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 26 June 2017, Hungary requested authorisation to prolong Council Implementing Decision (EU) 2015/2349 of 10 December 2015 and thus to continue the application of a measure derogating from Article 193 of the VAT Directive. In accordance with Article 395(2) of the VAT Directive and after it has received from Hungary further details on the justification of the request, the Commission informed the other Member States by letter dated 11 December 2017 of the request made by Hungary. By letter dated 12 December 2017, the Commission notified Hungary that it had all the information it considered necessary for appraisal of the request.

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Hungary informed the Commission of fraud schemes in the sector of supply of staff, in particular as regards temporary employment agencies and organisations providing similar services, such as school cooperatives whose members perform work for third parties. One of the characteristics of supplying this type of services is that large investments or specialised knowledge is not really required. It is therefore relatively easy to establish such a business which then disappears after a short period. Because of limited investments, the VAT received from clients often largely exceeds the deductible VAT on these investments or, more general, on the input. The non-deducted VAT on the input constitutes therefore only a small cost element when these undertakings, with little or no assets, disappear. The overall amount of unpaid VAT becomes difficult or impossible to recover. In order to fight VAT fraud in the sector of temporary employment agencies, Hungary requested in 2014 a derogation from Article 193 of the VAT Directive to be authorised to provide that for supplies of staff engaged in activities other than those covered by point (a) of Article 199(1) of the VAT Directive, the person liable for payment of VAT is the taxable person to whom the supplies are made (the reverse charge mechanism). The authorisation was granted by Council Implementing Decision (EU) 2015/2349 which expired on 31 December 2017. Hungary requested the authorisation to continue to apply the special measure derogating from Article 193 of the VAT Directive and at the same time to extend its scope to pensioners' cooperatives. According to information submitted by Hungary, the reverse charge mechanism has proven to be an appropriate and effective tool in combating corrupt practices in the temporary employment agencies sector. Hungary namely submits that once the reverse charge was introduced, the number of temporary agencies dropped. At the same time the data show that while the number of taxpayers in the given sector decreased, there was a sharp increase in the taxable amount of domestic supplies in 2016. Hungary submits that a significant number of measures were introduced to combat the VAT fraud (e.g. increased supervision and controls of new registering companies, legislative changes to increase the efficiency of control activities, monthly VAT returns for newly registered companies, the introduction of a minimum services fee for school cooperatives, monitoring of receipts from cash registers on-line, domestic VAT recapitulative statements in certain cases, etc.). Other anti-fraud measures with particular focus on temporary employment agencies are planned by Hungary (e.g. narrowing the scope of the temporary agency work sector, introduction of a guarantee linked to the activities in this sector, extension of an employment security). Notwithstanding these measures, Hungary considers that to further reduce the damage done to the sector the protective reverse charge mechanism needs to be maintained. Hungary also informed the Commission that a new legal institution was to be introduced in Hungary, namely the pensioners' cooperatives. Similarly to school cooperatives, employment by pensioners' cooperatives is to be considered analogous to temporary agency work. Hungary therefore requests the reverse charge mechanism to apply also to the latter cooperatives. It is to be noted that the VAT Directive already foresees in an optional application of the reverse charge mechanism in relation to the supply of staff (Article 199(1)(b) of the VAT Directive). This possibility is limited to, essentially, the immovable property sector (Article 199(1)(a) of the VAT Directive). The proposed derogating measure should therefore only be applicable to situations not already covered by the VAT Directive.

Finally, as the adoption of the derogating measure will take place after the expiry of Council Implementing Decision (EU) 2015/2349 (i.e. after 31 December 2017), this proposal cannot extend the previous measure.

It is proposed to grant the derogation until 31 December 2020. As until the expiry of the derogation, the measures undertaken and to be introduced by Hungary should be effective in the fight against fraud in the sector concerned, Hungary should not need any longer period to derogate from Article 193 of the VAT Directive with regards to supplies of staff by temporary employment agencies. A renewal of the derogation should therefore not be necessary.

2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

•Legal basis

Article 395 of the VAT Directive.

•Subsidiarity (for non-exclusive competence)