COMMUNICATION FROM THE COMMISSION TO THE COUNCIL in accordance with Article 395 of Council Directive 2006/112/EC
Date: 2018-01-18
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Latvia, VAT, building materials, derogation from EU law, supply, taxpayer

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  EN 

   EUROPEAN COMMISSION  Brussels, 18.1.2018  COM(2018) 34 final  COMMUNICATION FROM THE COMMISSION TO THE COUNCIL in accordance with Article 395 of Council Directive 2006/112/EC  
 
 
1. 

BACKGROUND 

Pursuant to Article 395 of Council Directive 2006/112/EC of 28 November 2006 on 
the  common  system  of  value  added  tax  (the  VAT  Directive),  the  Council,  acting 
unanimously on a proposal from the Commission, may authorise any Member State 
to introduce special measures for derogation from the provisions of this Directive, in 
order to simplify the procedure for collecting VAT or to prevent certain forms of tax 
evasion  or  avoidance.  As  this  procedure  provides  for  derogations  from  the  general 
principles of VAT, in accordance with the consistent rulings of the Court of Justice 
of  the  European  Union,  such  derogations  should  be  proportionate  and  limited  in 
scope. 

By  letter  registered  with  the  Commission  on  8  August,  Latvia  requested  an 
authorisation to apply a measure derogating from Article 193 of the VAT Directive. 
In accordance with Article 395(2) of the VAT Directive, the Commission informed 
the other Member States by letter dated 3 November 2017 (Portugal by letter dated 6 
November 2017) of the request made by Latvia. By letter dated 7 November 2017, 
the Commission notified Latvia that it had all the information it considered necessary 
for appraisal of the request. 

As  a  general  rule,  the  person  liable  for  the  payment  of  VAT  to  the  tax  authorities 
under  Article  193  of  the  VAT  Directive  is  the  taxable  person  supplying  the  goods. 
The  purpose  of  the  derogation  requested  by  Latvia  is  to  place  that  liability  on  the 
taxable  person  to  whom  the  supplies  are  made  (the  so-called  reverse  charge 
mechanism),  in  the  case  of  particular  products,  notably  as  regards  construction 
goods. The aim of the requested derogation is the fight against fraud. 

2. 

REVERSE CHARGE 

The  person  liable  for  the  payment  of  VAT  pursuant  to  Article  193  of  the  VAT 
Directive is the taxable person supplying the goods or services. The purpose of the 
reverse charge mechanism is to shift that liability onto the taxable person to whom 
the supplies are made. 

Missing trader fraud occurs when traders sell goods or provide services, collect the 
VAT  from  their  customers  and  subsequently  disappear  without  remitting  the  VAT 
they  collected  from  their  customers  to  the  tax  authorities.  In  the  most  aggressive 
cases  of  such  tax  evasion,  the  same  goods  or  services  are,  via  a  "carousel"  scheme 
(which  involves  the  goods  or  services  being  traded  between  Member  States), 
supplied several times without payment of VAT to the tax authorities, whereas at the 
same time the customer will deduct the VAT it paid to its supplier. By designating 
the  person  to  whom  the  goods  or  services  are  supplied  as  the  person  liable  for  the 
payment  of  VAT  in  such  cases,  the  domestic  reverse  charge  mechanism  has  been 
found to eliminate the opportunity to engage in that form of tax evasion. 

3. 

THE REQUEST 

Latvia  requests,  under  Article  395  of  the  VAT  Directive,  that  the  Council,  acting 
upon  a  proposal  of  the  Commission,  authorises  Latvia  to  apply  a  special  measure 
derogating from Article 193 of the VAT Directive as regards the application of the 
reverse charge mechanism in relation to domestic supplies of construction products.  

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In  light  of  occurring  fraud,  Latvia  introduced  the  reverse  charge  mechanism  in  the 
sector  of  construction  services  pursuant  to  Article  199(1)(a)  of  the  VAT  Directive 
which  according  to  Latvia,  reduced  the  VAT  fraud  in  the  sector  of  construction 
services. However, Latvia submits that an increase of VAT refunds to taxpayers has 
been observed after the introduction of the reverse charge mechanism in the sector of 
construction services and this can be partially explained by the increase of fraud in 
the supply of constructions goods. Latvia claims that there are grounds to believe that 
part of the registered VAT payers in the construction sector are acting in bad faith, 
not  disclosing  the  actual  volumes  of  construction  products  used  when  providing 
construction services.  

Following the information submitted by Latvia, similarly to other sectors, taxpayers 
operating  in  the  construction  sector  apply  the  same  methods  for  VAT  evasion, 
namely:  a)  input  tax  is  unjustly  increased  b)  suppliers  of  construction  goods  are 
doubtful ("missing trader") companies making it impossible to determine the origin 
of  the  products  c)  products  are  acquired  from  "buffer  companies"  and  input  tax  is 
declared.  

Latvia also submits that the construction sector has the highest proportion of shadow 
economy consisting of not reporting the business income and of envelope wages.  

By designating the person to whom the construction goods or services are supplied as 
the  person  liable  for  the  payment  of  VAT,  Latvia  would  like  to  combat  the  above 
fraud which occurs in the sector of construction products. It appears from the request 
and is confirmed by a letter sent to the Commission on 12 October 2017 that Latvia 
envisages the application of the reverse charge mechanism to supplies of these goods 
as from 1 January 2018.  

4. 

THE COMMISSION'S VIEW 

When  the  Commission  receives  requests  in  accordance  with  Article  395,  these  are 
examined  to  ensure  that  the  basic  conditions  for  their  granting  are  fulfilled  i.e. 
whether  the  proposed  specific  measure  simplifies  procedures  for  taxable  persons 
and/or  the  tax  administration  or  whether  the  proposal  prevents  certain  types  of  tax 
evasion or avoidance. In this context, the Commission has always taken a restrictive, 
cautious approach to ensure that derogations do not undermine the operation of the 
general VAT system, are limited in scope, necessary and proportionate. 

Any derogation from the system of fractionated payment can, therefore, not be more 
than  a  last  resort  and  an  emergency  measure  and  must  offer  guarantees  as  to  the 
necessity and exceptional nature of the derogation granted.  

Against  this  background,  it  should  be  recalled  that  it  has  been  the  Commission's 
policy  to  consider  derogations  on  the  reverse  charge  mechanism  only  when,  at  the 
same time, the goods at stake cannot reach the final consumption, a weak taxpayer is 
replaced by a more reliable one and there is no risk of fraud to the retail level or to 
other Member States that do not use the mechanism. 

In the first place, it should be noted that the products concerned can be intended for 
private consumption entailing thus the risk that the fraud is shifted further down the 
supply  chain  which  could  become  even  more  difficult  to  control.  Transferring  the 
whole VAT liability to the last link of the chain would, therefore, increase the risks. 
There is also a risk of fraud shift to other Member States.  

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Furthermore, a derogation is in any case not a long-term solution, nor does it replace 
adequate  control  measures  for  the  sector  and  for  taxable  persons.  Although  Latvia 
indicated in its request that a comprehensive range of control measures is currently in 
place  to  tackle  VAT  fraudsters,  it  did  not  demonstrate  why  such  control  measures 
would  not  be  sufficient  to  fight  fraud  in  construction  products.  Nor  did  Latvia 
indicate concretely which measures have been taken or will be taken to fight fraud in 
the sector of construction goods.  

Based  on  the  information  provided by  Latvia,  various  forms  of  fraud  appear  in  the 
sector  of  construction  products.  While  the  domestic  reverse  charge  mechanism  has 
been found effective to combat the missing trader fraud (MTIC), it does not seem to 
be an appropriate instrument to fight other forms of fraud, such as for instance non-
declaring  of  volumes  of  purchased  products.  Consequently,  the  requested  measure 
would  not  provide  an  optimal  solution  for  the  fraud  situation  in  the  sector  of 
construction goods.  

Finally,  the  Commission  refused  a  number  of  requests  for  derogation  to  apply  the 
reverse charge mechanism based on the above elements. In this respect reference is 
made  to  Commission's  communications  concerning  pig-farming  and  animal  fodder 
industry  (COM(2013)148  of  19.3.2013  -  in  response  to  a  request  from  Hungary), 
sugar sector (COM(2014)229 of 22.4.2014 – in response to the request by Hungary), 
precious  stones  (COM(2014)  623  of  10.10.2014  -  request  by  Estonia),  meat  sector 
(COM(2017) 24 final of 19.1.2017 – request by Slovakia).  

Taking  into  account  the  above,  the  Commission  has  come  to  the  conclusion  that  a 
derogation  allowing  the  reverse  charge  mechanism  to  be  applied  in  the  sector  of 
construction products could have adverse impacts on fraud at the retail level and on 
other Member States. The requested measure would also not seem to be an optimal 
measure able to deal with the complex fraud situation in this sector.  

A  solution  would  have  to  be  found  at  a  wider  level  involving  appropriate  control 
measures.  The  Commission  remains  available  to  provide  Latvia  with  necessary 
assistance to counter the problems of VAT fraud.  

5. 

CONCLUSION 

On the basis of the above-mentioned elements, the Commission objects to the request 
made by Latvia. 

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