based on the Gross National Income (GNI) of each EU Member State. While VAT-fraud does not impact the overall level of the EU budget, a loss to one own resource is still a loss, even if it is remedied by another resource in view of the principle of budgetary balance. 2.4.Evolution of the problem without action at EU level As further explained under the description of the baseline option below (see point 5.2 below), without any intervention at EU level, those Member States more heavily affected by fraud might not be able to address the urgent need for specific anti-fraud initiatives. They will have to rely exclusively on other short term measures (measures at EU level presented in the Action Plan, as well as conventional measures and technical assistance). However, even the short term measures might take some time to be implemented. In the meantime, fraud might be stable but it could also not decrease quickly enough. In the longer term, it is expected that the definitive VAT system based on the taxation of intra-EU transactions will efficiently curb carrousel fraud at an EU level by addressing the root of the problem (see box 4 and box 5 above). Such a reform has the potential according to a recent study to increase tax revenues by about EUR 40 billion per year. This proposal will be made in 2017 but will take several years to be agreed upon and fully implemented. Without a proposal on the GRCM, fraud might continue to severely affect during several years the budget of notably the most vulnerable Member States because of their lower collection and control capacity. This would have negative consequences on fiscal consolidation and competitiveness of honest businesses. 3.Why should the EU act? According to the principle of subsidiarity, as set out in Article 5(3) of the Treaty on European Union (TEU), action at EU level may only be taken if the envisaged aims cannot be achieved sufficiently by the Member States alone and can therefore, by reason of the scale or effects of the proposed actions, be better achieved by the EU. The application by individual Member States of a GRCM cannot be considered as a 'normal derogation' within the meaning of Article 395 of the VAT Directive as it entails a fundamental change to the VAT system. It is not possible for these Member States to address the problem in a very short term without a proposal to amend the VAT Directive. Therefore, the possibility for individual Member States to apply a GRCM requires a proposal by the Commission to amend the VAT Directive to allow for such a derogating system.

The legal basis is Article 113 of the TFEU that states that: “The Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition.” The envisaged proposal respects the principle of subsidiarity as its purpose is to allow Member States to adopt rules on a voluntary basis. Allowing temporarily individual Member States to apply a GRCM would in practice mean enable the coexistence, although temporary, of two different VAT systems within the EU, which could create difficulties for the functioning of the internal market. However, considering that some Member States have not sufficient means to secure in the short term their domestic VAT receipts, the intended derogation is inspired by the purpose and scope of Article 27 of the TFEU. This article explicitly foresees the possibility of temporary exceptions from the internal market rules which must, however, cause the least possible disturbance to the functioning of the internal market. Although other means to address the problem and its drivers are possible and are already envisaged, the time needed for them to be implemented might not be quick enough for certain Member States to address their VAT receipts losses. According to the principle of proportionality, the initiative should not go beyond what is necessary to meet the objectives of the Treaties, in particular the smooth functioning of the single market. The envisaged initiative might in this respect be challenging as it is not targeted to harmonise VAT but to improve its collection in some Member States. However, positive impacts on the internal market are expected from increased fiscal consolidation in these Member States. Moreover, as will be explained further on, the decision to grant a derogation to a particular Member State would be subject to the fulfilment of several criteria, amongst which are that the Member State in question does not have the administrative capacity to effectively tackle fraud and is confronted with a strong increase (or shift) of VAT fraud. Assessment of the situation (including any disproportionate increase in compliance costs to business) in each Member State requesting a derogation will be carried out in conformity with the proportionality principle. 4.What should be achieved? 4.1.General objectives The general objectives are: (G1) To contribute to fiscal consolidation within the EU – ensuring that taxes due are collected to feed national and EU budgets (G2) To ensure fair taxation – ensuring that all business are treated equally in order to avoid distortion of competition (G3) To preserve the functioning of the internal market – ensuring that compliance costs to businesses are not excessively high, especially for SMEs 4.2.Specific objectives The specific objectives are: (S1) To reduce the VAT fraud, in particular carrousel fraud, in specific Member States – Taking into account the specificities of Member States in terms of level of fraud and control capacities (S2) To minimize general increase in administrative burden – Minimizing the increase in compliance costs to business and in administrative costs to tax administrations (S3) To avoid fraud shifting – Ensuring that tax fraud does not move from one sector to another or from one Member State to another Table 1 - Linking the objectives to the problem Specific objectives General objectives Link to the problem Reducing VAT fraud, in particular carrousel fraud), in specific Member States by taking into account the specificities of Member States in terms of level of fraud and control capacities Helps fiscal consolidation within the EU (increases effectiveness of the tax system) Contributes to fairness of taxation system Helps Member States more heavily affected to fight against VAT fraud Minimizing general increase in administrative burden by: Preserves the functioning of the internal market Reconcile application of specific tools with integrity of the internal market - minimizing increase in compliance costs to business - minimizing increase in administrative costs to tax administrations Does not hamper fiscal consolidation within the EU Avoid fraud shifting by ensuring that tax fraud does not move from one sector to another or from one Member State to another Preserves the functioning of the internal market Contributes to fairness of taxation system Preserves the functioning of the internal market 4.3.Consistency with other EU policies and with the Charter for fundamental rights

The objective of fighting tax fraud and tax evasion to help securing revenues e.g. for public investment or for lowering taxes and to increase fairness of taxation is part of the fiscal priorities set out by the Commission for 2016 (Annual Growth Survey 2016 - Strengthening the recovery and fostering convergence). Reducing administrative burden, particularly for SMEs, is also an important objective highlighted in the EU’s growth strategy for the coming decade (Europe 2020 - A strategy for smart, sustainable and inclusive growth). The proposed initiative and its objectives would be consistent with the EU SME policy as set by the Small Business Act (SBA), in particular principle VII on helping SMEs to benefit more from the opportunities offered by the Single Market. It would be consistent with the Single Market Strategy (SMS) which referred to the single European VAT area mentioned in the Action Plan. It would also be consistent with the EU objectives under REFIT. The challenge would be to limit contradictions with these objectives as much as possible and to the minimum extent of what is needed to achieve fight against fraud and ensure fiscal consolidation in the short to medium term. The objectives envisaged do not affect fundamental rights. 5.What are the various options to achieve the objectives? 5.1.Scope of the changes proposed – concept of “person liable for payment of VAT” As explained before, the VAT system is based on fractioned payments ensuring that the VAT is collected at each stage of the production and distribution chain. This constitutes the basis of the functioning of the VAT system as defined in Article 1 of the VAT Directive. As also explained before (see box 3 above), under such a system the supplier is considered as “the person liable for payment of VAT to the tax authorities” because he collects the VAT from his customers. Under a reverse charge mechanism, the person liable for payment of VAT to the tax authorities is moved to the acquirer. As mentioned before, reverse charge is already possible under the VAT Directive in certain circumstances (sectorial reverse charge mechanism). The proposed initiative aims at extending this reverse charge mechanism to all supplies of goods and services that take place on the domestic market of specific Member States. The reverse charge mechanism is indeed mainly used by Member States in case they have to fight fraud developing in a particular sector in the meantime they adapt their control capacities. However, if this mechanism can prove to be helpful from a short term perspective, in time, fraudsters will adapt and target other sectors. By applying the reverse charge to all sectors, the proposed initiative intends to avoid fraud shifting from one sector to another. It is recalled that the initiative that is here being assessed consists of a derogation to the common VAT system. It is limited in scope and in time as its purpose is to temporary help those Member States more heavily affected by fraud. The options described below (except the baseline) have in common the following features: -They will be applicable in individual Member States on a voluntary basis; -They are limited to B2B domestic supplies above a certain threshold (see box 7 below); -They are limited in time (see box 8 below for further details); -They include similar mandatory flanking measures (see box 8 below for further details). These measures aim at ensuring the effective operation and monitoring of the application of the GRCM within the concerned Member States and the surveillance of its impact on other Member States. 5.2.Option 1: Baseline The baseline reflects the current legal framework including all the initiatives that are soon to be adopted by the Commission and the proposals announced by it in its Action Plan (see detail under point 1.4 above). This means that the VAT system as it currently exists will continue to apply while incorporating the different improvements that will be agreed in the Council to make the VAT system notably more robust to fraud.

Short term and medium term anti-fraud measures (other than reverse charge) will still be tabled this year or will be tabled in 2017. In total, the Commission intends to present 20 measures to tackle the VAT gap in addition to providing specific technical assistance to Member States. The most important ones are: -Improving cooperation between tax administrations within the EU and with non-EU countries; -Increasing efficiency of tax administrations; -Improving voluntary compliance and tax collection. A proposal for the definitive VAT system for cross-border trade is planned in 2017 which is expected to tackle the VAT gap at EU level as a longer term measure. All these measures aim at creating a coherent and robust single European VAT area. However, even the short term measures will need a certain time to be agreed and effectively implemented in all Member States. Fraud might be stable but it could also not decrease quickly enough in certain Member States. Member States are well aware of the loophole in the current VAT treatment of intra-EU trade that leads to carrousel fraud. In combatting carrousel fraud, exchange of information between Member States is crucial. Therefore, there is a need to speed up and to improve this exchange of information and to adapt control measures while, in the meantime, the definitive regime is being implemented. Exchange of information works well between some Member States (Member States that have a long experience in multilateral controls with other – in general neighbouring - Member States) but it is not the case with others. Some Member States have national legislation constraints (e.g. data protection) that, at present, prevent them from exchanging particular information or, at least, delay this process. It is expected that this situation would gradually improve, thanks to the above mentioned set of measures announced by the Commission, but again, this might take some years to be adopted in Council and then implemented by the Member States. In the immediate future, some Member States might not benefit from exhaustive and on-time information. Member States also have different tax control capacities (linked to their internal organisation, legal, human and technical resources) meaning that some Member States are more effective in controlling fraudulent schemes than others. Technical assistance to these Member States is and will be provided (this is currently already the case for Greece, Cyprus and Slovakia) but this also needs time to be put in place and become effective. The proposal for the definitive VAT system, scheduled for 2017, is expected to put an end to carrousel fraud. However, it is only a long term solution as this package is expected to take some years to be adopted by the Council and to be fully implemented. 5.3.Discarded option: Derogation to apply a GRCM without any threshold Under a GRCM, in B2B transactions, VAT is no longer charged by the supplier to the acquirer but is accounted for by the acquirer, who can in principle deduct it at the same time. No VAT is actually paid to the treasury before the final sale to the end consumer (the last B2C transaction). In case reverse charge would have to be applied whatever the amount of the transaction might be, this would mean that the supplier would need to ascertain transaction per transaction (i) whether his customer is a taxable person or not and (ii) in case he is a taxable person, apply the reverse charge mechanism. Therefore, even when selling for a small amount, all businesses would have to adapt their accountancy system in order to be able to apply the reverse charge mechanism in B2B transactions (e.g. adapt record keeping of payments, check VAT status of the acquirer and obtain and subsequently store the necessary documentation, provide for new reporting obligations – see flanking measures under box 8 below) as well as the normal system in B2C transactions. This would add much complexity in situations like for instance when a business pays for a taxi, a toll or when it buys food or, in more general terms, products which can easily be used for both business and private purposes (e.g. a computer). Since these products are sold in e.g. supermarkets, it would be for persons, such as a cashier in a store, to decide - on the spot - whether the VAT should be charged or not. This would create an unworkable situation for staff that is not qualified or in a position to check (in less than a few minutes) the taxable status of a customer, lead to numerous administrative mistakes and create opportunities for fraudsters who would be tempted to present any VAT registration number in order to obtain goods 'VAT free' (see in this respect role and control of the threshold in box 7 below). Increased administrative costs might, in particular, be problematic for SMEs for which the costs are relatively higher (e.g. in particular as regards the adaptation of IT systems). A number a business associations have expressed their concerns in this respect. The main objective of the GRCM is to fight against carousel fraud, i.e. fraud committed on transactions involving real or simulated EU cross-border transactions combined with domestic transactions. This type of fraud is generally committed by criminal organisations seeking to quickly gain huge amounts of money. It is therefore characterised by transactions involving important flows of money occurring within a short period of time so that tax administrations, with inadequate control performance, fail to react timely to stop the fraud. Applying a GRCM to all B2B transactions, even those consisting in small amounts, would add unnecessary administrative burden (either for businesses or tax administrations) as what is targeted is carrousel fraud which usually involves high value transactions. Also, the political commitment of the Commission explicitly refers to the application of a GRCM to domestic supplies above a defined threshold.

For all these reasons this option has been discarded at an early stage. Notwithstanding this, implementing a GRCM with a threshold is also challenging. In B2B transactions, a distinction would need to be made between transactions above the threshold (to which reverse charge would apply) and below the threshold (to which the normal system would apply). Compliance costs would here be associated to the management of the threshold. In addition, the risk is that transactions would artificially be split up. Supplies could then take place below the threshold, escape controls and continue to give rise to carrousel fraud. However, a balance between the risk of fraud and the simplicity of the application of the mechanism may be achieved by fixing the threshold at the appropriate level (see further explanations on this threshold under box 7 below). Box 7: Level of the threshold As explained under point 5.3 above, the purpose of applying a GRCM in respect of any supply of goods or services above a certain threshold is: 1) to target the bulk of transactions (high value) that could lead to carrousel fraud; 2) to minimize impact on compliance costs to businesses, in particular the smallest ones; 3) to avoid that fraudsters present any VAT registration number in order to obtain goods 'VAT free'. In fixing the level of the threshold, account should be taken of all these issues. In addition, attention should be paid to the fact that the authorisation to apply a GRCM might be extended to more than one Member State. The Member States having initially requested a derogation to apply a GRCM asked for such a threshold to be set at EUR 10,000 per invoice. According to these Member States, given this high threshold, the smallest companies would generally not be affected. Nowadays medium and large sized companies apply electronic bookkeeping systems where the basic data of the customer and the supplier are already recorded. Therefore the change of the system is more or less limited to a simple adaptation of the IT bookkeeping system. At the very least, this relatively high level should exclude the smallest retailers. This would limit the impact on microbusinesses that should in principle not be affected by the changes. This threshold is likely to exclude most of the B2C transactions which should also limit the risk that consumer goods (to the exclusion of high value goods) are purchased without VAT (in case a non-business purchaser presents himself as a business). In this respect, a link should be made with the cash payment limitations introduced in more and more Member States in order to fight against money laundering, drug trafficking and terrorist activities. When cash payments are limited to a certain threshold (cash payment threshold), any purchase that would be made under the reverse charge mechanism could be tracked, provided that the reverse charge threshold is equal or above the cash payment threshold. Currently, in the EU, cash payment limitations vary from EUR 1,000 to EUR 15,000 (and the tendency is to decrease such a threshold). In addition, Regulation (EU) No 1889/2005(94) of the European Parliament and of the Council introduced controls on cash entering or leaving the EU and a duty to declare any sum of money or equivalent of more than EUR 10,000. Setting the threshold to this amount for the GRCM would therefore make sense both at the level of one of the requesting Member States (e.g. in Austria payments exceeding EUR 10.000 have now to be made via bank transfer) as well as for any other Member State. Therefore, such a threshold is expected to be capable of targeting transactions at risk, while not affecting other transactions more than necessary, in particular involving smaller businesses and the majority of B2C transactions. 5.4.Option 2: derogation to apply a GRCM above a certain threshold only for preselected Member States Under option 2, the GRCM would apply to B2B domestic supplies of goods and services above a certain threshold within the concerned Member States. This threshold would, in principle, be set at EUR 10,000 exclusive of VAT per invoice . The “normal” VAT system (see outline under option 1 and box 1 and box 5 above) would apply to all other transactions, i.e. B2C transactions or transactions equal or below the threshold. The other Member States would also continue to apply the 'normal' VAT system. For each supply, the supplier will need to determine whether he has to charge VAT or not to his customer, i.e. check the status (and be capable to prove it) of his customer (a “business” or another “consumer”).

A derogation would be granted to preselected Member States on a voluntary basis (for instance, Austria and the Czech Republic who submitted the latest request). Mandatory flanking measures accompanying the implementation of the derogation are detailed in box 8 below. Two sub-options could be envisaged: 5.4.1.Option 2a: reverse charge mechanism applies to any domestic supplies of goods and services. The Member States to which the derogation is granted can choose which supplies of goods or services that are above the threshold will be subject to the reverse charge mechanism. This sectorial approach should however respect the principle of fiscal neutrality. 5.4.2.Option 2b: reverse charge mechanism applies to all domestic supplies of goods and services The Member States to which the derogation is granted must ensure that all supplies of goods and services that are above the threshold are subject to the reverse charge mechanism. 5.4.3.Discard of option 2a Option 2a means that the concerned Member State can choose which supplies of goods or services that are above the threshold will be subject to the reverse charge mechanism. As explained under point 1.3 above (box 3), this sectorial approach already exists today for a limited number of goods and services. This approach is motivated by the occurrence of fraud in a particular sector and is generally limited in time because it does not correspond to the normal functioning of the VAT system and can therefore hamper the good functioning of the internal market. While such a sectorial approach might be helpful as a short term measure, its efficiency on a medium term seems questionable (see opinion from Member States and stakeholders including respondents to the Green Paper consultation in Annex 2). In fact, fraudsters adapt quickly to these measures and fraud is moved from one sector to another (see box 9 below). A genuine GRCM, applicable to all supplies of goods and services within the concerned Member State, as conceived under option 2b would on the contrary avoid that fraud is moved from one sector to the next. Also, having a sectorial approach would add significant complexity to the VAT system of the concerned Member State, leading to increased compliances costs (43% increase according to a recent study on the assessment of the optional reverse charge) to business (see opinion from business representatives, including respondents to the Green Paper consultation, and REFIT platform in Annex 2) and administrative burden to tax administrations. In addition, the request from Austria and the Czech Republic to apply a reverse charge mechanism covers all sectors and the political commitment of the Commission relates to a “generalised” reverse charge mechanism. For all these reasons, option 2a has been discarded at an early stage. Only option 2b is further analysed under 6.2.2. Box 8 – Flanking measures and duration of the derogation

The derogation should be granted for a period of maximum 5 years. As is currently the case with the sectorial reverse charge derogation, Member States authorised to apply the GRCM should introduce specific reporting obligations on businesses so as to ensure the effective operation and monitoring of the application of that mechanism and detect and prevent all new forms of tax fraud. In particular, they shall ensure that all transactions (in goods and in services) above or below the defined threshold are reported to the tax authorities by the suppliers. Member States shall ensure that reporting obligations are fulfilled by businesses by electronic means in order to minimize burdens on business and make tax controls more efficient. In order to assess the effect of the application of the GRCM on fraudulent activities in a transparent manner, pre-defined evaluation criteria should be established by these Member States so as to enable an assessment of the level of fraud before and after the application of the GRCM. To closely monitor the impact on the internal market, all Member States should present an interim report (within 2 years) and a final report (after 5 years) so as to enable an assessment of the impact on fraud, compliance costs to businesses and a possible shift in trends of fraudulent activities. EU-wide criteria will also be established to this purpose. 5.5.Option 3: derogation to apply a GRCM above a certain threshold for any Member State fulfilling certain pre-defined criteria Under option 3, the possibility to apply the GRCM, as described under option 2 (same functioning and flanking measures), would not be granted to preselected Member States but would instead be open to any Member State asking for it and fulfilling certain predefined criteria. The Commission would receive implementing powers in order to adopt such derogations. The aim of setting predefined criteria is to confine the application of the GRCM to few Member States in order to prevent disruption of the internal market. These criteria would be linked to the actual level of the VAT gap, as well as of carrousel fraud, in a given Member State and to the failure of other control measures in this Member State to curb such fraud. Since the application by a given Member State of the GRCM could entail a risk of fraud shifting to other Member States, in particular neighbour Member States, the possibility to apply such a GRCM should also be open to these Member States under similar conditions. In doing so, option 3 ensures that the possibility to apply the GRCM is restricted to Member States that are heavily affected by fraud, in particular carousel fraud, or for which a substantial risk of fraud shifting is likely to take place. Hence, subject to equal treatment, some Member States would be allowed to apply the GRCM either to tackle actual fraud or later on, in case fraud would move from neighbouring Member States due to the derogation being applied by them. Therefore, in order to limit the effects on the internal market and to ensure that the application of the GRCM respects the principle of proportionality, the derogation could be granted on the basis of the situation in the requesting Member State resulting from the following criteria: -The level of the VAT gap, as well as of carrousel fraud, and the insufficiency of other control measures to combat that fraud in the concerned Member State; or -A substantial risk of fraud shifting to the concerned Member State because of the application of a GRCM in another Member State and in case other control measures would be insufficient to combat that risk of fraud. In granting any derogation, the Commission would pay special attention that accompanying measures envisaged by the requesting Member State do not disproportionately increase compliance costs to businesses. A safeguard clause should also be provided in the Commission implementing decision allowing the derogation in order to enable the Commission to revoke this decision if negative consequences appear in several Member States or in the internal market as a whole. The same two sub-options could be envisaged: 5.5.1.Option 3a: reverse charge mechanism applies to any domestic supplies of goods and services.

The Member States to which the derogation is granted can choose which supplies of goods or services that are above the threshold will be subject to the reverse charge mechanism. This sectorial approach should however respect the principle of fiscal neutrality. 5.5.2.Option 3b: reverse charge mechanism applies to all domestic supplies of goods and services The Member States applying the mechanism must ensure that all supplies of goods and services that are above the threshold are subject to the reverse charge mechanism. 5.5.3.Discard of option 3a For the same reasons explained under option 2 (see point 5.4.3 above), option 3a has been discarded at an early stage. Only option 3b is further analysed below. 6.What are the impacts of the different policy options and who will be affected? 6.1.Methodology The initiative is the result of a political commitment taken on 17 June 2016 to present a proposal to allow a temporary derogation for a GRCM for certain Member States before the end of 2016. Due to timing constraints, no specific tool or methodology was developed for the assessment of the impact of these options. For the same reason, no independent study could either be launched. However, a number of studies in the field of fraud and reverse charge already existed (see list in Annex 4) of which the results were used in this impact assessment. In addition, the replies received by the Commission to the questionnaire sent by it to the two requesting Member States also served the analysis. These results were complemented by a qualitative analysis on which this impact assessment mainly relies. 6.2.Analysis of the impacts of each of the options The envisaged initiative is limited in scope and in time. Because of its basic features, its impact is circumscribed to businesses and tax administrations and would only influence the way VAT is collected by these two stakeholders. Consumer prices can be impacted in case compliance costs to businesses are increased and those costs are passed through the final consumer. However, as will be developed further on, the application of the GRCM might also have positive effects in terms of cash flow for businesses which are likely to compensate the negative effects. Consumer prices are therefore not expected to be impacted substantially by the initiative. The social and environment impacts should be negligible or even zero. The analysis of the policy options concentrated on the following economic impacts: - Impact on carrousel fraud and tax collection; - Impact on compliance costs to business; - Impact on administrative costs to tax administrations; - Impact on the functioning of the internal market; In addition, the way the different options interlock with the VAT reform process announced in the Action Plan aiming to further improve the functioning of the internal market has also been taken into account.

6.2.1.Option 1: baseline Section 1 explains the context of the proposed initiative and section 2 outlines in detail the problem and problem drivers of the baseline. In summary, some Members States are more heavily affected than others by fraud and in particular by carrousel fraud. This is due to the combination of two main factors: a legislative loophole at EU level (the way the current intra-EU VAT system works) and the tax control/collection capacity of individual Member States. The baseline offers a comprehensive and definitive solution to all Member States, notably, in terms of fighting carrousel fraud (see previous description of definitive VAT system for which a separate impact assessment will be carried out). However, it is to be viewed as a medium to long term solution. 1.Level of carrousel fraud - Carrousel fraud at EU level is estimated at about EUR 50 billion. Some Member States seem to be more affected than others by carrousel fraud. The graph below shows that in six Member States, carrousel fraud amounts to 25% or more of their VAT gap. Figure 8 – Share of carrousel fraud in VAT gap (Source: "Own calculations" based on EY, 2015 study) The implementation of the definitive VAT system is expected to reduce carrousel fraud at EU level by 80%, representing about EUR 40 billion additional VAT receipts for the Member States. However, until its implementation, the evolution of carrousel fraud is uncertain. Envisaged short term measures to fight against fraud should in the meantime help preventing VAT fraud and improve VAT collection in the same way as recent reform measures introduced against tax non-compliance in the Member States (e.g. electronic reporting, limits on cash transactions and other anti-fraud or anti-smuggling measures) have shown their capacity to reduce the VAT gap. However, even the short term measures may take some time to show results and in the meantime, fraud may be stable or continue to increase in certain Member states. In a best-case scenario carrousel fraud would be stable in the short term or is even improved thanks to the envisaged other short term measures. 80% of carrousel fraud would be removed in the medium/long term with the introduction of the definitive VAT system. In a worst-case scenario, there would be no reduction of carrousel fraud in affected Member States in the short term and carrousel fraud could even continue to increase in the longer term until the introduction of the definitive VAT system. 80% of carrousel fraud would be removed in the medium/long term with the introduction of the definitive VAT system. 2.Compliance costs to business - Cost to businesses of complying with VAT obligations is substantial according to most studies and varies substantially across countries. Because much of the cost of complying with VAT is fixed (i.e. incurred regardless of the level of sales), compliance costs are relatively more burdensome for small businesses: compliance costs could represent 3.9% of turnover for unincorporated businesses but only 1.5% of turnover for firms with more than six employees. Compliance costs are also particularly high for cross-border trade. VAT obligations are 11% higher than the VAT compliance costs associated with domestic trade. The proposal for a definitive VAT system should help reduce compliance costs to business mainly due to simplifications in cross-border trade. In the meantime, compliance costs could remain stable or be slightly increased, depending on the scope of anti-fraud measures adopted by individual Member States to prevent existing fraud. In a best-case scenario, the set of measures to be proposed by the Commission in the short term would improve tax collection in all Member States with no impact on compliance costs. Simplification measures to be introduced by the definitive VAT system would reduce compliance costs to businesses in the medium/long term. In a worst-case scenario, compliance costs would increase in the short term due to anti-fraud measures (other than reverse charge) being taken by individual Member States. Simplification measures to be introduced by the definitive VAT system would reduce compliance costs to businesses in the medium/long term. 3.Administrative costs to tax administrations – Member States' tax authorities incur costs related to the management of the obligations imposed to their businesses acting as taxpayers (e.g. processing VAT registrations, reviewing VAT returns and other reporting obligations, providing information, handling and implementing of new legislation) and to the control of the application and the collection of the VAT (e.g. carrying out risk analysis, undertaking audits). These costs are specific to each Member State as they depend upon the organisation of its tax authorities. However, the more a legislation is susceptible to fraud, the more it is difficult and therefore costly to manage for tax authorities. It can prompt Member States to impose new obligations to their businesses that they would also need to implement and follow-up. This can lead to more complexity which, in turn, can create new opportunities for tax evasion and fraud. In a best-case scenario, the implementation of the set of measures to be proposed by the Commission in the short term would improve tax collection in all Member States with no significant impact on administrative costs to Member States and no need for other anti-fraud measures. As is the case with any new legislation, the introduction of the definitive VAT system in the medium/long term would require some additional costs in the year of its implementation (e.g. additional work for tax officials, implementation of IT systems). In a worst-case scenario, administrative costs could slightly increase in the short term due to anti-fraud measures (other than reverse charge) being taken complementarily by individual Member States in case the proposed measures do not prove to be sufficiently efficient in the short term. This would however depend upon the scope of anti-fraud measures adopted by individual Member States to prevent existing fraud. The implementation of the definitive VAT system in the medium/long term would require some additional costs in the year of its implementation. 4.Functioning of the internal market and extent to which further improvements can be made to the VAT system under the Action Plan- The baseline is perfectly in line with the Commission’ agenda announced in its Action Plan aimed to improve the functioning of the current VAT system and therefore the functioning of the internal market. It proposes a gradual progression towards the definitive VAT system with short and longer term initiatives. 6.2.2.Option 2b: derogation to apply a GRCM to all domestic supplies of goods and services above a certain threshold only for preselected Member States Estimation of the impacts of this option mainly relies on data that have been specifically requested to and provided by Austria and the Czech Republic, i.e. the Member States that submitted the latest request for such derogation. 6.2.2.1.Analysis of the impacts of option 2b Summary – The extent to which the specific policy objectives will be met Overall : Objectives partially met 1.Reducing VAT fraud in specific Member States – Very uncertain but could be met if sufficient controls are put in place in order to monitor the functioning of the GRCM and prevent new domestic types of fraud to appear too quickly in the Member State benefiting from the derogation. 2.Minimising general increase in administrative burden – Not met. Although the increase of running costs will be limited in the two countries because most obligations are already in place and despite the protection effect of the threshold on the smallest businesses, set up costs will be incurred twice. 3.Avoid fraud shifting to other sectors and other Member States – Not met. No fraud shifting between sectors but major risk of fraud shifting between Member States. Economic impacts Impact on carrousel fraud and Member Sates’ tax revenue Implementation of the GRCM may create gains for the budget of the Member State having introduced it if new fraud patterns (see box 9 below) take a few years to appear (as it seems to have been the case in 1993 when the fiscal frontiers were dismantled for VAT). In particular fraud might shift “down the chain” and concentrate (for the total amount of the VAT due) to the retail stage which is normally more difficult (more numerous) and burdensome to control (see notably Taj opinion in Annex 2). “VAT free” obtained goods could be sold on with VAT but without remitting the tax subsequently or end up on the black market, either of the Member States applying the GRCM or any (neighbouring) Member State; in particular of a Member State with higher VAT rates, allowing fraudsters to maximize the benefit when selling these goods on to private consumers with VAT or to have a larger competitive advantage over those that apply the VAT when selling without VAT on the black market. It is difficult to assess to what extent these phenomena will take place but, as mentioned before, it could be pointed out that this phenomenon has already been experienced in practice in relation to existing sectorial reverse charge derogations (e.g. in the sector of cereals in South Eastern Europe). Therefore, existing fraud in a Member State applying the GRCM is likely to quickly migrate to Member States which did not implement the GRCM. A number of Member States as well as business organisations expressed their fears in respect of tax fraud shifting to their country. According to the Czech Republic, two thirds of its VAT gap would stem from carousel fraud, i.e. roughly EUR 2.2 billion. In the first year of introduction of the GRCM, a decrease in tax revenue by EUR 1.2 billion is expected due to a change in cash flow . On the other hand, a rise in tax revenue by EUR 1.1 billion due to the elimination of carousel frauds is estimated. In the further years, a positive impact is expected due to the elimination of carousel frauds. According to the Czech Republic, reporting obligations, such as electronic filing of invoices or VAT control statements, should solve the risk of fraud shifting at the end of the distribution chain. Individual invoices are matched in the system of VAT control statements and the potential problems are detected with the sensibility set at the level of the invoice. Based on the data from the VAT control statements and electronic filing of invoices and using mechanisms of administrative cooperation the Czech Republic would be in a position to provide other Member States with the information and data they could use when applying their own anti-fraud measures. It would not exclude fraud shifting to other Member States as effective anti-fraud measures have in principle the effect of shifting fraud to another destination. Austria, whose VAT gap is already under the EU average, namely 10.17%, did not provide budget estimates. Referring to a study , Austria predicts that carrousel fraud would be eliminated entirely. The only disadvantage pointed out would be micro fraud but this new risk was assessed as negligible compared to the estimated benefits from such a new system. Considering that carrousel fraud would amount to 13% of the Austrian VAT gap this would represent additional VAT revenue of about EUR 375 billion. Concerning cash flow, Austria considers there will be no difference between the current system and the GRCM. Therefore, no negative effects are expected with regard to the state budget. Concerning the shift of fraud to the retail stage, Austria does not expect problems as due to the structure of its retailors (retail stage is to a large extent marked by a few big companies), the number of taxable persons accounting for the bulk of the VAT would not substantially increase. As for the shift of fraud to other Member States, Austria ascertains that the reporting system and risk analysis will prevent a shift of fraud to other Member States. Without practical experience, it is however not possible for the Commission to assess the analysis made by Austria and the Czech Republic but two scenarios can be envisaged: In a best-case scenario, reduction of carrousel fraud in the Member State applying the GRCM might be expected in the short term if sufficient controls are in place. On a longer term, new risks of fraud are likely to develop in the Member State applying the GRCM in particular in case of insufficient controls. The net impact is difficult to predict without real experience but it could be well positive in case the new risks of fraud expected in the longer term would not develop before the implementation of the definitive VAT system. However, fraud is very likely to migrate in the short term to other Member States (as this phenomenon has actually been experienced several times and in a very quick way). In a worst-case scenario, new risks of fraud are likely to develop in the Member State applying the GRCM at the same time the reduction of carrousel fraud is expected in this Member State. The net impact would be almost nil. Fraud is in any case also likely to migrate in the short term to other Member States. Impact on compliance costs to business Specific measures to avoid new forms of fraud are needed under a GRCM (see box 10 below). Set-up costs for the year of introduction of the GRCM were assessed in 2008 at EUR 1.6 billion to EUR 2 billion for Germany alone, and recurring costs at EUR 100 to 200 million per year, which is the equivalent of EUR 500 million to EUR 1 billion a year at the level of the EU in 2016. Although the threshold above which the reverse charge should apply would help excluding from this system the smallest businesses, it will nevertheless imply that most businesses (those that have transactions below and above the threshold and those that are involved in both B2B and B2C transactions) might have to deal with two different systems: the current one and the reverse charge. Taking into account that the initiative is meant to be a temporary derogation to the VAT Directive, similar one-off costs are expected to revert back to the current VAT system. A recent EU-wide study on the impact of the optional reverse charge has concluded that the reverse charge mechanism implies an increase by 43% of compliance costs to businesses, although a generalized reverse charge is expected to generate less compliance costs as the same scheme would apply across sectors. Most business associations as well as the REFIT platform have expressed their concerns in respect of the expected increase in compliances costs to business linked to the possible application of a GRCM . It should also be anticipated that the CJEU might develop on specific cases linked to the application of the GRCM in two Member States only. This can add a layer of complexity in the application of the scheme. The increased compliance costs and additional complexity of the VAT system will affect those businesses that are active in the Member State applying the GRCM. Additional obligations (anti-fraud measures other than GRCM) could be imposed to their businesses by Member States not applying the GRCM in order to limit fraud shifting to their country. According to the Czech Republic, the setting of the threshold for the application of the GRCM in tax and accounting systems could cause a slight increase in costs for VAT payers. However, no other increase in costs for VAT payers is expected as obligations that already exist should be used within the GRCM as well. The Czech Republic already has an electronic VAT listing system (so-called 'VAT control statement') which contains data about each individual invoice. All registered taxable persons have, since 1 January 2016, to file a listing of all received and provided supplies, regardless whether they have been supplied under reverse charge or not. This enables the tax administration to crosscheck invoices. VAT returns and “VAT control statements” are already submitted exclusively by electronic means. An electronic filing of invoices will be introduced soon in order to allow the control of the end of the distribution chain. This will happen regardless the implementation of the temporary GRCM. No specific cost is expected for non-established taxable persons because, thanks to a simplification measure , they will not be touched by the domestic reverse charge. According to Austria, given the high threshold, small companies will generally not be affected by the GRCM. Nearly all medium and large-sized companies apply electronic bookkeeping systems where the basic data of customer and supplier are already recorded. Therefore the change of the system is more or less limited to a simple adaptation of the IT bookkeeping system. Austria foresees a monthly recapitulative statement of the supplier and the purchaser in which they both have to indicate the monthly total amount of supplies and purchases under reverse charge with respect to all business partners. This should enable an automatic reconciliation of data from the recapitulative statements with VAT declarations in view of a subsequent inquiry by tax administration as to have discrepancies examined. Payments above the threshold of EUR 10,000 are obligatory to be made by bank transfer. If non-established taxable persons are either suppliers or recipients of transactions covered by the GRCM, their compliance costs will be negligible or reduced. In a best-case scenario, as would normally be the case for Austria and the Czech Republic, part of the obligations which are necessary in the context of a GRCM have already been put in place. No large increase of obligations can therefore be expected in the short term. Also, the threshold will avoid that microbusinesses are affected. It remains however that very high set up costs will be incurred twice (in the short and the long term) and that most businesses will need to manage two systems (above and below the threshold) pending adoption of the definitive system. Overall, the impact on compliance costs will be largely negative and this explains the negative position of business organisations on this subject (see Annex 2). In a worst-case scenario, the necessary obligations to accompany the GRCM are not in place and would still need to be fully implemented in a very short term. Anti-fraud measures adopted by other Member States (other than those applying the GRCM) might further increase compliance costs to businesses active in these Member States. Impact on administrative costs to tax administrations Besides the need to change legislation and adapt were necessary administrative practice (see flanking measures in box 8 above), Member States wishing to implement a GRCM will have to implement and control the new system for transactions above the threshold, as well as continue managing the current system for transactions below the threshold. Mandatory electronic reporting and modern audit solutions should facilitate the inspection tasks but the control of the reverse charge chain cannot be done exclusively via listings. Due to increased risk of fraud shifting to Member States that have not implemented the GRCM, additional administrative costs are expected for these Member State in order to put in place additional measures to cope with this fraud shifting. A number of Member States confirmed the negative impact on their control capacity in case of tax fraud shifting to their country. According to the Czech Republic no additional costs for the tax administration are expected. Austria foresees one-off costs in the course of the implementation period and in training staff but was unable to provide any figure. In a best-case scenario, increase in the short term in administrative costs to tax administrations linked to the implementation, running and control of the GRCM will highly depend upon the actual level of efficiency of the Member State’s tax administration. This efficiency is linked to its structure, organisation and level of computerisation. In Austria and the Czech Republic, limited or no increase in administrative costs is expected. In the longer term, the Member States applying the GRCM would need to end the application of the GRCM and adapt to the definitive VAT system. It is expected that Member States wishing to implement the GRCM have budgeted the costs of its implementation. As the GRCM remains an option to the Member States, no further costs (other than those provisioned) would be expected. In a worst-case scenario, the other Member States (those not applying the GRCM) would need to reinforce their control capacities and maybe introduce anti-fraud measures (other than the GRCM) to limit fraud shifting to their country. Impact on the functioning of the internal market The application of a GRCM even by a single Member State means that two different VAT systems will run in parallel within the EU: the current fractioned VAT system in twenty-six Member States and a GRCM (a kind of sales tax) in two Member States. The functioning of the internal market is expected to be impacted from a business and Member States ‘perspective in the following way. Business ‘perspective Businesses acting as suppliers or acquirers in one of the Member States applying the GRCM will have to adapt and comply with the obligations linked to the new system. When also active in another Member State (a Member State not applying the GRCM), they will have to comply with the normal VAT rules. Businesses in the Member States applying the GRCM will have a different cash-flow situation compared to businesses in the other Member States. The cash flow impact will however depend on the business-model of the enterprise and will be influenced by the import/export situation of the company as well as payment lead times toward both suppliers and customers. Based on case-studies, the average cash flow impact for SMEs is expected to be negative, while the average impact on large enterprises would be positive . Member State ‘perspective A decrease in the VAT receipts during the implementation period is likely to happen in the Member States that will introduce the GRCM because of the cash flow effect that might not be (fully) compensated by a reduction in carrousel fraud. This could affect negatively the yearly budgetary targets of these Member States on their way towards fulfilling their Medium-Term Objective (MTO) . New risks of fraud are likely to develop at domestic level in the Member States opting for a GRCM but these new risks might only develop after a few years. The final impact is difficult to predict without a real experience. VAT fraud is likely to shift to the Member States that do not have a GRCM. This fraud is expected to shift in the first instance to the neighbour countries and may then spread progressively to other countries. Member States not applying the GRCM might therefore undergo a negative budgetary impact either because of new types of fraud and/or because of additional costs to adapt and reinforce their control capacities. Disturbance to the functioning of the internal market resulting from divergent obligations imposed to businesses and from unequal treatment of Member States in a similar situation is expected. Disturbance would start as from the application of the GRCM by at least one Member State and would last until adoption of the definitive VAT system. Link with the VAT reform process The implementation of the GRCM in preselected Member States is at odds with the implementation of the single European VAT area (as announced in the Action Plan) in all Member States. It entails twice implementing expenditures (set-up costs to implement the GRCM and similar costs to revert to the normal VAT system that will be based on the principle of taxation of all transactions) for both businesses and Member States. Part of these costs could however be outweighed by gains in terms of VAT collection improvements in the Member States applying the GRCM. The initiative is at odds with the Commission’s overall strategy to improve the VAT system in all Member States. Given its foreseeable negative impact on the internal market, it is somewhat inconsistent with the political commitment of the Commission. Environmental and social impacts Negligible or even zero.

6.2.3.Option 3b: derogation to apply a GRCM to all domestic supplies of goods and services above a certain threshold for any Member State fulfilling certain pre-defined criteria As for option 2, estimation of the impacts of option 3 relies in part on data provided by Austria and the Czech Republic. No such specific data is available for the other Member States. 6.2.3.1. Analysis of the impacts of option 3b Summary – The extent to which the specific policy objectives and the political commitment of the Commission will be met Overall: Objectives partially met - Political commitment met 1.Reducing VAT fraud in specific Member States – Very uncertain but could be met if sufficient controls in place to monitor the functioning of the GRCM and prevent new domestic types of fraud to appear too quickly in the Member State applying the GRCM. However, only real experience can give a final estimation of this impact. 2.Minimising general increase in administrative burden – Not met. Although the increase of running costs will be limited in the two countries because most obligations are already in place and despite the protection