Proposal for a Council Decision authorising Latvia to extend the application of a measure derogating from Article 21 of the Sixth Council Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes
Date: 2005-08-18
Institutions: European Commission
Subjects: Latvia, VAT, approximation of laws, derogation from EU law, tax system, wood product

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 18.8.2005 
COM(2005) 376 final 

Proposal for a 

COUNCIL DECISION 

authorising Latvia to extend the application of a measure derogating from Article 21 of 
the Sixth Council Directive 77/388/EEC on the harmonisation of the laws of the Member 
States relating to turnover taxes 

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

1)  CONTEXT OF THE PROPOSAL 

110 

•  Grounds for and objectives of the proposal 

Pursuant to Article 27(1) of the Sixth Council Directive 77/388/EEC of 17 May 1977 
on  the  harmonisation  of  the  laws  of  the  Member  States  relating  to  turnover  taxes  - 
Common system of value added tax: uniform basis of assessment, the Council, acting 
unanimously on a proposal from the Commission, may authorise any Member State to 
apply  special  measures  for  derogation  from  that  Directive  in  order  to  simplify  the 
procedure for charging the tax or to prevent certain types of tax evasion or avoidance. 

By letter registered with the Secretariat-General of the Commission on 16 March 2005, 
Latvia has requested authorisation to extend the application of a derogation measure on 
timber transactions previously granted for a limited period by the Act of Accession. In 
accordance with Article 27(2) of Directive 77/388/EEC, the Commission informed the 
other Member States by letter dated 10 May 2005 of the request made by Latvia. By 
letter  dated  31  May  2005,  the  Commission  notified  Latvia  that  it  had  all  the 
information it considered necessary for appraisal of the request. 

120 

•  General context 

The  timber  market  in  Latvia  is  dominated  by  small  local  companies  and  individual 
suppliers,  which  have  often  proved  to  be  transitory  businesses,  difficult  for  the  tax 
administration  to  control  and  vehicles  for  tax  evasion.  The  most  common  form  of 
evasion  involves  the  invoicing  of  supplies  followed  by  the  disappearance  of  the 
business without paying tax but leaving the customer in receipt of a valid invoice for 
tax deduction. In order to prevent evasion of tax, a special provision was included in 
Latvia's  law  on  VAT.  This  provision,  derogating  from  Article  21  of  Directive 
77/388/EEC,  stipulates  that  in  the  case  of  transactions  in  relation  to  timber,  the 
recipient  of  goods  or  services  is,  under  certain  circumstances,  the  person  liable  to 
account for the VAT. This system is applied for supplies of goods and services within 
the territory of Latvia and has no impact on cross-border transactions. 

The  Commission  understands  that  this  arrangement  has  effectively  enabled  Latvia  to 
reduce the risk of VAT evasion and to simplify the procedure for charging the tax in 
the timber market. 

The  Commission  therefore  considers  it  appropriate  for  Latvia  to  be  authorised  to 
continue to apply the special measure. 

•  Existing provisions in the area of the proposal 

Derogation previously granted in the Act of Accession, Chapter 7, point 1(b) of Annex 
VIII. 

•  Consistency with other policies and objectives of the Union 

Not applicable. 

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2)  CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

•  Consultation of interested parties 

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Not relevant 

•  Collection and use of expertise 

There was no need for external expertise. 

•  Impact assessment 

229 

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The Decision proposal aims at combatting potential VAT evasion in the timber market 
of Latvia and has therefore a potential positive economic impact. 

Impact will in any case be limited because of the narrow scope of the derogation. 

3)  LEGAL ELEMENTS OF THE PROPOSAL 

305 

•  Summary of the proposed action 

Authorisation for Latvia to extend the application of a measure derogating from Article 
21 of the Sixth  Council  Directive 77/388/EEC as regards the use of  a  reverse  charge 
mechanism for timber transactions. 

310 

•  Legal basis 

Article  27(1)  of  the  Sixth  Council  Directive  77/388/EEC  of  17  May  1977  on  the 
harmonisation of the laws of the Member States relating to turnover taxes - Common 
system of value added tax: uniform basis of assessment. 

329 

•  Subsidiarity principle 

The proposal falls under the exclusive competence of the Community. The subsidiarity 
principle therefore does not apply. 

•  Proportionality principle 

The proposal complies with the proportionality principle for the following reason(s). 

This  Decision  concerns  an  authorisation  granted  to  a  Member  State  upon  its  own 
request and does not constitute any obligation. 

Given the limited scope of the derogation, the special measure is proportionate to the 
aim pursued. 

•  Choice of instruments 

Proposed instruments: other. 

Other means would not be adequate for the following reason(s). 

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According  to  Article  27  of  the  Sixth  Council  Directive  77/388/EEC  on  the 
harmonisation  of  the  laws  of  the  Member  States  relating  to  turnover  taxes,  only  a 
Council Decision is possible. 

4)  BUDGETARY IMPLICATION 

409 

The proposal has no implication for the Community budget. 

5)  ADDITIONAL INFORMATION 

•  Review/revision/sunset clause 

The proposal includes a sunset clause. 

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E-2904 

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Proposal for a 

COUNCIL DECISION 

authorising Latvia to extend the application of a measure derogating from Article 21 of 
the Sixth Council Directive 77/388/EEC on the harmonisation of the laws of the Member 
States relating to turnover taxes 

(Only the Latvian version is authentic) 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, 

Having regard to Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the 
laws of the Member States relating to turnover taxes – Common system of value added tax: 
uniform basis of assessment1, and in particular Article 27 thereof, 

Having regard to the proposal from the Commission2, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

Under  Article  27(1)  of  the  Sixth  Council  Directive  77/388/EEC,  the  Council,  acting 
unanimously on a proposal from the Commission, may authorise any Member State to 
apply  special  measures  for  derogation  from  that  Directive  in  order  to  simplify  the 
procedure for charging the tax or to prevent certain types of tax evasion or avoidance. 

By  letter  registered  with  the  Secretariat-General  of  the  Commission  on  16  March 
2005,  Latvia  has  requested  authorisation  to  extend  the  application  of  a  derogation 
measure on timber transactions. 

In accordance with Article 27(2) of Directive 77/388/EEC, the Commission informed 
the other Member States by letter dated 10 May 2005 of the request made by Latvia. 
By  letter  dated  31  May  2005,  the  Commission  notified  Latvia  that  it  had  all  the 
information it considered necessary for appraisal of the request. 

The  timber  market  in  Latvia  is  dominated  by  small  local  companies  and  individual 
suppliers. The nature of the market and businesses involved have generated tax fraud 
which the tax authorities have found difficult to control. In order to combat this abuse, 
a special provision was included in Latvia's law on VAT, laying down that the person 
liable  to  pay  tax  is,  under  certain  circumstances,  the  taxable  person  for  whom  the 
taxable supply of goods or services is carried out. 

1 
2 

OJ L 145, 13.6.1977, p. 1. Directive last amended by Directive 2004/66/EC (OJ L 168, 1.5.2004, p. 35) 
OJ C […], […], p. […]. 

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(5) 

(6) 

(7) 

Article 21(1) of Directive 77/388/EEC, in the version set out in Article 28g of the said 
Directive, stipulates that under the internal system, the taxable person supplying goods 
or services is normally liable for payment of the tax. However, the Act of Accession of 
20033, and in particular Chapter 7, point 1(b) of Annex VIII thereof, authorised Latvia 
for a limited period to continue to apply their procedure for charging VAT on timber 
transactions.  

The Commission understands that this arrangement has effectively enabled Latvia to 
reduce the risk of VAT evasion and to simplify the procedure for charging the tax in 
the timber market. 

The  derogation  has  no  adverse  impact  on  the  Communities'  own  resources  accruing 
from VAT, 

HAS ADOPTED THIS DECISION:  

Sole Article 

By way of derogation from Article 21(1)(a) of Directive 77/388/EEC, in the version set out in 
Article 28(g) thereof, Latvia is hereby authorised to continue to designate the recipient as the 
person liable to pay VAT in the case of timber transactions until 31 December 2009. 

This Decision is addressed to the Republic of Latvia. 

Done at Brussels,  

For the Council 
The President 

3 

OJ L 236, 23.9.2003, p. 33 

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