Proposal for a COUNCIL DECISION amending Implementing Decision 2009/1008/EU authorising 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
Date: 2012-11-30
Institutions: European Commission
Subjects: Latvia, VAT, distributive trades, small business, tax exemption

EUROPEAN 
COMMISSION 

Brussels, 30.11.2012  
COM(2012) 666 final 

2012/0315 (NLE) 

Proposal for a 

COUNCIL DECISION 

amending Implementing Decision 2009/1008/EU authorising 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 

1. 

CONTEXT OF THE PROPOSAL 

Grounds for and objectives of the proposal 

Pursuant  to  Article  395(1)  of  Council  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  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 Commission on 20 April 2012, the Republic of Latvia (hereafter 
'Latvia') requested authorisation to continue to apply 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  30  July  2012  of  the  request 
made by Latvia (however, Spain was informed by letter dated 31 July 2012). By letter dated 2 
August  2012,  the  Commission  notified  Latvia  that  it  had  all  the  information  it  considered 
necessary for appraisal of the request. 

General context 

Latvia  requests  to  be  authorised  to  extend  the  current  application  of  a  reverse  charge 
mechanism in relation to supplies of timber. On the basis of information provided by Latvia, it 
appears  that  the  timber  market  in  Latvia  is  still  largely  dominated  by  small  companies  and 
individual  suppliers  which  often  disappear  without  paying  the  tax  to  the  authorities  but 
leaving the customer in receipt of valid invoice for VAT deduction. 

Under the reverse charge mechanism, the recipient, in so far he qualifies as a taxable person 
for  VAT  purposes,  becomes  liable  for  the  payment  of  the  VAT  to  the  tax  authorities.  In 
practice,  this  results  in  the  supplier  of  timber  not  charging  the  VAT  to  his  customer  who, 
provided  he  has  a  full  right  of  deduction,  would  simultaneously  declare  and  deduct  the 
corresponding  VAT;  thus  removing  the  need  for  an  effective  payment  to  the  Treasury.  The 
system is applied on the territory of Latvia and has no impact on cross-border transactions. 

This  derogating  measure  (derogating  from  the  then  applicable  Sixth  Directive1  that  has, 
without  substantial  modification  to  the  content,  been  replaced  by  the  VAT  Directive)  had 
initially been granted in the 2003 Act of Accession2 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 20063 and until 31 
December 2012 by Council Decision 2009/1008/EU of 7 December 20094. 

The  Commission  understands  that  the  situation,  on  which  the  initial  derogation  was  based, 
continues to exist. Latvia claims that a number of indicators demonstrate that the risk level for 

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4 

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) 
OJ L 236, 23.9.2003, p. 33 
OJ L 25, 28.1.2006, p. 31 
OJ L 347, 24.12.2009, p. 30 

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VAT fraud is still high in this sector. The derogation should therefore be granted for another 
limited period.  

However, since the derogation has been in place for a rather long period, an evaluation report 
should,  in  case  Latvia  would  consider  another  extension  beyond  2015,  be  submitted  to  the 
Commission together with that extension request no later than 1 April 2015. 

Existing provisions in the area of the proposal 

Similar derogations in relation to Article 193 of the VAT Directive have been granted to other 
Member States. 

Consistency with the other policies and objectives of the Union 

Not applicable. 

2. 

RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND 
IMPACT ASSESSMENTS 

Consultation of interested parties 

Not relevant. 

Collection and use of expertise 

There was no need for external expertise. 

Impact assessment 

The Decision proposal aims at combating VAT evasion in the timber market of Latvia 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. 

3. 

LEGAL ELEMENTS OF THE PROPOSAL 

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. 

Legal basis 

Article 395 of the VAT Directive. 

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, 

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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). 

The 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 

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. 

4. 

BUDGETARY IMPLICATION 

The proposal has no implication for the Union budget. 

5. 

OPTIONAL ELEMENTS 

Review/revision/sunset clause 

The proposal includes a sunset clause. 

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2012/0315 (NLE) 

Proposal for a 

COUNCIL DECISION 

amending Implementing Decision 2009/1008/EU authorising 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 on the Functioning of the European Union, 

Having  regard  to  Council  Directive  2006/112/EC  of  28  November  2006  on  the  common 
system of value added tax5, and in particular Article 395(1) thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

By  letter  registered  with  the  Commission  on  20  April  2012,  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 value added 
tax (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 30 
July 2012. Spain, however, was informed of the request by letter dated 31 July 2012. 
By  a  letter  dated  2  August  2012,  the  Commission  notified  Latvia  that  it  had  all  the 
information that it considered necessary for appraisal of the request. 

The  timber  market  in  Latvia  remains  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. In order to 
combat  this  abuse,  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. This measure 
derogates  from  Article  193  of  Directive  2006/112/EC,  providing  that,  under  the 
internal system, the taxable person supplying goods or services is normally liable for 
the payment of the tax. 

(4) 

The legal and factual situation which justified the derogating measure under Council 
Implementing Decision 2009/1008/EU of 7 December 2009 authorising the Republic 
of  Latvia  to  extend  the  application  of  a  measure  derogating  from  Article  193  of 

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OJ L 347, 11.12.2006, p. 1. 

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Directive 2006/112/EC on the common system of value added tax6 has not changed. 
On the basis of information provided by Latvia, it appears that the risk level for VAT 
fraud  in  the  sector  remains  high.  Latvia  should  therefore  be  authorised  to  apply  the 
measure during a further limited period. 

In  case  Latvia  would  consider  another  extension  of  the  derogating  measure  beyond 
2015, it should submit a report on the application of the measure to the Commission 
together with that request by 30 March 2015 at the latest. 

The  derogation  has  no  adverse  impact  on  the  Union's  own  resources  accruing  from 
VAT. 

(5) 

(6) 

(7) 

Decision 2009/1008/EU should therefore be amended accordingly, 

HAS ADOPTED THIS DECISION:  

Decision 2009/1008/EU is amended as follows: 

Article 1 

In  Article  2,  the  date  "31  December  2012"  is  replaced  by  the  date  "31  December 

(1) 
2015"; 

(2) 

The following Article 2a is inserted: 

"Article 2a 

Any request for the extension of the measure provided for in this Decision shall be submitted 
to the Commission by 30 March 2015 at the latest and shall be accompanied by a report on 
the application of this measure." 

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 347, 24.12.2009, p. 30. 

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