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 26 July 2019, Italy requested an authorisation to continue, until 31 December 2022, to exempt from VAT taxable persons whose annual turnover is below a certain threshold, as provided for in Article 285 of the VAT Directive, to increase this threshold from EUR 65 000 to EUR 100 000 and, in parallel, apply a mandatory electronic invoicing scheme to the taxable persons concerned, and to raise the threshold for voluntary organisations and associations for social advancement up to EUR 130 000.

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 20 September 2019 of the request made by Italy. By letter dated 23 September 2019, the Commission notified Italy that it had all the information it considered necessary for the appraisal of the request.

Subsequently, following informal discussions with the competent Commission services and further political assessments at national level, Italy decided to modify its original request by letter sent on 26 November 2019 and registered with the Commission on 5 December 2019.

By means of that letter, Italy asked to withdraw its request to increase the exemption threshold from EUR 65 000 to EUR 100 000, explaining that this request was based on a national rule which was in the course of being repealed. Instead, Italy expressed its wish to keep the current threshold of EUR 65 000, which is in line with the flat-rate scheme for taxpayers in the field of direct taxes. Moreover, Italy asked to withdraw the request concerning the EUR 130 000 threshold for voluntary organisations and associations for social advancement, given that it is linked to direct taxation measures not yet in force; Italy reserved the right to resubmit such request once the overall measures at issue enter into force. Furthermore, following the Member States’ agreement during the Economic and Financial Affairs Council (ECOFIN) of 8 November 2019 on the Commission proposal on new simplification rules in respect of VAT for small businesses, which was adopted on 18 February 2020 and will enter into force on 1 January 2025, Italy requested that the extension of the derogating measure expire on 31 December 2024.

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 10 December 2019 of the corrigendum to the original request that Italy had sent. By letter dated 11 December 2019, the Commission notified Italy that it had all the information it considered necessary for the appraisal of the revised 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.

The possibility of applying special VAT rules including exemptions or graduated tax relief to small undertakings was first introduced by Article 14 of Council Directive 67/228/EEC. Member States which did not make use of the option provided for under that provision were allowed subsequently, according to Article 24(2)(b) of Directive 77/388/EEC, now recast as the first paragraph of Article 285 of the VAT Directive, to only exempt from VAT taxable persons whose annual turnover is no higher than EUR 5 000 or the equivalent in national currency.

Italy never made use of the option provided for by Article 14 of Council Directive 67/228/EEC. In 2007, it requested authorisation to derogate from the first paragraph of Article 285, by exempting from VAT taxable persons whose annual turnover was no higher than EUR 30 000. That request was prompted by the Italian economic structure, largely comprised of micro enterprises with a very small number of employees, and Italy’s desire to simplify VAT obligations for small businesses and to ease VAT collection for the national tax administration. The derogating measure was authorised until 31 December 2010, by virtue of Council Decision 2008/737/EC. The measure had an optional character, allowing small businesses to opt for the normal VAT arrangements.

Italy was subsequently authorised to extend the expiry date of the derogating measure until 31 December 2013, by Council Implementing Decision 2010/688/EU, then until 31 December 2016, by Council Implementing Decision 2013/678/EU, which also increased the maximum exemption threshold from EUR 30 000 to EUR 65 000, and finally until 31 December 2019, by Council Implementing Decision (EU) 2016/1988. The present (revised) request from Italy to prolong further the expiry date of the derogating measure until 31 December 2024, without increasing the current threshold of EUR 65 000 (or any higher value which is equivalent to that threshold in real terms), is based on the same grounds as those presented in the previous requests. Italy maintains that small and medium-sized enterprises, and in particular micro-enterprises, play a preponderant role in the non-financial business economic sector of the country, in terms of both added value and employment. Given the disproportionate VAT compliance costs such businesses bear in comparison with large enterprises, and the fact that they are still affected by the economic crisis, Italy states that the derogating measure constitutes a significant incentive for the start-up and consolidation of their economic activity. In this regard, it is stressed 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. It is noted that the measure affects 1 332 000 taxable persons, that constitute 25% of the potentially eligible taxable persons. Italy estimates the total amount of revenue reduction at EUR 385.7 million.

Based on the information provided by Italy, it is clear that the aim of the request to extend 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 and the auditing of small businesses. This could allow the tax administration to focus its control activities towards larger taxable persons. 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. 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.