COMMUNICATION FROM THE COMMISSION TO THE COUNCIL in accordance with Article 395 of Council Directive 2006/112/EC
Date: 2014-04-22
Institutions: European Commission
Subjects: Hungary, VAT, farming sector, sugar, tax avoidance, tax collection, tax evasion, tax inspection













EUR-Lex - 52014DC0229 - EN











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52014DC0229

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL in accordance with Article 395 of Council Directive 2006/112/EC /* COM/2014/0229 final */









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 notification
registered at the Commission on 27 November 2013, Hungary requested, on the
basis of Article 199b[1]
of Directive 2006/112/EC (hereafter ‘the VAT Directive’), authorisation to
introduce a Quick Reaction Mechanism (QRM) special measure derogating from
Article 193 of the VAT Directive in order to apply the reverse charge mechanism
to supplies of sugar. However, the Commission was not in a position to accept
the proposed measure as the basic legal conditions were not fulfilled[2].
When a notification
within the framework of the QRM is sent, an application for a ‘normal’
derogation within the meaning of Article 395 of the VAT Directive has to be
filed as well in accordance with the last paragraph of Article 199b(2) of the
VAT Directive. Hungary, via the same letter sent for the QRM notification,
requested to be authorised to apply, as mentioned, the reverse charge mechanism
to supplies of sugar.
In accordance
with the second paragraph of Article 395 of that Directive, the Commission
informed the other Member States by letter dated 19 March 2014 of the request
made by Hungary. By letter dated 20 March 2014, the Commission notified Hungary that it had all the information it considered necessary for appraisal of the
request.

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
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 and following a QRM
notification, 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 quantities of sugar in excess of 200 kg.
On the basis of
information provided by Hungary, it appears that fraud problems in the sector
already started to occur in 2007. A steep increase of non-paid VAT was however
noted during 2013 (on the basis of the then available figures for the first
three quarters of that year). Anti-fraud measures which have been put in place
in this context would, according to Hungary, not be sufficient to counter the
increasing fraud.

4.                      
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 first
place, the Commission notes that it is the third time in one year that a
request is filed by Hungary in relation to agricultural products (cereals and
oilseeds; pigs; and now sugar).
In the same way
as for the pig-farming and animal fodder industry ((COM)2013 148final), it is
the Commission’s view that the type of good in question (sugar) is of a nature
which should make auditing possible through conventional control means without
the need to implement the reverse charge mechanism.
In addition,
applying the reverse charge mechanism in relation to goods destined for final
consumption, such as sugar, always entails the risk that the fraud is shifted
further down the supply chain which could become even more difficult to
control, despite the proposed application of a threshold. That is also the
reason why Member States have deliberately excluded agricultural products
destined for final consumption from the ‘Reverse Charge Directive’[3].
This approach is also justified by the risk of fraud moving to other Member
States in a sector whose economic importance is quite considerable in several
Member States. Previous experiences with cereals and oilseeds confirm that this
risk is more than hypothetical.
A derogation is
in any case not a long-term solution, nor does it compensate for inadequate
surveillance of taxable persons in this market. The various requests seem to
indicate that there are structural problems in the control of the agricultural
sector in Hungary and which therefore require a different approach.
In this context,
the Commission has been made aware through publicly available information in
the Hungarian press of allegations of possible mismanagement which would hamper
the correct tax collection in the sector. It should be noted that they have led
to a difficult situation. Therefore, it would appear that a solution at
political, administrative or even judicial level has to be found as to clarify
the situation and as to ensure that the normal functioning of the tax
administration is guaranteed and, where needed, improved or restored.
As regards the
fraud figures, the VAT losses in the sector are considerable but in relation to
the total estimated VAT gap in Hungary, they corresponded to only 0,291%
(figures of 2011)[4],
indicating the need for a more comprehensive solution to address VAT control
and collection issues.
Hungary
indicates in its request that certain measures to fight fraud in this sector
have been taken (such as, inter alia, a better registration procedure, more
efficient inspections, increased fines, integration of tax and customs
authorities). However, it has not implemented yet all recommendations already
produced by the EU in this context.
Measures should
in the Commission's view rely more on improving the efficiency of tax control
than on imposing new obligations on taxable persons. The Commission indeed
notes that
tax obligations in Hungary are already relatively heavy and that this country
has a low ranking – according to the World Bank – in terms of easiness of
paying taxes[5].
On the basis of
all these elements, the Commission has come to the conclusion that a derogation
allowing the reverse charge mechanism to be applied is not the appropriate
solution in order to deal with the fraud situation in the sugar sector and
would have adverse impacts on fraud at the retail level and on other Member
States. A solution would have to be found at a wider level involving structural
reforms of tax control and collection. The Commission remains willing to
provide, where possible, the necessary assistance to Hungary as to counter the
problems regarding VAT fraud. The Commission also suggests that Hungary should strengthen the cooperation in the context of Eurofisc with other Member
States that are confronted, or likely to be confronted, with similar problems
in the agricultural sector.

5.                      
CONCLUSION

On the basis of
above-mentioned elements, the Commission objects to the request made by Hungary.
[1]              Introduced by Council Directive 2013/42/EU of 22 July
2013 amending Directive 2006/112/EC on the common system of value added tax, as
regards a Quick Reaction Mechanism against VAT fraud (OJ L 201, 26.7.2013, p.
1)
[2]              Commission implementing Decision of 11 December 2013
refusing the request by Hungary to introduce a Quick Reaction Mechanism special
measure derogating from Article 193 of Council Directive 2006/112/EC on the
common system of value added tax (OJ L 341, 18.12.2013, p. 68)
[3]              Council Directive 2013/43/EU of 22 July 2013 amending
Directive 2006/112/EC on the common system of value added tax, as regards an
optional and temporary application of the reverse charge mechanism in relation
to supplies of certain goods and services susceptible to fraud (OJ L 201,
26.7.2013, p. 4)
[4]              Study to quantify and analyse the VAT Gap in the
EU-27 Member States. Report commissioned by the European Commission and
prepared by a consortium led by CPB (Netherlands Bureau for Economic Policy
Analysis): http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/vat-gap.pdf
[5]              See: Assessment of the 2013 national reform programme
and convergence programme for Hungary - Accompanying the document
Recommendation for a Council recommendation on Hungary’s 2013 national reform
programme and delivering a Council Opinion on Hungary’s convergence programme
for 2012-2016 (Commission staff working document - SWD(2013) 367 final; p.
21-22); see also: http://www.doingbusiness.org