authorising the Republic of Latvia to introduce a special measure derogating from Article 193 of Council Directive 2006/112/EC on the common system of value added tax

EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (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 15 November 2017, Latvia requested a derogation from Article 193 of the VAT Directive in order to apply the reverse charge mechanism to supplies of game consoles. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 23 November 2017 of the request made by Latvia. By letter dated 24 November, the Commission notified Latvia that it had all the information necessary to consider the request.

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

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 199a (1) of the VAT Directive Member States may provide that the person liable for payment of VAT on supplies listed in this Article is the taxable person to whom the supply is made (the reverse charge mechanism). Under the reverse charge procedure, the taxable person, to whom the supplies are made, becomes liable for the payment of VAT. This taxable person, provided he 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. Supplies of game consoles are included in point (h) of Article 199a, paragraph 1.

Latvia did not make use of the option of Article 199a (1) (h) of the VAT Directive and does not apply the reverse charge mechanism to supplies of game consoles. However, due to the recent increased fraud in the sector of game consoles in Latvia, the latter Member State would like to introduce the reverse charge mechanism to domestic supplies of game consoles.

Following Article 199a (1) of the VAT Directive, the reverse charge mechanism may be applied until 31 December 2018 and for a minimum period of two years. As the condition of the two-year period is not fulfilled, Latvia cannot apply the reverse charge mechanism based on this Article.

Consequently, Latvia requests a derogation from Article 193 of the VAT Directive to be authorised to apply the reverse charge mechanism to supplies of game consoles based on Article 395 of the VAT Directive.

The aim of the requested derogation is to prevent VAT fraud in the sector of game consoles. On the basis of the options set out in Article 199a(1) (c), (d) and (h), since 1 April 2016, Latvia applies the VAT reverse charge mechanism to supplies of mobile phones, tablet PCs, laptops, and integrated circuit devices. It has been established that following the introduction of the reverse charge for the latter supplies, VAT fraud increased in the supplies of game consoles. These products are susceptible to fraud as they are relatively small in size, with a relatively high value and a well-developed trade on the Internet.

Latvia submits that audits were performed in the sector of supplies of game consoles. It was established in 2017 that there were 14 shell companies operating in the game console supply sector, representing 6.4 % of all enterprises in this sector. In 2016, of the 219 registered VAT taxable persons active in the game console supply sector, eight had declared VAT as input tax for transactions with other taxable persons classified as shell companies (3.7 % of the total number of persons registered for VAT purposes). In order to prevent fraudulent activities by economic operators, the Latvian State Revenue Service (VID) makes use of the possibility to exclude them from its register of persons subject to VAT. In 2017, the number of taxable persons active in this sector that were excluded from the VID’s VAT taxpayer register has increased significantly. In the first eight months of the year, 16 taxable persons active in the sector have been excluded from the register, which is already 88.9 % of the total number excluded in 2016 (18 taxable persons).

According to the information submitted by Latvia, a number of measures are undertaken by Latvia to reduce and fight VAT fraud. For instance, cash registers have been subject to new requirements aiming to completely eliminate the deletion of registered transactions, a detailed breakdown of transactions must be given in the VAT declaration, particular attention is also given to improving the routine controls and administrative measures, and an obligation for credit institutions and other entities to inform the VID of suspicious transactions was introduced. The adoption of electronic invoicing is also being considered. Despite all these measures, Latvia considers it nevertheless necessary to introduce the reverse charge mechanism for the supplies of game consoles to prevent VAT revenue losses to the public budget.

Supplies of game consoles are considered to be susceptible to fraud and are included in Article 199a (1) (h) of the VAT Directive next to tablet PC's and laptops. If the condition regarding the minimum period of application was fulfilled, Latvia would have been able to rely on the latter Article for the application of the reverse charge mechanism.

It is therefore, proposed to grant the derogation for the period of validity of Article 199a of the VAT Directive. The derogation is thus proposed until 31 December 2018, i.e. the date of expiry of Article 199a of the VAT Directive.

•Consistency with existing policy provisions in the policy area

Based on Article 199a (1) (h) of the VAT Directive, the reverse charge mechanism may be applied to the supplies of game consoles. A number of Member States apply the reverse charge relying on this provision. If the condition of the minimum period of two years were fulfilled, Latvia could apply the reverse charge mechanism to supplies of game consoles without requesting a derogation based on Article 395 of the VAT Directive. The proposed measure is, therefore, consistent with the existing provisions of the VAT Directive.

2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY