Proposal for a COUNCIL DIRECTIVE amending Directive 2006/112/EC on the common system of value added tax as regards the temporary application of a 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

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   EUROPEAN COMMISSION  Brussels, 21.12.2016  COM(2016) 811 final 2016/0406 (CNS)   Proposal for a COUNCIL DIRECTIVE amending Directive 2006/112/EC on the common system of value added tax as regards the temporary application of a generalised reverse charge mechanism in relation to supplies of goods and services above a certain threshold {SWD(2016) 457 final} {SWD(2016) 458 final}  
 
EXPLANATORY MEMORANDUM 

1. 

CONTEXT OF THE PROPOSAL 

Reasons for and objectives of the proposal 

• 
On 7 April 2016, the Commission adopted the VAT Action Plan1 which presents objectives 
and measures to modernise the EU VAT system. It builds on the work carried out since the 
Communication on the future of VAT2 that followed the large consultation process initiated 
by the Commission with its Green Paper on the future of VAT3. 

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 system for 
intra-EU business-to-business (B2B) cross-border trade in order to replace the current system 
which was intended to be transitional. 

As  agreed  by  the  European  Parliament  and the Council,  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”)  whereas  the  current  system  is  based  on  exemption  of  supplies  of 
goods in the Member State of departure. 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. 

However, since preparing, adopting and implementing such a major change is likely to take 
some  time,  the  Commission  recognized  the  need  to  work  in  parallel  on  other  initiatives,  in 
particular  on  urgent  measures  to  tackle  VAT  fraud  and,  subsequently,  the  VAT  gap,  the 
difference  between  the  expected  VAT  revenue  and  the  VAT  actually  collected  by  tax 
authorities. This VAT gap has reached an alarming level of nearly EUR 160 billion4 of which 
cross-border fraud accounts for about EUR 50 billion of revenue loss each year5. 

As  one  of  these  urgent  measures,  the  Commission  considered,  upon  request  of  certain 
Member  States,  the  possibility  of  allowing  these  Member  States  to  implement  a  temporary 
generalised reverse charge mechanism (GRCM) that would derogate from one of the general 
principles  of  the  VAT  Directive6,  which  is  the  fractionated  payment.  To  that  end,  the 
Commission  agreed  to  thoroughly  assess  the  political,  legal  and  economic  implications  of 
such a temporary GRCM before presenting its conclusions.  

This  in  depth  analysis  at  technical  level  of  a  GRCM,  with  an  invoice  threshold  of 
EUR 10 000,  has  been  carried  out  and  presented  during  the  ECOFIN  meeting  of  17  June 
2016. In the context of a political agreement on the overall anti-fraud policy within the EU, 
the  Commission  made  the  following  statement  to  the  ECOFIN  Minutes:  "The  Commission 
commits  to  present,  before  the  end  of  the  year,  a  legislative  proposal  allowing  individual 

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6 

Communication  from  the  Commission  to  the  European  Parliament,  the  Council  and  the  European 
Economic and Social Committee on an action plan on VAT - Towards a single EU VAT area - Time to 
decide (COM(2016)148 final of 7.4.2016). 
Communication  from  the  Commission  to  the  European  Parliament,  the  Council  and  the  European 
Economic and Social Committee on the future of VAT - Towards a simpler, more robust and efficient 
VAT system tailored to the single market (COM(2011) 851 of 6.12.2011). 
Green  paper  on  the  future  of  VAT  -  Towards  a  simpler,  more  robust  and  efficient  VAT  system 
(COM(2010) 695 of 1.12.2010). 
CASE, Study and Reports on the VAT Gap in the EU-28 Member States:2016 Final Report 
Ernst  &  Young,  Implementing  the  ‘destination  principle’  to  intra-EU  B2B  supplies  of  goods:  2015 
Final Report.  
Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ L 
347, 11.12.2006, p. 1) 

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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." 

• 

Consistency with existing policy provisions in the policy area 

The purpose of the legislative proposal is limited in scope and in time and is without prejudice 
to  the  development  of  the  definitive  VAT  system  based  upon  the  taxation  of  cross-border 
supplies. 

2. 

• 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

Legal basis 

The  Directive  amends  the  VAT  Directive  on  the  basis  of  Article  113  of  the  Treaty  on  the 
Functioning of the European Union. 

Because  of  its  derogation  from  the  fundamental  principle  of  the  fractioned  payments,  a 
specific legal basis for such a temporary application of a GRCM to goods and services above 
a certain threshold is the best way forward and is in line with the VAT Action Plan. 

• 

Subsidiarity (for non-exclusive competence)  

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. 

Member States could not act individually since 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 fundamental change to the VAT system. Therefore, the 
possibility  for  individual  Member  States  to  apply  a  GRCM  requires  a  proposal  by  the 
Commission to amend the VAT Directive in order to allow for such a derogating system. The 
proposal still leaves a high degree of subsidiarity to Member States as the application of the 
mechanism is voluntary and each Member State can decide whether to request the derogation 
or not, provided the criteria are fulfilled. 

• 

Proportionality 

Because  of  its  optional  and  temporary  character,  the  measure  is  proportionate  to  the  aim 
which  is  to  combat  fraud  in  certain  Member  States  who  do  not  have  the  administrative 
capacity to  effectively  tackle  it  or  are  confronted  with  a  strong  increase  of  VAT  fraud.  The 
granting  of  the  GRCM  is  subject  to  pre-defined  criteria  aiming  to  limit  the  scope  of  the 
measure to Member States which are particularly affected by carousel fraud. In this context, a 
VAT  gap  excess  of  5  percentage  points  above  the  EU  median  and  a  carousel  fraud  level 
within a Member States' total VAT gap of more than 25% are considered as reasonable and 
representative criteria in order to identify those Member States which are more than averagely 
affected. In addition, because of the uncertainty of the effects of the measure as regards fraud 
shifting,  a  Member  State  having  a  common  border  with  a  Member  State  that  applies  the 
GRCM, should also be authorised to apply the GRCM under certain conditions.  

However,  the  impact  on  the  internal  market  should  be  closely  monitored.  To  that  end,  in  a 
safeguard clause the Commission should be empowered to repeal, without retroactive effect, 
derogations in case the impact on the internal market would be negative. 

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• 

Choice of the instrument 

A Directive is proposed in view of amending the VAT Directive. 

3. 

• 

RESULTS 
CONSULTATIONS AND IMPACT ASSESSMENTS 

EX-POST 

EVALUATIONS, 

OF 

STAKEHOLDER 

Stakeholder consultations 

No particular stakeholder consultation was carried out. 

The open public consultation on the 'Green Paper on the future of VAT' - Towards a simpler, 
more  robust  and  efficient  VAT  system"  COM(2010)695),  which  resulted  in  around  1700 
contributions,  provided  the  Commission  with  a  clear  understanding  of  the  problems  and 
possible  solutions,  including  on  the  aspects  of  reverse  charge.  Further  details  are  set  out  in 
Annex 2 of the impact assessment. 

Tax administrations and business representatives have discussed the issue during a meeting of 
the Group on the Future of VAT (GFV) and the VAT Expert Group (VEG) in February 2016 
which provided the Commission with a comprehensive view of the opinions on the possible 
implementation and application of such a system. 

• 

Collection and use of expertise 

The VEG,  which assists and advises the European  Commission on VAT  matters in  view of 
the preparation of legislative acts and other policy initiatives, was, as mentioned, consulted in 
February 2016. 

In its opinion of 28 June 2016 the REFIT Platform called for a simpler and more basic VAT 
regime in the EU, highlighting in particular the barriers to the internal market and regulatory 
burden created7. 

Many  opinions  adopted  by  business  federations  and  scientific  publications  were  taken  into 
account. 

• 

Impact assessment 

The  impact  assessment  was  submitted  to  the  Regulatory  Scrutiny  Board  for  a  first  time  on 
27 September 2016 and a meeting took place on 26 October 2016. On the basis of the opinion 
of  the  Board,  a  new  draft  was  submitted  to  the  Board  which  gave  a  positive  opinion  on 
28 November  2016  with  recommendations,  notably  to  include  a  best  case  and  worst  case 
scenario8 (see also annex 1 of the impact assessment accompanying this proposal). 

The  impact  assessment  identified,  as  preferred  option,  a  derogation  to  apply  the  GRCM  by 
certain Member States fulfilling pre-defined criteria, on a voluntary basis and to all goods and 
services with an invoice threshold of more than EUR 10 000. This option offers a short term 
solution  to  Member  States  particularly  affected  by  carrousel  fraud.  It  minimises  negative 
impacts on the internal market by limiting fraud shifting between Member States. A safeguard 
clause is foreseen in case of negative impacts on the internal market. 

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http://ec.europa.eu/smart-regulation/refit/refit-platform/docs/recommendations/opinion_taxation_1a.pdf 
The executive summary sheet is available at the following link: 
http://ec.europa.eu/smart-regulation/impact/ia_carried_out/cia_2016_en.htm 

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4. 

OTHER ELEMENTS 

The proposal includes a sunset clause. 

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2016/0406 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending Directive 2006/112/EC on the common system of value added tax as regards 
the temporary application of a generalised reverse charge mechanism in relation to 
supplies of goods and services above a certain threshold 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 113 thereof, 

Having regard to the proposal from the European Commission, 

After transmission of the draft legislative act to the national parliaments, 

Having regard to the opinion of the European Parliament, 

Having regard to the opinion of the European Economic and Social Committee, 

Acting in accordance with a special legislative procedure, 

Whereas:  

(1) 

(2) 

(3) 

In  its  VAT  Action  Plan9,  the  Commission  announced  its  intentions  to  come  forward 
with  a  proposal  for  a  definitive  value  added  tax  (VAT)  regime  for  cross-border 
business-to-business  trade  between  Member  States  on  the  basis  of  the  taxation  of 
cross-border supplies of goods and services. 

Given  the  current  level  of  VAT  fraud  and  the  fact  that  not  all  Member  States  are 
equally affected by this fraud, and given the fact that it will take several years for the 
definitive VAT regime to be implemented, some urgent and specific measures may be 
necessary. 

In  this  context,  certain  Member  States  have  asked  to  be  allowed  to  implement  a 
temporary generalised reverse charge mechanism (hereinafter 'GRCM') with a certain 
threshold per invoice which would derogate from one of the general principles of the 
current VAT system, as regards the fractionated payment system, in order to address 
endemic carousel fraud. Carousel fraud finds notably its root in the current exemption 
for  intra-community  supplies  that  allows  for  goods  to  be  obtained  VAT-free.  A 
number of traders engage subsequently in tax fraud by not paying to the tax authorities 
the VAT received from their customers. Those customers, however, being in receipt of 
valid  invoices,  remain  entitled  to  a  tax  deduction.  The  same  goods  can  be  supplied 
several  times  by  including  again  exempt  intra-community  supplies.  Similar  carousel 
fraud can also occur when services are supplied. By designating the taxable person to 
whom  the  goods  or  services  are  supplied  as  the  person  liable  for  the  VAT,  the 
derogation would remove the opportunity to engage in that form of tax fraud. 

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Communication  from  the  Commission  to  the  European  Parliament,  the  Council  and  the  European 
Economic and Social Committee on an action plan on VAT - Towards a single EU VAT area - Time to 
decide (COM(2016)148 final of 7.4.2016). 

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(4) 

(5) 

(6) 

In order to limit the risk of fraud shifting between Member States, all Member States 
that  fulfil  certain  criteria  as  regards  their  fraud  level,  in  particular  in  relation  to 
carousel  fraud,  and  who  are  able  to  establish  that  other  control  measures  are  not 
sufficient to combat that fraud, should be allowed to use a GRCM. 

In  addition,  also  bordering  Member  States  that  encounter  a  serious  risk  of  shift  of 
fraud  to  their  territory,  because  of  the  authorisation  of  that  mechanism  in  another 
Member  State,  should  be  allowed  to  use  the  GRCM,  where  other  control  measures 
would be insufficient to combat that risk of fraud. 

If Member States choose to apply the GRCM, they should apply it to all supplies of 
goods and services above a defined threshold per invoice. The GRCM should not be 
restricted to any specific sector. 

(7)  Member  States  choosing  to  apply  the  GRCM  should  introduce  specific  electronic 
reporting obligations on taxable persons so as to ensure the effective functioning and 
monitoring of the application of the GRCM. They should detect and prevent all new 
forms of tax fraud. 

(8) 

(9) 

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  those 
Member  States  as  to  enable  an  assessment  of  the  level  of  fraud  before  and  after  the 
application of the GRCM. 

In  order  to  ensure  uniform  conditions  for  the  implementation  of  this  Directive, 
implementing powers should be conferred on the Commission as regards granting the 
authorisation to the requesting Member State in order to introduce the GRCM. 

(10)  Member  States  choosing  to  apply  the  GRCM  should  request  the  Commission  to 
authorise  the  application  of  the  GRCM  and  provide  relevant  information  in  order  to 
enable  the  Commission  to  assess  that  request.  Where  necessary,  the  Commission 
should be able to request additional information. 

(11)  Given the unexpected effects that such a GRCM might have on the functioning of the 
internal market because of the possible shift of fraud to other Member States that do 
not  apply  it,  the  Commission  should  be  able,  as  a  safeguard  measure,  to  repeal  all 
implementing decisions approving the application of the GRCM. 

(12) 

In view of the uncertain effects that such a mechanism might have, it should be limited 
in time. 

(13)  To  closely  monitor  the  impact  on  the  internal  market,  all  Member  States  should,  in 
case  the  GRCM  is  used  at  least  in  one  Member  State,  present  reports  to  the 
Commission  as  to  enable  an  assessment  of  the  impact  on  the  fraud,  the  compliance 
costs  for  businesses  and  a  shift  in  fraudulent  activities  due  to  the  application  of  the 
GRCM. 

(14)  Directive 2006/112/EC should therefore be amended accordingly, 

HAS ADOPTED THIS DIRECTIVE: 

The following Article 199c is inserted in Directive 2006/112/EC: 

Article 1 

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'Article 199c 

Until  30  June  2022  a  Member  State  may,  as  a  Generalised  Reverse  Charge 
1.  
Mechanism (GRCM), provide that the person liable for payment of VAT is the taxable 
person to  whom supplies of goods and services are made  above a threshold of EUR 
10 000 per invoice, by derogation from Article 193. 

A  Member  State  wishing  to  introduce  the  GRCM  shall  comply  with  the  following 
conditions: 

(a) 

(b) 

(c) 

it has a VAT gap, expressed as a percentage of the VAT Total Tax Liability, of 
at least 5 percentage points above the Community median VAT gap; 

it has a carousel fraud level within its total VAT gap of more than 25%; 

it establishes that other control measures are not sufficient to combat carousel 
fraud on its territory. 

The Member State shall attach to the request referred to in paragraph 4 the calculation 
of the VAT gap according to the method and figures available in the latest report on 
the VAT gap published by the Commission. 

2. 
Until  30  June  2022,  a  Member  State  may  provide  that  the  person  liable  for 
payment  of  VAT  is  the  taxable  person  to  whom  supplies  of  goods  and  services  are 
made above a threshold of EUR 10 000 per invoice where this Member State: 

(a)  has  a  common  border  with  a  Member  State  that  is  authorised  to  apply  the 

GRCM; 

(b) 

(c) 

establishes  that  a  serious  risk  of  shift  of  fraud  towards  its  territory  exists 
because of the authorisation of the GRCM to that Member State; 

establishes that other control measures are not sufficient to combat fraud on its 
territory. 

3. 
Member States that apply the GRCM shall establish appropriate and effective 
electronic  reporting  obligations  on  all  taxable  persons  and,  in  particular,  on  taxable 
persons who supply or receive the goods or services to which this mechanism applies.  

4. 

Member  States  wishing  to  apply  the  GRCM  shall  submit  a  request  to  the 

Commission and provide the following information: 

(a) 

(b) 

(c) 

a  detailed  justification  that  the  conditions  referred  to  in  paragraph  1  or  2  are 
fulfilled; 

the starting date of the application of the GRCM and the period to be covered 
by it; 

actions  to  be  taken  to  inform  taxable  persons  of  the  introduction  of  the 
application of the GRCM; 

(d) 

a detailed description of the accompanying measures referred to in paragraph 3. 

If  the  Commission  considers  it  does  not  have  all  the  necessary  information,  it  shall 
request  additional  information  within  one  month  of  receipt  of  the  request.  The 
requesting  Member  State  shall  submit  the  required  information  within  a  month  of 
receipt of the notification. 

The  Commission  shall,  at  the  latest  three  months  after  it  has  received  all  the 
5. 
necessary  information,  adopt  an  implementing  decision  confirming  that  the  request 
complies with the requirements referred to in paragraph 4 and authorise the requesting 

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Member State to apply the GRCM. In case where the requirements are not fulfilled, it 
shall adopt an implementing decision rejecting the request. 

6. 
In  case  of  considerable  negative  impact  on  the  internal  market,  the 
Commission shall repeal all the implementing decisions referred to in paragraph 5, at 
the  earliest  six  months  after  the  entry  into  force  of  the  first  implementing  decision 
authorising a Member State to apply the GRCM. 

Considerable  negative  impact  shall  be  considered  established,  where  the  following 
conditions are fulfilled: 

(a)  more  than  one  Member  State,  not  applying  the  GRCM  referred  to  in 
paragraphs 1 and 2, informs the Commission of an increase of VAT fraud on 
its territory due to the GRCM; 

(b) 

the Commission establishes, including on the basis of the information provided 
by  the  Member  States  referred  to  in  point  (a),  that  such  increase  is  directly 
linked  with  the  application  of  such  a  mechanism  in  one  or  several  Member 
States. 

7. 
Member  States  applying  the  GRCM  shall  submit  an  interim  report  to  the 
Commission no later than two years after the start of application of the GRCM. This 
report shall provide a detailed assessment of the effectiveness of the GRCM. 

Three months after the end of the application of the GRCM, Member States applying 
the mechanism shall submit a final report on its overall impact. 

Member States  not  applying the mechanism shall  submit an interim report to 
8. 
the Commission as regards the impact in its territory of other Member States applying 
the GRCM no later than 30 June 2019, insofar the GRCM will have been applied for 
at least one year in one Member State by that date. 

If  at  least  one  Member  State  applies  the  GRCM,  Member  States  not  applying  the 
mechanism shall submit a final report to the Commission as regards the impact in its 
territory of other Member States having applied the GRCM no later than 30 September 
2022. 

In the reports referred to in paragraph 7, Member States shall assess the impact 

9. 
of the application of the GRCM on the basis of the following evaluation criteria: 

(a) 

(b) 

(c) 

(d) 

the evolution of the VAT gap; 

the evolution of the VAT fraud, notably carrousel fraud and fraud at the retail 
level; 

the evolution of the administrative burdens on taxable persons; 

the evolution of administrative costs for the tax administration. 

In the reports referred to in paragraph 8, Member States shall assess the impact 

10. 
of the application of the GRCM on the basis of the following evaluation criteria: 

(a) 

(b) 

the evolution of the VAT gap; 

the evolution of the VAT fraud, notably carrousel fraud and fraud at the retail 
level; 

(c) 

shift of fraud from Member States applying or having applied the GRCM.'. 

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This Directive shall enter into force on the twentieth day following that of its publication in 
the Official Journal of the European Union. 

Article 2 

It shall apply until 30 September 2022. 

This Directive is addressed to the Member States. 

Done at Brussels, 

Article 3 

For the Council 
The President 

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