Proposal for a COUNCIL IMPLEMENTING DECISION on authorising Hungary to apply a measure derogating from Article 193 of Directive 2006/112/EC on the common system of value added tax
Date: 2015-11-10
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Hungary, VAT, derogation from EU law, tax evasion, temporary employment, temporary employment agency

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   EUROPEAN COMMISSION  Brussels, 10.11.2015  COM(2015) 557 final 2015/0257 (NLE)   Proposal for a COUNCIL IMPLEMENTING DECISION on authorising Hungary to apply a measure derogating from Article 193 of Directive 2006/112/EC on the common system of value added tax  
 
EXPLANATORY MEMORANDUM 

1. 

• 

CONTEXT OF THE PROPOSAL 

Reasons 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 tax1 (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  the  provisions  of  that  Directive  in  order  to  simplify  the 
procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance. 

By letters registered with the Commission on 23 December 2014 and 8 May 2015, Hungary 
requested authorisation 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 2 July 2015 of the request made by Hungary. By letter dated 7 
July  2015,  the  Commission  notified  Hungary  that  it  had  all  the  information  it  considered 
necessary for appraisal of the request. 

Hungary  has  informed  the  Commission  that  they  are  confronted  with  fraud  schemes  in  the 
sector  of  supply  of  staff,  in  particular  as  regards  temporary  employment  agencies  and 
organisations providing similar services, such as school cooperatives whose members perform 
work  for  third  parties.  Around  1000  companies  are  registered  as  temporary  employment 
agencies in Hungary. 

A number of undertakings in the sector are member of Hungarian national associations (e.g. 
Hungarian National Association of Temporary Employment Agencies, National Associations 
of School Cooperatives) of which the membership, according to Hungary, provides a certain 
guarantee that they operate lawfully. However, a considerable number of undertakings are not 
member  of  a  National  Association  and  it  is  in  particular  in  this  category  that,  according  to 
Hungary, 40% to 50% would engage in fraudulent activities. 

This fraud has different forms, such as fictitious supply of services or fake invoices, but the 
main 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  VAT  fraud  in  this  sector  in  2014  was  calculated  by 
Hungary at around €22.500.000. 

One  of  the  characteristics  of  supplying  this  type  of  services  is  that  large  investments  or 
specialised knowledge is not really required. It is therefore relatively easy to establish such a 
business which then disappears after a short period. Because of limited investments, the VAT 
received from clients often largely exceeds the deductible VAT on these investments or, more 
general, on the input. The non-deducted VAT on the input constitutes therefore only a small 
cost element when these undertakings, with little or no assets, disappear. The overall amount 
of unpaid VAT becomes difficult or impossible to recover. 

Notwithstanding  certain  control  measures  that  have  been  introduced  (e.g.  increased 
supervision and controls on registration of new companies), Hungary has declared not to be in 
a position to successfully combat the fraud in this sector. Therefore, they ask to be authorised, 
in derogation of the general rule of Article 193 of the VAT Directive, to apply to this sector 

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OJ L 347, 11.12.2006, p. 1. 

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the reverse charge mechanism under which not the supplier but the taxable client accounts for 
the VAT due on the supply in his VAT return. 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  prevents  that  fraudulent 
suppliers  disappear  with  the  VAT.  Moreover,  the  service  users  are,  as  the  Commission 
understands on the basis of information provided by Hungary, generally more compliant than 
these  suppliers.  The  proposed  measure  will  therefore  also  have  the  effect  that  VAT 
obligations are shifted from smaller, less reliable businesses to larger taxable persons that are 
more compliant. At the same time, no risk of fraud could be identified as regards the shifting 
of  fraud  to  other  Member  States  not  applying  this  measure.  In  the  same  way,  there  is  no 
foreseeable shift of fraud to the retail level as the type of service is normally not destined for 
final consumption. 

It  is  to  be  noted  that  the  VAT  Directive  already  foresees  in  an  optional  application  of  the 
reverse  charge  mechanism  in  relation  to  the  supply  of  staff  (Article  199(1)(b)  of  the  VAT 
Directive).  This  possibility  is  limited  to,  essentially,  the  immovable  property  sector  (Article 
199(1)(a)  of  the  VAT  Directive)  but  the  background  of  the  option  in  the  directive  is 
comparable  to  the  one  of  the  present  request.  The  proposed  derogating  measure  should 
therefore only be applicable to situations not already covered by the VAT Directive. 

Finally, the Commission  has  been  informed  that  Hungary has  already have started applying 
the requested derogation without having awaited the adoption of the Council decision based 
on this proposal. 

2. 

• 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

Legal basis 

Article 395 of the VAT Directive. 

• 

Subsidiarity (for non-exclusive competence)  

Considering the provision of the VAT Directive on which the proposal is based, the proposal 
falls under the exclusive competence of the Union. The subsidiarity principle therefore does 
not apply. 

• 

Proportionality 

The proposal complies with the proportionality principle for the following reasons. 

The Decision concerns an authorisation granted to a Member states 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, i.e. to combat tax evasion. It goes not beyond what is required to combat fraud in a 
specific sector. 

• 

Choice of the instrument 

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. 

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3. 

• 

RESULTS 
CONSULTATIONS AND IMPACT ASSESSMENTS 

EX-POST 

EVALUATIONS, 

OF 

STAKEHOLDER 

Stakeholder consultations 

This proposal is based on a request made by Hungary and concerns only this Member State. 

• 

Collection and use of expertise 

There was no need for external expertise. 

• 

Impact assessment 

The Decision aims at combating VAT fraud in relation to supplies of staff by imposing that 
the VAT due is accounted for by the taxable recipient of the service. 

It  will  therefore  have  a  potential  positive  impact  on  VAT  receipts  insofar  that  fraudulent 
suppliers  can  no  longer  disappear  with  the  amount  of  VAT  they  receive  from  their  clients 
under the normal rules. 

4. 

BUDGETARY IMPLICATIONS 

The proposal will have no negative implication for the EU budget. 

5. 

OTHER ELEMENTS 

The proposal includes a sunset clause; an automatic time limit which is set at 31 December 
2017. 

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2015/0257 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

on authorising Hungary to apply 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 tax2, and in particular Article 395(1) thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

By  letters  registered  with  the  Commission  on  23  December  2014  and  8  May  2015, 
Hungary  requested  authorisation  to  introduce  a  special  measure  derogating  from 
Article  193  of  Directive  2006/112/EC  as  regards  the  person  liable  for  payment  of 
value added tax (VAT). 

The Commission informed the other Member States by letter dated 2 July 2015 of the 
request  made  by  Hungary.  By  letter  dated  7  July  2015,  the  Commission  notified 
Hungary that it had all the information it considered necessary to consider the request. 

Article  193  of  Directive  2006/112/EC  provides  that  the  taxable  person  supplying 
goods  or  services  is,  as  a  general  rule,  liable  for  the  payment  of  the  VAT  to  the  tax 
authorities.  The  purpose  of  the  derogation  requested  by  Hungary  is  to  make  the 
recipient liable for the payment of VAT in relation to supply of staff. 

According  to  Hungary,  a  number  of  traders  in  the  sector  of  temporary  employment 
agencies engage in fraudulent activities by supplying services without paying the VAT 
over  to  the  tax  authorities.  Since  this  type  of  activity  does  not  necessarily  require 
important input or investment, the VAT these agencies receive often exceeds largely 
the  deductible  VAT  they  have  paid  to  their  suppliers.  A  number  of  these  agencies, 
often with little or no assets, disappear subsequently after a short period of even only a 
few months, making the recovery of unpaid VAT difficult or impossible. 

By designating the person to whom these services are supplied as the person liable for 
the payment of VAT in such cases, the derogation would eliminate the opportunity to 
engage  in  that  form  of  tax  evasion.  For  a  number  of  situations  of  supply  of  staff, 
enumerated  in  Article  199(1)(a)  of  Directive  2006/112/EC,  it  is  already  possible  to 
indicate  the  recipient  as  the  person  liable  for  the  payment  of  VAT.  The  derogating 
measure is therefore applicable to situations of supply of staff not already covered by 
Directive 2006/112/EC. 

(6) 

The derogation will not have an adverse effect on the Union's own resources accruing 
from VAT, 

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OJ L 347, 11.12.2006, p. 1. 

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HAS ADOPTED THIS DECISION:  

Article 1 

By way of derogation from Article 193 of Directive 2006/112/EC, Hungary is authorised to 
provide that the person liable for payment of VAT is the taxable person to whom supplies of 
staff, engaged in other activities than covered by Article 199(1)(a) of Directive 2006/112/EC, 
are made. 

This Decision shall expire on 31 December 2017. 

Article 2 

This Decision is addressed to Hungary. 

Done at Brussels, 

Article 3 

For the Council 
The President 

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