EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (hereafter 'the VAT Directive'), the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to apply special measures for derogation from the provisions of that Directive in order to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance. By letter registered with the Commission on 16 October 2018, Lithuania requested a derogation from Article 193 of the VAT Directive in order to apply the reverse charge mechanism to hard drives. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letters dated 19 November 2018 of the request made by Lithuania. By letter dated 20 November 2018, the Commission notified Lithuania that it had all the information necessary to consider the request.

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

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

Pursuant to Article 395 of the VAT Directive, Lithuania requested a derogation from Article 193 of the VAT Directive to be authorised to apply the reverse charge mechanism to supplies of hard drives which are not covered by Article 199a of the VAT Directive. Under this procedure, the taxable person, to whom the supplies are made, becomes liable for the payment of VAT. This taxable person, provided it has a full right of deduction, would simultaneously declare and deduct the VAT corresponding to the supply, thus leading to no effective payment of VAT to the Treasury.

Lithuania discovered VAT fraud in the sector of electronic goods such as laptops, mobile phones, tablets and hard drives. These goods are acquired from other Member States and, before they are supplied to retailers or directly to consumers, multiple transactions take place between missing traders who do not pay VAT to the Treasury. Checks carried out in Lithuania revealed that in 2016-2017 around 6 million EUR in tax may not have been paid on electronic goods representing significant losses for the state budget.

Lithuania undertook a number of measures to tackle and prevent the VAT fraud. Since October 2016, all VAT payers in Lithuania are obliged, on a monthly basis, to enter information on the VAT invoices that they have received and issued into the e-invoice subsystem (‘i.SAF’) of the smart administration system ('i.MAS') helping the authorities to identify differences between the data declared by VAT taxpayers and the amounts of tax not declared in a timely manner. Also information on goods transport documents must be registered in the i.MAS electronic consignment notes subsystem (‘i.VAZ’), specifying the goods carried, consignors and consignees, before the goods are transported in the territory of Lithuania. This operational information gathered by the State Tax Inspectorate also used to detect potential cases of fraud or to quickly find out about goods involved in a fraudulent chain.

Despite all the measures introduced to combat VAT fraud, the information provided by Lithuania shows that these measures are not sufficient to prevent VAT fraud in the supply of electronic goods. Lithuania considers that the introduction of the reverse charge in the sector concerned is necessary.

Lithuania intends to introduce the reverse charge to electronic products based on Article 199a of the VAT Directive. However hard drives are not included in this article. Lithuania also submits that the experience of other Member States shows that following the introduction of the reverse charge mechanism to those electronic goods covered by Article 199a of the VAT Directive the fraud moves to other electronic goods. Lithuania therefore requests to be authorised to introduce the reverse charge mechanism also to hard drives based on Article 395 of the VAT Directive.

Given the potential positive impact of the measure in the fight against fraud discovered by Lithuania, it is proposed to grant the derogation for a limited period, from 1 March 2019 until 28 February 2022. During the period of application of the derogating measure Lithuania should introduce other conventional measures to effectively control and prevent fraud in the supplies of hard drives. Consequently there should be no further need to derogate from Article 193 of the VAT Directive with regards to the supplies of hard drives.

Consistency with existing policy provisions in the policy area

Similar derogations in relation to Article 193 of the VAT Directive have been granted to other Member States. The proposed measure is, therefore, consistent with the existing provisions of the VAT Directive.

2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

•Legal basis

Article 395 of the VAT Directive.