Proposal for a COUNCIL IMPLEMENTING DECISION authorising the Republic of Latvia to extend the application of a measure derogating from Article 193 of Council 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: Latvia, VAT, derogation from EU law, small business, supply, wood product

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 10.11.2015  COM(2015) 560 final 2015/0260 (NLE)   Proposal for a COUNCIL IMPLEMENTING DECISION authorising the Republic of Latvia to extend the application of a measure derogating from Article 193 of Council 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  of  Council  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  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  30  March  of  2015,  the  Republic  of  Latvia 
(hereafter  'Latvia')  requested  authorization  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 18 May 2015 of the request 
made by Latvia. By letter dated 20 May 2015, the Commission notified Latvia that it had all 
the information it considered necessary for appraisal of the request. 

The  Latvian  government  asks  to  extend  the  validity  of  the  current  application  of  a  reverse 
charge mechanism in relation to supplies of timber. 

As  regards  the  supplies  of  timber,  Latvia  was  confronted  with  a  considerable  number  of 
traders  that  failed  to  comply  with  their  obligations.  Businesses  in  this  sector  are  frequently 
small  resellers,  which  often  disappear  without  paying  to  the  tax  authorities  the  tax  they 
charged  on  their  supplies  but  leaving  their  customers  in  receipt  of  a  valid  invoice  for  VAT 
deduction. 

Under the reverse charge mechanism, by derogating from a general rule provided in Article 
193  of  the  VAT  Directive,  the  customer  becomes  liable  for  the  payment  of  the  VAT  on 
domestic transactions. 

This  derogating  measure  had  initially  been  granted  by  Council  Decision  2006/42/EC  of  24 
January 20062. The application of the derogating measure for supply of timber was extended 
by Council Implementing Decision 2009/1008/EU of 7 December 20093 . A last extension of 
the derogating measure has been granted by Council Implementing Decision 2013/55/EU of 
22 January 20134 . 

From  the  report  submitted  by  the  Latvian  Tax  Authorities  together  with  the  request  to 
continue to apply the derogating measure, the Commission understands that the situation, on 
which the initial derogation was based, continues to exist. Latvia claims that despite the fact 
that there has been a reduction in the number of cases of fraud involving VAT payments into 
the  national  budget  and  VAT  evasion  on  the  timber  market  since  the  introduction  of  the 
reverse charge procedure, the risk is not eliminated. One of the indicators which shows that 
the risk level is still high is the number of registered traders which the State Revenue Service 
(SRS)  has  designated  as  shell  companies  in  this  sector  of  the  economy.  These  traders  enter 
into  artificial  transaction  schemes  in  order  to  reduce  the  amount  of  VAT  payable  into  the 
national budget or increase the amount of VAT repayable from the national budget to other 

1 
2 
3 
4 

OJ L 347, 11.12.2006, p. 1. 
OJ L 25, 28.1.2006, p. 31. 
OJ L 347, 24.12.2009, p.30. 
OJ L 22, 25.1.2013, p.16. 

EN 

2 

   EN 

                                                 
registered traders involved in these schemes. In the opinion of Latvia, it is therefore important 
to continue using the reverse charge procedure for the payment of VAT in Latvia on timber 
transactions. 

On this basis, the derogation should be granted for another limited period. 

• 

Consistency with existing policy provisions in the policy area 

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

• 

Consistency with other Union policies 

Not applicable. 

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. 

This Decision concerns an authorisation granted to a Member State upon its own request and 
does not constitute any obligation. 

Furthermore,  the  measure  is  targeted  and  restricted  to  a  very  limited  number  of  taxable 
suppliers  in  relation  to  which  the  VAT  collection  has  proven  to  be  problematic.  Given  the 
limited scope of the derogation, the special measure is proportionate to the aim pursued.  

• 

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  Implementing  Decision  is  the  most  suitable  instrument 
since it can be addressed to individual Member States. 

3. 

• 

RESULTS 
CONSULTATIONS AND IMPACT ASSESSMENTS 

EX-POST 

EVALUATIONS, 

OF 

STAKEHOLDER 

Stakeholder consultations 

Not relevant. 

• 

Collection and use of expertise 

There was no need for external expertise. 

EN 

3 

   EN 

• 

Impact assessment 

The  Decision  proposal  aims  at  simplifying  the  procedure  for  charging  the  tax  and  at 
combating  possible  VAT  evasion  or  avoidance  and  has  therefore  a  potential  positive 
economic impact. 

Impact will in any case be limited because of the narrow scope of the derogation. 

4. 

BUDGETARY IMPLICATIONS 

The proposal has no implication for the Union budget. 

5. 

• 

OTHER ELEMENTS 

Implementation plans and monitoring, evaluation and reporting arrangements 

The proposal includes a sunset clause; an automatic time limit which is set at 31 December 
2018. 

However, in case Latvia would consider another extension of the derogating measure beyond 
2018, an evaluation report should be submitted to the Commission together with the extension 
request no later than 1 April 2018. 

EN 

4 

   EN 

2015/0260 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

authorising the Republic of Latvia to extend the application of a measure derogating 
from Article 193 of Council 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,  and  in  particular 
Article 291 (2) thereof, 

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) 

(4) 

(5) 

5 
6 

7 

8 

By letter  registered with the  Commission  on 30 March 2015, the Republic of Latvia 
(hereafter 'Latvia') requested authorisation to continue to apply a measure derogating 
from the provisions of Directive 2006/112/EC which govern the person liable for the 
payment of the value added tax (VAT) to 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 18 
May 2015. By a letter dated 20 May 2015, the Commission notified Latvia that it had 
all the information necessary to consider the request. 
Council Decision 2006/42/EC6  authorised Latvia to make the recipient liable for the 
VAT due on the supply of timber. 

The time period for the application of the derogating measure until 31 December 2009 
was  extended  twice,  by  Council  Implementing  Decision  2009/1008/EU7  and  by 
Council Implementing Decision 2013/55/EU8 . 

The  investigations  and  the  appropriate  analysis  of  the  application  of  the  mechanism 
carried  out  by  the  Latvian  tax  authorities  have  revealed  the  effectiveness  of  that 
derogating measure. 

OJ L 347, 11.12.2006, p. 1. 
Council  Decision  2006/42/EC  of  24  January  2006  authorising  Latvia  to  extend  the  application  of  a 
measure derogating from Article 21 of the Sixth Council Directive 77/388/EEC on the harmonisation of 
the laws of the Member States relating to turnover taxes (OJ L 25, 28.1.2006, p.31). 
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  Directive  2006/112/EC  on  the 
common system of value added tax (OJ L 347, 24.12.2009, p.30). 
Council  Implementing  Decision  2013/55/EU  of  22  January  2013  amending  Implementing  Decision 
2009/1008/EU  authorising  the  Republic  of  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  (OJ  L  22, 
25.1.2013, p.16). 

EN 

5 

   EN 

                                                 
(6) 

(7) 

(8) 

The  Commission  understands  that  the  legal  and  factual  situation  which  has  justified 
the  application  of  the  derogating  measure  has  not  changed  and  continues  to  exist. 
Latvia should therefore be authorised to apply the measure concerned during a further 
limited period. 

If Latvia were to require a further extension of the derogating measure beyond 2018, 
an  evaluation  report  should  be  submitted  to  the  Commission  together  with  the 
extension request no later than 31 March 2018. 

The  derogating  measure  will  have  no  adverse  impact  on  the  Union's  own  resources 
accruing from VAT, 

HAS ADOPTED THIS DECISION:  

Article 2 of Implementing Decision 2009/1008/EU is replaced by the following:  

Article 1 

This Decision shall apply until 31 December 2018.  

‘Article 2 

Any request for the extension of the measure provided for in this Decision shall be submitted 
to the Commission no later than 31 March 2018 and shall be accompanied by a report which 
includes a review of the application of this measure.’ 

This Decision is addressed to the Republic of Latvia. 

Done at Brussels, 

Article 2 

For the Council 
The President 

EN 

6 

   EN