EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax ('the VAT Directive'), the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to apply special measures for derogation from the provisions of that Directive in order to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance.

By letter registered with the Commission on 4 December 2019, the Italian Republic requested authorisation to continue to derogate from Articles 206 and 226 of the VAT Directive with regard to VAT payment and invoicing requirements for supplies of goods and services made to public authorities. That request implied a reduction of the scope of the derogating measure in force, granted by Council Implementing Decision (EU) 2017/784, which also applied to supplies of goods and services to companies controlled by central and local public authorities and to a list of companies listed on the stock exchange.

However, by letter registered with the Commission on 27 March 2020, Italy changed its request, asking that the scope of the authorisation should remain identical to that granted by Council Implementing Decision (EU) 2017/784, and therefore requesting to apply the derogation from Articles 206 and 226 of the VAT Directive for supplies of goods and services made to public authorities, to companies controlled by central and local public authorities and to a list of companies listed on the stock exchange. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 5 May 2020 of the request made by the Italian Republic. By letter dated 6 May 2020, the Commission notified the Italian Republic that it had all the information necessary to consider the request.

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Following the introduction of a system of statistical checks, Italy discovered considerable VAT fraud in relation to supplies of goods and services to public authorities. To put an end to these practices Italy requested in 2014 that, for supplies to public authorities, the VAT due would no longer be paid to the supplier, but to a separate and blocked bank account of the tax authorities. This mechanism is commonly referred to as a type of ‘split payment’, as the payment which is usually transferred in full by the customer to the supplier (consideration in exchange for the supply plus VAT) is split into: (i) on the one hand, the consideration which is paid to the supplier of the goods or services; and, (ii) on the other hand, the VAT due is paid to a blocked bank account of the tax authorities.

The derogation was authorised by Council Implementing Decision (EU) 2015/1401 until 31 December 2017. It authorised Italy to derogate from Article 206 of the VAT Directive regarding VAT payment and from Article 226 of the VAT Directive regarding the invoicing rules.

The derogation was requested by Italy for a limited period, allowing it to organise and implement adequate control policy measures and to fully benefit from the data available via electronic invoicing. The implementation of the obligation of electronic invoicing for supplies to public authorities, allowing the possibility of real-time control of individual transactions and the exact amounts of VAT which public authorities are due to pay on their purchases, should allow Italy to audit the sector concerned on the basis of conventional control techniques without the need to derogate from the VAT Directive in order to apply the split payment measure.

According to information submitted by Italy, the introduction of electronic invoicing for supplies to public authorities provided tax authorities considerable information regarding the flow of invoices allowing the control of transactions and corresponding VAT amounts. However, another element of the effective control system – the obligation to communicate data of all invoices issued and received to the tax authorities – was only introduced as from 1 January 2017. More time was required for the measure to be effective and to effectively induce taxpayers to improve their compliance with tax obligations. Consequently, Italy requested to prolong the derogation from Articles 206 and 226 of the VAT Directive on supplies to public authorities.

Additionally, Italy discovered tax evasion in the sector of supplies to companies controlled by public authorities and to a small group of 40 companies that are listed on the stock exchange. In order to fight this tax evasion and to ensure no further VAT losses for public revenues, Italy requested to broaden the scope of the derogation from Articles 206 and 226 of the VAT Directive to supplies of goods and services made to the above mentioned entities which were considered by Italy as reliable as public authorities. These entities are both companies controlled by central and local public authorities and a list of around 40 companies listed on the stock exchange adding up to a total of around 2 400 companies. Italy expected that extending the split payment measure to these companies would tackle tax evasion in the form of non-payment of VAT by the suppliers to the entities concerned and consequently would increase the VAT revenues.

The extension of the derogation with its widened scope was authorised by Council Implementing Decision (EU) 2017/784 until 30 June 2020.

In October 2018, Italy presented a report in accordance with second paragraph of Article 3 of the Council Implementing Decision (EU) 2017/784. According to this report, the split payment measure introduced in Italy increased VAT revenues and this increase was higher than the estimates made at the time of the introduction of the measure. Furthermore, the report stated that the increase in VAT credit for the suppliers of the companies within the scope of the split payment, which results from the implementation of the measure, can be easily controlled and managed and that the situation of VAT refunds had not worsened.

The split payment mechanism is part of a package of measures introduced by Italy in order to counter tax fraud and evasion. This package of measures involves amongst others electronic invoicing and the electronic transmission of data on daily charges. Electronic invoicing was introduced as of 1 July 2018 in respect to certain sectors, and as of 1 January 2019 in a generalised form. This obligation was authorised by Council Implementing Decision (EU) 2018/593. The electronic transmission of data on daily charges requires taxpayers engaged in the retail trade and similar activities (not involving invoicing obligations) to store data on daily charges electronically and transmit them electronically to the Agenzia delle Entrate. This latter obligation became applicable on 1 January 2020 and, for taxpayers with a turnover of over EUR 400 000, on 1 July 2019. This package of measures has replaced other control measures, and allows the Italian tax authorities to cross-check the different operations declared by the operators and to monitor their VAT payments. The latest legislative changes introduced an obligation to make the data on VAT transactions from electronic invoices, cross-border transactions and electronic charges immediately available to taxpayers in order to simplify their compliance; it will lead to VAT returns being pre-completed by the Agenzia delle Entrate and to the preparation of regular VAT assessments, which taxpayers will be able to accept or supplement. According to recital 7 of the abovementioned Decision 2017/784, once this system is fully implemented, there should be no need to further derogate from Directive 2006/112/EC in order to apply the split payment measure.

However, according to the Italian authorities, at this moment it would not be convenient to remove altogether the measure on split payment. According to their estimates, the measures implemented through the anti-fraud package reduce the time needed by the tax administration to become aware of the existence of a potential case of evasion or fraud to three months, compared to the 18 months that were originally necessary. Nevertheless, in the absence of split payment, the recovery from the tax evaders or fraudsters once the check has been carried out could prove to be impossible if they are insolvent. The split payment mechanism, as an ex ante measure, provides a much higher effectiveness.

The Commission still considers that the full implementation of the package of anti-fraud measures designed by Italy should end the need for further derogations from the VAT Directive in order to apply the split payment. However, it is still early to fully assess the effectiveness of those measures due to their recent implementation. The generalised mandatory e-invoicing only entered into force on 1 January 2019 while the electronic transmission of data on daily charges was fully implemented on 1 January 2020. Therefore, the evaluation of these measures and their impact in the detection of VAT fraud and the collection of the tax cannot be carried out extensively. Thus, in the absence of the full implementation of the anti-fraud package, it is advisable to extend the measure for an additional period, as its removal could have significant negative effects in the fight against tax evasion and the collection of VAT in relation to the sectors covered by the scope of the measure. Further, in case the measure will not be extended, the companies applying the split payment mechanism would have to change their invoicing systems to accommodate the changes. The tax administration would have to implement similar adaptations to its systems. Due to the difficulties caused by the COVID-19 outbreak, that Italy is experiencing it does not seem appropriate to request businesses and tax administration to undertake these changes at this moment.

One of the effects of split payment is the fact that suppliers being taxable persons are not able to offset the VAT paid on their input with the VAT received on their supplies. They may constantly be in a credit position and may need to ask for an effective refund of this VAT from the tax administration. On the other hand, under certain conditions Italy authorises these suppliers to offset the VAT they did not receive from their customers with other taxes due in Italy, thus limiting the cash flow problem that otherwise may arise for businesses liable for paying their taxes in Italy.

According to the information submitted by Italy, the refund procedure has been speeded up. Requests for refund are processed on average within 67 days and the average time for actual payment to the beneficiary is 7 days. At the time of the introduction of the split payment measure, it was envisaged that the taxable persons who carry out transactions subject to the split payment scheme, within the limit of the credit deriving from such transactions, are entitled to receive the payment of the relevant VAT credits as a priority. This practice implies that refund requests related to the split payment mechanism are processed with priority both during preliminary investigation and during the payment of sums due vis-à-vis non-priority refunds.

The request submitted by Italy and registered with the Commission on 4 December 2019, implied a reduction of the scope of the derogating measure in force, as it was requested authorisation to continue to derogate from Articles 206 and 226 of the VAT Directive only with regard to VAT payments and invoicing requirements for supplies of goods and services made to public authorities. However, by letter registered with the Commission on 27 March 2020, Italy changed its request, asking that the scope of the authorisation should remain identical to that granted by Council Implementing Decision (EU) 2017/784, and therefore requesting to apply the derogation from Articles 206 and 226 of the VAT Directive for supplies of goods and services made to public authorities, to companies controlled by central and local public authorities and a list of companies listed on the stock exchange.