COMMUNICATION FROM THE COMMISSION TO THE COUNCIL in accordance with Article 395 of Council Directive 2006/112/EC
Date: 2013-03-19
Institutions: European Commission
Subjects: Hungary, VAT, agricultural product, derogation from EU law, tax evasion

EUROPEAN 
COMMISSION 

Brussels, 19.3.2013  
COM(2013) 148 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 

Pursuant to 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 introduce special measures for derogation from the provisions of this Directive, in 
order to simplify the procedure for collecting VAT or to prevent certain forms of tax 
evasion  or  avoidance.  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 proportionate and limited in scope. 

By letter registered with the Commission on 7 January 2013, Hungary has requested 
to  be  authorised  to  introduce  a  measure  derogating  from  Article  193  of  the  VAT 
Directive. In accordance with the second paragraph of Article 395 of that Directive, 
the Commission informed the other Member States by letter dated 12 February 2013 
of the request made by Hungary. By letter dated 13 February 2013, the Commission 
notified Hungary that it had all the information it considered necessary for appraisal 
of the request. 

Hungary requests to be authorised to apply the reverse charge mechanism in relation 
to  a  number  of  agricultural  goods,  mainly  those  produced  and  supplied  in  the  pig-
farming and animal fodder industry. The particular goods covered by the Hungarian 
request are listed in detail below under point (3). 

Hungary  was  most  recently  given  the  authorisation  to  apply  the  reverse  charge 
mechanism to supplies of certain cereals and oilseeds1. 

This derogation was granted by the Council under very specific circumstances, under 
which Hungary committed itself to implement, during the application period of the 
said derogation, appropriate and effective control measures and reporting obligations 
which  would  make  it  possible  to  revert  to  the  normal  system  after  this  transitional 
period of time. Hungary is obliged to notify the Commission of the introduction of 
those measures and obligations. Hungary has not yet fulfilled this obligation. 

This  approach  was  notably  justified  by  the  risk  of  fraud  moving  to  other  Member 
States in a sector whose economic importance is quite substantial in several Member 
States. 

It  should  be  recalled  that  during  recent  Council  negotiations  of  similar  types  of 
derogation, a number of Member States have expressed their concern, stressing that 
any derogation from the system of fractionated payment cannot be more than a last 
resort and an emergency measure in proven cases of fraud, and must offer guarantees 
as to the necessity and exceptional nature of the derogation granted, the duration of 
the  measure  and  the  specific  nature  of  the  products  concerned.  Moreover,  those 
Member States have pointed out that the reverse charge mechanism always entails a 
risk  of  the  fraud  being  transferred  to  other  Member  States  and  recalled  that  the 

1 

Council  Implementing  Decision  2012/624/EU  of  4  October  2012  authorising  Hungary  to  introduce  a 
special measure derogating from Article 193 of Directive 2006/112/EC on the common system of value 
added tax (OJ L 274, 9.10.2012, p. 26) 

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reverse charge procedure shall not be used systematically to make up for inadequate 
surveillance by a Member State's tax authorities. 

Hungary  confirmed  its  acceptance  of  these  conditions.  This  engagement  was  in 
particular  mentioned  in  the  first  recital  of  the  Council  Implementing  Decision 
2012/624/EU of 4 October 2012 where it is stated that Hungary "has said that it will 
not seek renewal of this authorisation". 

2. 

REVERSE CHARGE 

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  particularly  been  found  to  eliminate 
the opportunity to engage in that form of tax evasion.  

3. 

THE REQUEST 

Hungary requests, under Article 395 of the VAT Directive, that the Council, acting 
upon a proposal of the Commission, authorises Hungary to apply a special measure 
derogating from Article 193 of the VAT Directive as regards the application of the 
reverse charge mechanism in relation to supplies of the following goods: 

CN Code2 

Description 

0103 1000 

Pure-bred breeding live swine 

0103 9110 

Domestic species of live swine weighting less than 50 kg 

0103 9211 

Sows having farrowed at least once, of a weight of not less than 160 kg, weighting 50 kg or more 

0103 9219 

Other domestic species of live swine weighting 50 kg or more 

0203 1110 

Fresh or chilled carcases and half-carcases of domestic swine 

0203 2110 

Frozen carcases and half-carcases of domestic swine 

1103 

2302 

2304 

2306 

Cereal groats, meal and pellets 

Bran,  sharps  and  other  residues,  whether  or  not  in  the  form  of  pellets,  derived  from  the  sifting,  milling  or 
other working of cereals or of leguminous plants 

Oilcake and other solid residues, whether or not ground or in the form of pellets, resulting from the extraction 
of soya-bean oil 

Oilcake and other solid residues, whether or not ground or in the form of pellets, resulting from the extraction 
of vegetable fats or oils, other than those of heading 2304 or 2305 

2309 90 

Preparations of a kind used in animal feeding, other than dog or cat food put up for retail sale 

2 

Combined nomenclature code established by Regulation (EEC) No 2658/87 

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The current request has to be seen against the background of the derogation that was 
most recently granted to Hungary, pursuant to which it is already authorised to apply 
the reverse charge mechanism to supplies of certain cereals and oilseeds3.  

The  applicability  of  that  derogation  is  limited  in  time  for  a  period  of  2  years. 
Moreover,  Hungary  has  committed  itself  to  introduce  appropriate  and  effective 
control  measures  and  reporting  obligations  with  respect  to  taxable  persons  that 
supply goods to which that special measure applies and to notify the Commission of 
the introduction of the corresponding measures and obligations. 

Hungary has informed the Commission that it has observed a number of fraudulent 
activities with respect to supplies of the goods listed in the table above which have 
resulted in high amounts of unpaid VAT. According to the information supplied by 
Hungary, the detection of those cases of VAT fraud is also a result of a significant 
increase of the number of tax inspections carried out in Hungary. 

Hungary  is  however  of  the  opinion  that  those  inspections  are  usually  highly  time-
consuming  and  therefore  seeks  authorisation  to  establish  that  the  transactions  in 
question shall be subject to the reverse charge mechanism in order to prevent VAT 
fraud. 

4. 

THE COMMISSION'S VIEW 

When the Commission receives requests in accordance with Article 395 of the VAT 
Directive,  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 first place, it  is  the  Commission's view that the type of  the various goods in 
question  –  as  listed  above  in  detail  –  are  of  a  nature  which  should  make  auditing 
possible  through  conventional  control  means  without  the  need  to  implement  the 
reverse charge mechanism.  The derogation recently granted to Hungary concerning 
cereals and oilseeds4 was granted in exceptional circumstances in order to give time 
to Hungary to implement certain reforms to combat the fraud.  

Secondly,  the  measure  concerning  cereals  and  oilseeds  was  never  intended  to  be  a 
long term solution or to compensate for inadequate surveillance of taxable persons in 
these extremely valuable markets. The derogation was justified as part of a package 
of measures to be undertaken by Hungary while, at the same time, being restricted to 
a limited period in time. The very same conditions were included in the derogation 
granted to Romania5. 

Hungary has not yet notified the Commission of the introduction of the appropriate 
and effective control measures and reporting obligations concerning the supplies of 
the  goods  covered  by  the  derogation  recently  granted.  Given  the  strictly  limited 

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5 

See footnote (1) 
See footnote (1) 
Council  Implementing  Decision  2011/363/EU  of  20  June  2011  authorising  Romania  to  introduce  a 
special measure derogating from Article 193 of Directive 2006/112/EC on the common system of value 
added tax (OJ L 163, 23.6.2011, p. 26) 

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nature of that derogation, the Commission takes the view that – at this stage – it is 
not justified to extend the list of goods subject to the reverse charge mechanism to a 
considerable  extent  as  now  requested  by  Hungary.  Applying  the  reverse  charge 
mechanism to the long list of goods as requested by Hungary in addition to the list of 
goods  already  authorised  would  result  in  a  situation  where  a  considerably  high 
number of supplies made in the agricultural sector would fall out of the normal VAT 
rules. The Commission has reason to doubt that such a global approach could still be 
regarded  as  a  “special  measure”  within  the  meaning  of  Article  395  of  the  VAT 
Directive. 

Moreover, the detailed information submitted by Hungary together with the request 
for  derogation  shows  that  Hungary  has  already  successfully  started  taking  the 
necessary  steps  to  effectively  counteract  the  observed  fraudulent  activities  in  the 
sectors involved. The statistics Hungary has shared with the Commission underline 
that in 2012 Hungary had almost doubled the number of tax inspections carried out 
in  comparison  to  2011  and  had  also  managed  to  increase  the  effectiveness  of  the 
inspections  performed  in  the  most  affected  sectors  in  terms  of  the  detection  of 
fraudulently  unpaid  VAT.  The  Commission  acknowledges  the  efforts  taken  and 
encourages Hungary to carry on with those measures which the Commission thinks 
are appropriate in terms of preventing the observed cases of VAT fraud.  

The Commission also considers that the so-called conventional measures designed to 
tackle Carrousel fraud should first be fully implemented. Against this background, it 
stands  ready  to  assist  Hungary  in  fully  implementing  such  measures.  Given  this 
situation,  the  Commission  takes  the  view  that  the  introduction  of  a  further 
transitional  measure  based  on  Article  395  of  the  VAT  Directive  to  allow  for  the 
application of the reverse charge mechanism is not the right approach. 

Also, the reverse charge mechanism could have in this sector an adverse impact on 
fraud  at  the  retail  level.  Contrary  to  cereals  where  transformation  is  almost  always 
done  at  an  industrial  stage,  the  transformation  of  carcasses  of  animals  into  meat  is 
also often carried out in the same place as where it is sold to private consumers. The 
risk of transferring the whole VAT liability to the last chain is therefore much higher.  

Lastly,  indications  are  that  fraud  in  these  sectors  has  shifted  to,  in  particular,  other 
Member States in South–East Europe. Against this background, applying the reverse 
charge to an extended number of goods in the agricultural sectors concerned would 
represent  a  fraud  risk  for  those  Member  States,  a  risk  which  cannot  be 
underestimated given the importance of these sectors in the region. 

5. 

CONCLUSION 

On  the  basis  of  above-mentioned  elements,  the  Commission  objects  to  the  request 
made by Hungary. 

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