EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of Council 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 14 January 2020, Romania requested an authorisation to continue, after 31 December 2020, to exempt from VAT taxable persons whose annual turnover is no higher than the equivalent in national currency of EUR 88 500.

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 18 February 2020 of the request made by Romania. By letter dated 19 February 2020, the Commission notified Romania that it had all the information it considered necessary for the appraisal of the request.

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Chapter 1 of Title XII of the VAT Directive allows for the possibility for Member States to apply a special scheme for small enterprises, which includes the possibility to exempt from VAT taxable persons below a certain annual turnover. Taxable persons falling under this exemption do not have to charge VAT on their supplies and, consequently, cannot deduct VAT on their inputs.

Under Article 287(18) of the VAT Directive, Romania may exempt from VAT taxable persons whose annual turnover is no higher than the equivalent in national currency of EUR 35 000.

By Council Implementing Decision 2012/181/EU Romania was authorised until 31 December 2014 to exempt from VAT taxable persons with annual turnover not exceeding the equivalent in national currency of EUR 65 000 at the conversion rate on the date of its accession to the European Union. Council Implementing Decision 2014/931/EU authorised Romania to continue to apply until 31 December 2017 the special measure derogating from Article 287(18) of the VAT Directive. Romania was subsequently authorised by Council Implementing Decision (EU) 2017/1855 to increase the exemption threshold to the equivalent in national currency of EUR 88 500 and to extend the expiry date of the derogating measure until 31 December 2020 or until the entry into force of a directive amending the provisions of Articles 281 to 294 of the VAT Directive, whichever date was the earlier. The measure has an optional character, allowing small businesses to opt for the normal VAT arrangements.

The present request from Romania to prolong further the expiry date of the derogating measure, without increasing the current threshold of EUR 88 500, is based on the same grounds as those presented in the previous requests. Romania maintains that the prolongation of the derogating measure as well as the current exemption ceiling are justified, taking into account the structure of the national economy. Small and medium-sized enterprises bear disproportionate VAT compliance costs in comparison with large enterprises. The exemption from VAT significantly reduces small businesses’ VAT obligations, while relieving the tax authorities of the burden of having to monitor the collection of a small volume of revenue from small and medium-sized enterprises with an annual turnover of less than EUR 88 500. In this regard, Romania estimates that in 2019 the amount of VAT paid to the state budget by taxable persons registered for VAT purposes with an annual turnover of less than EUR 88 500 represented 2.52% of total VAT revenue and 1.09% of total State budget revenue. For the same year, taxable persons with an annual turnover above EUR 88 500 (representing 42.85% of the total number of taxable persons registered for VAT purposes) made a contribution of 97.48% to total VAT revenue. Thus, it appears that the impact of the derogating measure on tax revenue collected at the final consumption stage will be negligible, whereas its impact will be significant in terms of simplifying both the tax obligations of the taxable persons concerned as well as the procedure for collecting VAT for the tax administration.

Based on the information provided by Romania, it is clear that the aim of the request to prolong the derogating measure is to release small businesses from many of the VAT obligations under the normal VAT arrangements as well as to reduce the burden of the tax administration in terms of tax collection, thus making it more efficient, while saving administrative resources and reducing tax evasion. The derogating measure is thus in line with the objectives of the first subparagraph of Article 395(1) of the VAT Directive, which allows Member States to introduce special measures derogating from its provisions in order to simplify the procedure for collecting VAT or to prevent tax evasion. In this context, it is reiterated that the measure is and will remain optional for taxable persons, which are allowed to opt for the normal VAT arrangements.

As demonstrated by Romania, the derogating measure is not expected to either affect significantly the overall amount of its tax revenue collected at the stage of the final consumption. Therefore, the derogating measure appears to be in accordance with the second subparagraph of Article 395(1) of the VAT Directive. In the light of the above, and given that the EU legal framework and the factual situation remain unchanged, the requested extension of the expiry date of the derogating measure appears to be justified. Hence, it is proposed that Romania’s request be granted.

Derogations are normally granted for a limited period to allow an assessment of whether the derogating measure remains appropriate and effective. Moreover, the Council adopted on 18 February 2020 a directive amending the provisions of Articles 281 to 294 of the VAT Directive on the special scheme for small enterprises. The new directive on simpler VAT rules for small enterprises requires that Member States adopt and publish the laws, regulations and administrative provisions, which are necessary to comply with the new rules, by 31 December 2024 at the latest. Member States will have to apply those national provisions from 1 January 2025.

It is therefore appropriate to authorise Romania to continue to apply the derogating measure until 31 December 2024.