amending Implementing Decision (EU) 2017/2408 authorising the Republic of Latvia to apply a special measure derogating from Article 287 of Directive 2006/112/EC on the common system of value added tax

EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of valued 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 17 April 2020, Latvia requested an authorisation to continue to apply, until 31 December 2024, a measure derogating from Article 287 of the VAT Directive, allowing Latvia to exempt from VAT taxable persons whose annual turnover is no higher than EUR 40 000.

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 19 May 2020 of the request made by Latvia. The Commission notified Latvia by letter dated 20 May 2020 that it had all the information necessary to consider 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 special schemes for small enterprises, including the possibility of exempting taxable persons below a certain annual turnover. This exemption implies that a taxable person does not have to charge VAT on his supplies and, consequently, he or she cannot deduct the VAT on his inputs. Under Article 287(10) of the VAT Directive, Latvia may exempt from VAT taxable persons whose annual turnover is no higher than the equivalent in national currency of EUR 17 200 at the conversion rate on the day of its accession. By virtue of Council Implementing Decision 2010/584/EU Latvia was authorised to apply a higher threshold and thus to exempt from VAT taxable persons with an annual turnover not exceeding EUR 50 000. This measure was extended by Council Implementing Decision 2014/796/EU until 31 December 2017. By Council Implementing Decision (EU) 2017/2408, Latvia was authorised to extend the measure until 31 December 2020 and, at the same time, to decrease the exemption threshold from EUR 50 000 to EUR 40 000. According to the Latvian authorities, the measure facilitates VAT collection, enabling Latvia to simplify administrative procedures for small enterprises and thus reduce the administrative burden on them. Moreover, the measure also reduces the workload for the tax authorities. Further, the Latvian authorities explain that in the last years they observed a reduction in the number of registered VAT payers, partly due to the faster removal of VAT payers from the VAT register as a result of measures adopted to combat VAT fraud, while the VAT revenue continued to increase and the cost incurred by the Latvian tax administration to collect one euro decreased. Those results, coupled with the fact that Latvia´s neighbouring countries have similar thresholds for the application of the special scheme for small enterprises (the threshold in Estonia is fixed at EUR 40 000 while the threshold in Lithuania is of EUR 45 000), advise to maintain the threshold at the current level. According to the estimates of the Latvian authorities, lowering the threshold further will not have a major positive fiscal impact or increase the number of persons registered for VAT purposes, because, as actual data for 2018 show, the impact in fiscal terms and in terms of the number of enterprises was lower than forecast. By contrast, increasing it, for example to EUR 50 000, would have a negative fiscal impact. The measure has an optional character. Therefore, small businesses whose turnover does not exceed the threshold will still have the possibility to exercise their right to apply the normal VAT arrangements. Derogations are normally granted for a limited period to allow an assessment of whether the derogating measure remains appropriate and effective. Moreover, the provisions of Articles 281 to 294 of the VAT Directive on the special scheme for small enterprises have recently been reviewed. The new directive laying down 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 Latvia to apply the derogating measure until 31 December 2024.

•Consistency with existing policy provisions in the policy area