EXPLANATORY MEMORANDUM

1.CONTEXT OF THE PROPOSAL

Grounds for and objectives of the proposal

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 24 November 2014, the Italian Republic requested authorisation to derogate from Articles 206 and 226 of the VAT Directive. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 16 March 2015 of the request made by the Italian Republic. By letter dated 17 March 2015, the Commission notified the Italian Republic that it had all the information necessary to consider the request.

General context

Following the introduction of a system of statistical checks, Italy has discovered that considerable VAT fraud exists in relation to supplies of goods and services to public authorities. In accordance with the general rule, VAT is charged on these supplies and the public authorities pay the VAT, together with the price, to the supplier. Italy has noted that a significant number of suppliers engage in tax evasion by not paying this VAT to the tax authorities.

To put an end to these practices, Italy has requested that, for supplies to public authorities, the VAT due would no longer be paid to the supplier. Since, however, public authorities are in principle not taxable persons, the application of the so-called ‘reverse charge’ mechanism is not possible as VAT returns, in which VAT due can be accounted for and deducted, are, as a general rule, not filed by non-taxable persons. Therefore, Italy has the intention to develop a system under which the VAT, in relation to supplies to public authorities, would be paid to a separate and blocked bank account. Italy has estimated that this would generate VAT revenues for an estimated total between 741 and 1.235 million euro.

In order to enable such a system, Italy has requested to be authorised to derogate from Article 206 of the VAT Directive as to ensure that the supplier is no longer obliged to pay over the VAT on his supplies to the tax authorities since this VAT has to be paid, as mentioned above, to a special account by the public authority to whom a supply has been made. At the same time, it is necessary to derogate from Article 226 of the VAT Directive regarding the maximum invoice details that can be requested from taxable suppliers as to allow the introduction of a special additional mentioning on the invoice indicating that the amount of VAT has to be paid to that separate account and not to the supplier.

Since June 2014, Italy has implemented the obligation of electronic invoicing for supplies to public authorities, which has opened the possibility of real-time control of individual transactions and the exact amounts of VAT which public authorities are due to pay on their purchases. On the basis of this precise information, it should be possible to audit the sector concerned on the basis of conventional control techniques without the need to derogate from the VAT Directive. However, in order to organise and implement an adequate control policy and to fully benefit from the data available via electronic invoicing, Italy requested a derogation for a limited period during which the above-mentioned special system would be applied. At the same time, Italy has accepted not to seek any renewal of the derogation.

In the context of this electronic invoicing, a database of all public authorities has been set up and made available via a dedicated website, which should provide the necessary guarantee to providers that they are indeed supplying to public authorities to whom the derogating measure applies.

One of the effects of the proposed measure, however, is the fact that taxable persons, mainly engaged in supplies of goods or services to public authorities, will no longer be able to offset the VAT paid on their input with the VAT received on their supplies from their clients. This type of taxable persons might be constantly in a credit position and will need to ask for an effective refund of this VAT from the tax administration.

However, the refund procedure in Italy has given rise to concerns and it should be pointed out that there is still an infringement procedure in this context that has not been closed yet.

Against this background, Italy has reformed its refund procedure of which the main feature is to refund the VAT within three months to the claimant. In addition to this overall reform, a number of categories of taxable persons, in terms of business conducted and types of transactions carried out, are identified to which refunds are made as priority. Taxable persons within the scope of the proposed derogation will be able to benefit of this priority procedure.

Nonetheless, as to guarantee the necessary follow-up within the framework of this derogation, Italy is requested to provide a report, eighteen months after the entry into force of this derogation, on the VAT refund procedure with regard to this category of taxable persons. This report should, in particular, provide statistics as regards the average time needed to effectively refund the VAT to these taxable persons and outline particular problems that might have occurred in this context.

Finally, it has been brought to the attention of the Commission that Italy would have started applying the measure without having awaited the adoption of the relevant Council decision.

2.RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND IMPACT ASSESSMENTS

Consultation of interested parties

This proposal is based on a request made by Italy and concerns only this Member State.