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 9 April 2018, Latvia requested a derogation from Article 193 of the VAT Directive in order to apply the reverse charge mechanism to supplies of ferrous and non-ferrous semi-finished metals. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 4 May 2018 of the request made by Latvia. By letter dated 7 May 2018 the Commission notified Latvia that it had all the information necessary to consider the request.

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

As a general rule, Article 193 of the VAT Directive stipulates that the taxable person supplying goods or services is normally liable to pay value added tax (VAT).

Pursuant to Article 199a(1) of the VAT Directive Member States may provide that the person liable for payment of VAT on supplies listed in this Article is the taxable person to whom the supply is made (the reverse charge mechanism). Under the reverse charge procedure, the taxable person, to whom the supplies are made, becomes liable for the payment of VAT. This taxable person, provided he has a full right of deduction, would simultaneously declare and deduct the VAT corresponding to the supply, thus leading to no effective payment of VAT to the Treasury. Supplies of ferrous and non-ferrous semi-finished metals are included in point (j) of Article 199a, paragraph 1.

Latvia did not make use of the option of Article 199a (1)(j) of the VAT Directive and did not apply the reverse charge mechanism to supplies of ferrous and non-ferrous semi-processed metals. However, due to recently discovered fraud schemes in the supplies of these products Latvia would like to introduce the reverse charge mechanism to domestic supplies of ferrous and non-ferrous semi-finished metals.

Following Article 199a (1) of the VAT Directive, the reverse charge mechanism may be applied until 31 December 2018 and for a minimum period of two years. As the condition of the two-year period is not fulfilled, Latvia cannot apply the reverse charge mechanism based on this Article.

Consequently, Latvia requests a derogation from Article 193 of the VAT Directive to be authorised to apply the reverse charge mechanism to supplies of ferrous and non-ferrous semi-finished metals based on Article 395 of the VAT Directive.

Latvia submits that during tax audits VAT fraud schemes have been identified in the sector of metal products. When assessing the tax audits whereby tax evasion in relation to transactions with metal products was detected, Latvia found out that they systematically led to significant amounts of additional tax be paid. These additional assessments mounted up to the double of average additional assessments following audits. According to Latvia, this points to the high risk of fraud in transactions involving metal products.

According to the information submitted by Latvia, a number of measures are undertaken by Latvia to reduce and fight VAT fraud. For instance, cash registers have been subject to new requirements aiming to completely eliminate the fraudulent deletion of registered transactions, a detailed breakdown of transactions must be given in the VAT declaration and particular attention is also given to improving the standard controls and administrative measures. Despite all these measures, Latvia considers it nevertheless necessary to introduce the reverse charge mechanism for the supplies of ferrous and non-ferrous semi-processed metals to prevent VAT revenue losses to the public budget.

Supplies of ferrous and non-ferrous semi-finished metals are considered to be susceptible to fraud and are therefore included in Article 199a(1)(j) of the VAT Directive. If the condition regarding the minimum period of application was fulfilled, Latvia would have been able to rely on the latter Article for the application of the reverse charge mechanism.

It is therefore, proposed to grant the derogation for the period of validity of Article 199a of the VAT Directive. The derogation is thus proposed until 31 December 2018, i.e. the date of expiry of Article 199a of the VAT Directive.

•Consistency with existing policy provisions in the policy area

Based on Article 199a(1)(j) of the VAT Directive, the reverse charge mechanism may be applied to the supplies of ferrous and non-ferrous semi-finished metals. A number of Member States apply the reverse charge relying on this provision. If the condition of the minimum period of two years were fulfilled, Latvia could apply the reverse charge mechanism to supplies of ferrous and non-ferrous semi-finished metals without requesting a derogation based on Article 395 of the VAT Directive. The proposed measure is, therefore, consistent with the existing provisions of the VAT Directive.

2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

•Legal basis