Proposal for a Council Directive amending Directive 2006/112/EC as regards an optional and temporary application of the reverse charge mechanism in relation to supplies of certain goods and services susceptible to fraud
Date: 2009-09-29
Institutions: European Commission
Subjects: VAT, basis of tax assessment, delivery, distributive trades, provision of services, tax exemption, tax harmonisation, tax on consumption, tax relief

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 29.9.2009 
COM(2009) 511 final 

2009/0139 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending Directive 2006/112/EC as regards an optional and temporary application of 
the reverse charge mechanism in relation to supplies of certain goods and services 
susceptible to fraud 

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EXPLANATORY MEMORANDUM 

1. 

CONTEXT OF THE PROPOSAL 

•  Ground for and objectives of the proposal 

The  purpose  of  this  proposal  for  a  Directive  amending  Council  Directive  2006/112/EC  of 
28 November 2006 on the common system of value added tax1 (hereafter the 'VAT Directive') 
is  to  allow  the  temporary  application  of  the  reverse  charge  mechanism  to  combat  existing 
fraud in relation to trade with emission certificates and to transactions involving certain fraud-
sensitive goods. The application of a targeted reverse charge mechanism should, however, not 
alter  the  fundamental  principles  of  the  VAT  system,  such  as  the  fractionated  payment,  and 
should therefore be restricted to a pre-defined list of goods and services. 

•  General context 

The  Commission  presented  in  May  2006  a  Communication2  with  a  view  to  launching  an 
overall debate at EU level on the need for a co-ordinated approach in the fight against fiscal 
fraud  in  the  Internal  Market.  Following  the  Commission's  Communication  of  23 November 
20073 contributing to the establishment of an anti-fraud strategy within the EU and the report 
on  the  state  of  play  within  the  Anti  Tax  Fraud  Strategy  (ATFS)  expert  group4,  the 
Commission  presented  a  Communication  on  its  analysis  of  more  far-reaching  measures  to 
change the VAT system in order to fight fraud5. 

One of the measures, which was analysed in this context, was the establishment of a general 
reverse  charge  system.  The  Commission  also  demonstrated  its  willingness,  under  certain 
conditions,  to  propose  a  pilot  project  in  order  to  establish  whether  a  type  of  generalised 
reverse  charge  system  could  be  an  appropriate  response  to  tackle  VAT  fraud.  However,  the 
ECOFIN  Council  could  not  agree  on  conclusions  as  regards  the  issues  raised  in  that 
Communication. In the absence of a political agreement on the more 'far reaching' measures, 
the Commission concentrated its efforts exclusively on the so-called 'conventional' measures 
to  enhance  the  traditional  methods  in  the  fight  against  tax  fraud.  In  this  respect,  reference 
should in particular be made to the Communication of the Commission of December 2008 on 
a coordinated strategy to improve the fight against VAT fraud in the European Union6. 

However, the present initiative is different from the above pilot-scheme idea. 

As  fraud  is  a  major  concern  for  the  correct  functioning  of  the  Internal  Market  and  poses  a 
threat to the Member States' tax revenues, some Member States have requested, by means of a 
derogation granted by the Council on the basis of Article 395 of the VAT Directive, to combat 
fraud schemes via a targeted reverse charge system in relation to a particular fraud sensitive 
sector or to certain goods. 

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OJ L 347, 11.12.2006, p. 1. 
COM(2006) 254 final, 31.5.2006 
COM(2007) 758 final, 23.11.2007 
SEC(2007) 1584, 23.11.2007 
COM(2008) 109 final, 22.2.2008 and SEC(2008) 249, 22.2.2008 
COM(2008) 807 final, 1.12.2008 

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In  this  context,  the  most  common  form  of  evasion  consists  in  invoicing  supplies  by  a  VAT 
registered supplier who disappears without accounting for this VAT but leaving the customer 
(also a taxable person) with a valid invoice for deduction. This results in the situation that the 
treasury does not receive VAT on the supply, but must give the next trader in the chain credit 
for  input  VAT.  This  has  in  certain  cases  developed  into  Missing  Trader  Intra-Community 
Fraud (MTIC) which is an organised attack on the VAT system, exploiting that the supplier 
receives  credit  for  the  input  VAT  through  a  refund  of  VAT  when  his  onward  supply  to  a 
taxable  person  in  another  Member  State  is  exempt.  In  addition,  such  frauds  are  often 
organised in a series of supplies in which the same goods may circulate several times between 
Member States (so-called carousel fraud) and the treasury may loose several times the amount 
of tax on a single good. It is to be noted that this type of fraud is, according to information 
provided by various Member States, extending to services as well. 

The  reverse  charge  mechanism  results  in  no  VAT  being  charged  by  the  supplier  to  taxable 
customers  who,  in  turn,  become  liable  for  the  payment  of  the  VAT.  In  practice,  customers 
(insofar as they are normal taxable persons with a full right of deduction) would declare and 
deduct at the same time without effective payment to the treasury. In this sense, the theoretical 
possibility to commit fraud is removed. 

With this proposal, the Commission aims at providing the possibility for interested Member 
States  to  apply  this  targeted  reverse  charge  mechanism  in  relation  to  a  choice,  from  a  pre-
defined list, of goods and services which have been identified by Member States as sensitive 
to  fraud.  The  present  proposal  for  allowing  the  application  of  a  targeted  reverse  charge 
concentrates on the following areas: 

First, the Commission has some information on alleged cases of fraud in the area of trading 
greenhouse emission allowances. Any allegations of fraud, whether in the carbon market or 
elsewhere,  are  of  course  of  concern  and  require  an  appropriate  response.  The  differences  in 
individual Member States responses have prompted the Commission to prepare this proposal. 
Although further analysis is still required as regards the precise circumstances and the actual 
dimension of the fraud problem, the information already provided by several Member States 
is such that it is appropriate to take swift action and include it in this proposal, which is in the 
first instance only a temporary measure. 

Second, another category of products that has been included in the scope of this Directive is 
related to mobile telephones and integrated circuit devices. These goods are currently subject 
of a reverse charge derogation, which had been granted to the United Kingdom on the basis of 
Article 395 of the VAT Directive and that had been prolonged under specific circumstances7. 
The  text  of  that  Commission  proposal  also  serves  as  a  basis  for  the  current  proposal  for  a 
Council Directive. In the Explanatory Memorandum of its proposal for a Council decision, the 
Commission explained the very specific circumstances leading to the exceptional granting of 
this derogation and already announced to be willing to examine the possibility of allowing the 
application of a targeted reverse charge mechanism by any interested Member State. Notably, 
it had not been possible so far to determine to which extent the reverse charge mechanism is 
an  appropriate  and  efficient  instrument  to  tackle  fraud  in  the  specific  sector  concerned.  In 
order to overcome this deficiency any further application needs to be made conditional on a 

7 

Council  Decision  of  5  May  2009  authorising  the  United  Kingdom  to  continue  to  apply  a  special 
measure from Article 193 of Directive 2006/112/EC on the common system of value added tax, OJ L 
148 of 11.6.2009, p. 14. 

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full evaluation of its effects. A number of Member States who had shown interest to apply the 
reverse charge in the sector would be allowed to do so under the current proposal.  

Thirdly,  the  proposal  includes  other  products  (perfume,  precious  metals  (such  as  platinum)) 
which  have,  during  meetings  of  working  groups  on  fraud,  been  signalled  by  the  Member 
States as goods to which fraud seems to have moved and it is therefore pertinent to include 
them in this Directive as well. 

In procedural terms, Member States should first inform the Commission about their intention 
of introducing such mechanism. Secondly, the experimental application of a targeted reverse 
charge will need to be subject to detailed conditions so as to guarantee the functioning of the 
scheme, avoid potential negative impacts as far as possible and allow for a proper evaluation 
of  the  results  Before  applying  this  reverse  charge  scheme,  it  is  required  that  the  taxable 
persons who will be affected by the application of this scheme, as a supplier or as a customer, 
are identified for VAT purposes under an individual number, insofar as this would not already 
be the case. It is furthermore stipulated that the Member States concerned have to introduce 
reporting obligations in order to guarantee a sufficient  follow-up  of  the  measure  in  order  to 
provide  assurance  that  the  measure  is  operating  effectively.  Moreover,  to  ensure  that  the 
application of reverse charge remains targeted and exceptional to the normal VAT rules, the 
goods  and  services  have  been  listed  and  each  Member  State  may  choose  to  apply  a  reverse 
charge mechanism to a maximum of three categories of which two can be goods. 

The interested Member States should implement effective control measures to monitor and to 
avoid,  as  much  as  possible,  all  forms  of  fraud  and  in  particular  new  forms  of  fraud  which 
would consist in the spilling over of fraud patterns to other products, to the retail level or to 
other Member States. For the implementation of these measures, it would be recommendable 
that the findings on the reverse charge mechanism, as described in the Commission document 
on measures to change the VAT system to fight fraud8, would be taken into consideration. 

The experiences stemming  from this  temporary application of the scheme  to  fraud  sensitive 
goods or services should allow, on the basis of an information and evaluation procedure as set 
out in the proposal, a better overall assessment of the usefulness and the proportionality of the 
targeted application of reverse charge.  

2. 

CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

There was no need for consultation or external expertise. Public consultation, as to the use of 
reverse charge to combat fraud, was already held in the context of the preceding Commission 
Communications on VAT fraud (see in particular Consultation paper - Possible introduction 
of  an  optional  reverse  charge  mechanism  for  VAT  –  Impact  on  businesses  of  13  August 
20079). 

To achieve a better understanding of the impact of a targeted reverse charge mechanism, this 
Directive  lays  down  that  the  Member  States,  volunteering  to  apply  the  scheme,  have  to 
determine evaluation criteria in order to allow an assessment of the situation before and at the 
end of the application period. This Directive opens the possibility for a Member State to apply 
a targeted reverse charge mechanism under certain circumstances but does not constitute any 

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SEC(2008) 249, 22.2.2008 
http://ec.europa.eu/taxation_customs/common/consultations/tax/article_4209_en.htm 

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obligation  in  this  respect.  As  the  proposed  rules  provide  Member  States  with  an  option  to 
apply temporarily for carefully selected goods or services the reverse charge mechanism, it is 
up  to  these  Member  States  to  carry  out  detailed  impact  assessments,  as  laid  down  in  the 
Directive. 

3. 

LEGAL ELEMENTS OF THE PROPOSAL 

The Directive amends the VAT Directive. 

Because  of  the  uncertainty  of  the  effects  of  the  measure  and  its  derogation  from  the 
fundamental principle of the fractioned payment, a specific legal basis for such a temporary 
application  of  reverse  charge  for  certain  goods  and  services  is  the  best  way  forward  and  in 
line with the principles spelled out in the Commission's Communication on possible measures 
to  change  the  VAT  system  to  fight  fraud10.  Furthermore,  Article 395  of  the  VAT  Directive 
cannot  be  considered  as  a  sufficient  basis  for  a  further  and  wider  application  in  different 
Member  States  of  a  targeted  reverse  charge  mechanism  in  relation  to  certain  goods  or 
services. Therefore, the objective of combating fraud via a reverse charge mechanism can be 
better  achieved  at  Community  level  via  a  Directive  which  offers  the  possibility  to  Member 
States  to  apply  a  reverse  charge  mechanism  to  domestic  supplies  of  certain  goods  and 
services. This does therefore not go beyond what is necessary to achieve the objective. 

4. 

BUDGETARY IMPLICATION 

The proposal has no negative impact on the Community budget. 

5. 

ADDITIONAL INFORMATION 

The proposal includes a sunset clause. 

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COM(2008) 109 final, 22.2.2008 

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2009/0139 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending Directive 2006/112/EC as regards an optional and temporary application of 
the reverse charge mechanism in relation to supplies of certain goods and services 
susceptible to fraud 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article 93 thereof, 

Having regard to the proposal from the Commission, 

Having regard to the opinion of the European Parliament11, 

Having regard to the opinion of the European Economic and Social Committee12, 

Whereas: 

(1) 

(2) 

(3) 

Council Directive of 28 November 2006 2006/112/EC on the common system of value 
added  tax13  specifies  that  value  added  tax  (VAT)  shall  be  payable  by  any  taxable 
person carrying out transactions involving the taxable supply of goods and services. In 
the case of cross-border transactions, and for certain domestic high risk sectors such as 
construction or waste, it is foreseen, however, to shift the obligation to pay VAT onto 
the person to whom the supply is made. 

Given  the  seriousness  of  VAT  fraud,  innovative  approaches  should  be  explored  to 
address  this  problem  in  the  most  efficient  way.  Member  States  should  therefore  be 
allowed  to  apply  a  mechanism  whereby  the  obligation  to  pay  VAT  shifts  onto  the 
person to whom the taxable supply of goods or services is made, on a temporary basis, 
to supplies of certain categories of goods and services, even where these categories are 
not  listed  in  Article  199  of  Directive  2006/112/EC  or  subject  to  specific  derogations 
granted to Member States. 

The introduction of such a mechanism targeting supplies of certain categories of goods 
or  services,  as  opposed  to  its  general  application,  should  not  adversely  affect  the 
fundamental principles of the VAT system, such as fractionated payment, and should 
therefore be restricted to a pre-defined list of goods and services. 

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OJ C , , p. . 
OJ C , , p. . 
OJ L 347, 11.12.2006, p. 1. 

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(4) 

(5) 

The  pre-defined  list,  from  which  Member  States may choose, should be restricted to 
supplies of goods and services which, according to recent experience, are particularly 
susceptible to fraud. In order to ensure that the introduction of such mechanism may 
effectively  be  assessed  and  that  its  impact  is  carefully  monitored,  Member  States 
should be limited in their choice. 

Before the mechanism may be applied, it is necessary that taxable persons supplying 
or receiving the goods or services in the pre-defined list are always identified for VAT 
purposes.  Furthermore,  Member  States  choosing  to  apply  the  mechanism  should 
introduce specific control measures and reporting obligations on both the supplier and 
the customer so as to ensure the effective operation and monitoring of the application 
of that mechanism and detect and prevent all new forms of tax fraud. 

(6)  Member  States  should  produce  an  evaluation  report  on  the  application  of  the 
mechanism  before  the  end  of  the  application  period  so  as  to  enable  a  timely 
assessment of its efficiency. 

(7) 

(8) 

(9) 

In  order  to  assess  the  effect  of  the  application  of  the  mechanism  on  fraudulent 
activities  in  a  transparent  manner,  evaluation  reports  by  Member  States  should  be 
based  on  pre-defined  criteria  established  by  Member  States.  Any  such  evaluation 
should  clearly  assess  the  level  of  fraud  before  and  after  the  application  of  the 
mechanism and any shifts in trends of fraudulent activities, including supplies of other 
goods and services, supplies at the retail level and supplies in other Member States. 

The  report  should  also  evaluate  compliance  costs  for 
taxable  persons  and 
implementation costs incurred by Member States, including those entailed by control 
and audit measures. 

In order to provide all Member States with the option of applying such a mechanism, a 
specific amendment to Directive 2006/112/EC is appropriate. 

(10)  Since the objective of the proposed action is to address VAT fraud through temporary 
measures which  derogate from existing Community rules, it can only be achieved at 
Community level. The adoption of a Community measure is therefore in compliance 
with the principle of subsidiarity, as set out in Article 5 of the Treaty. In accordance 
with the principle of proportionality, as set out in that Article, this Directive does not 
go beyond what is necessary in order to achieve its objectives. 

(11)  Directive 2006/112/EC should therefore be amended accordingly, 

HAS ADOPTED THIS DIRECTIVE: 

Article 1 

Directive 2006/112/EC is amended as follows: 

(1) 

The following Article 199a is inserted: 

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'Article 199a 

1.  Member States may, until 31 December 2014 and for a minimum period of two 
years,  introduce  and  apply  a  mechanism  whereby  the  VAT  due  on  supplies  of  the 
categories  of  goods  and  services  listed  in  Annex  VI  A  is  payable  by  the  person  to 
whom those goods and services are supplied. 

When  choosing  which  goods  and  services  shall  be  subject  to  that  mechanism, 
Member States are limited to three of the categories listed in Annex VI A of which a 
maximum of two must be categories of goods. 

2.  A  Member  State  choosing  to  introduce  the  mechanism  provided  for  in 
paragraph 1 shall:  

(a) 

(b) 

(c) 

(d) 

ensure  that  any  taxable  person  supplying  or  receiving  goods  or  services  to 
which the mechanism applies, is identified by means of an individual number 
insofar  as  the  taxable  person  is  not  already  identified  in  accordance  with 
Article 214(1); 

introduce appropriate and effective reporting obligations on any taxable person 
supplying goods or services to which that mechanism applies, as to enable, for 
each transaction, the identification of that taxable person and the taxable person 
to whom the supplies are made, of the type of goods or services supplied, and 
of the tax period and value of these supplies; 

impose transaction-based or global reporting obligations on any taxable person 
receiving  goods  or  services  to  which  that  mechanism  applies  for  cross-
checking purposes against information submitted by the supplier; 

introduce  appropriate  and  effective  control  measures  to  monitor  and  mitigate 
current  forms  of  fraud,  as  well  as  to  prevent  the  emergence  of  fraudulent 
activities  in  respect  of  other  goods  or  services,  at  the  retail  level  or  in  other 
Member States. 

3.  Member  States  shall  inform  the  Commission  of  the  application  of  the 
mechanism referred to paragraph 1 prior to the introduction of any such mechanism 
and shall provide the following information to the Commission: 

(a) 

(b) 

a statement on the scope of the measure applying the mechanism and a detailed 
description  of  accompanying  measures,  including  reporting  obligations  on 
taxable persons and control measures; 

evaluation  criteria  to  enable  comparison  between  fraudulent  activities  in 
relation  to  the  goods  and  services  listed  in  Annex VI A  before  and  after  the 
application  of  the  mechanism,  fraudulent  activities  in  relation  to  other  goods 
and services and in other Member States before and after the application of the 
mechanism, and any increase in other types of fraudulent activities before and 
after the application of the mechanism, particularly at the retail stage; 

(c) 

date of commencement and period to be covered by the measure applying the 
mechanism. 

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4.  Member States applying the mechanism provided for in paragraph 1 shall, on 
the  basis  of  the  evaluation  criteria  provided  for  under  point (b)  of  paragraph 3, 
submit  a  report  to  the  Commission  no  later  than  one  year  before  the  expiry  of  the 
measure applying the mechanism. The report shall clearly indicate the information to 
be treated as confidential and the information which may be published. 

The report shall provide a detailed assessment of the measure's overall effectiveness 
and efficiency, in particular as regards: 

(a) 

the impact on fraudulent activities in relation to supplies of goods or services 
covered by the measure; 

(b) 

the possible shift of fraudulent activities to other goods or services; 

(c) 

the possible shift of fraudulent activities to other Member States; 

(d) 

the possible shift of fraudulent activities to the retail level; 

(e) 

the compliance costs for taxable persons resulting from the measure; 

(f) 

the  cost  of  implementation  of  the  measure  for  Member  States,  including  the 
cost of control and audit measures;' 

(2) 

The Annex to this Directive is inserted as Annex VI A. 

Article 2 

Member States choosing to apply the mechanism provided for in point (1) of Article 1 shall 
communicate  the  provisions  of  the  measure  applying  the  mechanism  to  the  Commission 
before the commencement date of its application. 

This Directive shall enter into force on the twentieth day following that of its publication in 
the Official Journal of the European Union. 

Article 3 

The Directive shall apply until 31 December 2014. 

Article 4 

This Directive is addressed to the Member States. 

Article 5 

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Done at Brussels,  

For the Council 
The President 

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ANNEX  

'Annex VI A 

List of goods and services referred to in Article 199a 

Part A – Goods 

(1) 

(2) 

(3) 

(4) 

Mobile  telephones,  being  devices  made  or  adapted  for  use  in  connection  with  a 
licensed  network  and  operated  on  specified  frequencies,  whether  or  not  they  have 
any other use;  

integrated  circuit  devices  such  as  microprocessors  and  central  processing  units  in  a 
state prior to integration into end user products; 

perfume; 

precious metals where they are not covered by the special arrangements for second-
hand goods, works of art, collector's items and antiques pursuant to Articles 311 to 
343 or the special scheme for investment gold pursuant to Articles 344 to 356. 

Part B – Services 

Allowances  to  emit  greenhouse  gases  as  defined  in  Article  3  of  Directive 
2003/87/EC(*),  transferable  in  accordance  with  Article  12  of  that  Directive,  and 
other  allowance  units  that  may  be  used  by  operators  for  compliance  with  the  same 
Directive. 

(*) OL J 275, 25.10.2003, p. 32.' 

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