Proposal for a Council Decision authorising the Republic of Latvia to extend the application of a measure derogating from Article 193 of Directive 2006/112/EC onthe common system of value added tax
Date: 2009-10-29
Institutions: European Commission
Subjects: Latvia, VAT, derogation from EU law, goods and services, tax avoidance, tax evasion, tax system, wood industry

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 29.10.2009 
COM(2009)582 final 

Proposal for a 

COUNCIL DECISION 

authorising the Republic of Latvia to extend the application of a measure derogating 
from Article 193 of Directive 2006/112/EC on the common system of value added tax 

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EXPLANATORY MEMORANDUM 

CONTEXT OF THE PROPOSAL 

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Grounds for and objectives of the proposal 

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  to  derogate  from  the  provisions  of  that  Directive,  in 
order  to  simplify  the  procedure  for  collecting  value  added  tax  (VAT)  or  to  prevent 
certain forms of tax evasion or avoidance. 

By letter registered with the Secretariat-General of the Commission on 3 March 2009, 
the  Republic  of  Latvia  (hereinafter  'Latvia')  requested  authorisation  to  continue  a 
measure derogating from Article 193 of the VAT Directive. In accordance with Article 
395(2)  of  the  VAT  Directive,  the  Commission  informed  the  other  Member  States  by 
letter  dated  22  September  2009  of  the  request  made  by  Latvia.  By  letter  dated  24 
September  2009,  the  Commission  notified  Latvia  that  it  had  all  the  information 
necessary to consider the request. 

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General context 

The timber market in Latvia is largely dominated by small companies and individual 
suppliers,  which  have  often  proved  to  be  transitory  businesses,  difficult  for  the  tax 
administration to control and therefore often vehicles for tax evasion. A common form 
of  evasion  involves  the  invoicing  of  supplies  followed  by  the  disappearance  of  the 
supplier without paying the tax to the tax authorities but leaving the customer in receipt 
of a valid invoice for VAT deduction. 

The proposed provision stipulates that in the case of transactions in relation to timber, 
the recipient of the goods and services will, under certain circumstances, be the person 
liable to account for the VAT. This provision derogates from the general rule of Article 
193 of the VAT Directive, which stipulates that it is the supplier of goods or services 
who is liable for the payment of the VAT to the tax authorities. In practice, this results 
in  the  supplier  of  the  goods  not  charging  the  VAT  to  his  customer  in  so  far  as  the 
customer qualifies as a taxable person for VAT purposes. Such a customer, 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. 

This derogating measure (derogating from the then applicable Sixth Directive (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  (OJ  L  145,  13.6.1977)  which  has,  without  substantial 
modification  to  the  content,  been  replaced  by  the  VAT  Directive)  had  initially  been 
granted  in  the  Act  of  Accession  of  2003  ((OJ  L  236,  23.9.2003,  p.  33)  and,  more 
precisely,  in  Chapter  7,  point  1(b)  of  Annex  VIII  for  a  period  until  30  April  2005. 
Subsequently, the measure was extended until 31 December 2009 by Council Decision 
2006/42/EC of 24 January 2006 (OJ L 25, 28.1.2006, p. 31). 

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The  Commission  understands  that  the  situation  and  facts,  on  which  the  initial 
derogation  was  based,  continue  to  exist  and  that  the  previous  derogation  has  enabled 
Latvia  to  reduce  the  risk  of  VAT  evasion  and  to  simplify  the  procedure  for  charging 
the  tax  in  the  timber  market.  The  derogation  should  therefore  be  granted  for  another 
limited period. 

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Consistency with the other policies and objectives of the Union 

Not applicable. 

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 

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The Decision proposal aims at combating VAT evasion in the timber market of Latvia 
and at simplifying the charging of the tax and has therefore a potential positive impact. 

However, because of the narrow scope of the derogation and the limited application in 
time, the impact will in any case be limited. 

LEGAL ELEMENTS OF THE PROPOSAL 

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Summary of the proposed action 

Authorisation for Latvia to extend the application of a measure derogating from Article 
193 of the VAT Directive as regards the use of a reverse charge mechanism for timber 
transactions. 

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Legal basis 

Article 395 of the VAT Directive. 

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Subsidiarity principle 

In  accordance  with  Article  395  of  the  VAT  Directive,  a  Member  State  wishing  to 
introduce  measures  derogating  from  the  said  Directive  must  obtain  an  authorisation 
from  the  Council,  which  will  take  the  form  of  a  Council  Decision.  Therefore,  the 
proposal complies with the subsidiarity principle. 

Proportionality principle 

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

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The  Decision  concerns  an  authorisation  granted  to  a  Member  State  upon  its  own 

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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 

Under  Article  395  of  the  VAT Directive,  derogation  from  the  common  VAT  rules  is 
only possible with the authorisation of the Council acting unanimously on a proposal 
from  the  Commission.  Moreover,  a  Council  Decision  is  the  most  suitable  instrument 
since it can be addressed to individual Member States. 

BUDGETARY IMPLICATION 

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The proposal has no implication for the Community budget. 

ADDITIONAL INFORMATION 

Review/revision/sunset clause 

The proposal includes a sunset clause. 

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E-4931 

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Proposal for a 

COUNCIL DECISION 

authorising the Republic of Latvia to extend the application of a measure derogating 
from Article 193 of Directive 2006/112/EC on the common system of value added tax 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, 

Having  regard  to  Council  Directive  2006/112/EC  of  28  November  2006  on  the  common 
system of value added tax1, and in particular Article 395(1) thereof, 

Having regard to the proposal from the Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

By letter registered with the Secretariat-General of the Commission on 3 March 2009, 
the  Republic  of  Latvia  (hereinafter  'Latvia')  requested  authorisation  to  continue  to 
apply a measure derogating from the provisions of Directive 2006/112/EC governing 
the person liable for the payment of the VAT to the tax authorities. 

In  accordance  with  Article  395(2)  of  Directive  2006/112/EC,  the  Commission 
informed the other Member States of the request made by Latvia in a letter dated 22 
September 2009. By a letter dated 24 September 2009, the Commission notified Latvia 
that it had all the information that it considered necessary to consider the request. 

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

The  measure  derogates  from  Article  193  of  Directive  2006/112/EC,  stipulating  that, 
under the  internal  system, the taxable person supplying goods or  service is  normally 
liable for the payment of the tax. 

The  measure  has  previously  been  authorised  in  the  Act  of  Accession  20032,  and  in 
particular  in  Chapter  7,  point  1(b)  of  Annex  VIII  thereof,  and  by  Council  Decision 

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OJ L 347, 11.12.2006, p. 1. 
OJ L 236, 23.9.2003, p. 33. 

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2006/42/EC  of  24  January  20063  under  the  then  applicable  Sixth  Directive 
77/388/EC4. 

(6) 

The  Commission  understands  that  the  legal  and  factual  situation  which  justified  the 
current  application  of  the  derogating  measure  in  question  has  not  changed  and 
continues to exist. Latvia should therefore be authorised to apply the measure during a 
further limited period. 

(7) 

The  derogation  will  not  adversely  affect  the  Community's  own  resources  accruing 
from VAT, 

HAS ADOPTED THIS DECISION:  

Article 1 

By  way  of  derogation  from  Article  193  of  Directive  2006/112/EC,  Latvia  is  authorised  to 
continue  to  designate  the  recipient  as  the  person  liable  to  pay  VAT  in  the  case  of  timber 
transactions from 1 January 2010 until 31 December 2012. 

Article 2 

This Decision is addressed to the Republic of Latvia. 

Done at Brussels,  

For the Council 
The President 

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OJ L 25, 28.1.2006, p. 31. 
OJ L 145, 13.6.1977. 

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