amending Directive 2006/112/EC as regards the extension of the application period of the optional reverse charge mechanism in relation to supplies of certain goods and services susceptible to fraud and of the Quick Reaction Mechanism against VAT fraud

EXPLANATORY MEMORANDUM

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

The purpose of the current proposal for a Directive amending Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (hereafter the ‘VAT Directive’) is to prolong: 1) the possibility for Member States to apply the reverse charge mechanism to combat existing fraud in supplies of goods and services included in Article 199a(1) of the VAT Directive and 2) the possibility to use the Quick Reaction Mechanism (QRM), as set out in Article 199b of the VAT Directive, to combat fraud via the application of the reverse charge mechanism in very specific cases.

As a general rule, Article 193 of the VAT Directive stipulates that the taxable person supplying goods or services is liable to pay VAT. As a derogation, the reverse charge mechanism allows to designate the recipient of the supply as the person liable for the payment of VAT. Under this reverse charge mechanism, VAT is not charged by the supplier but accounted for by the customer (a taxable person) in his VAT return. This VAT is then deducted in that same VAT return and, therefore, insofar this person has a full right of deduction, the result is nil.

The reverse charge mechanism is used to combat fraud and in particular Missing Trader Intra-Community (MTIC) fraud. This type of fraud occurs when a trader acquires goods, transported or dispatched from another Member State, by means of a supply exempt from VAT, and sells them on including VAT on the invoice to the customer. After having received the VAT amount from the customer such trader disappears before paying the VAT due to the tax authorities. At the same time, the customer acting in good faith can normally deduct the VAT he paid to the supplier through his VAT return. Hence, under the reverse charge mechanism VAT is not effectively paid to the supplier.

The reverse charge mechanism based on Article 199a of the VAT Directive is optional for Member States to apply. It allows them to fight this type of fraud in the pre-defined sensitive areas where it typically occurs on their territory. Once suppliers are obliged to use the reverse charge mechanism for such domestic supplies, they cannot charge VAT on their invoice. They will subsequently not receive the VAT amount from their customer and, as a result, such traders cannot disappear with the amount of VAT received. The QRM of Article 199b is an exceptional measure allowing Member States to quickly introduce, in cases of imperative urgency, a temporary reverse charge mechanism for supplies of goods and services in sectors where sudden and massive fraud occurred and which are not listed in Article 199a of the VAT Directive. This procedure is exceptional and extremely quick as the Commission has to react within one month, either with a negative opinion or to confirm in writing to the Member State concerned that it does not object the measure. The Member State may adopt the QRM special measure from the date of receipt of that confirmation. By using this mechanism, Member States can bridge the period required for obtaining a ‘normal’ derogation under Article 395 of the VAT Directive, which can take up to six months. Such a derogation requires a proposal from the Commission and unanimous adoption by Council.

Article 199a of the VAT Directive was introduced for the period 2010 until 30 June 2015 and was a first time extended, with amendments, until 31 December 2018. Article 199b of the VAT Directive was introduced for the period 2013 until 31 December 2018. Both Articles 199a and 199b of the VAT Directive were subsequently extended until 30 June 2022 in order to coincide with the initially foreseen date on which the VAT definitive system would enter into force (see more details below).

At the time the application period of Articles 199a and 199b of the VAT Directive would be extended until 30 June 2022, the Commission presented a report on the effects of the mechanisms included in these articles and concluded, on the basis of contributions of tax administrations and business stakeholders, that the measures in these articles were useful in the fight against fraud.

In order to deal with the issue of (MTIC) fraud in a more structural manner, the Commission made a proposal for the introduction of the so-called definitive VAT system, a simpler and fraud-proof system for intra-Union trade of goods. These arrangements, which the Commission proposed to enter into force on 1 July 2022, provide a fundamental response to MTIC fraud.

However, the state of play of the ongoing negotiations in the Council indicates that it will not be possible for the definitive VAT system to enter into force on 1 July 2022. In order to allow the negotiations on the definitive system to continue, without putting at risk the available tools in order to combat VAT fraud, it is appropriate to prolong the anti-fraud measures contained in the said articles for another limited period.

To extend the application period of Articles 199a and 199b would also allow developing further tools to fight tax evasion. To that end, and in accordance with the Tax Package, the Commission is preparing a proposal in order to modernise the current VAT rules, taking into account the opportunities offered by digital technologies. Under the heading ‘VAT in the digital age’, the Commission will assess VAT reporting obligations, possibly including on Transaction-Based Reporting (TBR) and an enhanced system of e-invoicing. This should provide quicker and more detailed information on individual transactions to tax administrations and therefore lower the risk of fraud. Based on such legislative developments, the need to further extend Articles 199a and 199b should be reassessed in the future.

•Consistency with existing policy provisions in the policy area

The current proposal prolongs the measures, laid down in Articles 199a and 199b of the VAT Directive, for a limited period while the negotiations at the Council on the proposal for a definitive VAT system, which includes amendments to Articles 199a and 199b of the VAT Directive as to align them to the functioning of that definitive system, are continued. As the definitive VAT system is related to goods, Articles 199a and 199b would be restricted to services. The prolongation is also consistent with the timing of the Commission’s preparations for new reporting rules as an anti-fraud measure, which could result in the application of the reverse charge mechanism no longer being required. However, even if these new reporting rules would be adopted rather soon, a period of time would be needed for taxable persons to adapt to the new rules; an extension until the end of 2025 seems therefore adequate.

•Consistency with other Union policies

Article 199a of the VAT Directive covers under the reverse charge mechanism, among others, the EU trading in greenhouse gas emission allowances (EU Emission Trading System (ETS)). In order to support the goals of the Green Deal, in particular as regards the reduction of emissions of greenhouse gases by 55% by 2030, it is essential that the ETS is further protected from (carousel) fraud as to avoid that, apart from the financial losses, the credibility of the system would be undermined.

2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

•Legal basis