authorising the Republic of Lithuania to extend the application of a measure derogating from Article 193 of Council Directive 2006/112/EC on the common system of value added tax

EXPLANATORY MEMORANDUM

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Pursuant to Article 395 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (hereafter 'the VAT Directive'), the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to apply special measures for derogation from that Directive in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance.

By letter registered with the Commission on 1 April of 2015, the Republic of Lithuania (hereafter 'Lithuania') requested authorisation to continue to apply a measure derogating from Article 193 of the VAT Directive. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 18 May 2015 of the request made by Lithuania. By letter dated 20 May 2015, the Commission notified Lithuania that it had all the information it considered necessary for appraisal of the request.

The Lithuanian government asks to extend the validity of the current application of a reverse charge mechanism in relation to supplies of timber and supplies by taxable persons under judicial insolvency or restructuring procedures.

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

Taxable persons under judicial insolvency or restructuring procedures often did not pay the VAT they have received from their customers to the tax authorities. However, the purchaser can, as a compliant trader, still deduct the VAT incurred.

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

This derogating measure had initially been granted by Council Decision 2006/388/EC of 15 May 2006, which also included supplies of ferrous waste and scrap and construction work. The application of the derogating measure for supply of timber and supplies by taxable persons under judicial insolvency or restructuring procedures was extended by Council Implementing Decision 2010/99/EU of 16 February 2010. A last extension of the derogating measure has been granted by Council Implementing Decision 2012/704/EU of 13 November 2012.

From the report submitted by the Lithuanian Tax Authorities, together with the request to continue to apply the derogating measure, the Commission understands that the situation, on which the initial derogation was based, continues to exist. Lithuania claims that, based on the results of tax investigations, the derogation proved to be effective both for supply of timber and supplies by taxable persons under judicial insolvency or restructuring procedures.

In these particular cases, the reverse charge mechanism shifts the liability for the payment of the VAT, as well as the corresponding obligations, from smaller or less reliable taxable suppliers to larger and more reliable taxable customers. This supports the tax authorities which are confronted with difficulties of VAT collection in these specific sectors.

The derogation should therefore be granted for another limited period.

•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.

•Consistency with other Union policies

Not applicable.

2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

•Legal basis