COMMUNICATION FROM THE COMMISSION TO THE COUNCIL in accordance with Article 395 of Council Directive 2006/112/EC
Date: 2012-12-06
Institutions: European Commission
Subjects: Austria, France, Germany, VAT, derogation from EU law, electricity supply, gas supply, provision of services, tax evasion, telecommunications

EUROPEAN 
COMMISSION 

Brussels, 6.12.2012  
COM(2012) 733 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

in accordance with Article 395 of Council Directive 2006/112/EC 

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COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

in accordance with Article 395 of Council Directive 2006/112/EC 

1. 

BACKGROUND 

In accordance with Article 395 of Council Directive 2006/112/EC of 28 November 2006 on 
the common system of value added tax (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.  Agreement  is  needed  by 
Council prior to any change in the national legislation of a Member State. As this procedure 
provides  for  derogations  from  the  general  principles  of  VAT,  in  accordance  with  the 
consistent rulings from the European Court of Justice, such derogations should be limited in 
scope and proportionate. 

By  letter  registered  with  the  Commission  on  24  February  2012,  the  French  Republic  has 
requested  to  be  authorised  to  introduce  measures  derogating  from  Article  193  of  the  VAT 
Directive. In accordance with Article 395(2) of that Directive, the Commission informed the 
other  Member  States  by  letter  dated  9  November  2012  of  the  request  made  by  France.  By 
letter dated 12 November 2012, the Commission notified France that it had all the information 
it considered necessary for appraisal of the request. 

By letter registered with the Commission on 11 June 2012, the Federal Republic of Germany 
has requested to be authorised to introduce measures derogating from Article 193 of the VAT 
Directive. In accordance with Article 395(2) of that Directive, the Commission informed the 
other Member States by letter dated 9 November 2012 of the request made by Germany. By 
letter  dated  12  November  2012,  the  Commission  notified  Germany  that  it  had  all  the 
information it considered necessary for appraisal of the request. 

By  letter  registered  with  the  Commission  on  25  July  2012,  the  Republic  of  Austria  has 
requested  to  be  authorised  to  introduce  measures  derogating  from  Article  193  of  the  VAT 
Directive. In accordance with Article 395(2) of that Directive, the Commission informed the 
other  Member  States  by  letter  dated  9  November  2012  of  the  request  made  by  Austria.  By 
letter  dated  12  November  2012,  the  Commission  notified  Austria  that  it  had  all  the 
information it considered necessary for appraisal of the request. 

2. 

SUMMARY OF THE REQUESTS 

France requests a derogation to allow for the introduction of the reverse charge mechanism on 
domestic  supplies  between  taxable  persons  of  gas  and  electricity,  and  telecommunications 
services, as  a  VAT  anti-fraud  measure, specifically  to  deal  with  the  threat  of  VAT  carousel 
fraud.  

Germany and Austria request a derogation to allow for the introduction of the reverse charge 
mechanism  on  domestic  supplies  between  taxable  persons  of  gas  and  electricity  as  a  VAT 
anti-fraud measure, specifically to deal with the threat of VAT carousel fraud.  

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3. 

REVERSE CHARGE DEROGATION 

The person liable for the payment of VAT pursuant to Article 193 of the VAT Directive is the 
taxable person supplying the goods or services. The purpose of the reverse charge mechanism 
is to shift that liability onto the taxable person to whom the supplies are made. 

Missing trader fraud occurs when traders evade paying VAT to the tax authorities after selling 
their  products.  Their  customers,  however,  are  entitled  to  a  tax  deduction  as  they  are  in 
possession of a valid invoice. In the most aggressive cases of such tax evasion the same goods 
or services are, via a "carousel"  scheme  (which  involves  the goods  or services being traded 
between  Member  States)  supplied  several  times  without  payment  of  VAT  to  the  tax 
authorities.  By  designating  the  person  to  whom  the  goods  or  services  are  supplied  as  the 
person liable for the payment of VAT in such cases, the reverse charge mechanism has been 
found to eliminate the opportunity to engage in that form of tax evasion.  

In  September  2009,  the  Commission  proposed  to  amend  the  VAT  Directive  as  regards  an 
optional and temporary application of the reverse charge mechanism in relation to supplies of 
certain goods and services susceptible to fraud (COM(2009) 511, OJ C 26, 28.01.2011, p11). 
Those goods were specifically mobile phones, integrated circuit devices, precious metals and 
perfumes, and the services were greenhouse gas emissions allowances. This list was based on 
information collected by the Commission relating to sectors highly affected by carousel fraud 
at that time. The objective of this proposal was to give the same option to all Member States 
and at the same time to put in place an effective evaluation mechanism in order to assess its 
cross-border implications. 

The Council could not agree at that time to the proposal in its entirety, instead adopting, by 
Council  Directive  2010/23/EU  of  16  March  2010,  only  the  element  which  related  to 
greenhouse gas emissions allowances and undertaking to return to the outstanding elements of 
the proposal at a later date. Via a Council minute statement, the Council committed itself to 
continue discussions on the other parts of the proposal. The Commission considers that it is 
now time to resume these negotiations.  

In  combination  with  the  Quick  Reaction  Mechanism  proposal  (COM(2012)  428),  missing 
trader fraud in VAT would then be tackled both in the short and longer term. 

4. 

THE REQUESTS 

France  requests,  under  Article  395  of  the  VAT  Directive,  that  the  Council,  acting  on  a 
proposal  from  the  Commission,  authorises  France  to  introduce  special  measures  derogating 
from  Article  193  as  regards  the  application  of  the  reverse  charge  mechanism  to  domestic 
supplies between taxable persons of gas and electricity, and telecommunications services. It 
claims  that  such  a  reverse  charge  mechanism  is  necessary  in  order  to  establish  safeguards 
against revenue losses from carousel fraud in France. 

The reason for this request  by France is that the current fraud prevention measures will not 
work effectively and whilst there is currently no detected fraud in these sectors in France, a 
large  number  of  suspicious  firms  or  individuals  have  gained  access  to  the  French  gas  and 
electricity  market  and  are  being  investigated.  France,  therefore,  fears  that  the  fraud  will 
migrate from greenhouse gas emissions allowances to other tradable goods and services such 
as gas and electricity, and telecommunications services. As of 1 April 2012 France changed 
its legislation to apply a reverse charge to these supplies. 

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Germany  and  Austria  request,  under  Article  395  of  the  VAT  Directive,  that  the  Council, 
acting  on  a  proposal  from  the  Commission,  authorises  Germany  and  Austria  to  introduce 
special measures derogating from Article 193 as regards the application of the reverse charge 
mechanism to domestic supplies between taxable persons of gas and electricity. They claim 
that  such  a  reverse  charge  mechanism  is  necessary  in  order  to  establish  safeguards  against 
revenue losses from carousel fraud in Germany and Austria. 

The  reason  for  these  requests  by  Germany  and  Austria  is  that  the  current  fraud  prevention 
measures  have  been  exhausted  and  will  not  work  effectively  in  the  medium  to  long  term. 
Although  they  have  not  provided  information  on  any  proven  fraud  cases  at  present  a  large 
number of suspicious firms or individuals have gained access to the German and Austrian gas 
and electricity market and are being investigated. There is a fear that the fraud will migrate 
from greenhouse gas emissions allowances to other tradable goods and services such as gas 
and electricity. 

5. 

THE COMMISSION’S VIEW 

When the Commission receives requests in accordance with Article 395, these are examined 
to  ensure  that  the  basic  conditions  for  their  granting  are  fulfilled  i.e.  whether  the  proposed 
specific  measure  simplifies  procedures  for  taxable  persons  and/or  the  tax  administration  or 
whether the proposal prevents certain types of tax evasion or avoidance. In this context, the 
Commission has always taken a limited, cautious approach to ensure that derogations do not 
undermine  the  operation  of  the  general  VAT  system,  are  limited  in  scope,  necessary  and 
proportionate.  

In the view of the Commission, the requests received from France, Germany and Austria do 
not fulfil the basic condition of Article 395, i.e. in that they neither simplify procedures for the 
taxable persons and/or the tax administration, nor do they prevent certain types of tax evasion 
or  avoidance.  There  is  indeed  no  evidence  from  France  or  Austria  of  tax  evasion  in  these 
requesting Member States as regards supplies of gas and electricity, and telecommunications 
services in France, and whilst the French request mentions a detected fraud case in Germany, 
the German request does not.  

More  importantly,  it  is  the  Commission's  view  that  the  application  of  the  reverse  charge 
mechanism for supplies of gas and electricity and telecommunications services would have a 
considerable negative impact on other Member States and on the Internal Market as a whole. 
Indeed, fraud in these types of goods and services can very quickly move from one Member 
State to another, because of the pan European integration of these types of markets and also 
because  a  high  quantity  of  transactions  can  be  undertaken  in  a  short  period  of  time  at  a 
distance, without the need for any physical contact between operators.  

In the case of gas and electricity, as was the case with greenhouse gas emission allowances, it 
is common for sellers and buyers to be established in a Member State other than that of the 
market where the supply is registered. This means that markets in Member States which have 
a  derogation  could  still  be  used  to  commit  VAT  fraud  in  other  Member  States  without  a 
derogation, and importantly without the ability to react quickly through legislative changes. 

Therefore, the only appropriate and effective approach to tackle this type of fraud is to amend 
the  VAT  Directive  in  a  similar  way  to  that  which  was  done  for  greenhouse  gas  emissions 
allowances  in  Council  Directive  2010/23/EU,  thereby  providing  all  Member  States  with  the 

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same anti-fraud measures and allowing them to react quickly if and when this type of fraud 
moves across borders. 

This  view  is  shared  by  the  Council,  as  confirmed  in  the  minutes  statement  to  Council 
Directive  2010/23/EU,  in  which  it  not  only  committed  itself  to  further  discussion  on  the 
application  of  the  reverse  charge  mechanism  to  counter  specific  types  of  fraud,  but  also 
recognised  the  exceptional  nature  of  a  derogation  allowing  for  the  introduction  of  such  a 
measure  in  order  to  urgently  tackle  a  fraud  which  has  resulted  in  substantial  losses  in  a 
Member State.  

6. 

CONCLUSION 

Accordingly,  the  Commission  concludes  that  the  requests  made  by  France,  Germany  and 
Austria do not fulfil the conditions laid down in Article 395 of the VAT Directive and would 
have a considerable negative impact on other Member States and on the Internal Market as a 
whole. It therefore objects to the derogations requested.  

The  Commission  also  reminds  the  Council  of  its  proposal  from  September  2009  on  an 
optional  mechanism  which  would  be  available  to  all  Member  States  and  should  be  the 
adequate  response  to  the  concerns  expressed  by  France,  Germany  and  Austria.  The 
Commission  supports  the  inclusion  of  gas  and  electricity,  as  well  as  telecommunications 
services, in the list of goods and services currently under negotiation. It is the Commission's 
view that other goods and services for which Member States are currently authorised to apply 
a reverse charge and for which the migration of fraud would have a negative impact on the 
Internal Market should be treated in a consistent manner as supplies of gas and electricity, and 
telecommunications services. 

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