Proposal for a Council Decision Authorising Lithuania to apply 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: 2006-01-10
Institutions: European Commission
Subjects: Lithuania, VAT, approximation of laws, derogation from EU law, tax harmonisation

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 10.01.2006 
COM(2005) 704 final 

Proposal for a 

COUNCIL DECISION 

Authorising Lithuania to apply 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 

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•  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 28 June 2005, 
the  Republic  of  Lithuania  has  requested  to  be  authorised  to  introduce  measures 
derogating from Article 21 of Directive 77/388/EEC. In accordance with Article 27(2) 
of Directive 77/388/EEC, the Commission informed the other Member States by letter 
dated  22  August  2005  of  the  request  made  by  Lithuania.  By  letter  dated  23  August 
2005,  the  Commission  notified  Lithuania  that  it  had  all  the  information  it  considered 
necessary for appraisal of the request. 

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•  General context 

As  a  general  rule,  Article  21(1)  of  Directive  77/388/EEC,  in  the  version  set  out  in 
Article  28(g)  thereof,  stipulates  that,  under  the  internal  system,  the  taxable  person 
supplying goods or services is normally liable to pay value added tax (VAT).  

The Lithuanian Government would like to apply a reverse charge procedure, whereby 
the taxable person, to whom the supplies of goods or services are made, becomes liable 
for the payment of the VAT in the following situations: 

-  supplies  of  goods  and  services  by  a  taxable  person  while  under  an  insolvency 
procedure or a restructuring procedure subject to judicial oversight; 

- supplies of timber by a taxable person; 

- supplies by a taxable person of ferrous waste and scrap, residues and other recyclable 
materials consisting of ferrous and non-ferrous metals; 

-  supplies  of  construction  work  by  a  subcontractor  to  either  a  general  contractor, 
another subcontractor or a company which carries out its own construction work. 

As  regards  supplies  of  taxable  persons,  while  under  an  insolvency  procedure  or  a 
restructuring procedure subject to judicial oversight, they have often not the possibility 
or  the  intention  to  submit  the  VAT  received  on  their  supplies  to  the  competent 
authorities. On the other hand, the purchaser usually being a compliant trader, can still 
deduct the VAT incurred. 

The timber sector in Lithuania represents a high risk of tax evasion and avoidance. The 
sector  accounts  for  a  considerable  amount  of  traders,  often  small  resellers  and 
intermediaries,  which  frequently  disappear  without  having  paid  the  tax  they  initially 

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charged  to  their  clients.  The  Lithuanian  Government  therefore  considers  it  important 
that  the  derogation  would  be  applicable  at  all  the  stages  whereby  timber  is  supplied 
between taxable persons. 

A  similar  situation  is  encountered  in  the  waste  sector,  where  traders  engaged  in  the 
collection, sorting and basic transformation often become untraceable.  

Problems of this nature are also noted in the construction sector, in particular in those 
areas where construction work is provided by subcontractors, which subsequently fail 
to pay the tax. 

The present request will, in principle, be granted until 31st December 2009. However, 
it should be taken into account that on 16 March 2005, the Commission has presented a 
proposal for a Directive modifying Directive 77/388/EEC as regards certain measures 
to simplify the procedure for charging VAT and to assist in countering tax evasion and 
avoidance, and repealing certain Decisions granting derogations (the rationalisation of 
Article 27 derogations exercise). This proposal includes, amongst other things, the use 
of the reverse charge mechanism in certain situations. For those parts of the derogation, 
which will be covered by the rationalisation exercise, the derogation will cease to have 
effect as from the entry into force of that Directive.  

•  Existing provisions in the area of the proposal 

Similar  derogations  in  relation  to  Article  21  of  Directive  77/388/EEC  have  been 
granted to other Member States. 

•  Consistency with other policies and objectives of the Union 

Not applicable. 

2)  CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

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•  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  simplifying  the  procedure  for  charging  the  tax  and  at 
combating  possible  VAT  evasion  or  avoidance  and  has  therefore  a  potential  positive 
economic impact. 

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

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3)  LEGAL ELEMENTS OF THE PROPOSAL 

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•  Summary of the proposed action 

Authorisation for Lithuania to apply a measure derogating from Article 21 of the Sixth 
Council  Directive  77/388/EEC  as  regards  the  use  of  a  reverse  charge  mechanism  in 
case  of  insolvency  procedures,  restructuring  subject  to  judicial  oversight,  supplies  of 
timber, certain supplies of waste and certain supplies of construction work. 

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). 

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. 

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4)  BUDGETARY IMPLICATION 

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The proposal has no implication for the Community budget. 

5)  ADDITIONAL INFORMATION 

•  Review/revision/sunset clause 

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The proposal includes a sunset clause. 

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Proposal for a 

COUNCIL DECISION 

Authorising Lithuania to apply 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 Lithuanian version is authentic) 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, 

Having  regard  to  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 assessment1, and in particular Article 27 thereof, 

Having regard to the proposal from the Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

Under  Article  27(1)  of  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 28 June 2005, 
Lithuania  has  requested  to  be  authorised  to  introduce  measures  derogating  from 
Article 21 of Directive 77/388/EEC. 

In accordance with Article 27(2) of Directive 77/388/EEC, the Commission informed 
the  other  Member  States  by  letter  dated  22  August  2005  of  the  request  made  by 
Lithuania. By letter dated 23 August 2005, the Commission notified Lithuania that it 
had all the information it considered necessary for appraisal of the request. 

Article 21(1) of Directive 77/388/EEC, in the version set out in Article 28(g) thereof, 
stipulates  that,  under  the  internal  system,  the  taxable  person  supplying  goods  or 
services is normally liable to pay value added tax (VAT). 

The  purpose  of  the  derogation  requested  by  Lithuania  is  to  make,  under  certain 
conditions, the recipient liable for the VAT due on the supply of goods and services in 
the  case  of  insolvency  procedures  or  of  restructuring  procedures  subject  to  judicial 
oversight, of timber transactions, of supplies of ferrous and non-ferrous waste and of 
construction work. 

1 

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

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(6) 

(7) 

(8) 

(9) 

Taxable  persons  under  insolvency  procedures  or  restructuring  procedures  subject  to 
judicial  oversight  are  often  prevented  by  financial  difficulties  from  paying  VAT 
invoiced on their supplies of goods and services. The recipient can nonetheless deduct 
the VAT even though it has not been paid by the supplier. 

Problems are encountered in the timber market of Lithuania because of the nature of 
the  market  and  the  businesses  involved.  The  market  is  dominated  by  small  local 
companies,  often  resellers  and  intermediaries,  which  the  tax  authorities  have  found 
difficult  to  control.  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. 

Similar problems of non-payment of invoiced VAT are encountered in the Lithuanian 
waste recycling sector of ferrous and non-ferrous metals. 

Comparable problems also occur in the Lithuanian construction sector, in particular in 
relation to VAT invoiced by subcontractors who subsequently disappear. 

(10)  By designating the recipient as the person liable for the VAT in the abovementioned 
cases  that  adversely  affects  public  finances,  the  derogation  removes  the  difficulties 
encountered without affecting the amount of tax due. This has the effect of simplifying 
the work of the tax authorities for charging the tax and of preventing certain types of 
tax evasion or avoidance. 

(11)  The measure is proportionate to the objectives pursued since it is not intended to apply 
generally,  but  only  to  specific  operations  and  sectors  which  pose  considerable 
problems in charging the tax or of tax evasion or avoidance. 

(12)  Similar derogations have been granted to other Member States and have been found to 

be effective. 

(13)  The authorisation should be limited to 31 December 2009, so that in the light of the 
experience  gleaned  up  to  that  date  an  assessment  may  be  made  whether  or  not  the 
derogation remains justified. However, on 16 March 2005 the Commission proposed a 
Directive  rationalising  some  of  the  derogations  pursuant  to  Article  27  of  Directive 
77/388/EEC2. It is therefore necessary to limit the application period for those parts of 
this Decision which are covered by the proposal, until this Directive comes into effect.  

(14)  The  derogation  has  no  adverse  impact  on  the  Communities'  own  resources  accruing 

from VAT, 

HAS ADOPTED THIS DECISION:  

By way of derogation from Article 21(1)(a) of the Sixth Council Directive 77/388/EEC, in the 
version set out in Article 28(g) thereof, Lithuania is hereby authorised to designate the taxable 

Article 1 

2 

OJ C 125, 24.5.2005, p. 12. COM(2005)89 

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person,  to  whom  the  supplies  of  goods  or  services  referred  to  in  Article  2  are  made,  as  the 
person liable to pay VAT. 

Article 2 

The recipient of the supply of goods or services may be designated as the person liable to pay 
VAT in the following instances:  

1. 

2. 

3. 

4. 

supplies  of  goods  and  services  by  a  taxable  person  while  under  an  insolvency 
procedure or a restructuring procedure subject to judicial oversight;  

supplies of timber; 

supplies  of  ferrous  waste  and  scrap,  residues  and  other  recyclable  materials 
consisting of ferrous and non-ferrous metals; 

supplies  of  construction  work  by  a  subcontractor  to  either  a  general  contractor, 
another subcontractor or a company which carries out its own construction work. 

Article 3 

The authorisation granted under Article 1 shall expire on 31 December 2009. However, point 
(1),  (3)  or  (4)  of  Article  2  will  cease  to  have  effect  on  the  date  of  the  entry  into  force  of  a 
Directive rationalising the derogations pursuant to Article 27 of Directive 77/388/EEC which 
includes  a  special  scheme  for  the  application  of  VAT  to  that  sector,  provided  that  date  is 
before 31 December 2009. 

Article 4 

This Decision is addressed to the Republic of Lithuania.  

Done at Brussels, 

For the Council 
The President 

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