COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Generalised reverse charge mechanism Accompanying the document Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax as regards the temporary application of the generalised reverse charge mechanism in relation to supplies of goods and services above a certain threshold
Date: 2016-12-21
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: VAT, delivery, fraud, goods and services, intra-EU trade, supply, tax harmonisation, tax offence, tax system

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 21.12.2016  SWD(2016) 457 final   COMMISSION STAFF WORKING DOCUMENT  IMPACT ASSESSMENT  Generalised reverse charge mechanism Accompanying the document Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax as regards the temporary application of the generalised reverse charge mechanism in relation to supplies of goods and services above a certain threshold {COM(2016) 811 final} {SWD(2016) 458 final}  
 
 
Contents 

1. 

INTRODUCTION AND POLICY CONTEXT .......................................................... 5 

1.1.  Common system of value added tax .................................................................. 5 

1.2.  Scope  of  the  proposed  initiative:  the  generalised  reverse  charge 

mechanism (GRCM) ......................................................................................... 6 

1.3.  Comparison of initiative with existing legislation in the area of reverse 

charge mechanism ............................................................................................. 8 

1.4.  Context of the initiative ..................................................................................... 9 

1.4.1.  Medium term measure to tackle the VAT gap .................................... 9 

1.4.2.  Urgent measures to tackle the VAT gap ............................................ 10 

2.  WHAT IS THE PROBLEM AND WHY IS IT A PROBLEM? ............................... 14 

2.1.  The problem ..................................................................................................... 14 

2.1.1.  VAT fraud affecting more specifically certain Member States ......... 14 

2.1.2.  Derogating measures to individual Member States can affect 

the integrity of the internal market .................................................... 22 

2.2.  Problem drivers ............................................................................................... 23 

2.2.1.  Driver 1: Endemic weakness of current intra-EU VAT system ........ 23 

2.2.2.  Driver 2: Different (weak) tax collection and control capacity 

of certain Member States ................................................................... 25 

2.3.  Problem tree ..................................................................................................... 25 

2.4.  Evolution of the problem without action at EU level ...................................... 26 

3.  WHY SHOULD THE EU ACT? .............................................................................. 26 

4.  WHAT SHOULD BE ACHIEVED? ........................................................................ 27 

4.1.  General objectives ........................................................................................... 27 

4.2.  Specific objectives ........................................................................................... 28 

4.3.  Consistency  with  other  EU  policies  and  with  the  Charter  for 

fundamental rights ........................................................................................... 29 

5.  WHAT  ARE  THE  VARIOUS  OPTIONS  TO  ACHIEVE  THE 

OBJECTIVES? .......................................................................................................... 30 

5.1.  Scope  of  the  changes  proposed  –  concept  of  “person  liable  for 

payment of VAT” ............................................................................................ 30 

5.2.  Option 1: Baseline ........................................................................................... 30 

5.3.  Discarded option: Derogation to apply a GRCM without any threshold ........ 31 

5.4.  Option 2: derogation to apply a GRCM above a certain threshold only 

for preselected Member States ........................................................................ 34 

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5.4.1.  Option 2a: reverse charge mechanism applies to any domestic 

supplies of goods and services. ......................................................... 34 

5.4.2.  Option 2b: reverse charge mechanism applies to all domestic 

supplies of goods and services .......................................................... 35 

5.4.3.  Discard of option 2a .......................................................................... 35 

5.5.  Option 3: derogation to apply a GRCM above a certain threshold for 

any Member State fulfilling certain pre-defined criteria ................................. 36 

5.5.1.  Option 3a: reverse charge mechanism applies to any domestic 

supplies of goods and services. ......................................................... 37 

5.5.2.  Option 3b: reverse charge mechanism applies to all domestic 

supplies of goods and services .......................................................... 37 

5.5.3.  Discard of option 3a .......................................................................... 37 

6.  WHAT  ARE  THE  IMPACTS  OF  THE  DIFFERENT  POLICY  OPTIONS 

AND WHO WILL BE AFFECTED? ........................................................................ 37 

6.1.  Methodology .................................................................................................... 37 

6.2.  Analysis of the impacts of each of the options ................................................ 38 

6.2.1.  Option 1: baseline .............................................................................. 38 

6.2.2.  Option  2b:  derogation  to  apply  a  GRCM  to  all  domestic 
supplies of goods and services above a certain threshold only 
for preselected Member States .......................................................... 41 

6.2.3.  Option  3b:  derogation  to  apply  a  GRCM  to  all  domestic 
supplies  of  goods  and  services  above  a  certain  threshold  for 
any Member State fulfilling certain pre-defined criteria ................... 47 

6.2.4.  Common explanations to option 2b and option 3b ............................ 50 

7.  HOW DO THE OPTIONS COMPARE? .................................................................. 52 

7.1.  Summary assessment of the impacts ............................................................... 52 

7.2. 

Identification of the preferred option .............................................................. 56 

7.2.1.  Overall  assessment  of  the  options  and  selection  of  the 

preferred option ................................................................................. 56 

7.2.2.  Benchmark ......................................................................................... 57 

8.  HOW  WOULD  ACTUAL 

IMPACTS  BE  MONITORED  AND 

EVALUATED? ......................................................................................................... 57 

8.1.  Monitoring  by  the  Member  States  applying  the  reverse  charge 

mechanism ....................................................................................................... 58 

8.1.1.  Reporting obligations ........................................................................ 58 

8.1.2. 

Interim and final report ...................................................................... 58 

8.2.  Monitoring  by  the  Member  States  not  applying  the  reverse  charge 

mechanism ....................................................................................................... 58 

8.3.  Monitoring by the Commission – Operational objectives ............................... 58 

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9.  ANNEXES ................................................................................................................ 59 

9.1.  Annex 1: Procedural information concerning the process to prepare the 

impact assessment report and the related initiative ......................................... 59 

9.2.  Annex 2: Stakeholder consultation .................................................................. 59 

9.3.  Annex 3: Who is affected by the initiative and how? ..................................... 59 

9.4.  Annex 4: Methodology .................................................................................... 59 

9.5.  Annex  5:  short  term  measures  to  enhance  tax  compliance  and 

strengthen the fight against vat fraud .............................................................. 59 

9.6.  Annex  6:  Replies  from  Austria  and  the  Czech  Republic  to  the 

questionnaire sent by the Commission ............................................................ 59 

9.7.  Annex  7:  Summary  table  on  the  new  forms  of  fraud  linked  with 

reverse charge mechanism ............................................................................... 60 

9.8.  Annex  8:  Meeting  report  of  the  ISSG  on  a  temporary  application  of 

the VAT reverse charge mechanism ................................................................ 60 

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1. 

INTRODUCTION AND POLICY CONTEXT 

1.1.  Common system of value added tax 

The common system of value added tax (VAT) is a major and growing source of revenue in 
the European Union (EU), raising almost EUR 1 trillion in 2014, which corresponds to 7% 
of EU GDP or 17.5 % of national tax revenues, including social contributions1. One of the 
EU’s own resources is also based on VAT (13% of EU budget in 20142). As a broad-based 
consumption tax, it is considered as one of the most growth-friendly forms of taxation. 

However,  huge  sums  of  VAT  are  being  lost  each  year  due  to  tax  fraud  and  evasion. 
Research  shows  that  the  overall  difference  between  the  expected  VAT  revenue  and  the 
amount actually collected (the so-called 'VAT Gap') amounted to nearly EUR 160 billion in 
the  EU  in  20143.  About  EUR  50  billion  out  of  this  would  be  due  to  carrousel  fraud  (see 
further  explanations  below,  in  particular  box  6).  This  illegally  deprives  Member  States’ 
public  budgets  of  money  but  also  creates  unfair  competition  between  compliant  and  non-
compliant businesses. 

VAT  is  governed  by  the  VAT  Directive4.  It  ensures  that  the  principles  underlying  the 
functioning  of  this  tax  apply  consistently  in  all  EU  Member  States  in  order  to  prevent 
distortions of competition and allow free movement of goods and services within the EU. 

VAT is assessed on the value added to goods and services that are bought and sold for use 
or  consumption  in  the  EU5.  VAT  is  collected  fractionally  by  businesses6  and,  as  a 
consumption tax, is borne ultimately by the final consumer7. 

This  system  of  partial  payments  allows  the  collection  of  the  tax  at  each  stage  in  the 
production  and  distribution  chain8  and  ensures  the  self-policing  character  of  this  tax  (see 
box 1 below). 

1   Eurostat. 
2   Multiannual financial framework 2014-2020 and EU budget 2014. See 

http://bookshop.europa.eu/en/multiannual-financial-framework-2014-2020-and-eu-budget-2014-
pbKV0413055/?CatalogCategoryID=mpgKABstFogAAAEjbIUY4e5K 

3   http://europa.eu/rapid/press-release_IP-16-2936_en.htm?locale=en 

4   Council  Directive  2006/112/EC  of  28  November  2006  –  as  amended  (http://eur-lex.europa.eu/legal-

content/EN/TXT/PDF/?uri=CELEX:02006L0112-20150101&from=EN). 

5   Further explanations on the common VAT system can be find here:  

http://ec.europa.eu/taxation_customs/taxation/vat/what_is_vat/index_en.htm 

6   Reference  is  made  to  “businesses”  for  simplification  reasons  but  the  correct  terminology  would  be 
“taxable persons”. The scope of the concept of “taxable persons” can be found in Articles 9 to 13 of the 
VAT Directive. 

7   A final consumer means for VAT purposes the last person in a production/distribution chain that is not 
allowed to deduct the VAT he paid on his purchases (contrary to VAT taxable persons who can do so). 
8   The amount of tax collected at a particular stage corresponds to the tax on the value added at this stage. 

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Box 1: Current VAT system based on fractionated payments 

On each supply made by a business, VAT is charged to its customers at the rate applicable. 
This business then deducts from the VAT collected from its customers the amount of tax it 
has  paid  to  other  businesses  on  purchases  for  its  own  business  activities.  Where  the 
customer is also a business, this system is replicated until it reaches the final consumer. At 
this last stage of the supply chain, the VAT is no more deductible and the tax is definitively 
vested to the Treasury.   

Example: VAT rate is 10% 

 A, B, C and D are businesses, i.e. taxable persons with right to deduct input VAT 

A  sells  goods  to  B  for  100  and  charges  10  VAT  which  is  paid  over  to  the  Treasury. 
B supplies  these  goods  for  a  total  amount  of  220  (including  20  VAT)  to  C.  B  deducts  its 
input VAT of 10 from the 20 received from C and pays the difference of 10 to the Treasury. 
C sells these goods on for 330 (including 30 VAT) to D. C deducts its input VAT of 20 from 
the 30 received from D and pays the difference of 10 to the Treasury. Finally, D sells the 
goods for 440 (including 40 VAT) to a final consumer. D deducts its input VAT of 30 from 
the 40 received and pays the difference of 10 to the Treasury. 

At each stage, VAT is paid to the Treasury on the added-value; i.e. the difference between 
the VAT received from the buyer and the price paid to the supplier. 

The self-policing character of the VAT system is linked to the need for each customer to pay 
the VAT to its supplier and to hold an invoice to be allowed to deduct the VAT paid to its 
supplier  who,  in  turn,  is  discouraged  from  evading  taxes  (as  it  has issued  an  invoice).  In 
case of fraud by the retailer or a supplier in the chain, 10 € is lost, but not the total amount 
of 40 €. 

1.2. 

Scope  of  the  proposed  initiative:  the  generalised  reverse  charge  mechanism 
(GRCM) 

The  proposed  initiative,  which  is  the  subject  of  this  impact  assessment,  aims  at  allowing 
individual Member States to derogate, under certain circumstances, from the common VAT 
system so as to apply another arrangement for the collection of the tax with a view to better 
tackle  tax  fraud,  in  particular  the  typical  intra-EU  cross-border  fraud,  better  known  as 
“carrousel fraud”9. 

9   The wording “carrousel fraud” is used in this document to refer to the typical intra-EU cross-border fraud 

as further explained under point 2.2.1 below.  

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This  derogation  consists  of  the  so-called  “generalised  reverse  charge  mechanism” 
(GRCM)  implying  that  the  tax  due  on  all  business-to-business  (B2B)  transactions  is  no 
more  collected  via  partial  payments  (as  explained  under  box  1  above)  but  is  instead 
collected only at the final stage of the supply chain (see box 2 below).  

Reverse  charge  allows  concentrating  the  collection  and  control  of  the  tax  on  a  particular 
person (e.g. the customer). It can therefore be useful in sectors10 highly sensitive to fraud, 
involving transactions of a huge amount and in which there are mostly B2B transactions. It 
is particularly useful in situations where purchases are made VAT-free (see notably further 
explanations on carrousel fraud under box 6 below) or where the input VAT of a business is 
far lower than its output VAT. This is because the reverse charge mechanism prevents the 
supplier from collecting the VAT and not remitting it to the Treasury. 

The VAT Directive already allows Member States to apply a reverse charge mechanism but 
only  to  particular  sectors  and  under  well-defined  circumstances  (see  sectorial  reverse 
charge mechanism under box 3 below). Indeed, such a mechanism constitutes a breach to 
the  fractionated  payment  system  and,  as  will  be  developed  further  on,  entails  new 
challenges to tax administrations and businesses in terms of tax collection monitoring.  

Box 2: Generalised reverse charge mechanism (GRCM) 

Under a GRCM, the payment of the VAT that would be due on the supplies made between 
businesses is suspended and the VAT is only due at the last stage of the supply chain on the 
total amount of the value of the final supply. The final supply is either a supply made by a 
business to a final consumer or a supply made by a business to another business but for an 
amount that is below a certain threshold11. 

Example: VAT rate is 10% 

 A, B, C and D are businesses, i.e. taxable persons with right to deduct input VAT 

A supplies goods to B for 100, no VAT is charged and, therefore, no VAT is actually paid 
over to the Treasury. In the same way, B charges a price of 200 to C without VAT. Again, 
no actual payment of VAT takes place. C supplies to D for 300, again with no VAT paid to 
the  Treasury.  Finally,  D  supplies  for  440  (including  40  VAT)  to  a  final  consumer  (or  to 
another business but for an amount below a certain threshold) in which case the VAT has 
to applied. In this situation, the collection of the VAT takes place at the end of the supply 
chain and for the total amount of VAT due (10% of 400). 

10   The wordings “sector” and “sectorial” in this document refer to a particular business activity (e.g. supply 
of  immovable  property,  mobile  telephones,  telecommunications  services)  in  the  same  logic  as  listed  in 
Articles 199, 199a or 199b of the VAT Directive.    

11   Further explanations on this threshold are provided under point 5.3 below. 

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Since no VAT is paid between businesses, VAT cannot in principle be evaded. However, in 
case of fraud by the retailer or the business supplying under the threshold (business D), 40 
€ is lost, i.e. the total amount of VAT due. 

1.3.  Comparison of initiative with existing legislation in the area of reverse charge 

mechanism 

As mentioned above, the VAT Directive already gives the Member States the possibility to 
apply  a  reverse  charge  mechanism  under  well-defined  circumstances  (see  further 
explanations in the box 3 below). However, a generalised reverse charge mechanism means 
that all kind of supplies (in goods and in services) made between businesses (and possibly 
above a certain threshold) within a Member State would be subject to this mechanism. As 
will be explained further on, such a “generalised” system avoids that fraud stopped in one 
sector  shifts  to  another  sector.  However,  this  would  equate  to  applying  de  facto  a  totally 
different tax collection system, comparable to a sales tax. 

Box  3:  Reverse  charge  mechanism  currently  applicable  under  certain  circumstances 
(sectorial reverse charge mechanism) 

As a rule, the supplier of a good or a service is considered for VAT purposes as the person 
liable to pay the VAT to the Treasury (Article 193 of the VAT Directive). Under a reverse 
charge mechanism this obligation is moved to another person, in general the customer, in 
which case we refer to a “reverse charge”. 

The VAT Directive already gives the possibility to Member States to apply a reverse charge 
mechanism  to  a  limited  number  of  transactions  under  specific  conditions.  The  reason  is 
either  to  simplify  the  tax  collection  (tax  can  under  certain  circumstances  be  more  easily 
collected from another person, e.g. the customer, the retailer) or the need to prevent fraud 
in  some  sectors  that  are  more  sensitive  (secure  the  tax  by  collecting  it  directly  from  the 
person who pays for it). 

The Member States may apply a reverse charge mechanism in the following sectors: 

-  for  certain  transactions  such  as  construction  works,  immovable  property  supplies,  used 
material or waste supplies (Article 199 of the VAT Directive); 

-  on  a  temporary  basis  for  specific  supplies  such  as  the  transfer  of  allowances  to  emit 
greenhouse  gases,  mobile  phones,  integrated  circuits,  game  consoles  or  cereal  supplies 
(Article 199a of the VAT Directive). 

In  cases  of  imperative  urgency,  Member  States  may  also,  under  certain  conditions,  be 
allowed to apply the reverse charge mechanism to particular supplies of goods or services. 
This  is  known  as  the  Quick  Reaction  Mechanism  (QRM)  foreseen  by  Article  199b  of  the 
VAT Directive, aimed to  combat  sudden  and massive  fraud liable  to  lead to  considerable 
and irreparable financial losses.  

Finally, Member States can ask for a derogation to apply a reverse charge mechanism to 
particular sectors on the basis of Article 395 of the VAT Directive. However, according to 
the  case  law  of  the  Court  of  Justice  of  the  European  Union  (CJEU),  measures  taken  in 
application  of  Article 395  of  the  VAT  Directive  in  order  to  simplify  the  procedure  for 
collecting  VAT  or  to  prevent  certain  forms  of  tax  evasion  or  avoidance,  have  to  be 

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necessary and appropriate for realising the specific objective which they pursue and have 
as little effect as possible on the objectives and principles of the VAT Directive12. 

A detailed description of the sectors to which the reverse charge mechanism applies in each 
Member  State  is  available  in  a  study  carried  out  for  the  Commission13  and  further 
explanations are provided under point 2.1.1.3 below. 

1.4.  Context of the initiative 

1.4.1.  Medium term measure to tackle the VAT gap 

The Action Plan on VAT (Action Plan) adopted on 7 April 201614 by the Commission sets 
out the objectives and measures envisaged by the Commission to modernise the EU VAT 
system.  It  builds  on  the  work  carried  out  since  the  Commission  Communication  on  the 
future of VAT on 6 December 201115 that followed the large consultation process initiated 
by the Commission with its Green Paper on the future of VAT16. 

The creation of a robust single European VAT area is one of the key actions announced by 
the  Commission  in  its  Action  Plan.  It  will  require  the  setting  up  of  the  definitive  VAT 
system17  for  intra-EU  B2B  cross-border  trade  (see  box  4  below).  As  agreed  by  the 
European Parliament18 and the Council19, this definitive VAT system will be based on the 
principle of taxation in the country of destination of the goods (the so called “destination 
principle”) (see explanations in box 4 below). 

On  the  basis  of  this  confirmed  objective  to  implement  a  definitive  VAT  regime  based  on 
the  destination  principle,  the  Commission  proceeded  with  in-depth  technical  work  and 
broad-based dialogue with the Member States20 and businesses21 with a view to examine in 

12   See for example case C-489/09, Vandoorne NV, paragraph 27. 
13   EY, 2014 (see complete reference in Annex 4). 
14   COM(2016)148 final of 7.4.2016. 
15   COM(2011) 851. See https://ec.europa.eu/taxation_customs/business/vat/action-plan-vat/communication-

future-vat_en 

16   COM(2010) 695. See https://ec.europa.eu/taxation_customs/business/vat/action-plan-vat/communication-

future-vat_en 

17   The present VAT system applicable to business-to-business intra-EU trade has been in place since 1993 
and  was  supposed  to  be  transitional.  This  transitional  system  is  too  sensitive  to  fraud  and  also 
cumbersome  for  businesses.  Work  in  on-going  on  the  way  to  implement  a  definitive  VAT  system.  For 
further information on this, see explanations in box 4 below. 
18   See Resolution on http://eur-lex.europa.eu/procedure/EN/199945 
19   See in particular point B, 4) of Council conclusions on the future of VAT adopted on 15 May 2012 on 

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/130268.pdf 

20   Formalised in the GFV (Group on the Future of VAT - see also Annex 2). The GFV provides a forum for 
discussion with VAT Experts from the Member States on the Commission pre-legislative initiatives and 
exchange of opinions on the preparation of future VAT legislation. 

21   Formalised in the VAT Expert Group (VEG – see also Annex 2). The VEG is composed of individuals 
with  the  requisite  expertise  in  the  area  of  VAT  and  organisations  representing  in  particular  businesses, 
consumers and tax practitioners.  

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detail  the  different  possible  ways  to  implement  the  destination  principle,  including  the 
implementation of a GRCM22. 

Preparatory  work  for  the  impact  assessment  on  the  implementation  of  this  destination 
principle  is ongoing  but  preliminary  results  show  that  taxing  intra-EU transactions comes 
out as the best option when taking into account the reduction in VAT fraud and compliance 
costs23. Therefore, the Commission announced its intention to present a legislative proposal 
in  2017  for  the  definitive  VAT  system  for  cross-border  trade  based  on  this  “taxation” 
option (see box 5 below). During its meeting of 25 May 201624, the Council took note of 
this intention. This initiative is not subject of this impact assessment. However it is referred 
to its preliminary results because of its close connection with the initiative that is here being 
assessed. 

1.4.2.  Urgent measures to tackle the VAT gap 

require  more 

Although  preliminary  results  on  the  above  mentioned  taxation  option  are  very  promising, 
preparing  and  adopting  such  a  major  change  is  likely  to  take  some  time.  The  definitive 
VAT  system  would  notably 
tax 
administrations25.  The  efficiency  in  collecting  VAT  and  fighting  fraud  between  tax 
administrations would therefore need to be aligned to the highest level. In order to ensure a 
smooth  transition  for  businesses  and  allow  all  Member  States  to  reach  higher  levels  of 
cooperation  and  administrative  capacity,  the  Commission  recognized  the  need  to  work  in 
parallel on other linked initiatives, in particular on urgent measures to tackle the VAT gap 
between  expected  revenue  and  revenue  actually  collected26.  These  include  so-called 
“conventional  measures”  (points  3.1  to  3.4  of  the  Action  Plan)  as  well  as  a  temporary 
derogation for Member States (point 3.5 of the Action Plan).   

trust  and  cooperation  between 

1.4.2.1.Conventional measures 

The  Commission  announced  20 measures27  meant  to  take  urgent  action  on  the  following 
fronts in 2016 and 2017: 

 

Improving cooperation within the EU and with non-EU countries; 

  Towards more efficient tax administrations; 

 

Improving voluntary compliance and tax collection. 

22   See Roadmap on Action Plan on VAT for more detailed information on the concept of “definitive VAT 

system” and work on the different options to implement it. 

23   Compliance  costs  to  businesses  relate  to  those  costs  that  are  directly  borne  by  businesses  to  the 

management of the VAT rules. 

24   See Council conclusions on http://www.consilium.europa.eu/press-releases-

pdf/2016/5/47244641288_en.pdf 

25   The Member State where the goods arrive would have to rely on the Member State of departure to collect 

the VAT due on the cross-border supply. 

26   The urgent measures are listed under point 3 of the Action Plan. 
27   https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/2016-03_20_measures_en.pdf 

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In order to help the Member States concerned to improve their tax collection and inspection 
capacity,  the  Commission  also  declared  to  be  prepared  to  provide  specific  technical 
assistance. A summary of how such a technical assistance could be organised and what it 
should aim at is annexed (see Annex 5). 

In this context, the adoption of the Commission proposal for a Directive on the  fight against 
fraud to the Union's financial interests by means of criminal law28
 to cover serious EU-wide 
VAT  fraud  and  the  proposal  for  a  Regulation  on  the  establishment  of  a  European  Public 
Prosecutor's Office29

 may also play a significant role. 

1.4.2.2.Temporary derogation for Member States 

Some  of  the  above-mentioned  “conventional  measures”  are  expected  to  improve  VAT 
collection in all Member States in the short term. However, part of these measures would 
need legislation to be adopted unanimously at EU level, which means their implementation 
might  take  some  more  time.  As  will  be  shown  further  on, some  Member  States  are  more 
heavily  affected  by  carrousel  fraud  and  therefore  the  Commission  recognised  the  need  to 
find practical and short-term solutions that would take into account the specificities of the 
Member States in question. In particular, it accepted to examine in detail the requests from 
Austria and the Czech Republic, to be granted a temporary derogation to the VAT Directive 
to apply a GRCM. 

It has to be recalled that the application of a GRCM on the basis of Article 395 of the VAT 
Directive  has  been  the  subject  of  previous  requests  from  Austria,  Bulgaria,  the  Czech 
Republic  and  Slovakia,  requests  that  were  rejected  on  legal  grounds  following  the 
Communication from the Commission to the Council30. 

As  announced  in  its  Action  Plan,  and  further  to  discussions  at  the  ECOFIN  meeting  of 
25 April 2016, the Commission assessed the political, legal and economic implications of 
such  derogation  and  presented  its  conclusions  at  the  ECOFIN  meeting  of  17  June  2016. 
These  conclusions  were  not  overwhelmingly  positive  as  risks  were  identified  as  regards 
new  forms  of  carousel  fraud,  shift  of  fraud  towards  other  Member  States  or  to  the  retail 
level  and  increased  burden  on  business.  Concerns  on  all  these  issues  were  also  raised  by 
stakeholders, including respondents to the Green Paper consultation (see Annex 2) and in 
particular in the context of the REFIT platform31. The Stakeholder group, notably business 
representatives,  opposed  to  the  application  of  an  optional  GRCM,  arguing  that  it  cannot 
solve  VAT  fraud  and  that  it  creates  instead  barriers  to  the  internal  market  and  increases 
regulatory burden. 

28   COM(2012) 363, 11.07.2012, Proposal for a Directive of the European Parliament and of the Council on 

the fight against fraud to the Union's financial interests by means of criminal law. 

29   COM(2013)  534,  17.07.2013,  Proposal  for  a  Council  Regulation  on  the  establishment  of  the  European 

Public Prosecutor's Office. 

30   COM (2015) 538 of 28.10.2015 

31   http://ec.europa.eu/smart-regulation/refit/refit-platform/docs/recommendations/opinion_taxation_1a.pdf 

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However,  as  argued  by  a  group  of  Member  States  in  the  GFV  and  in  the  Council,  the 
Commission acknowledged that a temporary derogation might be useful in the short term, 
provided  that  it  does  not  disproportionally  hamper  the  proper  functioning  of  the  internal 
market.  In  addition,  it  was  made  clear  that  the  granting  of  such  derogation  should  be 
without prejudice to the proposals for the implementation of the definitive VAT system to 
be presented by the Commission. 

In the context of a global political agreement on the Anti-Tax Avoidance Directive proposal 
(ATAD)32,  the  Commission  therefore  made  the  following  statement  to  the  ECOFIN 
minutes of 17 June 2016:  

"The  Commission  commits  to  present,  before  the  end  of  the  year,  a  legislative  proposal 
allowing individual Member States to derogate from the common system of value added tax 
so  as  to  apply  a  generalised  reverse  charge  mechanism  to  domestic  supplies  above  a 
defined threshold and preserving the Internal Market."  

This political commitment of the Commission forms the basis of the content as well as the 
timing of the legislative initiative to which the present impact assessment is linked. For the 
reasons explained above, it is to note that the purpose of the legislative proposal is limited 
in  scope  and  in  time,  as  work  shall  continue  in  building  the  definitive  VAT  system.  The 
initiative is meant to be a temporary measure aiming at helping individual Member States 
in their fight against fraud, as announced in the Action Plan, pending the implementation of 
a definitive VAT system.  

Box  4:  Transitional  and  definitive  VAT  system  -  Origin-based  and  destination-based 
definitive VAT system 

At  the  time  the  common  system  of  VAT  was  established33,  the  commitment  was  made  to 
establish a definitive VAT system operating  within  the European Union (EU) in  the same 
way  as  it  would  operate  within  a  single  country.  The  need  to  abolish  physical  borders 
between  Member  States  by  the  end  of  1992  made  it  necessary  to  reconsider  the  way  in 
which trade in goods was taxed in the EU. The goal was that goods would be taxed in the 
country of origin (Member State of departure of the goods), so that the same conditions that 
apply to domestic trade would apply to trade within the EU, perfectly reflecting the idea of 
a genuine internal market. 

Since the political and technical conditions34 were not ripe for such a system, transitional 
VAT arrangements were adopted. These arrangements split the cross-border movement of 
goods  into  two  different  transactions:  an  exempt  intra-EU  supply  and  an  intra-EU 
acquisition taxed in the country of destination. This system is de facto based on the taxation 
in  the  Member  State  of  destination  of  the  goods  (Member  State  of  arrival  of  the  goods). 

32   See 

details 

on 

https://ec.europa.eu/taxation_customs/business/company-tax/anti-tax-avoidance-

package_en 

33   First  Council  Directive  67/227/EEC  of  11  April  1967  on  the  harmonisation  of  legislation  of  Member 
States  concerning  turnover  taxes,  Second  Council  Directive  67/228/EEC  of  11  April  1967  on  the 
harmonisation of legislation of Member States concerning turnover taxes - Structure and procedures for 
application of the common system of value added tax. 

34   An  origin  based  system  requires  a  clearing  system  to  reattribute  VAT  receipts  to  the  Member  State  of 
consumption.  It  implies  a  high  degree  of  confidence  between  Member  States  and  a  high  level  of 
harmonisation of rates and exemptions, in order to avoid distortions of competition. 

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These  rules  were  regarded  as  temporary  (initially  4  years)  and  present  an  important 
drawback: allowing goods to be bought abroad free of VAT increases the opportunity for 
fraud. 

Since the basic requirements for an origin-based system have proved not to be achievable 
more  than  20  years  later,  despite  several  attempts  in  that  direction,  the  Commission,  in 
agreement  with  the  European  Parliament  and  the  Council,  decided    to  work  on 
implementing  the  destination  principle  for  intra-EU  supplies  of  goods.  After  having 
examined  in  detail  the  possible  options  for  implementing  the  destination  principle,  the 
Commission announced its intention (see Action Plan), and the Council took note of it, to 
present a legislative proposal in 2017 for the definitive VAT system for cross-border trade 
based on the best scoring option, i.e. the so-called “taxation” option. This option consists 
in  taxing  all  intra-EU  transactions  (while  still  tracking  the  flow  of  the  goods),  just  like 
would be the case for domestic transactions. This option is meant to put an end to carrousel 
fraud. To note that the European Parliament is currently examining the VAT Action Plan 
but has not adopted a resolution on the text yet. 

Box 5 – Intra-EU transactions: current transitional VAT system and definitive VAT 
system  

In  a  cross-border  B2B  transaction  (in  the  graph  transaction  between  C  and  D),  C  in 
Member  State  A  sells  goods  to  D  in  Member  State  B  without  VAT  being  added,  because 
cross-border transactions are exempt from VAT (the fractioned payment taking place in the 
preceding stages, A-B-C, is interrupted between C and D). The VAT is paid to the Treasury 
of Member State B when the product has been sold to the final consumer. 

This VAT system is open to fraud, e.g. where the ‘retailer’ in Member State B could buy the 
goods VAT free then charges VAT to the final consumer, but does not pay the VAT to the 
Treasury. This is the typical EU cross-border fraud (carrousel fraud) linked to the current 
transitional VAT system. 

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In  a  cross-border  B2B  transaction  (in  the  graph  transaction  between  C  and  D),  C  in 
Member State A sells goods to D in Member State B. D in Member State B pays the supplier 
the  sale  price  +  VAT  at  the  rate  applicable  in  Member  State  B  (the  fractioned  payment 
taking place in the preceding stages, A-B-C, is no more interrupted between C and D). This 
VAT  is  collected  by  the  Treasury  of  Member  State  A  and  transferred  to  the  Treasury  of 
Member  State  B.  This  system  reduces  carrousel  fraud  linked  to  goods  being  purchased 
VAT-free.  

2.  WHAT IS THE PROBLEM AND WHY IS IT A PROBLEM? 

2.1.  The problem 

2.1.1.  VAT fraud affecting more specifically certain Member States 

Tax  fraud  affects  all  Member  States  but  the  specific  problem  that  the  present  initiative 
intends  to  tackle  is  that  some  Member  States  are  more  heavily  affected  than  others,  in 
particular by carrousel fraud. 

2.1.1.1.Current VAT gap, carousel fraud and domestic fraud 

The  size  of  the  VAT  fraud  is  difficult  to  measure  but  the  VAT  gap35  offers  a  useful 
indicator.  The  overall  EU  VAT  gap  is  estimated  at  almost  EUR  160  billion  revenue  loss 
each year36, out of which about EUR 50 billion37 would be due to carrousel fraud alone38. 

35   The VAT Gap is a  measure of VAT compliance and enforcement that provides an estimate of revenue 
loss  due  to  fraud  and  evasion,  tax  avoidance,  bankruptcies,  financial  insolvencies,  as  well  as 
miscalculations. The VAT gap is defined as the difference between the VAT revenue expected (the VAT 
Total Tax Liability or VTTL) and the VAT actually collected by national authorities. It is expressed in 
both absolute and relative terms. 

36   CASE, 2016 (see complete reference in Annex 4). 
37    EY, 2015 (see complete reference in Annex 4). 
38   See further explanations in box 6 below. 

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The carrousel fraud portion of the VAT gap ranges from 12% in Bulgaria to 39% in France 
(see  Figure  1  below  on  share  of  carrousel  fraud  in  VAT  gap).  On  average  (weighted 
average), it is estimated that 24% of the overall VAT gap proportion is considered to be due 
to  carrousel  fraud.  The  rest  of  the  VAT  gap  is  attributed  to  losses  of  revenue  due  to 
domestic fraud and evasion, tax avoidance, bankruptcies, financial insolvencies, as well as 
miscalculations. 

Figure 1 – Share of carrousel fraud in VAT gap (source "Own calculations" based on 
EY, 2015 study) 

The  VAT  gap  varies  considerably  between  Member  States39.  The  smallest  gaps  are 
observed in Sweden (1.24%), Luxembourg (3.80%), and Finland (6.92%). The largest Gaps 
are registered in Romania (37.89%), Lithuania (36.84%) and Malta (35.32%). Overall, half 
of the EU-27 Member States record a gap below 10.4% (see Figure 2 below). 

39   CASE, 2016. 

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Figure  2:  VAT  Gap  as  a  percent  of  the  VAT  Total  Tax  Liability  (VTTL)  in  EU-27 
Member States, 2014 and 2013 (source CASE, 2016) 

2.1.1.2.Evolution of the VAT gap and carrousel fraud in individual Member States 

Monitoring at EU level of VAT collection by individual Member States is relatively recent 
as the first study on the VAT gap dates back from 2009. Methodology has been continually 
improved  and  the  annual  updates  of  the  study  always  included  the  latest  revised  figures. 
Although  the  Commission  is  working  on  methods  to  extract  data  on  fraud  from  the  VAT 
gap, this information is still not available today. The above estimations on carrousel fraud 
were provided by one specific study and, contrary to the VAT gap study, no further data on 
its trend evolution is available.   

The trend of the VAT Gap over the period 2009-2013 is shown in Figure 3 below.  Member 
States have tended to slightly reduce their gap compared to the beginning of the period (at 
the depth of the recent recession). For the EU-26 as a whole, the VAT gap declined by 4 
percentage points, from 19 to 15 percent40. 

Information on the VAT gap and on carrousel fraud for the period 1993-2009 (the period 
that followed the entry into force of the present intra-EU system put in place at the time the 
internal borders were dismantled) is not available, although it is likely that carrousel fraud 
(which finds its roots in the way this system is designed) has taken a few years to appear 
and to develop. 

40   CASE, 2015 (see complete reference in Annex 4). 

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Figure  3 – VAT Gap in the EU-26 countries, 2009-2013 (source CASE, 2015) 

In 2013, the VAT Gap in individual Member States ranged from a minimum of 4 percent in 
Finland, the Netherlands and Sweden, to a maximum of 41 percent in Romania (see Figure 
4 below). Over the period 2012-2013, overall, 15 Member States decreased their VAT Gap, 
with the largest improvements noted in Latvia, Malta and Slovakia. 11 Member States saw 
an increase in the VAT Gap, generally of small magnitudes, with the highest deteriorations 
in Estonia and Italy. 

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Figure 4 – VAT Gap in the EU-26 countries, 2012-2013 (source CASE, 2015) 

In 2014, the VAT Gap reached 14% on average. Compared to 2013, changes in the rank of 
the Member States were, in general, not large. Estonia experienced the largest change in the 
EU-wide  rank  (from  14th  to  7th  place  in  2014  –  see  Figure  2  above).  The  VAT  gap 
decreased  in  18  Member  States,  with  the  largest  improvements  noted  in  Greece,  Estonia 
and  Hungary  (see  Figure  5  below).  However  8  out  of  the  26  Member  States,  namely  the 
United Kingdom, Luxembourg, Finland, Austria, Slovenia, France, Romania, and Bulgaria, 
saw  an  incline  in  their  share  of  the  VAT  Gap,  with  the  largest  deteriorations  in  Romania 
and Bulgaria (see Figure 2 above and Figure 5 below). 

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Figure  5:  Percentage  Point  Change  in  VAT  Gap  (2014  over  2013)  (source  CASE, 
2016)  

2.1.1.3.Efficiency of the measures to combat fraud - Sectorial reverse charge mechanism 

The  year  2014  saw  numerous  changes  in  tax  enforcement  and  monitoring  which 
contributed  to  reducing  the  VAT  gap  in  several  Member  States,  such  as  anti-smuggling 
measures, electronic reporting functionalities and limits on cash transactions41. 

Although  the  VAT  gap  shows  an  encouraging  downwards  trend,  it  is  still  a  staggering 
figure (EUR 160 billion) and individual performances of Member States vary enormously 
when it comes to VAT compliance. 

Taking stock on sectorial reverse charge mechanism 

In about half of the Member States (16)42, the currently applied reverse charge mechanism 
represents between 1% and 4% of their respective overall economy i.e. GVA43. There are 
however some exceptions such as Hungary, Austria and Italy where the application of the 
reverse charge mechanism are wider. This brings the average for the countries covered to 
2.17% (see Figure 6 below). 

41   CASE, 2016. To note that no such information is available at EU level for the years before. 

42   EY, 2014. 

43 According to the Eurostat definition, Gross Value Added (GVA) can be defined as output at market prices 
minus intermediate consumption at purchaser prices. GVA can be broken down by industry. The sum of GVA 
at basic prices for all industries plus taxes on products minus subsidies on products gives the gross domestic 
product (“GDP”). The GVA of the total economy usually accounts for more than 90 % of GDP. 

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Figure 6: Importance of the applied reverse charge mechanism in all Member States 
compared to the overall economy based on the 2011 available data (source EY, 2014) 

In  2014,  the  reverse  charge  mechanism  has  been  extended  to  new  sectors  in  6  Member 
States, namely Denmark, Germany, Italy, Hungary, Austria and Romania. 

A small decline in the VAT gap was observed in Denmark, Germany, Italy (1 percentage 
point) and a larger one in Hungary (4 percentage points). A slight increase in the VAT gap 
was observed in Austria (1.2 percentage points) and a larger one in Romania (4 percentages 
points). 

On  this  basis,  it  is  difficult  to  draw  conclusions  on  the  efficiency  of  the  extension  of  the 
application  of  the  reverse  charge  mechanism,  in  particular  because  other  anti-fraud 
measures have been implemented by those Member States at the same time. The significant 
improvements  in  Hungary  are  linked  to  the  introduction  of  numerous  measures  to  fight 
VAT fraud and evasion (e.g. reclassification of a number of goods subject to reduced rates, 
increased  powers  of  VAT  inspectors).  In  Romania,  despite  the  application  of  the  reverse 
charge  mechanism  in  several  sectors  (supply  of  energy,  for  green  certificates  and  in  the 
wood industry)  and a good economic environment, the VAT gap increased  greatly and is 
still the highest in the EU.  

Experience  with  the  sectorial  reverse  charge  mechanism  has  shown  that  fraudsters 
immediately adapt to changes in legislation and therefore switch fraudulent activities from 
one sector to another (e.g. from supply of greenhouse gas emission certificates to supplies 
of gas and electricity, from mobile phones to tablet PC, from cereals to metals). It has even 

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happened  that  fraud  in  a  sector  has  shifted  to  other  Member  States.  For  instance,  the 
application of the reverse charge mechanism in Romania led to a shift of fraud to Hungary 
as  regards  certain  cereals.  Also,  the  application  of  reverse  charge  on  greenhouse  gas 
emission allowances in France led to a shift of this fraud to Belgium and the application of 
reverse  charge  on  mobile  phones  in  the  United  Kingdom  led  to  this  fraud  shifting  to  the 
Netherlands and Germany.   

Tax administrations may not have the possibility to adapt so quickly because of the current 
constraining legal  framework. The list  of goods and services to  which reverse charge  can 
apply (Article 199 of the VAT Directive) has been amended twice in order to add products. 
The  possibility  for  Member  States  to  apply  derogations  limited  in  time  has  also  been 
introduced  (Article  199a  of  the  VAT  Directive)  in  order  to  curb  fraud  in  new  sectors 
(greenhouse gas emission allowances, gas and electricity, microprocessors, etc.). 

The  problem  is  that  these  lists  of  products  are  “static”,  i.e.  Member  States  can  chose  to 
apply  them  but  cannot  extend  the  list  to  other  products.  Specific  derogations  (based  on 
Article  395  of  the  VAT  Directive)  can  also  be  granted  by  the  Council.  However,  the 
granting  of  such  derogations  takes  time  to  be  adopted  (8  months).  The  “Quick  Reaction 
Mechanism” (QRM) introduced in 2013, allows Member States to apply reverse charge on 
specific  products  in  case  of  imperative  urgency  (sudden  and  massive  fraud  leading  to 
considerable  and  irreparable  financial  losses).  Although  this  mechanism  is  quick,  it 
nevertheless  needs  to  fulfil  some  very  strict  legal  requirements.  For  the  time  being,  only 
one  request  has  been  received  by  the  Commission  (from  Hungary)  but  did  not  fulfil  the 
basic legal criteria in order to enable the application of the QRM. 

Even  if  the  reverse  charge  mechanism  would  be  applied  to  all  possible  sectors  under  the 
current  law,  the  importance  of  this  mechanism  would  range  between  2%  and  7%  in  the 
majority  of  the  Member  States  (23).  The  average  of  all  Member  States  is  at  4.99%  (see 
Figure 7 below). 

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Figure  7: Importance of the reverse charge mechanism if applied to all sectors in all 
Member  States  compared  to  the  overall  economy  based  on  the  2011  available  data 
(source EY, 2014) 

The fact that Member States face different levels of VAT fraud shows that the application 
of the common VAT system presents different national challenges in terms of tax collection 
and  might  therefore  indicate  that  not  only  EU-wide  solutions  may  be  required.  Even  if 
reverse charge can currently help Member States to stop fraud arising in a particular sector, 
this fraud can quickly shift to another sector or even to another Member State.  

2.1.2.  Derogating  measures  to  individual  Member  States  can  affect  the  integrity  of  the 

internal market 

The  second  problem  that  needs  to  be  tackled  is  to  avoid  negative  impacts  of  individual 
measures to tackle VAT fraud on the integrity of the internal market.  

Concretely, two types of risks need to be addressed: 

-  The  risk  of  having  anti-fraud  measures  affecting  negatively  compliance  costs  to 
businesses. As will be detailed further on, the GRCM is indeed always accompanied by 
new  reporting  obligations  compensating  the  fact  that  VAT  is  no  more  collected  on 
certain supplies. 

-  The risk of having anti-fraud measures in one Member State shifting fraud to neighbour 
Member States. As will be detailed further on, the GRCM means the possibility to buy 
goods  "VAT  free"  in  the  Member  State  applying  the  GRCM.  These  goods  can  then 
notably  end  up  on  the  black  market  of  other  Member  States  as  there  are  no  border 
controls within the EU. 

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2.2. 

Problem drivers 

VAT  fraud  can  have  multiple  causes.  It  represents  a  continuous  challenge  for  Member 
States  as  fraudsters  have  the  potential  to  quickly  adapt  to  changes  in,  for  instance,  trade 
patterns, technology, legislation framework, audit methods, etc. However, two main causes 
have been identified. The first one is more general and has an EU-wide dimension as it is 
made of typical EU cross-border fraud (carrousel fraud) linked to a loophole in the current 
VAT  legislation.  The  other  one  is  more  specific  and  linked  to  individual  Member  States’ 
tax administration control capacities.      

2.2.1.  Driver 1: Endemic weakness of current intra-EU VAT system 

On average, slightly less than one quarter of the overall VAT gap proportion44 is considered 
to be due to carousel fraud. Carousel fraud finds its roots in the endemic weakness of the 
current VAT system, which was meant to be transitional (see further explanation in box 4 
above), that allows for goods being able to be bought cross-border VAT-free.  

The current VAT system splits every cross-border sale of goods between businesses into an 
exempted supply in the Member State of departure and a taxable acquisition in the Member 
State of arrival (see further explanation in box 5 above). It is like a customs export-import 
scheme, but lacks equivalent border controls and is therefore the root of carrousel fraud (see 
box 6 below). Such fraud occurs when a supplier pretends to have transported the goods to 
another Member State but  the goods are in  fact consumed VAT-free locally or  especially 
when  a  client  of  a  cross-border  transaction  purchases  goods  or  services  VAT-free  and 
charges VAT without remitting it to tax authorities while his/her customer can deduct it. 

The  Commission  and  also  the  Member  States  are  fully  aware  of  this  flaw  in  the  current 
VAT system. In order to address carrousel fraud, the Commission intends to establish the 
principle of taxation to all cross-border transactions just as is the case for domestic supplies. 
A proposal will be made to this purpose by the end of 201745. 

However,  reaching  an  agreement  in  Council46  and  implementing  such  a  change  will  only 
happen  in  the  medium  to  long  term.  Although  a  series  of  short  time  measures  will  be 
proposed  by  the  Commission47,  it  might  take  time  until  these  measures  are  agreed  and 
implemented  so  that  they  might  not  provide  for  an  urgent  solution,  in  particular  in  those 
Member States with the highest VAT gap.          

Box 6: Carousel fraud 

VAT carousel fraud occurs in many different ways and the schemes become more difficult 
every time and include both goods and/or services. What they have in common is that they 
exploit situations in which goods and/or services can be bought free of VAT by purchasers.  

44   EY, 2015. 
45   See point 4 of the Action Plan. 
46   Any  legislative  proposal  on  VAT  matters  needs  to  be  adopted  by  the  Council  acting  unanimously  in 
accordance  with  a  special  legislative  procedure  and  after  consulting  the  European  Parliament  and  the 
Economic and Social Committee. 

47   See point 1.4 above and point 3 of the Action Plan. 

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The  basic  and  simplified  mechanism  usually  contains  the  following  transactions  (see 
scheme below; VAT rate is 20%): 

-  Company  A  (so-called  “conduite"  company),  registered  in  Member  State  1,  makes  an 
exempted  intra-community  supply  to  company  B  (so-called  “missing  trader”)  registered 
and located in Member State 2. VAT is accounted for on the acquisition but deducted in the 
same VAT return so that no actual payment of VAT has to be made to the tax authorities. 

-  Company  B  subsequently  makes  a  domestic  supply  to  company  C  (so-called  “buffer”). 
Company B charges VAT on the invoice sent to company C, collects it but does not pay the 
VAT to the treasury of Member State 2. Company B will rapidly disappear.  

- Company C is usually used as an intermediary company to distort VAT investigations (in 
a three-company carrousel there is no buffer company). 

- Company C resells on the domestic market the goods to company D (broker) which will 
deduct  the  VAT  charged  on  its  purchases.  D  will  eventually  make  an  intra-community 
supply to company A in Member State 1 in order to ask for the refund of the VAT charged 
on its purchases.  

In most cases there are more than one company in this position of the carrousel. 

Following the scheme, the missing trader will not declare and/or pay the charged VAT to 
the Treasury. 

At the end of the chain, the broker company will claim a refund because he makes an intra-
community supply to another Member State. At this moment money leaves the Treasury that 
was not received from the missing trader earlier in the chain. 

The  loss  of  VAT  receipts  can  be  unlimited,  and  the  profit  of  the  fraudulent  chain  can  be 
easily shared between all the participants even if the real VAT loss does not occur where 
the conduite company is located. 

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In  practice  this  simplified  scheme  can  be  combined  with  all  possible  MTIC  VAT  fraud 
(missing  trader  intra-community  fraud)  mechanisms  and  developed  over  the  borders  of 
several Member States and eventually third countries. 

2.2.2.   Driver  2:  Different  (weak)  tax  collection  and control  capacity  of  certain  Member 

States 

VAT fraud does not affect all EU Member States equally. As already mentioned before, the 
VAT gap varies from 1.24% to 37.89%. The difference in the VAT gap between Member 
States  finds  its  roots  in  very  diverse  collection  and  control  capacities  of  the  tax 
administrations.  In  the  framework  of  the  European  Semester48,  in  which  the  Commission 
undertakes  a  detailed  analysis  of  EU  Member  States’  economies  and  provides  tailored 
advice  to  Member  States,  special  attention  is  paid  to  the  fight  against  tax  evasion  and 
avoidance and to improving tax administration. Some Member States (Bulgaria, Poland and 
Romania)  were  specifically  recommended  in  201649  to  improve  their  tax  collection  by 
fighting against tax fraud and evasion (notably in VAT) and the shadow economy but also 
by  improving  tax  compliance.  Although  some  progress  has  been  made  in  some  Member 
States,  high  tax  evasion  and  low  levels  of  tax  compliance  remain  a  challenge  for  several 
other Member States (the Czech Republic, Italy, Latvia, Romania and Slovakia)50. 

2.3. 

Problem tree 

The problems, problem drivers and effects are summarised below. 

48   http://ec.europa.eu/europe2020/making-it-happen/index_en.htm 
49   See  Country-specific  Recommendations  on  http://ec.europa.eu/europe2020/making-it-happen/country-

specific-recommendations/index_en.htm 

50   See  Country 

reports  2016  on http://ec.europa.eu/europe2020/making-it-happen/country-specific-

recommendations/index_en.htm 

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Concerning  the  budget  impact  on  Member  States,  it  is  to  note  that  VAT  fraud  does  not 
impact the overall level of the EU budget. Although VAT fraud reduces the Member States' 
VAT contribution to the EU (one of the EU own resources is based on VAT), since the EU 
budget  must  be  in  balance,  expenditure  not  covered  by  amounts  yielded  from  other 
revenues  must  be  offset  by  contributions  based  on  the  Gross  National  Income  (GNI)  of 
each  EU  Member  State.  While  VAT-fraud  does  not  impact  the  overall  level  of  the  EU 
budget, a loss to one own resource is still a loss, even if it is remedied by another resource 
in view of the principle of budgetary balance.  

2.4.  Evolution of the problem without action at EU level 

As  further  explained  under  the  description  of  the  baseline  option  below  (see  point  5.2 
below), without any intervention at EU level, those Member States more heavily affected 
by fraud might not be able to address the urgent need for specific anti-fraud initiatives. 

They  will  have  to  rely  exclusively  on  other  short  term  measures  (measures  at  EU  level 
presented in the Action Plan, as well as conventional measures51 and technical assistance52). 

However, even the short term measures might take some time to be implemented. 

In the meantime, fraud might be stable but it could also not decrease quickly enough.  

In the longer term, it is expected that the definitive VAT system based on the taxation of 
intra-EU transactions will efficiently curb carrousel fraud at an EU level by addressing the 
root of the problem (see box 4 and box 5 above). Such a reform has the potential according 
to a recent study53 to increase tax revenues by about EUR 40 billion per year. This proposal 
will be made in 2017 but will take several years to be agreed upon and fully implemented. 

Without  a proposal on  the GRCM,  fraud  might continue to severely  affect during several 
years  the  budget  of  notably  the  most  vulnerable  Member  States  because  of  their  lower 
collection  and  control  capacity.  This  would  have  negative  consequences  on  fiscal 
consolidation and competitiveness of honest businesses.  

3.  WHY SHOULD THE EU ACT? 

According  to  the  principle  of  subsidiarity,  as  set  out  in  Article  5(3)  of  the  Treaty  on 
European Union (TEU), action at EU level may only be taken if the envisaged aims cannot 
be  achieved  sufficiently  by  the  Member  States  alone  and  can  therefore,  by  reason  of  the 
scale or effects of the proposed actions, be better achieved by the EU. 

The application by individual Member States of a GRCM cannot be considered as a 'normal 
derogation'  within  the  meaning  of  Article  395  of  the  VAT  Directive  as  it  entails  a 

51   Overall, conventional measures do not change the current VAT rules in the way the 'reverse charge' does, 
but are focussing on increasing the audit  and enforcement capacity of the tax administration e.g. by an 
improved  (de-)registration  process  for  taxable  persons,  by  increasing  the  number  of  audits,  via  an 
enhanced  use  of  electronic  data,  by  applying  already  existing  legal  possibilities  such  as  on  'joint  and 
several liability' between supplier and customer, etc. 

52   See also point 1.4 before. 
53   EY, 2015. 

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fundamental  change  to  the  VAT  system.  It  is  not  possible  for  these  Member  States  to 
address the problem in a very short term without a proposal to amend the VAT Directive. 

Therefore,  the  possibility  for  individual  Member  States  to  apply  a  GRCM  requires  a 
proposal  by  the  Commission  to  amend  the  VAT  Directive to  allow  for  such  a  derogating 
system.  

The legal basis is Article 113 of the TFEU54  that states that: 

“The Council shall, acting unanimously in accordance with a special legislative procedure 
and  after  consulting  the  European  Parliament  and  the  Economic  and  Social  Committee, 
adopt  provisions  for  the  harmonisation  of  legislation  concerning  turnover  taxes,  excise 
duties  and  other  forms  of  indirect  taxation  to  the  extent  that  such  harmonisation  is 
necessary  to  ensure  the  establishment  and  the  functioning  of  the  internal  market  and  to 
avoid distortion of competition.” 

The  envisaged  proposal  respects  the  principle  of  subsidiarity  as  its  purpose  is  to  allow 
Member  States  to  adopt  rules  on  a  voluntary  basis.  Allowing  temporarily  individual 
Member States to apply a GRCM would in practice mean enable the coexistence, although 
temporary, of two different VAT systems within the EU, which could create difficulties for 
the functioning of the internal market. However, considering that some Member States have 
not sufficient means to secure in the short term their domestic VAT receipts, the intended 
derogation  is  inspired  by  the  purpose  and  scope  of  Article  27  of  the  TFEU.  This  article 
explicitly  foresees  the  possibility  of  temporary  exceptions  from  the  internal  market  rules 
which must, however, cause the least possible disturbance to the functioning of the internal 
market. 

Although  other means to address the problem and its drivers are possible and are already 
envisaged,  the  time  needed  for  them  to  be  implemented  might  not  be  quick  enough  for 
certain Member States to address their VAT receipts losses. According to the principle of 
proportionality, the initiative should not go beyond what is necessary to meet the objectives 
of  the  Treaties,  in  particular  the  smooth  functioning  of  the  single  market.  The  envisaged 
initiative might in this respect be challenging as it is not targeted to harmonise VAT but to 
improve  its  collection in  some  Member  States. However,  positive  impacts  on  the  internal 
market are expected from increased fiscal consolidation in these Member States. Moreover, 
as will be explained further on, the decision to grant a derogation to a particular Member 
State  would  be  subject  to  the  fulfilment  of  several  criteria,  amongst  which  are  that  the 
Member  State  in  question  does  not  have  the  administrative  capacity  to  effectively  tackle 
fraud and is confronted with a strong increase (or shift) of VAT fraud. Assessment of the 
situation (including any disproportionate increase in compliance costs to business) in each 
Member  State  requesting  a  derogation  will  be  carried  out  in  conformity  with  the 
proportionality principle.   

4.  WHAT SHOULD BE ACHIEVED? 

4.1.  General objectives 

The general objectives are: 

54   Treaty on the Functioning of the European Union. 

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(G1) To contribute to fiscal consolidation within the EU – ensuring that taxes due are 

collected to feed national and EU budgets 

(G2) To ensure fair taxation – ensuring that all business are treated equally in order to 

avoid distortion of competition 

(G3)  To  preserve  the  functioning  of  the  internal  market  –  ensuring  that  compliance 

costs to businesses55 are not excessively high, especially for SMEs 

4.2. 

Specific objectives  

The specific objectives are: 

(S1) To reduce the VAT fraud, in particular carrousel fraud, in specific Member States 
– Taking into account the specificities of Member States in terms of level of fraud 
and control capacities 

(S2) To minimize general increase in administrative burden – Minimizing the increase 
tax 

in  administrative  costs56 

to  business  and 

to 

in  compliance  costs 
administrations 

(S3)  To avoid fraud shifting – Ensuring that tax fraud does not move from one sector57 

to another or from one Member State to another 

Table 1  - Linking the objectives to the problem 

Specific objectives  

General objectives 

Link to the problem 

Reducing VAT fraud, in 
particular carrousel fraud), 
in specific Member States 
by taking into account the 
specificities of Member 
States in terms of level of 
fraud and control capacities  

Helps fiscal consolidation 
within the EU (increases 
effectiveness of the tax 
system) 

Contributes to fairness of 
taxation system 

Helps Member States more 
heavily affected to fight 
against VAT fraud 

Minimizing general 
increase in administrative 
burden by: 

Preserves the functioning of 
the internal market                             

Reconcile application of  
specific tools with integrity 
of the internal market 

- minimizing increase in 
compliance costs to 

Does  not  hamper 
fiscal 
consolidation within the EU 

55   Compliance  costs  relate  to  those  costs  that  are  directly  borne  by  businesses  to  the  management  of  the 

VAT rules. 

56   Administrative costs are those costs that are borne directly by tax administrations (and indirectly by all 

taxpayers) to the management of the VAT rules. 

57   Recall that “sector” means a particular business activity – see footnote 10 

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business 

-  minimizing  increase  in 
administrative  costs  to  tax 
administrations 

Avoid fraud shifting by 
ensuring that tax fraud does 
not move from one sector to 
another or from one 
Member State to another 

Preserves the functioning of 
the internal market  

Preserves the functioning of 
the internal market  

Contributes to fairness of 
taxation system 

4.3.  Consistency  with  other  EU  policies  and  with  the  Charter  for  fundamental 

rights  

The objective of fighting tax fraud and tax evasion to help securing revenues e.g. for public 
investment  or  for  lowering  taxes  and  to  increase  fairness  of  taxation  is  part  of  the  fiscal 
priorities set out by the Commission for 2016 (Annual Growth Survey 2016 - Strengthening 
the recovery and fostering convergence)58. 

Reducing  administrative  burden,  particularly  for  SMEs,  is  also  an  important  objective 
highlighted in the EU’s growth strategy for the coming decade (Europe 2020  - A strategy 
for smart, sustainable and inclusive growth59). 

The proposed initiative and its objectives would be consistent with the EU SME policy as 
set by the Small Business Act (SBA), in particular principle VII on helping SMEs to benefit 
more from the opportunities offered by the Single Market. It would be consistent with the 
Single Market Strategy (SMS) which referred to the single European VAT area mentioned 
in the Action Plan. It would also be consistent with the EU objectives under REFIT60. 

The  challenge  would  be  to  limit  contradictions  with  these  objectives  as  much  as  possible 
and  to  the  minimum  extent  of  what  is  needed  to  achieve  fight  against  fraud  and  ensure 
fiscal consolidation in the short to medium term. 

The objectives envisaged do not affect fundamental rights. 

58   Annual  Growth  Survey  2016:  Strengthening  the  recovery  and  fostering  convergence  (COM(2015)  690 

final). See http://ec.europa.eu/europe2020/pdf/2016/ags2016_annual_growth_survey.pdf 
59   http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:2020:FIN:EN:PDF 
60   Regulatory Fitness and Performance programme. 

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5.  WHAT ARE THE VARIOUS OPTIONS TO ACHIEVE THE OBJECTIVES? 

5.1. 

Scope  of  the  changes  proposed  –  concept  of  “person  liable  for  payment  of 
VAT” 

As  explained  before,  the  VAT  system  is  based  on  fractioned  payments  ensuring  that  the 
VAT is collected at each stage of the production and distribution chain. This constitutes the 
basis of the functioning of the VAT system as defined in Article 1 of the VAT Directive61. 

As also explained before (see box 3 above), under such a system the supplier is considered 
as  “the  person  liable  for  payment  of  VAT  to  the  tax  authorities”  because  he  collects  the 
VAT from his customers. Under a reverse charge mechanism, the person liable for payment 
of VAT to the tax authorities is moved to the acquirer. As mentioned before, reverse charge 
is  already  possible  under  the  VAT  Directive  in  certain  circumstances  (sectorial  reverse 
charge mechanism). 

The proposed initiative aims at extending this reverse charge mechanism to all supplies of 
goods and services that take place on the domestic market of specific Member States. The 
reverse  charge  mechanism  is  indeed  mainly  used  by  Member  States  in  case  they  have  to 
fight  fraud  developing  in  a  particular  sector  in  the  meantime  they  adapt  their  control 
capacities.  However,  if  this  mechanism  can  prove  to  be  helpful  from  a  short  term 
perspective, in time, fraudsters will adapt and target other sectors. By applying the reverse 
charge to all sectors, the proposed initiative intends to avoid fraud shifting from one sector 
to another.    

It  is  recalled  that  the  initiative  that  is  here  being  assessed  consists  of  a  derogation  to  the 
common VAT system. It is limited in scope and in time as its purpose is to temporary help 
those Member States more heavily affected by fraud. 

The options described below (except the baseline) have in common the following features: 

-  They will be applicable in individual Member States on a voluntary basis; 
-  They are limited to B2B domestic supplies above a certain threshold (see box 7 below); 
-  They are limited in time (see box 8 below for further details); 
-  They include similar mandatory flanking measures (see box 8 below for further details). 
These  measures  aim  at  ensuring  the  effective  operation  and  monitoring  of  the 
application of the GRCM within the concerned Member States and the surveillance of 
its impact on other Member States.   

5.2.  Option 1: Baseline 

The baseline reflects the current legal framework including all the initiatives that are soon 
to  be  adopted  by  the  Commission  and  the  proposals  announced  by  it  in  its  Action  Plan62 
(see detail under point 1.4 above). 

This  means  that  the  VAT  system  as  it  currently  exists  will  continue  to  apply  while 
incorporating  the  different  improvements  that  will  be  agreed  in  the  Council  to  make  the 
VAT system notably more robust to fraud. 

61   Article 1(2) of the VAT Directive provides that “On each transaction, VAT, calculated on the price of the 
goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of 
the amount of VAT borne directly by the various cost components.” 

62   See further details in the Action Plan.  

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Short  term  and  medium  term  anti-fraud  measures  (other  than  reverse  charge)  will  still  be 
tabled this year or will be tabled in 201763. In total, the Commission intends to present 20 
measures  to  tackle  the  VAT  gap  in  addition  to  providing  specific  technical  assistance  to 
Member States. The most important ones are: 

- 

- 
- 

Improving cooperation between tax administrations within the EU and with non-EU 
countries; 
Increasing efficiency of tax administrations; 
Improving voluntary compliance and tax collection. 

A proposal for the definitive VAT system for cross-border trade is planned in 2017 which is 
expected to tackle the VAT gap at EU level as a longer term measure. 

All  these  measures  aim  at  creating  a  coherent  and  robust  single  European  VAT  area. 
However, even the short term measures will need a certain time to be agreed and effectively 
implemented  in  all  Member  States.  Fraud  might  be  stable  but  it  could  also  not  decrease 
quickly enough in certain Member States. 

Member  States  are  well  aware  of  the  loophole  in  the  current  VAT  treatment  of  intra-EU 
trade that leads to carrousel fraud. In combatting carrousel fraud, exchange of information 
between  Member  States  is  crucial.  Therefore,  there  is  a  need  to  speed up  and  to  improve 
this  exchange  of  information  and  to  adapt  control  measures  while,  in  the  meantime,  the 
definitive regime is being implemented. 

Exchange  of  information  works  well  between  some  Member  States  (Member  States  that 
have  a  long  experience  in  multilateral  controls  with  other  –  in  general  neighbouring  - 
Member  States)  but  it  is  not  the  case  with  others.  Some  Member  States  have  national 
legislation constraints (e.g. data protection) that, at present, prevent them from exchanging 
particular information or, at least, delay this process. 

It is  expected that  this situation would gradually improve, thanks to  the above  mentioned 
set of measures announced by the Commission, but again, this might take some years to be 
adopted in Council and then implemented by the Member States. 

In  the  immediate  future,  some  Member  States  might  not  benefit  from  exhaustive  and  on-
time information. 

Member  States  also  have  different  tax  control  capacities  (linked  to  their  internal 
organisation, legal, human and technical resources) meaning that some Member States are 
more effective in controlling fraudulent schemes than others. Technical assistance to these 
Member States is and will be provided (this is currently already the case for Greece, Cyprus 
and Slovakia) but this also needs time to be put in place and become effective. 

The proposal for the definitive VAT system, scheduled for 2017, is expected to put an end 
to carrousel fraud. However, it is only a long term solution as this package is expected to 
take some years to be adopted by the Council and to be fully implemented.   

5.3.  Discarded option: Derogation to apply a GRCM without any threshold 

Under  a  GRCM,  in  B2B  transactions,  VAT  is  no  longer  charged  by  the  supplier  to  the 
acquirer  but  is  accounted  for  by  the  acquirer,  who  can  in  principle  deduct  it  at  the  same 

63   See indicative timeline under point 7 of the Action Plan. 

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time. No VAT is actually paid to the treasury before the final sale to the end consumer (the 
last B2C64 transaction). 

In  case  reverse  charge  would  have  to  be  applied  whatever  the  amount  of  the  transaction 
might  be,  this  would  mean  that  the  supplier  would  need  to  ascertain  transaction  per 
transaction (i) whether his customer is a taxable person or not and (ii) in case he is a taxable 
person,  apply  the  reverse  charge  mechanism.  Therefore,  even  when  selling  for  a  small 
amount, all businesses would have to adapt their accountancy system in order to be able to 
apply  the  reverse  charge  mechanism  in  B2B  transactions  (e.g.  adapt  record  keeping  of 
payments,  check  VAT  status  of  the  acquirer  and  obtain  and  subsequently  store  the 
necessary  documentation,  provide  for  new  reporting  obligations  –  see  flanking  measures 
under box 8 below) as well as the normal system in B2C transactions. This would add much 
complexity in situations like for instance when a business pays for a taxi, a toll or when it 
buys food or, in more general terms, products which can easily be used for both business 
and private purposes (e.g. a computer). Since these products are sold in e.g. supermarkets, it 
would be for persons, such as a cashier in a store, to decide - on the spot - whether the VAT 
should  be  charged  or  not.  This  would  create  an  unworkable  situation  for  staff  that  is  not 
qualified  or  in  a  position  to  check  (in  less  than  a  few  minutes)  the  taxable  status  of  a 
customer, lead to numerous administrative mistakes and create opportunities for fraudsters 
who  would  be  tempted  to  present  any  VAT  registration  number  in  order  to  obtain  goods 
'VAT free' (see in this respect role and control of the threshold in box 7 below). 
Increased administrative costs might, in particular, be problematic for SMEs65 for which the 
costs  are  relatively  higher  (e.g.  in  particular  as  regards  the  adaptation  of  IT  systems).  A 
number a business associations have expressed their concerns in this respect66. 

The main objective of the GRCM is to fight against carousel fraud, i.e. fraud committed on 
transactions  involving  real  or  simulated  EU  cross-border  transactions  combined  with 
domestic transactions. This type of fraud is generally committed by criminal organisations 
seeking  to  quickly  gain  huge  amounts  of  money.  It  is  therefore  characterised  by 
transactions involving important flows of money occurring within a short period of time so 
that  tax  administrations,  with  inadequate  control  performance,  fail  to  react  timely  to  stop 
the fraud.  

Applying a GRCM to all B2B transactions, even those consisting in small amounts, would 
add  unnecessary  administrative  burden  (either  for  businesses  or  tax  administrations)  as 
what is targeted is carrousel fraud which usually involves high value transactions. 
Also, the political commitment of the Commission67 explicitly refers to the application of a 
GRCM to domestic supplies above a defined threshold. 

For all these reasons this option has been discarded at an early stage. 

64    Business-to-consumer. 
65   To note that a distinction should made between SMEs below and above the VAT exemption threshold for 
small  enterprises.  Only  SMEs  above  the  exemption  threshold  are  considered  as  normal  VAT  taxable 
persons that have to apply VAT to their supplies. See Annex 3 for further explanation. 

66   E.g. Opinion of the VAT expert group (VEG) on the Action Plan on VAT – Creating a definitive regime 
– 20 May 2016; Austrian Federal Economic Chamber (WKÖ) – General reverse charge – position paper 
– November 2015; BusinessEurope – General reverse charge – 18 November 2015 (see Annex 3). 

67   See point 1.4 “context of the initiative”.  

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Notwithstanding this, implementing a GRCM with a threshold is also challenging. In B2B 
transactions, a distinction would need to be made between transactions above the threshold 
(to  which  reverse  charge  would  apply)  and  below  the  threshold  (to  which  the  normal 
system would apply). Compliance costs would here be associated to the management of the 
threshold.  In addition, the risk is that transactions would artificially be  split up. Supplies 
could  then  take  place  below  the  threshold,  escape  controls  and  continue  to  give  rise  to 
carrousel  fraud.  However,  a  balance  between  the  risk  of  fraud  and  the  simplicity  of  the 
application  of  the  mechanism  may  be  achieved  by  fixing  the  threshold  at  the  appropriate 
level (see further explanations on this threshold under box 7 below). 

Box 7: Level of the threshold 

As  explained  under  point  5.3  above,  the  purpose  of  applying  a  GRCM  in  respect  of  any 
supply of goods or services above a certain threshold is: 

1) to target the bulk of transactions (high value) that could lead to carrousel fraud; 

2) to minimize impact on compliance costs to businesses, in particular the smallest ones; 

3) to avoid that fraudsters present any VAT registration number  in order to obtain goods 
'VAT free'. 

In fixing the level of the threshold, account should be taken of all these issues. In addition, 
attention  should  be  paid  to  the  fact  that  the  authorisation  to  apply  a  GRCM  might  be 
extended to more than one Member State. 

The  Member  States  having  initially requested  a derogation  to  apply  a  GRCM68  asked for 
such a threshold to be set at EUR 10,000 per invoice. 

According to these Member States, given this high threshold, the smallest companies would 
generally not be affected69. Nowadays medium and large sized companies apply electronic 
bookkeeping  systems  where  the  basic  data  of  the  customer  and  the  supplier  are  already 
recorded. Therefore the change of the system is more or less limited to a simple adaptation 
of the IT bookkeeping system. 

At the very least, this relatively high level should exclude the smallest retailers. This would 
limit the impact on microbusinesses that should in principle not be affected by the changes. 

This threshold is likely to exclude most of the B2C transactions which should also limit the 
risk that consumer goods (to the exclusion of high value goods) are purchased without VAT 
(in case a non-business purchaser presents himself as a business). 

In this respect, a link should be made with the cash payment limitations introduced in more 
and more Member States70 in order to fight against money laundering, drug trafficking and 

68   Austria and the Czech Republic. 

69   Recall  in  addition  that  only  businesses  that  do  not  benefit  from  the  VAT  exemption  scheme  might  be 

affected by the changes envisaged (see Annex 3).  

70   http://www.europe-consommateurs.eu/en/consumer-topics/financial-services/banking/means-of-

payment/cash-payment-limitations/ 

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terrorist  activities.  When  cash  payments  are  limited  to  a  certain  threshold  (cash payment 
threshold), any purchase that would be made under the reverse charge mechanism could be 
tracked,  provided  that  the  reverse  charge  threshold  is  equal  or  above  the  cash  payment 
threshold.  Currently,  in  the  EU,  cash  payment  limitations  vary  from  EUR  1,000  to  EUR 
15,000 (and the tendency is to decrease such a threshold). In addition, Regulation (EU) No 
1889/2005(94) of the European Parliament and of the Council introduced controls on cash 
entering or leaving the EU and a duty to declare any sum of money or equivalent of more 
than EUR 10,000. Setting the threshold to this amount for the GRCM would therefore make 
sense  both  at  the  level  of  one  of  the  requesting  Member  States  (e.g.  in  Austria  payments 
exceeding  EUR  10.000  have  now  to  be  made  via  bank  transfer)  as  well  as  for  any  other 
Member State.   

Therefore,  such  a  threshold  is  expected  to  be  capable  of  targeting  transactions  at  risk, 
while not affecting other transactions more than necessary, in particular involving smaller 
businesses and the majority of B2C transactions.  

5.4.  Option  2:  derogation  to  apply  a  GRCM  above  a  certain  threshold  only  for 

preselected Member States 

Under option 2, the GRCM would apply to B2B domestic supplies of goods and services 
above  a  certain  threshold  within  the  concerned  Member  States.  This  threshold  would,  in 
principle, be set at EUR 10,000 exclusive of VAT per invoice71 . 

The “normal” VAT system (see outline under option 1 and box 1 and box 5 above) would 
apply  to  all  other  transactions,  i.e.  B2C  transactions  or  transactions  equal  or  below  the 
threshold. The other Member States would also continue to apply the 'normal' VAT system. 

For each supply, the supplier will need to determine whether he has to charge VAT or not 
to  his  customer,  i.e.  check  the  status  (and  be  capable  to  prove  it)  of  his  customer  (a 
“business” or another “consumer”). 

A  derogation  would  be  granted  to  preselected  Member  States  on  a  voluntary  basis  (for 
instance, Austria and the Czech Republic who submitted the latest request72).  

Mandatory  flanking  measures  accompanying  the  implementation  of  the  derogation  are 
detailed in box 8 below. 

Two sub-options could be envisaged: 

5.4.1.  Option  2a:  reverse  charge  mechanism  applies  to  any  domestic  supplies  of  goods 

and services. 

The Member States to which the derogation is granted can choose which supplies of goods 
or  services  that  are  above  the  threshold  will  be  subject  to  the  reverse  charge  mechanism. 
This sectorial approach should however respect the principle of fiscal neutrality73. 

71   See further explanations on this threshold under box 7 above. 
72   Recall that a previous request, under Article 395 of the VAT Directive, to apply a GRCM was submitted 
by  Austria,  Bulgaria,  the  Czech  Republic  and  Slovakia  but  denied  on  legal  grounds  (see  previous 
mentioned Communication COM (2015) 538 of 28.10.2015). 

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5.4.2.  Option 2b: reverse charge mechanism applies to all domestic supplies of goods and 

services 

The  Member  States  to  which  the  derogation  is  granted  must  ensure  that  all  supplies  of 
goods  and  services  that  are  above  the  threshold  are  subject  to  the  reverse  charge 
mechanism. 

5.4.3.  Discard of option 2a 

Option 2a means that the concerned Member State can choose which supplies of goods or 
services that are above the threshold will be subject to the reverse charge mechanism.  

As explained under point 1.3 above (box 3), this sectorial approach already exists today for 
a limited number of goods and services.  

This approach is motivated by the occurrence of fraud in a particular sector and is generally 
limited in time because it does not correspond to the normal functioning of the VAT system 
and  can  therefore  hamper  the  good  functioning  of  the  internal  market.  While  such  a 
sectorial  approach  might  be  helpful  as  a  short  term  measure,  its  efficiency  on  a  medium 
term  seems  questionable  (see  opinion  from  Member  States  and  stakeholders  including 
respondents to the Green Paper consultation in Annex 2). In fact, fraudsters adapt quickly 
to these measures and fraud is moved from one sector to another (see box 9 below). 

A  genuine  GRCM,  applicable  to  all  supplies  of  goods  and  services  within  the  concerned 
Member  State,  as  conceived  under  option  2b  would  on  the  contrary  avoid  that  fraud  is 
moved from one sector to the next. 

Also, having a sectorial approach would add significant complexity to the VAT system of 
the  concerned  Member  State,  leading  to  increased  compliances  costs  (43%  increase 
according  to  a  recent  study  on  the  assessment  of  the  optional  reverse  charge)  to  business 
(see  opinion  from  business  representatives,  including  respondents  to  the  Green  Paper 
consultation,  and  REFIT  platform  in  Annex  2)  and  administrative  burden  to  tax 
administrations. 

In  addition,  the  request  from  Austria  and  the  Czech  Republic  to  apply  a  reverse  charge 
mechanism covers all sectors and the political commitment of the Commission relates to a 
“generalised” reverse charge mechanism74. 

For  all  these  reasons,  option  2a  has  been  discarded  at  an  early  stage.  Only  option  2b  is 
further analysed under 6.2.2. 

Box 8 – Flanking measures and duration of the derogation 

The derogation should be granted for a period of maximum 5 years.  

As  is  currently  the  case  with  the  sectorial  reverse  charge  derogation,  Member  States 
authorised  to  apply  the  GRCM  should  introduce  specific  reporting  obligations  on 

73   Means that goods and services that are the same or similar must be treated the same for tax purposes to 

avoid any distortion of competition. 
74   See point 1.4. « Context of the initiative ». 

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businesses so as to ensure the effective operation and monitoring of the application of that 
mechanism  and  detect  and  prevent  all  new  forms  of  tax  fraud.  In  particular,  they  shall 
ensure that all transactions (in goods and in services) above or below the defined threshold 
are  reported  to  the  tax  authorities  by  the  suppliers.  Member  States  shall  ensure  that 
reporting obligations are fulfilled by businesses by electronic means in order to minimize 
burdens on business and make tax controls more efficient. 

In  order  to  assess  the  effect  of  the application of  the  GRCM  on  fraudulent  activities  in  a 
transparent manner, pre-defined evaluation criteria should be established by these Member 
States so as to enable an assessment of the level of fraud before and after the application of 
the GRCM. 

To closely monitor the impact on the internal market, all Member States should present an 
interim  report  (within  2  years)  and  a  final  report  (after  5  years)  so  as  to  enable  an 
assessment of  the impact on fraud, compliance costs to  businesses and a possible shift in 
trends of fraudulent activities. EU-wide criteria will also be established to this purpose. 

5.5.  Option  3:  derogation  to  apply  a  GRCM  above  a  certain  threshold  for  any 

Member State fulfilling certain pre-defined criteria 

Under  option  3,  the  possibility  to  apply  the  GRCM,  as  described  under  option  2  (same 
functioning and flanking measures), would not be granted to preselected Member States but 
would instead be open to any Member State asking for it and fulfilling certain predefined 
criteria.  The  Commission  would  receive  implementing  powers  in  order  to  adopt  such 
derogations. 

The  aim  of  setting  predefined  criteria  is  to  confine  the  application  of  the  GRCM  to  few 
Member States in order to prevent disruption of the internal market.        

These criteria would be linked to the actual level of the VAT gap, as well as of carrousel 
fraud, in a given Member State and to the failure of other control measures in this Member 
State  to  curb  such  fraud.  Since  the  application  by  a  given  Member  State  of  the  GRCM 
could entail a risk of fraud shifting to other Member States, in particular neighbour Member 
States, the possibility to apply such a GRCM should also be open to these Member States 
under similar conditions.  

In  doing  so,  option  3  ensures  that  the  possibility  to  apply  the  GRCM  is  restricted  to 
Member States that are heavily affected by fraud, in particular carousel fraud, or for which 
a substantial risk of fraud shifting is likely to take place. 

Hence,  subject  to  equal  treatment,  some  Member  States  would  be  allowed  to  apply  the 
GRCM  either  to  tackle  actual  fraud  or  later  on,  in  case  fraud  would  move  from 
neighbouring Member States due to the derogation being applied by them. 

Therefore,  in  order  to  limit  the  effects  on  the  internal  market  and  to  ensure  that  the 
application of the GRCM respects the principle of proportionality, the derogation could be 
granted  on  the  basis  of  the  situation  in  the  requesting  Member  State  resulting  from  the 
following criteria: 

-  The  level  of  the  VAT  gap,  as  well  as  of  carrousel  fraud,  and  the  insufficiency  of 

other control measures to combat that fraud in the concerned Member State; 

or  

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-  A  substantial  risk  of  fraud  shifting  to  the  concerned  Member  State  because  of  the 
application of a GRCM in another Member State and in case other control measures 
would be insufficient to combat that risk of fraud. 

In granting any derogation, the Commission would pay special attention that accompanying 
measures  envisaged  by  the  requesting  Member  State  do  not  disproportionately  increase 
compliance costs to businesses.   

A  safeguard  clause  should  also  be  provided  in  the  Commission  implementing  decision 
allowing  the  derogation  in  order  to  enable  the  Commission  to  revoke  this  decision  if 
negative  consequences  appear  in  several  Member  States  or  in  the  internal  market  as  a 
whole. 

The same two sub-options could be envisaged: 

5.5.1.  Option  3a:  reverse  charge  mechanism  applies  to  any  domestic  supplies  of  goods 

and services. 

The Member States to which the derogation is granted can choose which supplies of goods 
or  services  that  are  above  the  threshold  will  be  subject  to  the  reverse  charge  mechanism. 
This sectorial approach should however respect the principle of fiscal neutrality.  

5.5.2.  Option 3b: reverse charge mechanism applies to all domestic supplies of goods and 

services  

The  Member  States  applying  the  mechanism  must  ensure  that  all  supplies  of  goods  and 
services that are above the threshold are subject to the reverse charge mechanism. 
5.5.3.  Discard of option 3a 

For the same reasons explained under option 2 (see point 5.4.3 above), option 3a has been 
discarded at an early stage. Only option 3b is further analysed below.    

6.  WHAT  ARE  THE  IMPACTS  OF  THE  DIFFERENT  POLICY  OPTIONS  AND  WHO  WILL  BE 

AFFECTED?  

6.1.  Methodology 

The  initiative  is  the  result  of  a  political  commitment  taken  on  17  June  2016  to  present  a 
proposal to allow a temporary derogation for a GRCM for certain Member States before the 
end of 2016. 

Due  to  timing  constraints,  no  specific  tool  or  methodology  was  developed  for  the 
assessment of the impact of these options. For the same reason, no independent study could 
either be launched. However, a number of studies in the field of fraud and reverse charge 
already  existed  (see  list  in  Annex  4)  of  which  the  results  were  used  in  this  impact 
assessment. In addition, the replies received by the Commission to the questionnaire sent by 
it  to  the  two  requesting  Member  States75  also  served  the  analysis.  These  results  were 
complemented by a qualitative analysis on which this impact assessment mainly relies.   

75   See Annex 6. 

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6.2.  Analysis of the impacts of each of the options 

The envisaged initiative is limited in scope and in time76. Because of its basic features, its 
impact is circumscribed to businesses and tax administrations and would only influence the 
way VAT is collected by these two stakeholders. 

Consumer prices can be impacted in case compliance costs to businesses are increased and 
those costs are passed through the final consumer. However,  as will be developed further 
on, the application of the GRCM might also have positive effects in terms of cash flow for 
businesses  which  are  likely  to  compensate  the  negative  effects.  Consumer  prices  are 
therefore not expected to be impacted substantially by the initiative. 

The social and environment impacts should be negligible or even zero. 

The analysis of the policy options concentrated on the following economic impacts: 

- Impact on carrousel fraud and tax collection; 

- Impact on compliance costs to business; 

- Impact on administrative costs to tax administrations; 

- Impact on the functioning of the internal market; 

In addition, the way the different options interlock with the VAT reform process announced 
in the Action Plan aiming to further improve the functioning of the internal market has also 
been taken into account. 

6.2.1.  Option 1: baseline 

Section 1 explains the context of the proposed initiative and section 2 outlines in detail the 
problem and problem drivers of the baseline. In summary, some Members States are more 
heavily affected than others by fraud and in particular by carrousel fraud. This is due to the 
combination  of  two  main  factors:  a  legislative  loophole  at  EU  level  (the  way  the  current 
intra-EU VAT system works) and the tax control/collection capacity of individual Member 
States.  The baseline  offers  a  comprehensive  and  definitive solution  to  all  Member  States, 
notably,  in  terms  of  fighting  carrousel  fraud  (see  previous  description  of  definitive  VAT 
system  for  which  a  separate  impact  assessment  will  be  carried  out).  However,  it  is  to  be 
viewed as a medium to long term solution. 

1.  Level  of  carrousel  fraud  -  Carrousel  fraud  at  EU  level  is  estimated  at  about 
EUR 50 billion. Some Member States seem to be more affected than others by carrousel 
fraud. The graph below shows that in six Member States77, carrousel fraud amounts to 
25% or more of their VAT gap. 

76   For further explanation on this, see point 1.4 “Context of the initiative”.  
77   France, Czech Republic, Spain, United Kingdom, Finland and Slovakia. 

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Figure  8  – Share of  carrousel fraud in  VAT  gap (Source: "Own calculations" based 
on EY, 2015 study) 

The implementation of the definitive VAT system is expected to reduce carrousel fraud 
at EU level by 80%, representing about EUR 40 billion additional VAT receipts for the 
Member States.  However, until its implementation,  the evolution  of carrousel  fraud is 
uncertain.  Envisaged  short  term  measures  to  fight  against  fraud78  should  in  the 
meantime help preventing VAT fraud and improve VAT collection in the same way as 
recent  reform  measures  introduced  against  tax  non-compliance  in  the  Member  States 
(e.g.  electronic  reporting,  limits  on  cash  transactions  and  other  anti-fraud  or  anti-
smuggling  measures)  have  shown  their  capacity  to  reduce  the  VAT  gap79.  However, 
even the short term measures may take some time to show results and in the meantime, 
fraud may be stable or continue to increase in certain Member states. 

In a best-case scenario carrousel fraud would be stable in the short term or is even 
improved thanks to the envisaged other short term measures. 80% of carrousel fraud 
would  be  removed  in  the  medium/long  term  with  the  introduction  of  the  definitive 
VAT system. 

In a worst-case scenario, there would be no reduction of carrousel fraud in affected 
Member States in the short term and carrousel fraud could even continue to increase 
in  the  longer  term  until  the  introduction  of  the  definitive  VAT  system.  80%  of 
carrousel fraud would be removed in the medium/long term with the introduction of 
the definitive VAT system. 

78   See Action Plan and point 1.4 above. 
79   CASE,  2016.  In  2014,  most  of  the  Member  States  experienced  an  increase  in  their  VAT  collection 
capacity, the most significant results being observed in Belgium, the Czech Republic, Germany, Estonia, 
Ireland, Greece, Spain, Hungary and Malta.   

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2.  Compliance costs to business - Cost to businesses of complying with VAT obligations 
is  substantial  according  to  most  studies  and  varies  substantially  across  countries80. 
Because much of the cost of complying with VAT is fixed (i.e. incurred regardless of 
the  level  of  sales),  compliance  costs  are  relatively  more  burdensome  for  small 
businesses:  compliance  costs  could  represent  3.9%  of  turnover  for  unincorporated 
businesses  but  only  1.5%  of  turnover  for  firms  with  more  than  six  employees. 
Compliance costs are also particularly high for cross-border trade. VAT obligations are 
11% higher than the VAT compliance costs associated with domestic trade81.  

The  proposal  for  a  definitive  VAT  system  should  help  reduce  compliance  costs  to 
business  mainly  due  to  simplifications  in  cross-border  trade.  In  the  meantime, 
compliance costs could remain stable or be slightly increased, depending on the scope 
of anti-fraud measures adopted by individual Member States to prevent existing fraud.   

In a best-case scenario, the set of measures to be proposed by the Commission in the 
short  term  would  improve  tax  collection  in  all  Member  States  with  no  impact  on 
compliance  costs.  Simplification  measures  to  be  introduced  by  the  definitive  VAT 
system would reduce compliance costs to businesses in the medium/long term. 

In  a  worst-case  scenario,  compliance  costs  would  increase  in  the  short  term  due  to 
anti-fraud  measures  (other  than  reverse  charge)  being  taken  by  individual  Member 
States. Simplification measures to be introduced by the definitive VAT system would 
reduce compliance costs to businesses in the medium/long term. 

3.  Administrative  costs  to  tax  administrations  –  Member  States'  tax  authorities  incur 
costs related to the management of the obligations imposed to their businesses acting as 
taxpayers  (e.g.  processing  VAT  registrations,  reviewing  VAT  returns  and  other 
reporting  obligations,  providing  information,  handling  and  implementing  of  new 
legislation)  and  to  the  control  of  the  application  and  the  collection  of  the  VAT  (e.g.  
carrying out risk analysis, undertaking audits). These costs are specific to each Member 
State as they depend upon the organisation of its tax authorities. However, the more a 
legislation is susceptible to fraud, the more it is difficult and therefore costly to manage 
for  tax  authorities.  It  can  prompt  Member  States  to  impose  new  obligations  to  their 
businesses that they would also need to implement and follow-up. This can lead to more 
complexity which, in turn, can create new opportunities for tax evasion and fraud.    

In a best-case scenario, the implementation of the set of measures to be proposed by 
the Commission in the short term would improve tax collection in all Member States 
with no significant impact on administrative costs to Member States and no need for 
other anti-fraud measures. As is the case with any new legislation, the introduction of 
the  definitive  VAT  system  in  the  medium/long  term  would  require  some  additional 
costs  in  the  year  of  its  implementation  (e.g.  additional  work  for  tax  officials, 
implementation of IT systems). 

In a worst-case scenario, administrative costs could slightly increase in the short term 
due to anti-fraud measures (other than reverse charge) being taken complementarily 
by  individual  Member  States  in  case  the  proposed  measures  do  not  prove  to  be 

80   IFS et al., 2011 (see complete reference in Annex 4). 
81   EY, 2015. 

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sufficiently efficient in the short term. This would however depend upon the scope of 
anti-fraud measures adopted by individual Member  States to prevent existing fraud. 
The  implementation  of  the  definitive  VAT  system  in  the  medium/long  term  would 
require some additional costs in the year of its implementation. 

4.  Functioning of the internal market and extent to which further improvements can 
be made to  the VAT system  under the Action Plan- The baseline is perfectly in line 
with  the  Commission’  agenda  announced  in  its  Action  Plan  aimed  to  improve  the 
functioning  of  the  current  VAT  system  and  therefore  the  functioning  of  the  internal 
market. It proposes a gradual progression towards the definitive VAT system with short 
and longer term initiatives.  

6.2.2.  Option  2b:  derogation  to  apply  a  GRCM  to  all  domestic  supplies  of  goods  and 

services above a certain threshold only for preselected Member States 

Estimation  of  the  impacts  of  this  option  mainly  relies  on  data  that  have  been  specifically 
requested to and provided by Austria and the Czech Republic82, i.e. the Member States that 
submitted the latest request for such derogation.     

6.2.2.1.Analysis of the impacts of option 2b 

Summary – The extent to which the specific policy objectives will be met 

Overall : Objectives partially met 

1.  Reducing VAT fraud in specific Member States – Very uncertain but could be met 
if  sufficient  controls  are  put  in  place  in  order  to  monitor  the  functioning  of  the 
GRCM  and  prevent  new  domestic  types  of  fraud  to  appear  too  quickly  in  the 
Member State benefiting from the derogation.  

2.  Minimising  general  increase  in  administrative  burden  –  Not  met.  Although  the 
increase  of  running  costs  will  be  limited  in  the  two  countries  because  most 
obligations are already in place and despite the protection effect of the threshold on 
the smallest businesses, set up costs will be incurred twice.  

3.  Avoid fraud shifting to other sectors and other Member States – Not met. No fraud 
shifting between sectors but major risk of fraud shifting between Member States. 

Economic impacts 
Impact on carrousel fraud and Member Sates’ tax revenue 
Implementation of the GRCM may create gains for the budget of the Member State having 
introduced it if new fraud patterns (see box 9 below) take a few years to appear (as it seems 
to  have  been  the  case  in  1993  when  the  fiscal  frontiers  were  dismantled  for  VAT).    In 
particular fraud might shift “down the chain” and concentrate (for the total amount of the 
VAT  due)  to  the  retail  stage  which  is  normally  more  difficult  (more  numerous)  and 
burdensome to control (see notably Taj opinion in Annex 2).  “VAT free” obtained goods 

82   See Annex 6. A study published by the Ministry of Finances of the Czech Republic “Closing VAT Gap 

through reverse Charge Mechanism (2015)” is available on 
http://www.mfcr.cz/en/news/news/2016/collection-of-the-tax-conference-23757. 

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could  be  sold  on  with  VAT  but  without  remitting  the  tax  subsequently  or  end  up  on  the 
black  market,  either  of  the  Member  States  applying  the  GRCM  or  any  (neighbouring) 
Member State; in particular of a Member State with higher VAT rates, allowing fraudsters 
to maximize the benefit when selling these goods on to private consumers with VAT or to 
have  a  larger  competitive  advantage  over  those  that  apply  the  VAT  when  selling  without 
VAT on the black market. It is difficult to assess to what extent these phenomena will take 
place  but,  as  mentioned  before,  it  could  be  pointed  out  that  this  phenomenon  has  already 
been experienced in practice in relation to existing sectorial reverse charge derogations (e.g. 
in the sector of cereals in South Eastern Europe).  Therefore,  existing fraud in a Member 
State  applying  the  GRCM  is  likely  to  quickly  migrate  to  Member  States  which  did  not 
implement  the  GRCM.  A  number  of  Member  States83  as  well  as  business  organisations84 
expressed their fears in respect of tax fraud shifting to their country.  

According to the Czech Republic, two thirds of its VAT gap85 would stem  from carousel 
fraud,  i.e.  roughly  EUR  2.2  billion.  In  the  first  year  of  introduction  of  the  GRCM,  a 
decrease in tax revenue by EUR 1.2 billion is expected due to a change in cash flow86. On 
the other hand, a rise in tax revenue by EUR 1.1 billion due to the elimination of carousel 
frauds is estimated. In the further years, a positive impact is expected due to the elimination 
of  carousel  frauds.  According  to  the  Czech  Republic,  reporting  obligations,  such  as 
electronic  filing  of  invoices  or  VAT  control  statements,  should  solve  the  risk  of  fraud 
shifting at the end of the distribution chain. Individual invoices are matched in the system 
of VAT control statements and the potential problems are detected with the sensibility set at 
the level of the invoice.  Based on the data from the VAT control statements and electronic 
filing of invoices and using mechanisms of administrative cooperation the Czech Republic 
would be in a position to provide other Member States with the information and data they 
could use when applying their own anti-fraud measures. It would not exclude fraud shifting 
to  other  Member  States  as  effective  anti-fraud  measures  have  in  principle  the  effect  of 
shifting fraud to another destination. 

Austria, whose VAT gap is already under the EU average, namely 10.17%, did not provide 
budget  estimates.  Referring  to  a  study87,  Austria  predicts  that  carrousel  fraud  would  be 
eliminated entirely. The only disadvantage pointed out would be micro fraud but this new 
risk was assessed as negligible compared to the estimated benefits from such a new system. 
Considering  that  carrousel  fraud  would  amount  to  13%  of  the  Austrian  VAT  gap88  this 
would represent additional VAT revenue of about EUR 375 billion. Concerning cash flow, 
Austria  considers there will be no difference between  the current system and the GRCM. 
Therefore, no negative effects are expected with regard to the state budget. Concerning the 
shift of fraud to the retail stage, Austria does not expect problems as due to the structure of 
its retailors (retail stage is to a large extent marked by a few big companies), the number of 

83   Meeting of the Group on the Future of VAT (GFV) of 5 February 2016. 
84   See Annex 2. 

85   The Czech Republic has a VAT gap of 16.14% which places the country slightly above the EU average 
(EU-26 Member States VAT gap at 14.06%) but much lower than the average value in CEE (Central and 
Eastern Europe). See CASE, 2016. 

86   Recall that under a GRCM the VAT is collected only at the end of the supply chain. 
87   PPS Schönberger Study. 
88   Based on average estimate of MTIC fraud proportion in EY, 2015.  

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taxable persons accounting for the bulk of the VAT would not substantially increase. As for 
the shift of fraud to other Member States, Austria ascertains that the reporting system and 
risk analysis will prevent a shift of fraud to other Member States. 

Without practical experience, it is however not possible for the Commission to assess the 
analysis made by Austria and the Czech Republic but two scenarios can be envisaged: 

In a best-case  scenario, reduction of  carrousel fraud in the Member State applying the 
GRCM might be expected in the short term if sufficient controls are in place. On a longer 
term, new risks of fraud are likely to develop in the Member State applying the GRCM in 
particular  in  case  of  insufficient  controls.  The  net  impact  is  difficult  to  predict  without 
real experience but it could be well positive in case the new risks of fraud expected in the 
longer term would not  develop before the implementation of the definitive VAT system. 
However, fraud is very likely to migrate in the short term to other Member States (as this 
phenomenon has actually been experienced several times and in a very quick way).  

In  a  worst-case  scenario,  new  risks  of  fraud  are  likely  to  develop  in  the  Member  State 
applying the GRCM at the same time the reduction of carrousel fraud is expected in this 
Member  State.  The  net  impact  would  be  almost  nil.  Fraud  is  in  any  case  also  likely  to 
migrate in the short term to other Member States.  

Impact on compliance costs to business 
Specific  measures  to  avoid  new  forms  of  fraud  are  needed  under  a  GRCM  (see  box  10 
below). Set-up costs for the year of introduction of the GRCM were assessed89 in 2008 at 
EUR  1.6  billion  to  EUR  2 billion  for  Germany  alone,  and  recurring  costs  at  EUR  100  to 
200 million per year, which is the equivalent of EUR 500 million to EUR 1 billion a year at 
the level of the EU in 2016. Although the threshold above which the reverse charge should 
apply would help excluding from this system the smallest businesses90, it will nevertheless 
imply that most businesses (those that have transactions below and above the threshold and 
those  that  are  involved  in  both  B2B  and  B2C  transactions)  might  have  to  deal  with  two 
different  systems:  the  current  one  and  the  reverse  charge.  Taking  into  account  that  the 
initiative is meant to be a temporary derogation to the VAT Directive, similar one-off costs 
are  expected  to  revert  back  to  the  current  VAT  system.  A  recent  EU-wide  study  on  the 
impact  of  the  optional  reverse  charge91  has  concluded  that  the  reverse  charge  mechanism 
implies  an  increase  by  43%  of  compliance  costs  to  businesses,  although  a  generalized 
reverse  charge  is  expected  to  generate  less  compliance  costs  as  the  same  scheme  would 
apply  across  sectors.  Most  business  associations  as  well  as  the  REFIT  platform  have 
expressed  their  concerns  in  respect  of  the  expected  increase  in  compliances  costs  to 
business linked to the possible application of a GRCM92. It should also be anticipated that 

89   COM (2008) 109 final. 
90   Only  small  businesses  that  are  not  covered  by  the  VAT  exemption  scheme  might  be  affected  by  the 

changes proposed (see Annex 3). 

91   EY, 2014. 
92   Opinion of the VAT expert group (VEG) on the Action Plan on VAT  – Creating a definitive regime – 
20 May 2016;  Austrian Federal Economic Chamber (WKÖ) – General reverse charge – position paper – 
November  2015;  BusinessEurope  –  General  reverse  charge  –  18  November  2015.  In  a  meeting 
(5 February 2016) of the Group on the Future of VAT (GFV), several Member States shared the concerns 
raised  by  their  businesses  on  increased  compliance  costs  linked  to  implementation  of  a  generalised 
reverse charge mechanism (Annex 2). 

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the  CJEU  might  develop  on  specific  cases  linked  to  the  application  of  the  GRCM  in  two 
Member States only. This can add a layer of complexity in the application of the scheme. 
The  increased  compliance  costs  and  additional  complexity  of  the  VAT  system  will  affect 
those  businesses  that  are  active  in  the  Member  State  applying  the  GRCM.  Additional 
obligations  (anti-fraud  measures  other  than  GRCM)  could  be  imposed  to  their  businesses 
by Member States not applying the GRCM in order to limit fraud shifting to their country.    

According  to  the  Czech  Republic,  the  setting  of  the  threshold  for  the  application  of  the 
GRCM  in  tax  and  accounting  systems  could  cause  a  slight  increase  in  costs  for  VAT 
payers. However, no other increase in costs for VAT payers is expected as obligations that 
already exist should be used within the GRCM as well. The Czech Republic already has an 
electronic  VAT  listing  system  (so-called  'VAT  control  statement')  which  contains  data 
about each individual invoice. All registered taxable persons have, since 1 January 2016, to 
file  a  listing  of  all  received  and  provided  supplies,  regardless  whether  they  have  been 
supplied  under  reverse  charge  or  not.  This  enables  the  tax  administration  to  crosscheck 
invoices. VAT returns and “VAT control statements” are already submitted exclusively by 
electronic means. An electronic filing of invoices will be introduced soon in order to allow 
the  control  of  the  end  of  the  distribution  chain.  This  will  happen  regardless  the 
implementation of the temporary GRCM. No specific cost is expected for non-established 
taxable persons because, thanks to a simplification measure93, they will not be touched by 
the domestic reverse charge. 

According  to  Austria,  given  the  high  threshold,  small  companies  will  generally  not  be 
affected  by  the  GRCM.  Nearly  all  medium  and  large-sized  companies  apply  electronic 
bookkeeping systems where the basic data of customer and supplier are already recorded. 
Therefore the change of the system is more or less limited to a simple adaptation of the IT 
bookkeeping  system.  Austria  foresees  a  monthly  recapitulative  statement  of  the  supplier 
and the purchaser in which they both have to indicate the monthly total amount of supplies 
and purchases under reverse charge with respect to all business partners. This should enable 
an  automatic  reconciliation  of  data  from  the  recapitulative  statements  with  VAT 
declarations in view of a subsequent inquiry by tax administration as to have discrepancies 
examined. Payments above the threshold of EUR 10,000 are obligatory to be made by bank 
transfer. If non-established taxable persons are either suppliers or recipients of transactions 
covered by the GRCM, their compliance costs will be negligible or reduced. 

In  a  best-case  scenario,    as  would  normally  be  the  case  for  Austria  and  the  Czech 
Republic,  part  of  the  obligations  which  are  necessary  in  the  context  of  a  GRCM  have 
already been put in place. No large increase of obligations can therefore be expected in 
the  short  term.  Also,  the  threshold  will  avoid  that  microbusinesses  are  affected.  It 
remains however that very high set up costs will be incurred twice (in the short and the 
long term) and that most businesses will need to manage two systems (above and below 
the  threshold)  pending  adoption  of  the  definitive  system.  Overall,  the  impact  on 
compliance  costs  will  be  largely  negative  and  this  explains  the  negative  position  of 
business organisations on this subject (see Annex 2). 

In a worst-case scenario, the necessary obligations to accompany the GRCM are not in 

93   Implementation of the option foreseen in Article 194 of the VAT directive that allows Member States to 
provide that where a taxable supply of goods or services is carried out by a taxable person not established 
in the Member State in which the VAT is due, the person liable for the payment of VAT is the recipient 
of such supply. See also annex 3. 

44/94 

 
 
                                                 
place  and  would  still  need  to  be  fully  implemented  in  a  very  short  term.  Anti-fraud 
measures adopted by other Member States (other than those applying the GRCM) might 
further increase compliance costs to businesses active in these Member States.   

Impact on administrative costs to tax administrations 
Besides  the  need  to  change  legislation  and  adapt  were  necessary  administrative  practice 
(see flanking measures in box 8 above), Member States wishing to implement a GRCM will 
have to implement and control the new system for transactions above the threshold, as well 
as  continue managing the current system for transactions below the threshold. Mandatory 
electronic reporting and modern audit solutions should facilitate the inspection tasks but the 
control of the reverse charge chain cannot be done exclusively via listings. Due to increased 
risk of fraud shifting to Member States that have not implemented the GRCM, additional 
administrative costs are expected for these Member State in order to put in place additional 
measures  to  cope  with  this  fraud  shifting.  A  number  of  Member  States  confirmed94  the 
negative impact on their control capacity in case of tax fraud shifting to their country. 

According  to  the  Czech  Republic  no  additional  costs  for  the  tax  administration  are 
expected.  

Austria  foresees  one-off  costs  in  the  course  of  the  implementation  period  and  in  training 
staff but was unable to provide any figure. 

In  a  best-case  scenario,  increase  in  the  short  term  in  administrative  costs  to  tax 
administrations  linked  to  the  implementation,  running  and  control  of  the  GRCM  will 
highly  depend  upon  the  actual  level  of  efficiency  of  the  Member  State’s  tax 
administration.  This  efficiency  is  linked  to  its  structure,  organisation  and  level  of 
computerisation.  In  Austria  and  the  Czech  Republic,  limited  or  no  increase  in 
administrative  costs  is  expected.    In  the  longer  term,  the  Member  States  applying  the 
GRCM would need to end the application of the GRCM and adapt to the definitive VAT 
system. It is expected that Member States wishing to implement the GRCM have budgeted 
the costs of its implementation. As the GRCM remains an option to the Member States, 
no further costs (other than those provisioned) would be expected. 

In a worst-case scenario, the other Member States (those not applying the GRCM) would 
need  to  reinforce  their  control  capacities  and  maybe  introduce  anti-fraud  measures 
(other than the GRCM) to limit fraud shifting to their country.    

Impact on the functioning of the internal market 
The application of a GRCM even by a single Member State means that two different VAT 
systems will run in parallel within the EU: the current fractioned VAT system in twenty-six 
Member States and a GRCM (a kind of sales tax) in two Member States. 

The  functioning  of  the  internal  market  is  expected  to  be  impacted  from  a  business  and 
Member States ‘perspective in the following way. 

Business ‘perspective 

Businesses  acting  as  suppliers  or  acquirers  in  one  of  the  Member  States  applying  the 
GRCM will have to adapt and comply with the obligations linked to the new system. When 

94   Meeting of the Group on the Future of VAT (GFV) of 5 February 2016. 

45/94 

 
                                                 
also active in another Member State (a Member State not applying the GRCM), they will 
have to comply with the normal VAT rules. 

Businesses  in  the  Member  States  applying  the  GRCM  will  have  a  different  cash-flow 
situation  compared  to  businesses  in  the  other  Member  States.  The  cash  flow  impact  will 
however  depend  on  the  business-model  of  the  enterprise  and  will  be  influenced  by  the 
import/export situation of the company as well as payment lead times toward both suppliers 
and customers. Based on case-studies, the average cash flow impact for SMEs is expected 
to be negative, while the average impact on large enterprises would be positive95.  

Member State ‘perspective 

A decrease in the VAT receipts during the implementation period is likely to happen in the 
Member States that will introduce the GRCM because of the cash flow effect that might not 
be (fully) compensated by a reduction in carrousel fraud. This could affect negatively the 
yearly  budgetary  targets  of  these  Member  States  on  their  way  towards  fulfilling  their 
Medium-Term Objective (MTO)96. 

New risks of fraud are likely to develop at domestic level in the Member States opting for a 
GRCM  but  these  new  risks  might  only  develop  after  a  few  years.  The  final  impact  is 
difficult to predict without a real experience. 

VAT fraud is likely to shift to the Member States that do not have a GRCM. This fraud is 
expected  to  shift  in  the  first  instance  to  the  neighbour  countries  and  may  then  spread 
progressively  to  other  countries.  Member  States  not  applying  the  GRCM  might  therefore 
undergo a negative budgetary impact either because of new types of fraud and/or because 
of additional costs to adapt and reinforce their control capacities.      

Disturbance  to  the  functioning  of  the  internal  market  resulting  from  divergent 
obligations  imposed  to  businesses  and  from  unequal  treatment  of  Member  States  in  a 
similar  situation  is  expected.  Disturbance  would  start  as  from  the  application  of  the 
GRCM by at least one Member State and would last until adoption of the definitive VAT 
system.  

Link with the VAT reform process 

The  implementation  of  the  GRCM  in  preselected  Member  States  is  at  odds  with  the 
implementation of the single European VAT area (as announced in the Action Plan) in all 
Member States. It entails twice implementing expenditures (set-up costs to implement the 
GRCM  and  similar  costs  to  revert  to  the  normal  VAT  system  that  will  be  based  on  the 
principle  of  taxation  of  all  transactions)  for  both  businesses  and  Member  States.  Part  of 
these  costs  could  however  be  outweighed  by  gains  in  terms  of  VAT  collection 
improvements in the Member States applying the GRCM.   

95   Pricewaterhousecoopers, 2007 (A) (see complete reference in Annex 4). 
96    As part of the Stability Programmes and Convergence Programmes, a Medium-Term Objective (MTO) is 
a budgetary target set for each Member State which is defined in structural terms. Member States must 
also set out yearly targets on the way towards the MTO and forecast the expected path of their debt-to-
GDP ratios. See more information on 
http://ec.europa.eu/economy_finance/economic_governance/sgp/convergence/index_en.htm 

46/94 

 
 
                                                 
The  initiative  is  at  odds  with  the  Commission’s  overall  strategy  to  improve  the  VAT 
system  in  all  Member  States.  Given  its  foreseeable  negative  impact  on  the  internal 
market, it is somewhat inconsistent with the political commitment of the Commission.  

Environmental and social impacts 

Negligible or even zero97. 

6.2.3.  Option  3b:  derogation  to  apply  a  GRCM  to  all  domestic  supplies  of  goods  and 
services  above  a  certain  threshold  for  any  Member  State  fulfilling  certain  pre-
defined criteria 

As  for  option  2,  estimation  of  the  impacts  of  option  3  relies  in  part  on  data  provided  by 
Austria and the Czech Republic98. No such specific data is available for the other Member 
States.  

6.2.3.1. Analysis of the impacts of option 3b 

Summary – The extent to which the specific policy objectives and the political 
commitment of the Commission will be met 

Overall: Objectives partially met - Political commitment met  

1.  Reducing VAT fraud in specific Member States – Very uncertain but could be met 
if sufficient controls in place to monitor the functioning of the GRCM and prevent 
new domestic types of fraud to appear too quickly in the Member State applying the 
GRCM. However, only real experience can give a final estimation of this impact. 

2.  Minimising  general  increase  in  administrative  burden  –  Not  met.  Although  the 
increase  of  running  costs  will  be  limited  in  the  two  countries  because  most 
obligations are already in place and despite the protection effect of the threshold on 
the smallest businesses, set up costs will be incurred twice. In other countries, the 
impact will be even more negative as these obligations are not always in place now. 

3.  Avoid fraud shifting to other sectors and other Member States – Met. 

Economic impacts 
Impact on carrousel fraud and Member Sates’ tax revenue 
The same impacts as those pointed out under option 2b are expected, i.e. expected curbing 
of carrousel fraud in the (higher number of) Member States applying the GRCM, new risks 
of  fraud  in  these  Member  States.  However,  in  case  of  effective  fraud  shifting  to  other 
Member  States,  these  Member  States  could  be  allowed  to  also  apply  the  GRCM.  This 
should contribute to help limiting the extension of carrousel fraud to these Member States. 
However,  VAT  receipts  could  be  lost  in  the  meantime  the  fraud  shift  is  detected  and  the 
derogation is implemented in the concerned Member States. 

97   See second paragraph under point 6.2 above. 
98   See Annex 6. 

47/94 

 
 
 
 
 
 
 
 
                                                 
In  a  best-case  scenario,  reduction  of  carrousel  fraud  in  a  higher  number  of  Member 
States  can  be  expected  in  the  short  term  if  sufficient  controls  are  in  place.  Fraud 
migration to other Member States would be curbed. On a longer term, new risks of fraud 
are  likely  to  develop  in  the  Member  State  applying  the  GRCM  in  particular  in  case  of 
insufficient  controls.  Final  impact  on  fraud  is  difficult  to  measure  without  practical 
experience  but  it  could  be  well  positive  in  case  the  new  risks  of  fraud  expected  in  the 
longer term would not develop before the implementation of the definitive VAT system. 

In a worst-case scenario, new risks of fraud are likely to develop in a higher number of 
Member States applying the GRCM. At the same time, the reduction of carrousel fraud is 
expected in these Member States. The net impact would be almost nil even where fraud 
migration to other Member States would be curbed. 

Impact on compliance costs to business 
The  same  impacts  as  those  pointed  out  under  option  2b  are  expected,  i.e.  new  reporting 
obligations  leading  to  set-up  costs  (and  costs  to  revert  back  to  the  normal  VAT  system), 
increase  in  compliance  costs  to  businesses.  Since  the  GRCM  might  be  implemented  in 
more  than  two  Member  States,  the  probability  that  a  business  will  be  active  in  these 
additional  Member  States  would  be  higher.    This  would  mean  complying  with  more 
numerous specific (and probably different) obligations in the Member States. 

In a best-case scenario, in the same way as under option 2b, the smallest businesses may 
not  be  impacted  by  the  changes  in  the  short  term,  and  increase  in  compliance  costs  to 
businesses may also be limited in Member States having already requested to  apply the 
GRCM  (as  in  Austria  and  in  the  Czech  Republic  part  of  these  costs  have  already  been 
incurred). However, in the medium term, an increase in compliance costs (approaching 
43%) to businesses active in other Member States (those that would have introduced the 
GRCM  because  of  fraud  shifting  to  their  Member  State)  is  more  than  likely.  Indeed, 
these other Member States could be forced to apply the GRCM although no such specific 
reporting  obligations  as  those  already  implemented  in  the  initial  Member  States  exist. 
However, large set up costs would in any case be incurred twice by all businesses of all 
Member  States  applying  the  GRCM  or  been  active  in  such  Member  States.  These 
businesses  would  also  need  to  manage  two  parallel  systems  (above  and  under  the 
threshold). 

In  a  worst-case  scenario,  the  increase  in  compliance  costs  in  the  other  Member  States 
(others  than  those  having  "initially"  implemented  the  GRCM)  happens  already  in  the 
short term leading to a possible more chaotic and therefore costly implementation.   

Impact on administrative costs to tax administrations 
The  same  impacts  as  those  pointed  out  under  option  2b  are  expected,  i.e.  new 
administrative costs for the Member State applying the GRCM to implement it and to adapt 
control capacity (however, the extent of the increase highly depend upon actual efficiency 
of  tax  administration).  The  difference  is  that  while  under  option  2b,  the  setting  up  of  the 
GRCM results from a decision taken by the Member State on the basis of its actual ability 
to implement such a system (e.g. already high level of computerisation), under option 3b, 
other Member States might be forced to put in place such a heavy mechanism in order to 
fight  against  fraud  shifting  to  their Member  State  although their  ability to  implement  this 
mechanism  might  need  important  improvements  (more  administrative  costs  not  initially 
foreseen).    

In  a  best-case  scenario,  the  same  impacts  in  the  short  and  longer  term  as  those 

48/94 

 
mentioned  under  option  2b  are  expected,  i.e.  limited  or  no  increase  in  administrative 
costs in Austria and the Czech Republic. In the medium term, the other Member States 
(those  not  applying  the  GRCM)  would  need  to  reinforce  their  control  capacities  and 
maybe  introduce  anti-fraud  measures  (other  than  the  GRCM)  to  limit  fraud  shifting  to 
their country.  Increase in administrative costs is expected in the Member States “forced” 
to implement the GRCM although actual level of efficiency is expected to improve at the 
same time thanks to the set of measures that will be proposed by the Commission. 

In a worst-case scenario, the increase in administrative costs to the other Member States 
(those that did not "initially" ask for applying the GRCM) happens already in the short 
term.  

Impact on the functioning of the internal market 
The same impacts as those pointed out under option 2b are expected, i.e. difficulties linked 
to  the  running  in  parallel  of  two  different  VAT  systems  within  the  EU  (increased 
complexity  of  the  rules,  cash  flow  impacts  on  businesses  and  tax  administrations). 
However, the risk of fraud shifting is mitigated by the fact that the Member States at risk 
will be given the possibility to react by being allowed to also apply the GRCM.  

Equal  treatment  of  Member  States  in  a  similar  situation  leads  to  limitation  of  fraud 
shifting  between  Member  States  which  is  less  detrimental  for  the  functioning  of  the 
internal market. Limited disturbance would start as from the application of the GRCM by 
at least one Member State and would last until adoption of the definitive VAT system.  

Link with the VAT reform process 

The same impacts as those pointed out under option 2b are expected, i.e. opposite direction 
to  the  implementation  of  the  single  European  VAT  area  in  all  Member  States,  with  extra 
implementation expenditures, partially outweighed by gains from improved VAT collection 
in  the Member  States  applying the GRCM. In  addition, option 3b might  present  a risk  of 
spill-over effect of the GRCM. More than two Member States might have implemented the 
GRCM  which  would  imply  that  more  businesses  and  more  tax  administrations  will  be 
affected. However, the criteria to be fulfilled in order for a Member State to be granted the 
derogation to apply the GRCM should limit the use of such instrument to what is necessary 
to  attain  the  objective  of  reducing  carrousel  fraud  while  preserving  the  internal  market. 
Also, the safeguard clause enabling the Commission to revoke a derogation should mitigate 
any negative impact on the internal market.  

The initiative is at odds with the Commission’s strategy to improve the VAT system in all 
Member  States.  However,  since  its  impact  on  the  internal  market  should  be  under 
control,  it  is  consistent  with  the  political  commitment  of  the  Commission  to  allow 
individual  Member  States  to  apply  a  GRCM  on  the  basis  of  a  derogation  while 
safeguarding the internal market.  

Environmental and social impacts 

Negligible or even zero99. 

99   See second paragraph under point 6.2 above. 

49/94 

 
 
 
 
 
                                                 
6.2.4.  Common explanations to option 2b and option 3b 

Box 9: New risks of fraud linked to the introduction of a GRCM 

An independent study100 carried out for the Commission on the new risks of fraud generated 
by the introduction of the reverse charge mechanism has shown that fraud might arise not 
only  at  a  cross-border  level  but  also  at  a  purely  domestic  level.  A  table  summarising  the 
current forms of fraud which are likely to increase with the reverse charge mechanism and 
those which can be considered as new forms of fraud is available in Annex 7. 

Forms of fraud likely to increase 

By enabling operators to acquire goods VAT-free, the reverse charge mechanism represent 
an  incentive  for  replicating  existing  forms  of  fraud,  but  highly  concentrated  at  the  retail 
level where the whole collection of VAT occur. 

The  possibility  to  acquire  goods  without  any  VAT  being  paid  enhances  the  interest  of 
operators (or even any person), who may  not  be  entitled  to reclaim  totally  or  partially  
the    VAT  charged  on  their  purchases,  to    perform    all    forms    of    hijacking  of  VAT 
identification numbers in order to benefit of such VAT-free acquisition. 

Moreover, the  risk  which  the  reverse  charge  mechanism  increases,  concerns  not  only  the 
fact  that  VAT  would  not  be  paid,  but  also  that  there  would  be  a  higher  incentive  for 
fraudulent  operators  to  divert  VAT  to  themselves  or  to  sell  goods  to  the  black  market. 
Existing fraudulent schemes would just be replicated at a purely domestic level without the 
need to interpose an intra-Community supply in between (to make purchases VAT-free) and 
prove the evidence of the transport from a Member State to another one. Indeed, VAT free 
obtained goods could be sold on with VAT but without remitting the tax subsequently or end 
up  on  the  black  market,  either  in  the  Member  State  applying  the  mechanism  or  in  any 
(neighbouring) Member State that did not implement it. In particular, this could happen in 
Member  States  with  higher  VAT  rates  as  to  maximize  the  benefits  of  the  fraudster  when 
these goods are sold on to private consumers with VAT or, when sold in 'black', to have a 
larger competitive advantage over those that apply the VAT.  

It  is  difficult  to  assess  to  what  extent  these  phenomena  will  take  place  but  it  could  be 
pointed out that this  phenomenon has already been  experienced in  practice in  relation to 
existing  sectorial  reverse  charge  mechanism  derogations  (e.g.  in  the  sector  of  cereals  in 
South East Europe101). 

According to the mentioned study, existing forms of fraud, far from being counteracted, will 
most likely increase. 

100   Pricewaterhousecoopers, 2007 (B) (see complete reference in Annex 4). 
101   Application  of  the  reverse  charge  mechanism  in  Romania  which  led  to  a  shift  of  fraud  to  Hungary  as 
regards  certain  cereals  (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)  and   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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New forms of fraud 

The  study  also  evidenced  that  the  existence  of  a  threshold  to  apply  the  reverse  charge 
mechanism would be the causing factor of specific schemes such as the artificial splitting of 
the  taxable  amount  of  a  transaction  in  order  to  circumvent  this  threshold  and  to  collect 
VAT from the customer without remitting it to the Treasury.  

Box 10: Additional compliance costs linked to the introduction of a GRCM 

When goods can be obtained 'VAT free' and can be sold under conditions whereby the VAT 
is  effectively  charged  to  and  paid  by  the  client,  the  self-policing  character  of  the  current 
VAT  system  needs  to  be  replaced  by  another  control  system.  This  control  system  should 
notably guarantee that all domestic transactions are tracked (see flanking measures in box 
8 above).  

The application of the two different VAT systems (the GRCM in the participating Member 
States and the current one in the rest of the Member States) within the internal market is 
expected  to  imply  substantial  costs  for  businesses  in  the  Member  States  applying  the 
GRCM102  in  order  to  change  invoicing,  accounting  and  declaration  obligations.  Set-up 
costs  for  the  year  of  introduction  of  the  measure  were  assessed103  in  2008  at  EUR  1.6 
billion to EUR 2 billion for Germany alone, and recurring costs at EUR 100 to 200 million 
per year, which is the equivalent of EUR 500 million to EUR 1 billion a year at the level of 
the  EU  in  2016.  Taking  into  account  that  the  initiative  is  meant  to  be  a  temporary 
derogation  to  the  VAT  Directive,  similar  costs  are  expected  to  revert  back  to  the  current 
VAT system. 

Increased complexity for taxable persons is expected in order to manage the threshold and 
to decide whether to apply the VAT or not. For each supply under the GRCM, suppliers will 
need to ascertain the VAT status of the acquirer and to obtain and subsequently store the 
necessary  documentation.  Increased  administrative  costs  might, 
in  particular,  be 
problematic for SMEs for which compliance costs are relatively higher (e.g. adaptation of 
IT  systems  where  those  systems  become  mandatory).  A  recent  study  on  the  impact  of  the 
optional  reverse  charge104  has  concluded  that  the  reverse  charge  mechanism  implies  an 
increase by 43% of compliance costs to businesses. Part of these costs would however not 
be incurred under a generalized scheme (no need to distinguish VAT treatment per sector). 

According  to  an  external  study105,  specific  means  to  combat  new  forms  of  fraud  are 
required under a reverse charge mechanism. These can include, notably, the need: 

- To issue domestic sales and purchase listings for all domestic transactions; 

- To adapt invoicing, accounting and declaration obligation; 

102   The GRCM will affect the established businesses as well as non-established taxable persons as they both 

might have to deal with two different VAT systems. 

103   COM (2008) 109 final. 
104   EY, 2014. 
105   Pricewaterhousecoopers, 2007 (B). 

51/94 

 
 
                                                 
- To implement or adapt IT services;   

- To comply with the use of a specific R number106; 

- To comply with a computerised Taxable Person’s identity card showing that the taxable 
person is a bona fide trader.  

7.  HOW DO THE OPTIONS COMPARE?  

7.1. 

Summary assessment of the impacts 

The table below analyses and evaluates the various impacts across the three options. 

The main elements of each option have been weighed (0: no significant impact, +: positive 
impact,  -:  negative  impact)  according  to  their  respective  expected  impacts.  Further 
explanations on these impacts are summarized under letter “E-Overall assessment” below. 

Key impacts 

Baseline 

Option 2b 

Option 3b 

A-Effectiveness of options vs policy objectives  

Reducing VAT 
fraud, in particular 
carrousel fraud, in 
specific Member 
States by taking into 
account the 
specificities of 
Member States in 
terms of level of 
fraud and control 
capacities 

Best-case scenario 
Outcome: 0 

Best-case scenario 
Outcome: - 

Best-case scenario 
Outcome: 0 

Carrousel fraud is 
stable or even 
reduced in the short 
term and 80% of 
carrousel fraud 
could be removed in 
the medium/long 
term with the 
introduction of the 
definitive VAT 
system 

Worst-case 
scenario 
Outcome: 0 

No reduction of 
carrousel fraud in 
most affected 
Member States in 
the short term and 

Reduction of 
carrousel fraud in 
the Member States 
applying the GRCM 
in the short term. 
New patterns of 
fraud (e.g. fraud 
shift to the retail 
stage) appear on a 
longer term but 
coincide with the 
implementation of 
the definitive VAT 
system 

Reduction of 
carrousel fraud in 
more Member 
States applying the 
GRCM in the short 
term. New patterns 
of fraud (e.g. fraud 
shift to the retail 
stage) appear on a 
longer term but 
coincide with the 
implementation of 
the definitive VAT 
system 

Worst-case 
scenario 
Outcome: 0 

New risks of fraud 
develop in the short 

Worst-case 
scenario 
Outcome: 0  

New risks of fraud 

106   R number is a special VAT ID  number  issued  by  the  VAT  authorities,  which  allows taxable  persons  
to  buy  under  application  of  the  reverse  charge. The format of the R number is exactly the same as a 
normal VAT ID number, except with a special “R” prefix.  

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Minimizing 
increase in 
compliance costs to 
business 

carrousel fraud 
could even continue 
to increase in the 
longer term until the 
introduction of the 
definitive VAT 
system 

term in the Member 
States applying the 
GRCM at the same 
time as  the 
reduction of 
carrousel fraud and 
prolong in the 
longer term until 
implementation of 
definitive VAT 
system 

develop in the short 
term in more 
Member States 
applying the GRCM 
at the same time as  
the reduction of 
carrousel fraud and 
prolong in the 
longer term until 
implementation of 
definitive VAT 
system 

Best-case scenario 
Outcome: 0 

Best-case scenario 
Outcome: - 

Best-case scenario 
 Outcome: -- 

Same as option 2b 
but in a wider 
number of Member 
States (more 
businesses 
impacted). This 
would include 
Member States 
where the reporting 
obligations are not 
yet in place 
(because GRCM is 
applied as a 
consequence of 
fraud shifting to 
their country), 
implying medium 
term additional 
costs to their 
businesses. 

Worst-case 
scenario 
Outcome: --- 

Same as option 2b 
but in a wider 
number of Member 
States 

Set of measures to 
be proposed by the 
Commission in the 
short term improves 
tax collection in all 
Member States with 
no impact on 
compliance costs. 
Simplification 
measures to be 
introduced by the 
definitive VAT 
system should 
reduce compliance 
costs to businesses 
in the medium/long 
term  

Worst-case 
scenario 
Outcome: 0 

Compliance costs 
increase in the short 
term due to anti-
fraud measures 
(other than reverse 
charge) being taken 
by individual 
Member States. 
Simplification 
measures to be 
introduced by the 
definitive VAT 

In the short term, in 
the Member States 
applying the 
GRCM, the impact 
on the smallest 
businesses will be 
very limited due to 
the threshold. New 
obligations on other 
businesses should 
be limited in the 
Member States in 
which the reporting 
obligations which 
are necessary to the 
GRCM are already 
in place. In the 
longer term, new 
costs to revert back 
to the normal VAT 
system will coincide 
with the 
implementation of 
the definitive VAT 
system.  

Worst-case 
scenario 
Outcome: --- 

The necessary 
obligations 
accompanying the 

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Minimizing 
increase in 
administrative 
costs to tax 
administrations 

system should 
reduce compliance 
costs to businesses 
in the medium/long 
term  

GRCM are not in 
place and would 
need an urgent 
implementation. 
Anti-fraud measures 
(other than GRCM) 
adopted by the rest 
of the Member 
States increase 
compliance costs to 
their businesses  

In the longer term, 
large set up costs 
will be incurred 
twice (to revert back 
to the normal VAT 
system). 

Best-case scenario 
Outcome: 0 

Best-case scenario 
Outcome: - 

Best-case scenario 
Outcome: -- 

Implementation of 
set of measures 
proposed by the 
Commission in the 
short term does not 
increase 
significantly costs to 
tax administrations. 
In the medium/long 
term, additional 
administrative costs 
are expected in the 
year of 
implementation of 
the definitive VAT 
system.  

Administrative costs 
in the short term are 
expected to be 
limited in the 
Member States 
applying the 
mechanism. 
Administrative costs 
linked to the end of 
the GRCM are 
expected in the 
longer term.  

Worst-case 
scenario 
Outcome: -- 

Increased 
administrative costs 
are expected in the 
rest of the Member 
States in order to 
curb fraud shifting 
to their country by 
means of anti-fraud 
measures (other 
than GRCM) 

54/94 

Worst-case 
scenario 
Outcome: 0 

Costs to tax 

Same as option 2b: 
administrative costs 
are expected to be 
limited in Member 
States been the firsts 
to apply the 
mechanism 

Worst-case 
scenario 
Outcome: --- 

 Increased 
administrative costs 
are expected in the 
rest of the Member 
States in order to 
curb fraud shifting 
to their country 
(through anti-fraud 
measures other than 
GRCM)  or to 
implement the 
GRCM in the short 
term 

 
 
 
 
 
 
 
 
 
 
already in the short 
term 

administration 
slightly increase in 
the short term due to 
anti-fraud measures 
being taken by the 
Member States. 

In the medium/long 
term, additional 
administrative costs 
are expected in the 
year of 
implementation of 
the definitive VAT 
system.  

Avoid fraud 
shifting by ensuring 
that tax fraud does 
not move: 
-  from one sector to 
another 

- from one Member 
State to another 

Outcome: 0 

Outcome: ++ 

Outcome: ++ 

Fraud can shift 
between sectors due 
to the application of 
the current sectorial 
reverse charge 

Fraud is no longer 
expected to shift 
between sectors in 
the Member States 
applying the 
mechanism 

Fraud is no longer 
expected to shift 
between sectors in 
the Member States 
applying the 
mechanism 

Outcome: 0 

Outcome: -- 

Outcome: + 

Fraud can shift  but 
to a limited extent 
between Member 
States because of 
the absence of the 
application by a 
Member State of a 
GRCM 

Fraud is expected to 
shift to other 
Member States 
(neighbour countries 
with poor/weaker 
tax control 
capacities) without 
any possibility to 
react  

Fraud could shift to 
other Member 
States (neighbour 
countries with 
poor/weaker tax 
control capacities) 
but be stopped once 
the GRCM is 
applied by these 
Member States 

B-Impact on internal market 

Outcome: 0 

Outcome: ---  

Outcome: 0  

No negative impact 
on the internal 
market 

Impact on the 
internal market is 
negative.  

Impact on the 
internal market is 
limited. In case of 
negative impact on 
several Member 

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B-Interaction between political commitment and VAT reform process 

States, safeguard 
clause would allow 
to revoke a 
derogation 

Baseline is 
consistent with the 
single European 
VAT area but does 
also not address 
immediate fraud 
problems in certain 
Member States in 
line with the 
political 
commitment 

Option 2b is at odds 
with the single 
European VAT area. 
It addresses the 
immediate problem 
of certain Member 
States. It is not 
perfectly in line 
with the political 
commitment 
because of its 
negative impact on 
the internal market 

Option 3b is at odds 
with the single 
European VAT area 
but addresses the 
immediate problem 
of certain Member 
States. It is in line 
with the political as 
it should preserve 
the internal market 

7.2. 

Identification of the preferred option 

7.2.1.  Overall assessment of the options and selection of the preferred option  

The analysis above provides mixed outcome when the impacts of the options are regarded 
either as short term or medium/long term solutions. 

In  the  medium/long  term,  the  baseline  is,  from  an  economic  point  of  view,  the  preferred 
option. It results from in-depth consultations, studies and analyses that started in 2011 with 
the Green Paper and the Communication on the future of VAT. It is also the most consistent 
way to improve the functioning of the current VAT system. However, its estimated results 
in terms of reducing fraud, compliance costs to businesses and improving the current VAT 
system  can  only  be  expected  in  the  medium  to  long  term.  It  therefore  does  not  solve  the 
urgent problems of fraud of specific Member States in the short term and does not meet the 
political commitment of the Commission (17 June 2016 ECOFIN). 

Option 2b and option 3b may in a best case scenario provide short term solutions in terms 
of  reducing  carrousel  fraud  in  the  Member  States  applying  the  mechanism  although  their 
final impact is very uncertain and could even be nil in a worst-case scenario. Both options 
have  negative  implications  on  administrative  burdens  and  are  therefore  subject  of  major 
concerns  from  businesses,  including  from  the  EU  REFIT  platform.  They  are  also  both  at 
odds with the objective to set up a single EU VAT area based on the principle of taxation of 
all transactions. 

As Option 2b would allow the buying of all goods "VAT free" without any border control 
to stop these goods entering the markets of other countries, this option would cause a major 
shift of their carrousel fraud to other Member States (particularly neighbour countries with 

56/94 

 
 
  
 
weaker tax control capacity). These Member States would not have the possibility to apply 
such  a  system  while  fraud  might  be  impossible  for  them  to  be  circumvented  in  the  very 
short term by traditional anti-fraud measures.  

Option  3b  would  offer  all  Member  States107the  possibility  to  apply  the  GRCM,  either 
because of their current fraud/control situation108or in case they prove that the application 
of  the  GRCM  in  other  Member  States  would  cause  a  shift  of  fraud  to  their  own  country. 
This option would have the advantage of giving all Member States the same instrument to 
fight against carousel fraud when other means prove not to be sufficient. 

Option  3b  is  therefore  the  only  option  which  fulfils  the  political  commitment  of  the 
Commission  to  grant  such  derogation  to  Member  States  without  creating  risks  for  the 
internal market.     

7.2.2.  Benchmark 

The  purpose  of  the  derogation  to  apply  a  GRCM  is  to  help  Member  States  more  heavily 
affected  by  fraud,  in  particular  carrousel  fraud,  to  curb  such  fraud.  However,  the 
introduction of the mechanism is expected to bring these Member States closer to the tax 
collection capacities of the rest of the Member States. Although, as mentioned before, fraud 
is by definition difficult to measure, a positive change in the trend of their VAT gap or the 
amount  of  its  carrousel  fraud  towards  the  EU  average  could  be  an  indication  of  the 
efficiency  of  the  measure.  However,  this  would  also  need  to  be  assessed  against  any 
possibly disproportionate increase in compliance costs to business.  

8.  HOW WOULD ACTUAL IMPACTS BE MONITORED AND EVALUATED?  

Since the initiative is a temporary measure meant to fight in the short term against carrousel 
fraud (until a definitive VAT system is adopted), its effects need to be closely monitored as 
regards  its  efficiency  already  during  its  implementation  period.  Because  of  its  potential 
side-effects (e.g. increase in compliance costs to businesses, development of new types of 
fraud,  fraud  shifting  to  other  Member  States),  a  close  monitoring  should  be  ensured  not 
only  by  the  Member  States  applying  the  mechanism  but  also  by  the  rest  of  the  Member 
States.  This  monitoring  should  allow  eventual  adjustments  to  the  mechanism  in  case  of 
substantial  negative  impact  on  the  functioning  of  the  VAT  system  within  the  internal 
market  (safeguard  clause  allowing  the  Commission  to  repeal  a  granted  derogation).  The 
monitoring  would  also  serve  in  case  of  need  to  extent  the  mechanism  to  other  Member 
States (option 3b). 

Therefore,  an  interim  report  (within  2  years  of  implementation)  as  well  as  a  final  report 
(after  the  5  years  implementation  period)  shall  be  submitted  to  the  Commission  by  all 
Member States. 

107   But on the basis of predefined criteria (see point 5.4 above). 
108   See description of predefined criteria under point 5.4 above. 

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8.1.  Monitoring by the Member States applying the reverse charge mechanism 

8.1.1.  Reporting obligations 

Member  States  choosing  to  apply  the  generalized  reverse  charge  mechanism  should 
introduce specific electronic reporting obligations on all taxable persons so as to ensure the 
effective  operation  and  monitoring  of  the  application  of  that  mechanism  and  detect  and 
prevent all new forms of tax fraud during the 5 years implementation period. The Member 
States  applying  the  mechanism  shall  inform  the  Commission  of  all  the measures  taken  in 
this respect.  

8.1.2.  Interim and final report 

In order to assess the effect of the application of the mechanism on fraudulent activities in a 
transparent manner, pre-defined evaluation criteria should be established by these Member 
States so as to enable an assessment of the level of fraud before and after the introduction of 
the mechanism. 

In  order  to  ensure  the  monitoring  of  the  efficiency  and  effectiveness  of  the  mechanism 
during  its  implementation  period,  Member  States  applying  the  GRCM  shall  submit  an 
interim  report  to  the  Commission,  within  2  years  of  implementation,  on  the  basis  of  the 
above mentioned evaluation criteria.  

This  report  shall  provide  a  detailed  assessment  of  the  mechanism's  effectiveness  and 
efficiency so far, in particular as regards the impact on fraud, the possible shift of fraud to 
the retail level and the compliance costs for taxable persons resulting from the mechanism. 

After the end of the 5 years implementation period, the Member States applying the GRCM 
shall submit to the Commission a final report on the overall effectiveness and efficiency of 
the  mechanism  in  particular  as  regards  the  impact  on  fraud  and  the  compliance  costs  for 
taxable persons resulting from the mechanism. 

8.2.  Monitoring by the Member States not applying the reverse charge mechanism 

To closely monitor the impact on the internal market of the application of the GRCM by 
some Member States and allow eventual adjustments, all the other Member States shall also 
submit an interim report (within 2 years of implementation) and a final report (after 5 years 
of  implementation) to  the  Commission.  These  reports  should  enable  an assessment  of  the 
impact on fraud, compliance costs to businesses and possible shift in trends of fraudulent 
activities. 

8.3.  Monitoring by the Commission – Operational objectives 

On  the  basis,  notably,  of  the  interim  reports  provided  by  all  Member  States,  the 
Commission would follow-up the implementation of the mechanism. Besides evaluating the 
direct  effect  of  the  mechanism  on  fraud,  this  should  allow  the  Commission  to  take  the 
necessary measures, either consisting in terminating the derogation in case of disruption of 
the functioning of the internal market or in extending it to other Member States. 

Operational objectives 

As  the  main  objective  of  the  derogation  is  to  fight  against  fraud,  in  particular  carrousel 
fraud while preserving the internal market (no substantial increase in compliances costs to 

58/94 

 
business,  no  shift  of  fraud  to  other  Member  States),  the  achievement  of  the  following 
operational objectives will be monitored: 

1)  Positive effect on the VAT gap trend 

The indicator used will be the annual VAT gap study109. 

2)  Reduction in the amount of fraud, in particular carrousel fraud 

The  indicator  would  be  set  up  by  the  Member  States  and  cross-checked  with 
information  from  Eurofisc110,  SCAC111,  fraud  cases  in  National/European  Courts  of 
Justice and feedback from stakeholders. 

3)  No disproportionate increase in compliance costs to business 

Analysis will rely on data provided at national level (by the Member States) and cross-
checked with information from Eurofisc, SCAC and stakeholders. 

9.  ANNEXES 

9.1.  Annex 1: Procedural information concerning the process to prepare the impact 

assessment report and the related initiative 

9.2.  Annex 2: Stakeholder consultation  

9.3.  Annex 3: Who is affected by the initiative and how? 

9.4.  Annex 4: Methodology 

9.5.  Annex  5:  short  term  measures  to  enhance  tax  compliance  and  strengthen  the 

fight against vat fraud 

This  Annex  describes  how  the  Commission  can  provide  technical  assistance  to  help  the 
Member States to improve their tax collection and inspection capacity. 

9.6.  Annex  6:  Replies  from  Austria  and  the  Czech  Republic  to  the  questionnaire 

sent by the Commission 

This Annex contains the replies from Austria and the Czech Republic respectively received 
on  24  and  25  May  2016  in  reply  to  a  questionnaire  that  the  Commission  sent  on  4  May 
2016, further to the requests from these Member States to be granted a derogation to apply 
the generalise reverse charge mechanism. 

109  Study  carried  out  by  an  external  contractor  for  the  Commission  in  close  cooperation  with  the  Member 

States. 

110   Eurofisc. 
111   Standing Committee on Administrative Co-operation (SCAC). 

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9.7.  Annex 7: Summary table on the new forms of fraud linked with reverse charge 

mechanism   

This  Annex  contains  a  table  summarising  the  current  forms  of  fraud  which  are  likely  to 
increase with a reverse charge system and those which can be considered as new forms of 
fraud.  It  is  extracted  from  the  Pricewaterhousecoopers,  2007  (B)  study  (see  complete 
reference in Annex 4). 

9.8.  Annex 8: Meeting report of the ISSG on a temporary application of the VAT 

reverse charge mechanism 

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Annex 1:  Procedural  information  concerning  the  process  to  prepare  the  impact 

assessment report and the related initiative 

1. Agenda planning and Work Programme References 

The proposal for a generalised reverse charge mechanism is linked to the VAT Action Plan. 

TAXUD  is  the  lead  DG  for  the  initiative.  The  Agenda  Planning  Reference  is 
[2016/TAXUD/027].  The  Inception  Impact  Assessment  was  published  on  [not  published 
yet]. 

2. Inter-Service Steering Group 

The  first  meeting  of  the  Inter-Service  Steering  Group  has  taken  place  on  15  September 
2016 [see minutes in Annex 8]. 

The  following  directorates  and  services  were  present:  SG,  SJ,  BUDG,  CNECT,  ENV, 
ENER,  JUST,  GROW  and  OLAF.  The  feedback  received  from  these  directorates  and 
services has been taken into account in the report.  

3. Consultation of the Regulatory Scrutiny Board 

The Impact Assessment Report was submitted to the Regulatory Scrutiny Board for a first 
time  on  27/09/2016  and  a  meeting  took  place  between  the  Board  and  DG  TAXUD  on 
26/10/2016. On 28 November, the Regulatory Scrutiny Board gave a positive opinion with 
recommendations  for  improvements.  The  report  was  adjusted  in  order  to  integrate  the 
Board's recommendations. 

The main issues were addressed in the following way: 

Board recommendations 

What has been done? 

Where? 

(1) Better structure the comparison 
of options. The report should clarify 
why worst-case scenarios were 
considered only for reducing VAT 
fraud and not for the other aspects, 
such as compliance cost increase or 
costs to tax administrations. 
Moreover, it should also make clear 
why short-term and long-term risks 
are only considered for VAT fraud 
reduction. The report should better 
explain the results of the comparison 
of options 2b and 3b, given that the 
assessment of the options appears to 
be the same even though the score is 
different. 

Worst cases scenarios for 
compliance costs and costs to 
tax administrations have been 
added. 

Short and long-term risks are 
considered for fraud but as 
regards e.g. compliance costs, a 
distinction is made between 
recurrent costs and costs to 
change and revert back to and 
from the GRCM (not really 
'risks' but certainties). 

Differences regarding option 2b 
and 3b are already explained as 
regards the number of Member 
States potentially involved in the 

61/94 

Section 6.2.1 
(points 3 and 4)  

Sections 6.2.2.1 
and 6.2.3.1 
(under "Impact 
on compliance 
costs to 
business", 
"Impact on 
administrative 
costs to tax 
administrations", 
"Impact on the 
functioning of 
the internal 
market") 

 
GRCM which has its effect on 
the score. 

The scoring for the baseline has 
overall been set at zero and the 
options have been re-scored 
along this benchmark. 

Section 7.1 
(summary table) 

Section 7.1 
(summary table) 

No new risks, in addition to 
those already established , were 
identified but risks linked to 
potential additional anti-fraud 
measures adopted by the 
Member States are better 
explained through the new best 
and worst-case scenarios 
developed for compliance and 
administrative costs. 

In addition to the nine references 
to the stakeholder views, another 
three were added, in particular 
as regards results of the Green 
Paper consultation. 

Same sections as 
under point (1) 
above 

See pages 10, 34 
and 35  

(2) Each option should be compared 
against a baseline. The scores should 
reflect the positive or negative 
assessment of the options compared 
against the baseline. So the baseline 
should be scored at zero and the 
scores of the options adjusted 
accordingly. 

(3) It should identify risks related to 
potential additional elements 
introduced by Member States that 
may increase administrative burden 
or may have negative cross-border 
effects. 

(4) Stakeholder views should be 
further referenced throughout the 
report, including also the points 
raised in the consultation for a Green 
Paper on the possible introduction of 
an optional reverse charge 
mechanism. 

4. Commission Group on the Future of VAT  

The  Group  on  the  Future  of  VAT  (GFV)112  provides  a  forum  for  discussion  with  VAT 
Experts  from  the  Member  States'  tax  administration  on  the  Commission  pre-legislative 
initiatives. This group provided on 5 February 2016 the Commission with a comprehensive 
view  of  the  opinions  on  the  possible  implementation  and  application  of  a  generalized 
reverse  charge  mechanism.  At  that  time,  a  considerable  number  of  Member  States  were 
rather opposed to the initiative. 

112   The Group on the Future of VAT provides a forum for discussion with VAT Experts from the Member 
States on the Commission pre-legislative initiatives and exchange of opinions on the preparation of future 
VAT legislation. 

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Annex 2:  Stakeholder consultation  

The  current  initiative  results  from  a  political  agreement  made  at  the  ECOFIN  of  17  June 
2016  during  which  the  Commission  committed  to  present,  before  the  end  of  the  year,  a 
legislative  proposal  allowing  individual  Member  States  to  derogate  from  the  common 
system  of  value  added  tax  so  as  to  apply  a  generalised  reverse  charge  mechanism  to 
domestic supplies above a defined threshold and preserving the internal market. 

Given  this  constraining  timing  aspect,  and  the  fact  that,  otherwise,  much  awaited  (anti-
fraud)  proposals  remain  or  will  be  blocked  at  the  Council,  no  specific  stakeholder 
consultation has taken place as regards the possibility for a derogating measure regarding 
the  possible  application  of  a  generalised  reverse  charge  mechanism  in  certain  Member 
States. 

Notwithstanding  this,  the  Commission  has  a  clear  understanding  of  the  problems  and 
possible  solutions  -  including  on  the  aspects  of  reverse  charge  -  as  the  current  process  is 
linked to a reform of the VAT system which already started in 2010. 

At that  time,  an open public consultation  took  place  on the 'Green  Paper on the future  of 
VAT'  -  Towards  a  simpler,  more  robust  and  efficient  VAT  system"113  (COM(2010)695), 
and  which  resulted  in  around  1700  contributions;  providing  a  detailed  view  of  problems 
linked to the VAT application in the different Member States. 

According  to  the  outcome  of  the  abovementioned  public  consultation,  it  appears  that  the 
complexity  of  the  current  VAT  system  creates  high  administrative  burdens,  in  particular 
related to the arrangements for intra-EU trade.  

On  one  side,  a  considerable  group  of  respondents  supported  the  implementation  of  the 
destination  principle  by  One-Stop-Shop  arrangements  (OSS).  On  the  other  side,  a  similar 
number  of  participants  to  the  consultation  supported  the  use  of  the  reverse  charge 
mechanism as a possible solution to carousel fraud or cash-flow problems, avoiding the gap 
between the payment and the deduction of the tax. 

The  majority  of  respondents  pointed  out  that  it  would  be  desirable  to  ensure  the  same 
treatment to domestic and cross border transactions, establishing the same obligations in the 
light of legal certainty and simplification. In particular, SMEs are the most affected by the 
complexity of the administrative burdens, in particular as regards the reporting obligations 
connected to such measure. 

The stakeholders involved in the public consultation, in particular governments and public 
authorities,  provided  some  remarks  in  relation  to  the  procedure  requested  for  the 
implementation of the reverse charge mechanism at national level for certain sectors. The 
mechanism  can  be  granted  after  a  derogation  request  under  article  395  of  the  VAT 
directive.  According  to  these  stakeholders,  the  criteria  in  Article  395  are  too  broad  and 
insufficiently  clear  to  assess  whether  a  derogation  on  reverse  charge  would  be  granted  or 
not.  

113   See consultations page: 

http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/future_vat/summar
y_vat_greenpaper.pdf 

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However, a number of respondents, including businesses, consider that the derogation is a 
good instrument to address national needs due to its efficiency and flexibility.  

In  conclusion,  the  reverse  charge  mechanism  (generalised  or  targeted)  was  considered  by 
several respondents as an effective measure to eliminate missing trader fraud. However, in 
order  to  tackle  the  VAT  gap  and  to  reduce  the  compliance  costs  and  the  administrative 
burdens, other measures with the same potential effectiveness exist and should, according 
to these respondents, be envisaged. For example, a number of stakeholders were in favour 
of an optional OSS as a simplification measure rather than the reverse charge.  

In  June  2015,  four  Member  States  submitted  a  request  under  article  395  of  the  VAT 
Directive  in  order  to  be  authorised  by  the  Commission  to  apply  the  reverse  charge 
mechanism  to  any  taxable  supply  where  the  overall  amount  (exclusive  of  VAT)  exceeds 
EUR 10,000. The request was however refused on legal grounds. 

The strengths and weaknesses of the reverse charge mechanism, as implemented within the 
current system, as a domestic measure to combat VAT fraud have been examined in depth 
by  the  Group  of  the  Future  of  VAT  (GFV-  representing  Member  States114)  and  the  VAT 
Expert Group (VEG -representing businesses, academics and accounting professions115). 

From  the  perspective  of  Member  States116,  the  sectorial  reverse  charge  is  an  effective 
measure  to  combat  tax  fraud,  in  particular  MTIC  frauds.  However,  regarding  the  options 
proposed  for  the  definitive  regime  after  the  Communication  on  the  future  of  VAT,  they 
would  have  preferred  a  further  analysis  in  order  to  decide  whether  the  reverse  VAT 
mechanism would be a suitable choice to improve the current system. 

From  the  perspective  of  tax  practitioners117,  the  further  implementation  of  the  sectorial 
reverse  charge  would  not  remove  the  VAT  fraud,  it  would  just  shift  the  fraud  from  one 
Member State to another with a 'domino' effect, or from one sector to another. 

Further, tax administrations and business representatives have discussed the issues related 
to the possibility to implement a generalised reverse charge mechanism during a meeting of 
the  Group  on  the  Future  of  VAT  and  of  the  VAT  Expert  Group  in  February  2016  which 
have  provided  the  Commission  with  a  comprehensive  view  of  different  opinions  on  the 
possible implementation and application of such a system.  

As  regards  Austria  and  the  Czech  Republic  (the  two  Member  States  that  requested 
authorisation  to  apply  a  generalised  reverse  charge  system  via  a  change  to  the  VAT 
Directive) replies were respectively received on 24 and 25 May 2016 to a questionnaire that 
the Commission sent on 4 May 2016. 

114   The Group on the Future of VAT provides a forum for discussion with VAT Experts from the Member 
States on the Commission pre-legislative initiatives and exchange of opinions on the preparation of future 
VAT legislation. 

115   The VAT Expert Group (VEG) is composed of individuals with the requisite expertise in the area of VAT 
tax  practitioners. 

in  particular  businesses,  consumers  and 

and  organisations 
https://ec.europa.eu/taxation_customs/business/vat/vat-expert-group_en 

representing 

116   GFV working paper n°37 of 2013 
117   VEG working paper n°20,21,25,31,39 

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The GFV during the 14th meeting on the 5th February 2016118, released its opinion on the 
project  proposed  by  the  above-mentioned  Member  States.  Only  four  delegations  were 
supportive of the generalised reverse charge, while the majority were in opposition to that 
idea for several reasons. The main argument was the risk for the national budget because 
the collection would only take place at the retail stage (i.e. at the end of the supply chain) 
with all the problems connected to the control of numerous businesses at this stage. On the 
concrete  extension  of  the  reverse  charge  mechanism  at  national  level,  the  need  for  a 
threshold  by  transaction  was  considered  problematic  and  easily  exploited  in  abusive 
situations. On the proposal to have a pilot temporary project only in some Member States, 
some  delegates  pointed  out  that  such  measure  could  lead  to  distortion  of  completion  or  a 
negative impact on non-established businesses. 

The  VEG,  during  the  13th  meeting  on  2  May  2016,  expressed  its  position  on  the  request 
submitted  by  the  above  mentioned  Member  States,  taking  into  account  the  academic, 
professional and business point of view; highlighting two main concerns: (i) collecting the 
VAT at the end of the chain just shifts fraud elsewhere, notably to the final last stage of the 
supply chain, and creates new fraud opportunities;(ii) the risk of fraud moving to Member 
States not applying the reverse charge. 

Other institutions, such as the Committee of the Regions and the European Economic and 
Social  Committee  (EESC)  have  given  their  opinion  on  the  Action  Plan  with  particular 
reference to the reverse charge mechanism. The first institution recognised that measures, 
like  the  reverse  charge,  could  be  effective  but  also  recommended  exploring  further  the 
possibility of a so-called split payment, under which the VAT is directly paid to a separate 
bank  account  of  the  competent  authority.119  The  second  institution  was  doubtful  on  the 
capacity  of  the  general  reverse  charge  to  achieve  the  objective  of  implementing  the 
destination  principle  as  a  clear  and  consistent  VAT  system.  The  measure  under  analysis, 
although effective for certain sectors, does not seem suitable to prevent fraud at the retail 
sale stage120. 

In  addition,  stakeholders  explained  their  position  in  the  Refit  Platform,  regarding  the 
application  of  the  reverse  charge  mechanism  to  all  domestic  transactions.  These 
contributions  are  very  important  because  they  represent  the  public  opinion  of  both  the 
businesses (stakeholder group) and the Member States (Government group) with the aim to 
settle a better legislation. 

The message from the stakeholders group, reported by the Danish business forum, is that it 
would be worth to "replace that measure with a simpler and more basic VAT regime in the 
EU".  The  rationale  of  that  statement  is  the  need  to  look  for  long  term  and  sustainable 
solutions instead of temporary measures adopted under a situation of urgency. 

In  fact,  the  reverse  charge  obliges  businesses  to  "operate  different  sales  and  accounting 
systems  for  different  business  transactions"121;  notably  increasing  the  administrative 

118   GFV working paper n°53 of 2016 
119   Committee of the Regions, 119th plenary session, 10, 11 and 12 October 2016.  
120   Opinion of the European Economic and Social Committee ECO/406,  Action plan on VAT, Brussels, 13 

July 2016. 

121 Refit Platform Opinion on the submission of the Danish Business Forum on the reverse charge mechanism 

within the VAT Directive, adopted on 27/28 of June 2016 

http://ec.europa.eu/smart-regulation/refit/refit-platform/docs/recommendations/opinion_taxation_1a.pdf 

65/94 

 
                                                 
burdens. In their opinion, the same results could be achieved enhancing the administrative 
cooperation between Member States and businesses. 

The German Chambers of Commerce and industry added that the reverse charge conditions 
should be standardised, ensuring a uniform application at EU level for B2B transactions. 

In  the  same  context,  the  REFIT  Government  group  stressed  that  such  a  measure  "may 
continue  to  be  necessary  to  combat  fraud  or  that  other  measures  would  be  required  to 
achieve the same objective"122. The reference to other measures to tackle VAT fraud, such 
as the improvement of the administrative cooperation or introducing targeted measures (e.g. 
sound  cross-check  system),  is  a  possibility  that  has  to  be  taken  into  account  besides  the 
sectorial reverse charge. 

Reference should also be made to the opinions adopted by business federations as well as to 
input received from academics via scientific publications. 

Regarding  to  the  business  federations,  the  Confederation  Fiscal  Europenne  (CFE)  has 
delivered  several  opinion  statements  on  the  strengths  and  weaknesses  of  a  domestic 
extended  reverse  charge.  The  weakness  of  the  proposed  model  of  VAT  liability  and 
collection  is  the  complexity  that  would  arise  establishing  a  different  treatment  between 
domestic and cross border transactions123.  
Regarding the sectorial reverse charge, it has been pointed out that businesses would face 
several difficulties, such as the complexity and the fragmentation of the procedures which, 
in turn, increase the compliance costs124. Costs will in particular increase for suppliers that 
cannot  offset  their  input  VAT  against  their  VAT  on  their  output  to  which  the  reverse 
mechanism is applied125. 
However, from a tax collection point of view the application of reverse charge mechanism 
to certain sector is the most effective measure against the MTIC fraud. For that reason, the 
CFE  "considers  that  other  helpful  steps  might  be  to  apply  the  reverse  charge  mechanism 
that  is  applied  by  at  least  one  member  state  to  some  products  on  an  EU  wide  basis  to 
transactions above a specified value in specified products"126 . 

On reverse charge, the Chartered Institute of taxation (CIOT), taking into account the study 
launched by the Commission and provided by Pricewaterhouse Coopers in 2007, referred to 
the possible cash flow effects and the increased responsibility on the businesses 127. 

122  Refit  Scoreboard,  Opinion  XVIII.1a  "VAT  Reverse  liability  charging"  and  Opinion  XV.III.7a 
"Documentation for Intra-Community Trade",  Towards a definitive VAT system for cross border trade, 
Summary, p. 335-336  

123   CFE Opinion Statement on the VAT Action Plan, 2016 
124   Opinion  Statement  of  the  CFE  on  persons  liable  for  payment  of  VAT  to  the  tax  authorities  regarding 
operations taking place in one Member State Submitted to the European Institutions in February 2011 
125   Opinion  Statement  of  the  CFE  on  persons  liable  for  payment  of  VAT  to  the  tax  authorities  regarding 
operations taking place in one Member State Submitted to the European Institutions in February 2011 
126   Opinion Statement of the CFE on the consequences of involvement in missing trader fraud Submitted to 

the European Institutions in February 2011 

127   Possible  introduction  of  an  optional  reverse  charge  mechanism  for  VAT.  Response  by  The  Chartered 

Institute of Taxation to the European Commission, 18 October 2007 

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In the same context, the Austrian federal economic chamber released a paper in November 
2015 where they explained in detail why a general reverse charge system would lead to a 
further complication of the VAT system causing legal uncertainty and large administrative 
costs. According to their position paper, the adoption of a reverse charge mechanism based 
on a threshold system will create the existence of four different VAT regimes at the same 
time:  (i)  domestic  transactions  under  the  old  VAT  –  regime;  (ii)  domestic  transactions 
under  the  new  VAT  regime;  (iii)  Intra  EU  acquisition  and  Intra  EU  supplies;  (iv)  export 
deliveries to third countries. 

In that scenario, adding a new system is not a desirable measure to enhance simplification, 
in  particular  for  SMEs  that  are  the  most  affected  category  by  administrative  compliance 
costs. Another interesting remark is related to the antifraud measures that could be effective 
in  the  current  system,  instead  of  the  reverse  charge;  like  an  electronic  cash  accounting 
system.  The  general  reverse  charge  would  shift  the  fraud  to  final  consumers,  at  the  retail 
stage, through the use of an invalid VAT number.  

The group of professionals specialised in tax matters (represented by TAJ, a Paris law firm) 
expressed  their  view  both  regarding  sectorial  reverse  charge  and  generalised  reverse 
charge128. 
In their opinion on the generalised reverse charge, they stated that the measure at domestic 
level  would  not  be  effective  because  it  would  just  shift  the  fraud  to  the  retail  stage  as  it 
would  transform  the  VAT  into  a  sale  tax.  The  consequence  would  be  that  the  control 
activity of the tax administration on the retailers would become more difficult without the 
collaboration of compliant taxable persons collecting the tax via the fractionated system. 

Another  French  group  of  professionals  (APTE)  delivered  his  position  to  the  commission, 
stressing the importance of keeping the fractioned payment of the tax in order to ensure the 
respect of the neutrality principle. 

Regarding  to  the  scientific  publications  on  VAT,  in  particular  in  the  VAT  Monitor,  there 
was  a  lively  discussion  between  academics  on  the  effectiveness  and  the  need  of  a 
generalised reverse charge129. 

The  debate  mainly  focused  on  the  elimination  of  the  fractioned  payment  introducing  the 
general  reverse  charge.  Two  authors  explained  that  the  general  reverse  charge  could  be 
implemented  under  the  condition  that  the  requesting  country  has  a  well-functioning  tax 
administration.  The  general  reverse  charge,  according  to  their  view,  is  the  most  effective 
remedy  to  combat  VAT  fraud130.  These  authors  defined  the  fractioned  collection  as  an 

128   M. Guichard and M. Manuelli "La généralisation de l’autoliquidation de la TVA aux transactions internes 
entre assujettis est-elle une mesure efficace pour lutter contre la fraude ?" in TAJ-STRATEGIE.FR 
129   Robert  F.  van  Brederode  and  Sebastian  Pfeiffer,  "VAT’  s  Superiority:  Is  the  Emperor  Dressed  like 

Adam?", IBFD, IVM, 04/2015, p.226 

Gorka Echevarría Zubeldia "Turning VAT Inside Out", IBFD, IVM, 04/2015, p.204 

Robert  F.  van  Brederode  and  Sebastian  Pfeiffer,  "Debate  on  general  reverse  charge",  IBFD,  IVM, 
05/2015, p.288 

130   Robert  F.  van  Brederode  and  Sebastian  Pfeiffer,  "Combatting  Carousel  Fraud:  The  general  reverse 

charge", IBFD, IVM, 03/2015  

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"illusion" as far as the recipient of the transaction has the right of full deduction of the input 
VAT131.  On  the  other  side,  the  other  author,  argued  that  abandoning  the  fractioned 
collection  of  VAT  would  not  comply  with  the  general  principle  governing  VAT  (i.e. 
neutrality and proportionality). Regarding to the practical aspects it would create a "much 
wider base of taxable persons to audit" and transform the actual EU VAT system in a retail 
sales tax system132. In such scenario, the cash flow would disappear for the taxable persons 
but,  in  the  same  way,  the  tax  authorities  would  not  collect  the  tax  unless  the  chain 
transaction ends with the final consumption. 

131   Robert  F.  van  Brederode  and  Sebastian  Pfeiffer,  "Debate  on  general  reverse  charge",  IBFD,  IVM, 

05/2015, p.288 

132   Gorka Echevarría Zubeldia "Turning VAT Inside Out", IBFD, IVM, 04/2015, p.204 

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Annex 3:  Who is affected by the initiative and how? 

In  Member  States  applying  the  generalised  reverse  charge  mechanism,  (normal)  VAT 
taxable  persons  (businesses)  and  tax  administrations  are  affected  by  these  new  rules. 
Businesses on the way the VAT is accounted for on supplies of goods and services and tax 
administrations that have to audit the application of these new rules by the taxable persons 
concerned. The general public should not be affected by these changes. Goods and services 
will  be  purchased  domestically  with  payment  of  VAT  in  exactly  the  same  way  as  is 
currently the case. Consumer prices are therefore not expected to be substantially impacted 
by the initiative.  

In  this  context,  it  is  important  to  underline  that  SMEs,  which  benefit  from  the  VAT 
exemption  scheme  for  small  enterprises  (see  Chapter  I  of  Title  XII  of  the  VAT  Directive 
which  encompasses  Articles  284  to  294  of  the  VAT  Directive)  are  not  affected  by  the 
measure at all. As today, these SMEs will continue not charging VAT to their customers on 
their supplies and will, as a consequence, also not be able to deduct their input VAT. In this 
respect, they are not different from private individuals who would sell personal goods. To 
note  that  the  current  exemption  thresholds  varies  amongst  Member  States,  which  is,  inter 
alia, linked to their date of accession (see Articles 285 to 287 of the VAT Directive) and to 
derogations granted to individual Member States (on the basis of Article 395 of the VAT 
Directive). Therefore, the Commission is planning to come forward with a proposal in the 
form of a  comprehensive VAT simplification package for small  enterprises by the end of 
2017. As the reverse charge mechanism is only applicable in those situations where VAT is 
actually due, these SMEs are, as mentioned, entirely unaffected and will remain unaffected 
even in case such a new proposal would be adopted. 

As regard the 'normal' taxable persons; i.e. taxable persons who are obliged to charge VAT 
on  their  supplies  and  who  are  filing  regular  VAT  returns,  a  distinction  should  be  made 
between  those  who  are  established  within  a  Member  State,  which  applies  the  generalised 
reverse charge mechanism, and those who are not established in such a Member State but 
who conduct operations in that Member State for which, under normal circumstances, they 
would be liable for the payment of the VAT. For those, who are not established, a further 
distinction is to be made according the situation under which the Member State, applying 
the generalised reverse charge mechanism, has made use (or not) of Article 194 of the VAT 
Directive that stipulates that Member States may provide that, in case a taxable supply of 
goods or services is carried out by a taxable person who is not established in the Member 
State where the VAT is due, the person liable for payment is the person to whom the goods 
or services are supplied. In cases where use has been made of this possibility, the situation 
remains unchanged in practice for those non-established taxable persons although the legal 
basis  regarding  the  person  liable  for  payment  of  VAT  might  change.  In  fact,  in  case  the 
threshold for the generalised reverse charge mechanism would be exceeded, the new rules 
would  be  applicable  and  the  reverse  charge  mechanism  would  be  applied.  In  case  the 
threshold would not be exceeded, the reverse charge mechanism would still be applied but 
then  on  the  basis  of  the  above  mentioned  Article  194  of  the  VAT  Directive.  Under  the 
situation that a Member State is not making use of this Article 194, the situation remains 
also unchanged as the supplier, in the same way as today, would also, as a rule, have to be 
identified for VAT purposes in the Member State where the supplies take place. 

Other  Member  States  than  those,  having  introduced  the  generalised  reverse  charge 
mechanism,  might  be  impacted  as  fraud  might  shift  to  their  territory  because  of  the 
possibility for taxable persons to obtain goods 'VAT free' (above the threshold) and to bring 

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them across the border in order to be sold on the black market. These Member States might 
therefore  adapt  or  reinforce  their  tax  control  measures  or  be  forced  to  introduce  a 
generalised reverse charge mechanism as well. This  might imply increased administrative 
costs  to  these  tax  administrations  as  well  as  new  compliance  cost  to  their  businesses.  In 
order  to  intercept  these  untaxed  goods  fleeing  into  the  country,  Member  States  might  be 
inclined to increase physical controls on e.g. foreign trucks which could gradually evolve 
into the equivalent of border controls. 

Finally,  it  is  to  note  that  VAT  fraud  does  not  impact  the  overall  level  of  the  EU  budget. 
Although VAT fraud reduces the Member States' VAT contribution to the EU (one of the 
EU own resources is based on VAT), since the EU budget must be in balance, expenditure 
not covered by amounts yielded from other revenues must be offset by contributions based 
on the Gross National Income (GNI) of each EU Member State. Therefore, the introduction 
of  the  generalised  reverse  charge  mechanism  is  not  expected  to  influence  the  EU  budget. 
However,  while  VAT-fraud  (and  the  measures  adopted  by  the  Member  States  to  fight 
against it) does not impact the overall level of the EU budget (because remedied by another 
resource in view of the principle of budgetary balance), a loss to one own resource is still a 
loss, which is particularly unacceptable in terms of fairness of EU taxation systems.    

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Annex 4:  Methodology 

The initiative is the result of a political agreement made on the ECOFIN of 17 June 2016 to 
present  a  proposal  on  a  generalised  reverse  charge  mechanism  for  certain  Member  States 
before the end of 2016. 

Given this timing, no specific tool or methodology was developed for the assessment of the 
options.  Due  to  timing  constraints,  no  independent  study  could  either  be  launched. 
However,  a  number  of  studies  in  the  field  of  fraud  and  reverse  charge  already  existed  of 
which the results were used in the impact assessment. In addition, the replies received by 
the  Commission  to  the questionnaire  sent  by  it to  the  two  requesting  Member  States  also 
served  the  analysis  (see  Annex  6).  These  results  were  complemented  by  a  qualitative 
analysis on which this impact assessment mainly relies.   

Overview of studies 

  CASE, 2016, Study and Reports on the VAT Gap in the EU-28 Member States  

https://ec.europa.eu/taxation_customs/sites/taxation/files/2016-09_vat-gap-report_final.pdf 

  EY, 2015, Implementing the ‘destination principle’ to intra-EU B2B supplies of goods 

https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/ey_study_destination_p
rinciple.pdf 

  CASE, 2015, Study to quantify and analyse the VAT Gap in the EU Member States 

http://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/common/publ
ications/studies/vat_gap2013.pdf 

  EY,  2014,  Assessment  of  the  application  and  impact  of  the  optional  ‘Reverse  Charge 

Mechanism’ within the EU VAT system 

https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/kp_07_14_060_en.pdf 

 

IFS et al., 2011, A retrospective evaluation of elements of the EU VAT system 

https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/report_evaluation_vat.p
df 

  Pricewaterhousecoopers, 2007 (A), Study in respect of introducing an optional reverse 

charge mechanism in the EU VAT Directive  

https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/4209_study_en.pdf 

  Pricewaterhousecoopers,  2007  (B),  Study  on  new  risks  of  fraud  generated  by  the 
introduction  of  a  generalised  reverse  charge  system  on  an  optional  basis  and  the 
taxation of intra-Community supplies 

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Annex 5:  Short term measures to enhance tax compliance and strengthen the fight 

against VAT fraud 

In  its  VAT  Action  Plan  -  adopted  on  7  April  20161 -  the  Commission  noted  that  fraud 
was  not  affecting all  Member  States  to  the  same  extent  and  that  shorter  term  measures 
might be needed in order to achieve better administrative cooperation, improve  voluntary 
compliance and collectively improve the performance of European tax administrations. In 
this context, the Commission stated that it stands ready, via the organisation of  technical 
assistance,  to  help  the  Member  States  concerned  to  improve  their  tax  collection  and 
inspection capacity. 

The  present  paper  summarises  how  such  a  technical  assistance  could  be  organised  and 
what it should aim at. 

The following actions could be considered: 

1.  Carrying  out  a  TADAT  assessment.  An  assessment  of  a  tax  administration’s 
tax 
strengths  and  weaknesses  helps  in  identifying  measures  for  improving 
compliance.  A  Tax  Administration  Diagnostic  Assessment  Tool  (TADAT)  is 
available  for  tax  administrations  to  assess  the  key  performance  areas  (registration, 
risk  analysis,  voluntary  compliance,  timely  filing  and  payment,  audit,  appeals, 
efficient  revenue  management,  accountability  and  transparency).  The  Commission 
and Member States have certified assessors for carrying out a TADAT assessment. 

2.  Making  better  use  of  IT  tools.  More  and  more  tax  administrations  are  using 
electronic means to collect data from taxpayers and other institutions. This allows  for 
cross-checking  and  better  risk  analysis.  In  the  area  of  the  cash  economy,  new 
techniques  (e.g.  electronic  cash  registers)  are  used  to  limit  the  possibilities  of 
committing fraud. Sharing experiences and practices with these measures could be  an 
advantage when a Member State is considering introducing them. The Commission is 
willing to organise targeted workshops in this area. 

3.  Providing  targeted  technical  assistance  on  request.  For  those  Member  States 
willing  to  improve  their  national  situation,  the  Commission  offers  hands-on 
assistance, either directly or via experts from other Member States. For this purpose a 
Fiscalis budget is available. 

4.  In-depth  analysis  of  VAT  fraud  schemes.  Not  all  non-compliance  is  fraud.  The 
nature, number and size of VAT fraud schemes vary between Member States. VAT 
fraud schemes can flourish depending on the weaknesses in VAT legislation and  tax 
administration  practices  (e.g.  lacking  auditing,  limited  exchange  of  information, 
corruption, restricted cooperation).. 

1 

Communication  from  the  Commission  to  the  European  Parliament,  the  Council  and  the  European 
Economic and Social Committee on an action plan on VAT (COM(2016) 148 final 7.4.2016) 

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5.  In-depth  analysis  of  the  VAT  Gap.  The  VAT  Gap  study  only  provides  for  a  general 
estimation  of  the  VAT  Gap.  Member  States  are  encouraged  to  further  analyse  the 
components  of  the  VAT  Gap  and  quantify  the  VAT  fraud  part  therein  by  identifying 
economic  sectors  and/or  activities  that  are  responsible  for  causing  VAT  losses.  The 
Commission published a report with an overview of methodologies currently used by several 
Member  States  to  measure  the  VAT  Gap.  The  Commission  will  also  try  to  develop  a 
methodology  for  estimating  VAT  fraud.  A  workshop  can  be  organised  to  discuss 
methodologies and experiences. 

6.  Improving  accessibility  of  information  at  national  and  international  level.  A    lot  of 
information  is  available  among  law  enforcement  bodies,  police,  customs  and  market 
regulators, but access is fragmentary. This situation is even worse when  it comes to cross-
border  transactions.  National  limitations  in  making  the  information  available  to  other 
Member States for their domestic risk analysis are limiting the efficiency of the risk analysis 
and tax collection. 

7.  Piloting  an  EU-wide  risk  analysis  by  a  dedicated  team  under  Eurofisc.  A  team 
composed of auditors/analysts from Member States could analyse  information available  at 
EU  level  within  the  Eurofisc  network  and  on  VIES2  .  This  should  be  completed by a) 
closer  cooperation  with  law  enforcement  agencies  (e.g.  police,  Europol,  Eurojust)  and 
customs,  b)  joint  audit  teams  conducting  audits  in  Member States  based  on  the  results  of 
the  joint  risk analysis. The Commission could play a coordinating role. 

8.  Sharing  good  practices  for  improving  tax  compliance  and  combating  VAT  fraud. 
Some  Member  States  managed  to  significantly  reduce  their  percentage  of  the  VAT  Gap. 
Sharing  their  practices  could  help  tackling  fraud  and  improving  tax  compliance.  The 
Commission is willing to organise targeted workshops in this area. 

9.  Reviewing  the  penalty  system.  Penalties  are  often  considered  as  an  effective  means  to 
enforce  compliance  with  tax  obligations.  However,  a  penalty  system  can  also  become 
ineffective  and  counterproductive.  The  Commission  is  launching  a  study  to  identify  the 
impact of a penalty system on compliance. 

10.  Influencing  taxpayer  behaviour.  The  willingness  of  taxpayers  to  pay  their  taxes  often 
relates  to  a  cultural  background.  Knowing  and  trying  to  change  this  background  requires 
that a government and tax administration is trustworthy and transparent. Experiences in this 
field should be shared. 

2   Value Added Tax information exchange system, containing the listings of all cross-border supplies. 

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Annex 6 

1. Background and general policy 

Replies of Austria 

Have any specific studies, analyses or simulation exercises been carried out to assess the impact of reverse charge 
on fraud and if so, what were the results? 

The  most  in  depth  study  -  PPS  Schönberger  Study  -  highlighted  the  effectiveness  of  such  a 

system. Missing trader fraud would be eliminated entirely; the only disadvantage would be micro 

fraud.  But  this  new  risk  was  assessed  as  negligible  compared  to  the  benefits  from  such  a  new 

system. 

The study further highlighted the very positive impacts of introduction of reverse charge in case of 

bankruptcy within the business chain. 

Currently the supplier of an insolvent customer is entitled to adjust his VAT debt with regard to the 

tax administration if he cannot recover the VAT from this customer. Reverse charge will eliminate 

this  kind  of  budgetary  losses.  Revenue  shortfalls  resulting  from  bankruptcy  will  be  enormously 

reduced. 

Has the effect on the budget of possible cash-flow losses during the year of introduction been assessed, and if so, 

what were the results? 

In Austria VAT deduction is generally possible in the same period in which the VAT is chargeable. 

Concerning cash flow there is no difference between the current system and reverse charge. With 

regard to the state budget negative effects are therefore not expected. 

How many taxable persons, as a percentage of all taxable persons, account for e.g. 80% of the VA Τ paid? What 

would this percentage be after the introduction of the generalized Reverse charge? 

VAT Revenue (2013)  VAT taxpayers 

80 % of revenue 

21.127.658.544,95 

698.978 

16.902.126.835,96 

Number  of 

taxpayers 

(80 % of revenue) 

2.265  

0,3% 

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It  is  not  possible  to  analyse  details  about  the  impact  of  the  reverse  charge  system  to  this 

percentage. 

Nevertheless it can be stated that the Austrian retail sector is to a large extent marked by a few big 

companies.  Therefore  we  do  not  expect  a  significant  increase  of  the  percentage  of  the  taxpayers 

who  account  for  a  large  part  of  the  revenue.  We  expect  only  a  shift  within  this  group  of  the  most 

important VAT payers. 

2. Main features of the system 

What are, apart from the EURO 10 000 threshold, the mam features of the system? 

B2B transactions are within the scope of reverse charge if the following conditions are met: 

• 

• 

• 

recipient is a taxable person or a public body using its VAT ID 

recipient is liable for VAT 

reporting obligations via a recapitulative statement (see below part 3) 

•  payments exceeding 10.000 Euro have to be made via bank transfer and so the identity of 

the purchaser can be tracked. 

Would the reverse charge be applicable to all types of taxable persons (partial taxable persons, mixed taxable persons, 

exempt taxable persons, SMEs who benefit from an exemption, a graduated tax relief or a fìat-rate scheme, farmers 

under the common fìat rate scheme, occasional taxable persons,..). 

AT  approach: In general reverse charge is applied to taxable persons or public bodies using their 

VAT  ID  when  receiving  supplies  exceeding  10.000  Euro.  Fully  VAT  exempt  businesses  as 

recipients are generally not covered by the reverse charge mechanism, except they use their VAT 

ID. Flat rate farmers as suppliers are not covered by reverse charge. 

If  a  business  carries  out  tax  exempt  as  well  as  taxed  transactions  it  is  obliged  to  use  its  VAT  ID 

number and reverse charge has to be applied. 

Would it be envisaged to extend the system to non-taxable persons such as public authorities? 

Public authorities without taxable activities using their VAT ID are subject to reverse charge. 

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Does the system have any impact on other elements (place of supply, right and adjustment of deduction, special 

regimes...) 

The main features of the VAT system remain unchanged. In general reverse charge will not affect 

any  of  the  mentioned  elements.  In  line  with  the  ECJ  case  law  input  VAT  deduction  would  be 

possible without invoice (in case reverse charge is applied). 

3. Obligations 

Which specific obligations on taxable persons would be needed to control such a proposed scheme? Would these 

obligations be applicable to all (types of) taxable persons? (see also further under 'control and fraud') 

The control system contains: 

• 

Identification of the status of the recipient (VAT ID) similar to the check of VAT ID for intra 

community transactions. 

•  A recapitulative statement of supplier and purchaser on a monthly basis (similar to the EU 

recapitulative statements) is foreseen. In these statements taxable persons have to indicate 

both, the monthly sum of all supplies and the monthly sum of all purchases under reverse 

charge  with  respect  to  all  business  partners.  This  system  enables  an  automatic 

reconciliation of the data. This automatic check is more comprehensive than the checks in 

the  current  system.  In  the  current  system  tax  authorities  can  only  check  the  transfer  of 

goods by tax audits of all pre-suppliers in the entrepreneurial chain, i.e. only a minor part of 

the overall transactions is checked. 

• 

In  the  proposed  system  discrepancies  can  be  detected  by  means  of  an  automatic 

reconciliation  of  the  recapitulative  statement  with  the  preliminary  VAT  declaration. 

Discrepancies will be examined by the tax office. 

•  Payments exceeding 10.000 Euro have to be made via bank transfer and so the identity of 

the purchaser can be tracked. 

How would non established taxable persons be treated when supplying or receiving goods or services? 

Non  established  taxable  persons  have  to  register  via  an  electronic  portal  when  supplying  or 

receiving goods or services. They will have the same rights and obligations as established taxable 

persons. 

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Has the cost and the administrative burden for taxable persons in relation to these new obligations been estimated? 

What would be the specific cost on non-established taxable persons? 

Given  the  high  threshold  small  companies  are  generally  not  affected.  Nearly  all  medium  and 

large sized companies apply electronic bookkeeping systems where the basic data of customer 

and supplier are already recorded. Therefore the change of the system is more or less limited to 

a simple adaptation of the IT bookkeeping system. 

Invoicing and check of VAT number: 

The reverse charge system does not significantly raise the administrative burden for taxpayers. 

Under the current VAT legislation all businesses which are carrying out B2B- transactions with a 

consideration  exceeding  10.000  Euro  are  obliged  to  indicate  the  VAT  number  of  the  purchaser 

on  the  invoice.  An  invoice  without  indication  of  the  client's  VAT  ID  is  insufficient  and  could  be 

penalized. Also in the current situation businesses have to indicate the VAT ID of their purchaser 

in the electronic bookkeeping systems and also have to check the validity of the VAT ID. 

Recapitulative statement: 

Electronic bookkeeping systems already contain all necessary information which is required for a 

recapitulative  statement.  Thus,  this  statement  can  be  generated  automatically.  Also  the  current 

generation  of recapitulative statements  and VAT statements is generally  carried out completely 

automatically  according  to  the  bookkeeping  data.  Implementation  costs  are  inherent  (e.g. 

deployment of new tools, additional staff training, etc.). 

Non-established taxable persons 

The same applies for non-established taxable persons. If non-established businesses are either 

suppliers  or  recipients of transactions covered by  the reverse  charge principle (e.g. in cases of 

chain transactions) the administrative costs will be negligible (or reduced). 

Currently  non-established  taxable  persons  in  Austria  have  to  register  with  the  tax  office  "Graz 

Stadt". 

Under  the  reverse  charge  system  they  can  use  the  Austrian  "FinanzOnline"  system. 

FinanzOnline  is  a  protected  electronic  portal  by  which  every  Austrian  taxpayer  can  directly 

communicate  with  the  tax  administration.  This  system  will  be  adapted  for  the  reverse  charge. 

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Although the official language in Austria is German, English operating elements could be added 

to ease the application. 

What would be the different steps for a taxable person to complete before deciding that the reverse charge mechanism 
has to be applied? What, in particular, would be the possibilities for a supplier to check whether his customer is a taxable 
person 
place?  
What would be the liability of a supplier who, in good faith, applied the reverse charge, only to discover subsequently that 
his customer was not entitled to receive the goods under reverse charge? 

supplies 

reverse 

charge 

whom 

under 

take 

can 

to 

As already mentioned there is no substantial change in the procedure. The check of the VAT ID of 

the recipient has to be done even under the current system in order to fulfil the invoicing obligations. 

Payments  exceeding  10.000  Euro  have  to  be  made  via  bank  transfer  and  so  the  identity  of  the 

purchaser can be tracked. 

What would happen if at the time of supply, the conditions for applying the reverse charge were fulfilled but these 

conditions are changed later? E.g. (in case a threshold is applied) a credit note is issued whereby the threshold is no 

longer exceeded. 

The criterion of the threshold has to be met when the transaction takes place. In case the amount of 

the invoice falls later below the threshold the transaction remains under the reverse charge regime. 

4. Control and fraud 

What steps should be taken to stop new forms of fraud in relation to the threshold? Fraudsters could obtain goods 'VAT 
free' (under RC), sell them on with VAT (possibly via artificial splitting of supplies to remain below the threshold) and then 
disappear before paying the tax over to the treasury; potentially developing this into national carousel fraud schemes. 

As to the reporting obligations please see our responses under point 3. 

The  system  of  recapitulative  statements  with  cross  checks  ensures  that  fraudsters  splitting  off 

supplies will be detected easily, because all acquisitions with reverse charge will be reported to the 

tax administration. If purchases are not matched by an adequate amount of sales, additional checks 

will be carried out. 

Would joint and several liability of the supplier be introduced? 

Joint and several liability currently is implemented in the Austrian VAT Act 1994. It is foreseen that 

the supplier can escape the liability if he provides the data necessary to identify the real recipient. 

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Could you explain in more detail the electronic control tools to which you refer in your letter and specify how they would 
be more useful within the generalised reverse charge mechanism than within the current system? 

See point 3 

Have you, in addition, considered other specific control measures to be deployed within the generalised reverse charge 
system and, if so, could you provide a detailed explanation on their functioning? 

Currently cross checks of invoices are carried out only within the frame of chain audits. 

After  the  implementation  of  the  reporting  system  far  more  information  will  be  available.  This 

reporting  system  enables  an  automatic  reconciliation  of  the  data.  This  automatic  check  is  more 

comprehensive than the checks in the current system. In the current system tax authorities can only 

check the transfer of goods by tax audits of all pre-suppliers in the entrepreneurial chain, i.e. only a 

minor part of the overall transactions is checked. 

In  the  proposed  system  discrepancies  can  be  detected  through  reconciliation  of  the  recapitulative 

statement  with  the  preliminary  VAT  declaration.  If  purchases  are  not  matched  by  an  adequate 

amount of sales, further checks will be carried out. 

Which control policy will be established to audit the more numerous taxable persons at the end of the chain who 

account for an increased amount of VAT in comparison to the current situation? 

To the assumption that there are more numerous taxable persons, see 1. 

The 

reporting  system  should  provide  vital 

information 

for  an  effective 

risk  analysis.

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Is it the intention, to that end, to re-a i locate control resources to end of the chain? How far could this be stretched without 
creating the risk that an increased amount of no n taxed goods would reach the retail stage (or stage where VA Τ has to 
be applied)? 

Yes,  there  is  an  intention  to  significantly  increase  control  resources  for  the  end  of  the  chain. 

Within  the  business  chain,  the  reporting  system  provides  an  important  tool  to  significantly 

increase the efficiency of the control. As mentioned above all purchases above the threshold will 

be reported to the tax office and if purchases are not matched by an adequate amount of sales, 

additional checks will be carried out. 

The significant reduction of the budgetary risk connected to bankruptcy within the business chain 

should  also  free  up  control  resources  that  can  be  used  to  monitor  the  end  of  the  chain.  The 

Austrian  control  measures  are  flexible  and  resources  are  always  allocated  to  occurring  fraud 

fields. Therefore risk management and permanent alignment of audit and control plans are and 

will be in place. 

In the same way, are measures foreseen to monitor and subsequently prevent the possible shift of fraud to other 

Member States? 

The reporting system and risk analysis will prevent a shift of fraud to other Member States. 

Which steps should be taken to control non-taxable persons claiming to be taxable persons (via "hijacking" of VAT 

identification numbers) to avoid that VAT would be charged? 

Payments exceeding 10.000 Euro have to be made via bank transfer and so the identity of the 

purchaser can be tracked. 

5. Other 

Has the business community been consulted on the idea of a generalised reverse charge? If so, what were the 

reactions? 

We are in close contact with the business community. 

Apart from the recurrent costs, has the cost of transition, both for tax administrations and taxable persons been estimated 
and, if so, what are the results? 

As already mentioned due to the fact of the high threshold and the currently used IT progress in 

bookkeeping  systems,  the  reverse  charge  application  should  not  significantly  affect  costs  of 

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regular  bookkeeping  operations.  We  expect  one-off  costs  incurred  in  the  course  of  the 

implementation period and in training of staff. 

6. Statistical document to be filled in 

Years 2013 to 2015 

AUSTRIA 

Tax fraud investigation and audit 
• Number of cases of missing trader fraud evidenced 

Year 

2013 

2014 

2015 

Number of cases 

Number of cases 

Additional VAT 

carousel fraud 

evidenced 

resulting in additional 

VAT revenue 

6 

6 

8 

6 

6 

8 

revenue x) 

58.687.528 

13.595.906 

36.582.852 

x) Additional revenue means all statements of an audit and is not limited to carousel fraud. 

•  Estimation of carousel fraud as part of the VAT gap (in%) 

Information on such traders and fraudulent transactions is collected, but there are no real data 

available  on  how  much  VAT  is  evaded  by  these  traders.  Therefore  recently  the  European 

Commission has initiated a Fiscalis project group on "Tax Gap Measurement". 

Administrative cooperation 

•  Early warnings 

A rather limited number of early warnings as Austrian businesses are involved in their role as 

suppliers but fraud happens in other Member States. 

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• Multilateral Controls  During the period  2013  to  2015  Austria joined  21 Multilateral Controls. 

14  out  of  these  21  MLCs  were  initiated  by  Austria.  7  out  of  the  21  have  been  finalized  in  the 

meantime.  The  result  for  Austria  was  9.050.000€.  In  one  case  the  carry  forward  losses  were 

reduced which will have impacts in the future. In another case the right of taxation was shifted to 

another state. For the future this might change. Two MLCs are to be finished in the near future. 

Other measures 

Year of limited validity of VAT ID 

Number of VAT-ID with limited validity 

2013 

2014 

2015 

33.916 

34.993 

36.732 

Replies of the Czech Republic 

Generalised reverse charge 

Background and general policy 

□  Have  any  specific  studies,  analyses  or  simulation  exercises  been  carried  out  to  assess  the 
impact of generalised reverse charge on fraud and if so, what were the results? 
Preliminary  analysis  on  impact  on  tax  revenue  and  cash  flow  has  been  carried  out  by  Ministry  of 
Finance. Our estimations are based on the suggestion that carousel frauds account for 2/3 of total VAT 
Gap, i. e. roughly 60 bln. CZK. The rest of VAT Gap creates frauds stemming from other VAT frauds. 

According  to  this  analysis  the  impact  on  the  tax  revenue  is  negative  in  the  first  year  of  introduction. 
However,  in  the  further  years  the  positive  impact  is  expected  hence  significant  elimination  of  the 
carousel frauds. In the first year of introduction the decrease in tax revenue 33,6 bln CZK hence change 
in cash flow is expected. On the other hand a rise in tax revenue by 30,7 bln CZK hence an elimination 
of carousel frauds is estimated in the first year of introduction as well. 

Analysis  regarding  already  introduced  reverse  charge  mechanism  has  been  carried  out  by  the  Czech 
Financial Administration. This analysis has proven that introduction of reverse charge mechanism has 
significantly  reduced  carousel  frauds.  As  in  2015  reverse  charge  mechanism  was  significantly 
broadened, the volume of carousel frauds, where reverse charge mechanism newly applied, significantly 
dropped. According to his analysis total volume declined by 98 %, number of detected carousel frauds 
went down by 89 %. Such result gives convincing result about efficiency of reverse charge mechanism. 

□  Has the effect on the budget of possible cash-flow losses during the year of introduction been 
assessed, and if so, what were the results? 
In the first year of introduction decrease in tax revenue by 33,6 bln. CZK is estimated. 

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□  How many taxable persons, as a percentage of all taxable persons, account for e.g.  80% of 
the VAT paid? What would this percentage be after the introduction of the generalised reverse 
charge? 
Currently 309 VAT tax payers account for 80 % of total VAT tax revenue. The share of these VAT payers 
on the total number of VAT payers was 0,1 %. 

Main features of the system 

□  What are, apart from the EURO 10 000 threshold, the main features of the system? 
The system is based on the assumption that all great features of VAT (neutrality, predictability, relative 
simplicity, etc.) can be maintained while its biggest problem (huge fraud) can be solved if the collection 
(rather  than  the  economic  principles)  of  the  tax  designed  60  years  ago  is  adopted  to  the  current 
technological tools (like internet and wireless data connections). 

□  Would  the  reverse  charge  be  applicable  to  all  types  of  taxable  persons  (partial  taxable 
persons, mixed taxable persons, exempt taxable persons, SMEs who benefit from an exemption, 
a  graduated  tax  relief  or  a  flat-rate  scheme,  farmers  under  the  common  flat  rate  scheme, 
occasional taxable persons,..). Would it be envisaged to extend the system to supplies made to 
non-taxable persons such as public authorities? 

We suggest to apply the domestic RCM applies in situations where the taxable person is  registered for 
VAT;  otherwise  it  stays  beyond  the  RCM  scheme.  Concerning  different  types  of  taxable  persons  we 
would  like  to  stress  that  we  work  with  them  just  now  when  applying  the  sectorial  reverse  charge.  No 
unsolved problems are expected then. 

□  Does the system have any impact on other elements (place of supply, right and adjustment of 
deduction, special regimes, ...) 
We do not see any reason why any other element of VAT should change. 

Obligations 
□  Which specific obligations on taxable persons would be needed to control such a proposed 
scheme?  Would  these  obligations  be  applicable  to  all  (types  of)  taxable  persons?  (see  also 
further under 'control and fraud') 

No new obligations on taxable persons would be needed. Obligations that already exist should be used 
within the reverse charge system as well. 

- 

electronic VAT listings "VAT control statement" (to crosscheck invoices)- already in force in CZ 
not only for the RCM transactions (it contains data about each individual invoice) 

o in the case the temporary measure is implemented, the current structure can be used 
o VAT returns and "VAT control statements" are already submitted exclusively by electronic 
means in CZ (there is no new burden for taxpayers) 

o it is obligatory for all persons registered as VAT payers (since  1.1.2016 regardless they 
make  RCM  operations  or  not)->  no  new  obligation  for  taxable  persons  (no  special  new 
listing to be submitted to the tax administration) 

-  electronic filling of sales (control of the end of the distribution chain)- is to be introduced soon 

regardless the temporary measure will be implemented or not 

□  How would non established taxable persons be treated when supplying or receiving goods or 

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services? 

There is a simplifying measure in the legislative process just now where according to the Art. 194 of the 
VAT directive. In case a non-established taxable person not registered for VAT in CZ supplies goods to 
the taxable person registered for VAT in CZ with the place of supply in CZ, the reverse charge is applied 
and the non-established taxable person is not touched by the domestic reverse charge. 

□  Has  the  cost  and  the  administrative  burden  for  taxable  persons  in  relation  to  these  new 
obligations been estimated? 

In the Czech Republic VAT control statement has been introduced since January 2016. All VAT payers 
have  been  obliged  to  complete  list  of  all  received  supplies  from  other  VAT  payers  and  all  provided 
supplies to other VAT payers. Such obligation is similar to the one that is already required within the 
reverse charge mechanism. 

It is suggested that all VAT payers have already adjusted their tax and accounting systems because of 
the  VAT  control  statement.  Hence,  no  substantial  additional  costs  are  expected  if  the  general  reverse 
charge mechanism is introduced. 

In general, current information duty stemming from VAT control statement is very similar to the one that 
would be required within reverse charge mechanism. 

Setting of threshold for application of the reverse charge mechanism in tax and accounting systems 
could cause a slight increase in costs for VAT payers. No other increase in costs for VAT payers is 
expected. 

□  What would be the specific cost on non-established taxable persons? 
No specific cost are expected (see the answer above). 

□  What would be the different steps for a taxable person to complete before deciding that the 
reverse charge mechanism has to be applied? What, in particular, would be the possibilities for 
a  supplier  to  check  whether  his  customer  is  a  taxable  person  to  whom  supplies  under  reverse 
charge can take place? 
The check of the validity of the  VAT  number and  of  the registration  has to  be done (the public online 
database of VAT payers exists) when the amount of the transaction exceeds the threshold. 

If the VAT number is checked and the taxable person does not use RCM because there is not a valid VAT 
registration, the RCM is not applied (we have introduced the provision for the strengthening of the legal 
certainty). 

The risk of the misuse of the VAT number is not higher than in the case of IC transactions. 

□  What would be the liability of a supplier who, in good faith, applied the reverse charge, only 
to discover subsequently that his customer was not entitled to receive the goods under reverse 
charge? 
Such cases are to be individually examined according to the case-law. As the quality of the data in the 
VAT database is not problematic, we do not suppose that the situation described could occur frequently. 

□  What would happen if at the time of supply, the conditions for applying the reverse charge 
were  fulfilled  but  these  conditions  are  changed  later.  E.g.  a  credit  note  is  issued  whereby  the 
threshold is no longer exceeded. 

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If  a  credit  note  is  issued  and  the  threshold  is  no  longer  exceeded,  the  RCM  is  still  applied.  If  the 
threshold is exceeded by a correction, RCM is applied to this correction. CZ has already implemented a 
RCM with a threshold; the practical experience of the tax administration and of taxpayers already exists 
concerning this issue. 

Control and fraud 

We can imply from questions posed in this section that some doubts arise concerning the complexity of 
the conception of the implementation of the reverse charge applied to big transactions especially in the 
relation with the existing VAT system, its administration and tackling tax fraud. One of doubts concerns 
the  possible  transformation  offraud  schemes  once  the  reverse  charge  is  introduced.  The  basic  idea  of 
this  is  that  VATfraud  would  split  to  shorter  chains  and  then  it  would  shift  from  the  beginning  of  the 
transaction chain to its end. Thus B2C sales would stay out of the system. 

The  example  of  the  scheme  is  for  example:  MT  -  Buf  1  -  Buf  2  -  Buf  3  -  Buf  4  -  Broker  -  Customer  / 
export 

In case where transactions in the chain are under the reverse charge scheme and the goods at the end of 
the transaction chain leave the CZ (from the point of view of the place of the supply), the problem with 
fraudulent schemes based on fictive transactions or the problem with carousel frauds can be solved by 
the reverse charge mechanism. 

In case the supply at the beginning of the distribution chain is not under the reverse charge or the final 
consumption  is  in  CZ,  the  risk  of  the  fraud  exists.  But  those  risks  are  significantly  smaller  and  the 
solution of potential frauds is much easier than within the current VAT system. 

The risk of the fraud at the end of the distribution chain is in CZ solved by the electronic filling of sales 
that is planned to be implemented for the risky segment at the beginning of 2017. At the same time the 
VAT control statement system reduces the risk of the shift of the trade to the "grey zone ". This system is 
significantly more effective than the simple procedure where the taxpayer just declares the value to be 
allowed  to  apply  the  right  to  deduct  the  VAT.  Individual  invoices  are  matched  in  the  system  of  VAT 
control  statements  and  the  potential  problems  are  detected  with  the  sensibility  set  at  the  level  of  the 
invoice. 

It is also important to say that the risk of this fraudulent shift is dramatically lower under the reverse 
charge  than  within  the  current  system  even  if  above  mentioned  control  tools  are  not  applied.  This  is 
because the possibility to make a fraud at the beginning of the chain is practically limited by the logistic 
and property limits of the group performing the fraud. It is possible to resale the  goods in the value of 
CZK 100 bil. plus CZK 21 bil. VAT by the sole invoice and steal this big volume of the VAT by one turn 
only.  When  the  tax  is  shortened  at  the  end  of  the  chain,  the  mass  of  the  fraud  is  limited  also  because 
fraudsters need to place huge volumes or values of goods to the final consumer or they need to find the 
requested  number  of  those  final  consumers.  This  fact  represents  a  serious  obstacle  for  the  fraudulent 
behaviour. 

It is possible to solve the risk of the fraud at the beginning of the distribution chain, which is performed 
by reduction of the transaction value under the threshold, more effectively under the reverse charge than 
in  the  current  VAT  system.  The  possibility  that  the  organiser  of  the  fraud  will  use  higher  number  of 
missing traders and buffers to reach the same fraudulent effect exists but the risk then will be diversified. 
It is easier to tackle smaller or shorter chains than it is for current huge and complicated structures. No 
risk would exist at the level of current big brokers. It would shift "lower" within the distribution chain, 
closer  to  missing  traders. It  would  be  logistically  and  economically  more  complicated  to  organize  the 
fraud than it is at present. Such chains are possible to be detected using the VAT control statement and 
could be easily eliminated. These assumptions are further supported by other steps of tax administration 
- the detailed control during the VAT registration process with the aim to reduce the number of potential 
fraudsters within the VAT system, use of the status of unreliable VAT payer by which we can indicate 

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high- risk companies for other traders, securing orders supported by joint and several liability and the 
cooperation in the prosecution area and AML as well. 

All the mentioned tools with the exception of the electronic filling of sales has been already implemented 
in  CZ  and  conditions  for  the  effective  implementation  of  the  reverse  charge  applied  to  big  volume 
transactions  are  met.  The  common  denominator  of  the  chain  (carousel)  frauds  is  the  big  volume  of 
transactions and the requested temporary derogation is targeted to this common attribute. 

□  □  What  steps  should  be  taken  to  stop  new  forms  of  fraud  in  relation  to  the  threshold? 
Fraudsters  could  obtain  goods  'VAT  free'  (under  RC),  sell  them  on  with  VAT  (possibly  via 
artificial splitting of supplies to remain below the threshold) and then disappear before paying 
the tax over to the treasury; potentially developing this into national carousel fraud schemes. 

Using the threshold in the combination with the data from the "VAT control statements"  will  allow to 
find out that the supply was split into several smaller supplies for one purchaser (see the reply above). 

□ Would joint and several liability of the supplier be introduced? 
We  have  already  implemented  the  joint  and  several  liability  in  some  predefined  cases  and  we  do  not 
intend to make further extension of this tool at the moment. 

□  Could you explain in more detail the electronic control tools to which you refer in your letter 
and specify how they would be more useful within the generalised reverse charge mechanism 
than within the current system? 

See the reply above. 

□  Have you, in addition, considered other specific control measures to be deployed within the 
generalised reverse charge system and, if so, could you provide a detailed explanation on their 
functioning? 

See the reply above. 

□  Which control policy will be established to audit the more numerous taxable persons at the 
end  of  the  chain  who  account  for  an  increased  amount  of  VAT  in  comparison  to  the  current 
situation? 
The generalized reverse charge will not have any impact on the number of taxable persons at the end of 
the transaction chain. The structure of control activities will probably change - it will be aimed mainly 
at two risky issues: control of the threshold and the control of the end of the transaction chain. It will be 
possible to strengthen the control of these risky issues because the rest of the transaction chain would 
not need such intensive control as it is now. The information from the "VAT control statement" together 
with  the  electronic  filling  of  sales  (primarily  oriented  on  "cash"  transactions)will  help  the  tax 
administrator to check the end of the transaction chain. 

□  Is it the intention, to that end, to re-allocate control resources to end of the chain? How far 
could  this  be  stretched  without  creating  the  risk  that  an  increased  amount  of  non-taxed  goods 
would reach the retail stage (or stage where VAT has to be applied)? 
The  transfer  of  control  resources  to  the  end  of  the  chain  will  be  important  but  not  absolute.  The 
assumption is that the reason for the creation of long and complicated fraudulent chains will not persist 
and there will be a positive impact on control resources of the tax administration. 

□  In  the  same  way,  are  measures  foreseen  to  monitor  and  subsequently  prevent  the  possible 
shift of fraud to other Member States? 
Based on the data from the VAT control statements and electronic filling of sales and using mechanisms 
of administrative cooperation  we can provide other member states with the information and data  they 

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could  use  when  applying  their  own  anti-fraud  measures.  All  effective  anti-fraud  measures  have  in 
principle the effect of the shifting of fraud to another destination (or commodity) disregarding the fact 
whether  this  measure  is  the  reverse  charge  or  any  conventional  measure  with  the  same  degree  of  the 
efficacy. 

Which steps should be taken to control non-taxable persons claiming to be taxable persons (via 
"hijacking" of VAT identification numbers) to avoid that VAT would be charged? 

There  is  no  general  measure  to  avoid  the  misuse  of  the  VAT  identification  number  irrespective  of  the 
system but this problem is not bigger than in IC transactions. Measures that can improve the potential 
risks  are  for  example  pre-registration  audits  of  taxpayers,  risk  analysis,  institution  of  unreliable 
taxpayer etc. 

Other 
□  Has the business community been consulted on the idea of a generalised reverse charge? If 
so, what were the reactions? 
The  Ministry  of  finance  has  organized  an  international  conference  in  Prague  (4.12.2015)  with  the 
participation of the representative of the business, academic field and the Commission. 

The business is generally in favour of the reverse charge, they want the most simple and compact system 
as it is possible. 

However  as  we  are  targeting  the  carousel  fraud  we  have  to  introduce  the  threshold  to  eliminate  the 
impact on small traders and to keep this goal. 

□  Apart from the recurrent costs, has the cost of transition, both for tax administrations and 
taxable persons been estimated and, if so, what are the results? 

No additional costs for tax administration are estimated and only some small improvement of IT systems 
could be needed on the side of taxable persons (relates to the setting of the threshold). 

* 
* * 

87/94 

 
Statistical  document  to  be  filled  in 
Years 2013 to 2015 

o Tax fraud investigation and audit 
Number of cases of missing trader fraud evidenced 

- Domestic carrousel fraud 
- MTIC fraud 

o Number of taxpayers involved in missing trader fraud 
- National taxpayers 
- Foreign taxpayer 
The data are analysed and it will be provided as soon as possible. 

o Number and amount of VAT assessments made as a result of the relevant 

audits or investigations in the context of Carrousel fraud 

The data from Annual reports of the Tax Administration - The total number of audits and 
assessments (the estimation is that the carousel fraud represents 80% of this number) 

Tax audits - number and results 

year 

2015 
2014 
2013 

Number of tax audits 

10 130 
11 565 
10 228 

assessed 

amount 

The 
thousands of CZK) 
13 660 791 
8 259 054 
7 033 203 

Other investigations - number and results 

year 

Number of 

investigations 

Number 
investigations 
closed  with 
difference 

tax 

of 

The  change  as  a 
result  of 
investigation (in thousands of CZK) 
a 

2015 
2014 
2013 
o Number of criminal prosecutions initiated in this context 

10 011 
8 312 
5 484 

7 459 754 
4 755 414 
2 876 534 

closed 
17 672 
16 522 
12 213 

of 

Excess 
deduction 
-3 105 244 
-1 526 874 
-1 713 981 

(in 

the 

the 

The data of the Tax administration (the data concerns all the taxes, not only VAT): 

Criminal 
offence 
shortening 
of the tax 

Number of cases 

Amount (in bil. of CZK) 

2011 
2012 
1 325  1 555 

2013 
1 164 

2014 
1 294 

2015 
1 512 

2011 
2012 
6 452  9 367 

2013  2014 
4 886  7 034 

2015 
10 603 

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The data of the Home Office  - opening of the prosecution (the data concerns all 
the taxes, not only VAT) 

year  Number 
of cases 

2013  703 
2014  435 
2015  473 

Damage (in CZK) 

3 478 352 100 
6 333 325 300 
5 691 709 100 

Number of convicted persons following these prosecutions (data of the Home Office) 

2013: 818 persons convicted 

2014: 725 persons convicted 

2015: 716 persons convicted 

Estimation of Carousel fraud as part of VAT fraud and as part of the VAT 
gap (in %) 

According to the latest estimation of VAT Gap we assume that  2/3 accounts for 
carousel frauds and 1/3 of VAT Gap accounts for other VAT frauds (unreported 
sales, fictitious invoices). This estimation is based on the data of Czech Statistical 
Office about unreported sales in the Czech Republic. 

Administrative cooperation 

Number  of  early  warnings  received  from  Eurofisc  and  results:  number  and 
amount of tax assessments, number of cancellation of VIES numbers, etc. 

Data from the annual reports for Eurofisc: 

WF 1 (MTI C) 

Year 

2013 
2014 
2015 
In total 

Number  of 
lines 
received - 

Missing 
Traders 
detected 

Conduit 
Companies
detected 

Deregistration
s 

Unreliable 
VAT payers 

VAT audits 

560 
773 
574 
1907 

114 
199 
99 
412 

28 
92 
51 
171 

9 
5 
23 
37 

20 
4 
24 

10 
24 
36 
70 

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WF 2 (Means of transport) 

Year 

Number of 
Lines 
received 

Missing 
Traders 
detected 

Conduit 

Companies 

Deregistrations 

2013 
2014 
2015 

495 
510 
435 

55 
64 
78 

WF 3 (Customs Procedures) 

detected 

9 
8 
16 

23 
22 
15 

Unreliabl
e 

VAT 

payers 

43 

VAT audits 

Additional 
VAT  return 
submitted 

36 
41 
43 

14 
21 
37 

In total  1440         197                  33 

60 

43 

120 

172 

Year 

2013 
2014 
2015 
In total 

Number 
lines received 

of 

992 
886 
2242 
4120 

Number 
of  VAT 
payers 
91 
88 
87 
266 

Missing 
Traders 
detected 
6 
5 
3 
14 

Deregistration
s 

6 
4 
1 
11 

Unreliable 

VAT 

3 
payers 
2 
4 
9 

VAT 
audits 

2 
4 
4 
10 

Additional 
VAT  return 
submitted 
2 
2 
3 
7 

Number of Multilateral Controls initiated or joined, and results thereof 

Results of multilateral controls with CZ participation opened in the period 2013-2015 

MLC code 

Iniciating MS 

020 
022 
035 
042 

049 
052 
053 
076 
037 
094 
100 
011 
133 
Total 

UK 
CZ 
AT 
SI 

CZ 
SK 
AT 
CZ 
IT 
NL 
RO 
LT 
DE 

Start year  End year  Additional  assessment  in 

CZ (EUR) 
0 
1.4 mil 
0 

28.6 mil 
0 
8.2 mil 
1.6 mil 
0 
0 
10 mil (up to now ) 
12.8 mil 
21.8 mil 
84.4 mil EUR 

2013 
2014 
2014 
2014 

2014 
2014 
2014 
2014 
2015 
2015 
2015 
2015 
2015 

2014 
2016 
2016 
ongoing 

2016 
2016 
2016 
2016 
2016 
2016 
ongoing 
ongoing 
2016 

90/94 

Commodity 

Mobile phones 
Concrete steel 
Sugar 
Precious 
metals 
Mobile phones 
IT components 
Rape 
Car tyres 
Electricity 
Used cars 
Electronics 
Mobile phones 
Gas 

 
 
 
 
 
 
 
 
 
 
 
Other measures 
Number of administrative de-registrations 

Number of deregistrations 

Year of deregistration (decisions) 

total 
from that made ex offo 

2013 

20 788 
4 167 

2014 

32 362 
10 338 

2015 

41 757 
16 168 

Unreliable VAT payers 
Number of persons qualified as unreliable VAT payers 

Decisions coming into force 

2013 
44 

2014 
159 

2015 
4104 

Number of unreliable VAT payers that has been made public 

Number  of  published  unreliable  VAT 
payers 

31 

143 

3486 

31.12.2013 

31.12.2014 

31.12.2015 

Total number of persons registered for VAT purposes 

Number of VAT registrations 

508 733 

508 538 

496 841 

10.1.2014 

29.12.2014 

11.1.2016 

Number of cancellations of the VIES number 

See above - there is no special registration for the VIES system in CZ. 

Number and amount of cases where joint and several liability has been applied 

No relevant data at the disposal. 

Number and amount of estimated assessments of non-filers 
The  total  number  of  the  non-submitted  VAT  returns  during  2013-2015  is  more  than 
310 000 (313 137). 

The estimation of the assessment from those VAT returns is CZK 60 bil. 

91/94 

 
 
 
 
 
 
 
 
 
Annex 7 

92/94 

 
 
EUROPEAN COMMISSION 
SECRETARIAT-GENERAL 
Directorate D - Policy Co-ordination I 
SG-D-2 Internal market and competitiveness 
Head of Unit 

Brussels, 16 September SG.D2 
TB/ik 

MEETING REPORT 

SUBJECT: 

ISSG on a temporary application of the VAT reverse charge mechanism 

ISSG members discussed the draft impact assessment and the draft legal text. 
1. 

Political context and timing 

SG pointed to the political commitment of the Commission to deliver this proposal by the end 
of 2016 and to the challenge not to ignore the risks coming with such proposal and at the same 
time establishing an impact assessment underpinning the proposal. TAXUD recalled the need 
to distinguish this proposal from the general reform of the VAT system planned for 2017 and 
gave an overview over the draft impact assessment and the draft proposal. 

Comments by ISSG members: 

2. 

Criteria for a temporary application 

Main  element discussed at the meeting were the criteria for the temporary  application of the 
reverse charge as the current draft impact assessment and proposal would require a high VAT 
gap and a deficiencies in tax collection capacity for all Member States except AT and CZ that 
would  not  have  to  meet  these  requirements.  SG,  ENV  and  SJ  stressed  the  need  to  ascertain 
whether the fact that CZ and AT have already made a request for a reverse charge derogation 
at  the  moment  of  the  proposal  is  sufficient  to  place  them  in  a  different  situation  than  other 
Member  States  whose  conditions  would  be  more  restrictive,  or  whether  other  aspects  would 
need  to  be  considered.  SJ  and  BUDG  also  wondered  whether  the  criteria  are  sufficiently 
precise. OLAF recalled that the criterion on VAT fraud would be difficult to apply since the 
Commission did not regularly receive data from the Member States as criticised by the CoA in 
its recent report. SJ wondered whether it should be for the Commission to assess whether the 
criteria  would  be  met  for  a  Member  State.  TAXUD  argued  that  safeguarding  the  Internal 
Market should first and foremost be a Commission task. 

3. 

Safeguarding the Internal Market 

SJ  and  SG  suggested  that  the  proposal  should  contain  a  safeguard  clause  or  recital  if  even 
before  the  interim  report  severe  distortions  of  the  internal  market  are  detected.  To  this  end, 
TAXUD should explore further with SJ how this could best be achieved, taking into account 
precedents  such  as  the  Quick  Reaction  Mechanism  (QRM).  TAXUD  showed  openness  to  a 
safeguard clause or recital. 

4. 

Other aspects of the draft impact assessment 

JUST  asked  to  elaborate  further  on  the  impacts  on  consumers,  in  particular  regarding 
compliance costs were passed on to consumers. OLAF raised that increased liquidity resulting 
from reverse 

Commission européenne/Europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGIË - Tel. +32 22991111 
http://ec.europa.eu/dgs/secretariat general/ 

93/94 

 
 
charge could counter this effect. TAXUD warned that such impacts were difficult to predict as 
only  limited data had been available.  OLAF also suggested replacing the explanatory graphs 
for carousel fraud with material used in other documents. CNECT  and SG suggested putting 
more emphasis on the potential double administrative burden when changing to reverse charge 
and  back  again.  CNECT  suggested  looking  at specific  sectors  more  prone  to  VAT  fraud  but 
TAXUD  and  SG  confirmed  that  this  was  reflected  by  current  VAT  legislation  such  as  the 
Quick Reaction Mechanism (QRM). SG suggested beefing up the monitoring, in particular by 
adding indicators. 

5. 

Other aspects of the draft proposal 

SJ  suggested  underpinning  the  proposal  not  only  with  political  but  also  legal  arguments.  SG 
asked to rephrase the justification for skipping an open public consultation in case the request 
for  exemption  was  granted  (a  decision  is  still  outstanding).  The  fact  that  "only"  businesses 
were concerned would not be an acceptable justification. 

6. 

Conclusions and next steps 

SG summarised that the draft impact assessment was a good basis. SG welcomed that SJ had 
generally  found  a  solution  to  legally  underpin  the  proposal  as  such  but  asked  them  to 
collaborate closely with TAXUD to solve the remaining issues. More specifically, they should 
explore options regarding the criteria for application to allow AT and CZ participation while 
ensuring equal treatment of Member States; further reflect on the decision-making mechanism 
on whether the application criteria are fulfilled; and look at feasible options for safeguards in 
case of severe distortions in the Single Market, possibly taking inspiration from the QRM. 

SG recalled the timing with RSB submission by 28 September, RSB meeting on 26 October, 
and an adoption in November/December, possibly with other VAT proposals on 30 November. 
Written comments should be sent to TAXUD, cc SG, by 21 September. 

[e-Signed] 
Michael Wimmer 

Contact: 

Thorsten Behnke, SG.D2, ext. 86485 

Participants: 
SG: Michael Wimmer (Chair), Thorsten Behnke 
SJ: Lidia Lozano Palacios, Marta Owsiany-
Hornung 
TAXUD:  Patrice  Pillet,  Jannetje  Bussink,  Maria  Del  Carmen  Muniz  Sanchez,  Paul 
Vanhollebeke 
BUDG: Olga Dikovič-Kukulske 
CNECT: Kalman Dezseri, Gianluca Papa 
ENV : Malgorzata Kicia 
ENER: Zsolt Tasnadi 
JUST: Julien Brugerolle 
GROW: Werner Vanborren 
OLAF: David Nossen 

Copy: 
Jean-Eric  Paquet,  Marcel  Haag,  Elies  Messaoudi,  Jessica  Larsson  (SG),  Antoine  Kasel  (Cab 
Juncker),  Antoine  Colombani  (Cab  Timmermans),  Jan  Ceyssens  (Cab  Dombrovskis),  Gints 
Freimanis (Cab Dombrovskis), Elena Scoppio (Cab Moscovici) 

94/94