Proposal for a COUNCIL IMPLEMENTING DECISION authorising the Republic of Latvia to introduce a special measure derogating from Article 193 of Council Directive 2006/112/EC on the common system of value added tax
Date: 2018-02-09
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Latvia, VAT, automatic game, derogation from EU law, supply, taxpayer

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   EUROPEAN COMMISSION  Brussels, 9.2.2018  COM(2018) 59 final 2018/0024 (NLE)  Proposal for a COUNCIL IMPLEMENTING DECISION authorising the Republic of Latvia to introduce a special measure derogating from Article 193 of Council Directive 2006/112/EC on the common system of value added tax  
 
 
EXPLANATORY MEMORANDUM 

Pursuant to Article 395(1) of Directive 2006/112/EC of 28 November 2006 on the common 
system of value added tax (hereafter 'the VAT Directive'), the Council, acting unanimously on 
a proposal from the Commission, may authorise any Member State to apply special measures 
for  derogation  from  the  provisions  of  that  Directive  in  order  to  simplify  the  procedure  for 
collecting VAT or to prevent certain forms of tax evasion or avoidance. 

By  letter  registered  with  the  Commission  on  15  November  2017,  Latvia  requested  a 
derogation  from  Article  193  of  the  VAT  Directive  in  order  to  apply  the  reverse  charge 
mechanism  to  supplies  of  game  consoles.  In  accordance  with  Article  395(2)  of  the  VAT 
Directive,  the  Commission  informed  the  other  Member  States  by  letter  dated  23  November 
2017 of the request made by Latvia. By letter dated 24 November, the Commission notified 
Latvia that it had all the information necessary to consider the request. 

1. 

• 

CONTEXT OF THE PROPOSAL 

Reasons for and objectives of the proposal 

As  a  general  rule,  Article  193  of  the  VAT  Directive  stipulates  that  the  taxable  person 
supplying goods or services is normally liable to pay value added tax (VAT). 

Pursuant to Article 199a (1) of the VAT Directive Member States may provide that the person 
liable for payment of VAT on supplies listed in this Article is the taxable person to whom the 
supply  is  made  (the  reverse  charge  mechanism).  Under  the  reverse  charge  procedure,  the 
taxable person, to whom the supplies are made, becomes liable for the payment of VAT. This 
taxable person, provided he  has a full right of deduction, would simultaneously declare and 
deduct the VAT corresponding to the supply, thus leading to no effective payment of VAT to 
the Treasury. Supplies of game consoles are included in point (h) of Article 199a, paragraph 
1.  

Latvia did not make use of the option of Article 199a (1) (h) of the VAT Directive and does 
not  apply  the reverse charge mechanism to  supplies of game consoles.  However, due to the 
recent increased fraud in the sector of game consoles in Latvia, the latter Member State would 
like to introduce the reverse charge mechanism to domestic supplies of game consoles.  

Following  Article  199a  (1)  of  the  VAT  Directive,  the  reverse  charge  mechanism  may  be 
applied until 31 December 2018 and for a minimum period of two years. As the condition of 
the two-year period is not fulfilled, Latvia cannot apply the reverse charge mechanism based 
on this Article.  

Consequently,  Latvia  requests  a  derogation  from  Article  193  of  the  VAT  Directive  to  be 
authorised  to  apply  the  reverse  charge  mechanism  to  supplies  of  game  consoles  based  on 
Article 395 of the VAT Directive.  

The aim of the requested derogation is to prevent VAT fraud in the sector of game consoles. 
On  the  basis  of  the  options  set  out  in  Article  199a(1)  (c),  (d)  and  (h),  since  1  April  2016, 
Latvia applies the VAT reverse charge mechanism to supplies of mobile phones, tablet PCs, 
laptops, and integrated circuit devices. It has been established that following the introduction 
of  the  reverse  charge  for  the  latter  supplies,  VAT  fraud  increased  in  the  supplies  of  game 
consoles. These products are susceptible to fraud as they  are relatively small in size, with a 
relatively high value and a well-developed trade on the Internet. 

Latvia submits that audits were performed in the sector of supplies of game consoles. It was 
established in 2017 that there were 14 shell companies operating in the game console supply 

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sector, representing 6.4 % of all enterprises in this sector. In 2016, of the 219 registered VAT 
taxable persons active in the game console supply sector, eight had declared VAT as input tax 
for  transactions  with  other  taxable  persons  classified  as  shell  companies  (3.7 %  of  the  total 
number of persons registered for VAT purposes). In order to prevent fraudulent activities by 
economic operators, the Latvian State Revenue Service (VID) makes use of the possibility to 
exclude  them  from  its  register  of  persons  subject  to  VAT.  In  2017,  the  number  of  taxable 
persons  active  in  this  sector  that  were  excluded  from  the  VID’s  VAT  taxpayer  register  has 
increased significantly. In the first eight months of the year, 16 taxable persons active in the 
sector  have  been  excluded  from  the  register,  which  is  already  88.9 %  of  the  total  number 
excluded in 2016 (18 taxable persons).  

According to the information submitted by Latvia, a number of measures are undertaken by 
Latvia to reduce and fight VAT fraud. For instance, cash registers have been subject to new 
requirements aiming to completely eliminate the deletion of registered transactions, a detailed 
breakdown of transactions must be given in the VAT declaration, particular attention is also 
given  to  improving  the  routine  controls  and  administrative  measures,  and  an  obligation  for 
credit  institutions  and  other  entities  to  inform  the  VID  of  suspicious  transactions  was 
introduced.  The  adoption  of  electronic  invoicing  is  also  being  considered.  Despite  all  these 
measures,  Latvia  considers  it  nevertheless  necessary  to  introduce  the  reverse  charge 
mechanism  for  the  supplies  of  game  consoles  to  prevent  VAT  revenue  losses  to  the  public 
budget.  

Supplies  of  game  consoles  are  considered  to  be  susceptible  to  fraud  and  are  included  in 
Article  199a  (1)  (h)  of  the  VAT  Directive  next  to  tablet  PC's  and  laptops.  If  the  condition 
regarding  the  minimum  period  of  application  was  fulfilled,  Latvia  would  have  been  able  to 
rely on the latter Article for the application of the reverse charge mechanism.  

It is therefore, proposed to grant the derogation for the period of validity of Article 199a of 
the VAT Directive. The derogation is thus proposed until 31 December 2018, i.e. the date of 
expiry of Article 199a of the VAT Directive.  

• 

Consistency with existing policy provisions in the policy area 

Based on Article  199a  (1) (h) of the VAT Directive, the reverse  charge mechanism  may be 
applied  to  the  supplies  of  game  consoles.  A  number  of  Member  States  apply  the  reverse 
charge relying on this provision1. If the condition of the minimum period of two years were 
fulfilled,  Latvia  could  apply  the  reverse  charge  mechanism  to  supplies  of  game  consoles 
without requesting a derogation based on Article 395 of the VAT Directive.  

The  proposed  measure  is,  therefore,  consistent  with  the  existing  provisions  of  the  VAT 
Directive.  

2. 

• 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

Legal basis 

Article 395 of the VAT Directive. 

• 

Subsidiarity (for non-exclusive competence)  

Considering  the  provision  of  the  VAT  Directive  on  which  the  proposal  is  based,  the 
subsidiarity principle does not apply. 

1 

See list of notifications of the VAT Committee: 
http://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/vat/key_docume
nts/vat_committee/notifications.pdf 

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• 

Proportionality 

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

Given  the  limited  scope  of  the  derogation,  the  special  measure  is  proportionate  to  the  aim 
pursued, i.e. to prevent certain forms of tax evasion or avoidance in a specific sector.  

• 

Choice of the instrument 

Under  Article  395  of  the  VAT  Directive,  derogation  from  the  common  VAT  rules  is  only 
possible  with  the  authorisation  of  the  Council  acting  unanimously  on  a  proposal  from  the 
Commission.  Moreover,  a  Council  Decision  is  the  most  suitable  instrument  since  it  can  be 
addressed to individual Member States. 

3. 

• 

RESULTS 
CONSULTATIONS AND IMPACT ASSESSMENTS 

EX-POST 

EVALUATIONS, 

OF 

STAKEHOLDER 

Stakeholder consultations 

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

• 

Collection and use of expertise 

There was no need for external expertise. 

• 

Impact assessment 

The  proposal  for  Implementing  Decision  aims  at  preventing  certain  forms  of  tax  evasion  or 
avoidance in the sector of supplies of game consoles. The reverse charge mechanism should 
help Latvia to  stop  further spreading  of  the VAT fraud with the supplies of game  consoles. 
Consequently, the derogating measure will have a potential positive impact.  

Because of the narrow scope of the derogation and the limited application in time, its impact 
will in any case be limited. 

4. 

BUDGETARY IMPLICATIONS 

The proposal has no negative implication for the EU budget.  

5. 

OTHER ELEMENTS 

The 

proposal 

includes 

a 

sunset 

clause 

set 

at 

31  December 

2018.

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2018/0024 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

authorising the Republic of Latvia to introduce a special measure derogating from 
Article 193 of Council Directive 2006/112/EC on the common system of value added tax 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty on the Functioning of the European Union,  

Having regard to Council Directive 2006/112/EC of 28 November 2006 on the common 
system of value added tax1,  

and in particular Article 395(1) thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

Pursuant  to  Article  193  of  Directive  2006/112/EC  any  taxable  person  carrying  out  a 
taxable supply of goods or services is, as a general rule, liable for the payment of value 
added tax (VAT) to the tax authorities. 

Pursuant  to  point  (h)  of  Article  199a(1)  of  Directive  2006/112/EC,  Member  States 
may provide that the person liable for payment of VAT on supplies of game consoles 
is  the  taxable  person  to  whom  the  supply  is  made  ("reverse  charge  mechanism"). 
Latvia does not avail of this option although it applies the reverse charge to supplies of 
tablet PC's and laptops based on point (h) of Article 199a (1) of that Directive. 

Due to the increased fraud in the sector of game consoles in Latvia, the latter Member 
State  would  like  to  introduce  the  reverse  charge  mechanism  to  domestic  supplies  of 
game consoles.  

Following  Article  199a(1)  of  Directive  2006/112/EC,  the  reverse  charge  mechanism 
may be applied until 31 December 2018 and for a minimum period of two years. As 
the condition of two year period is not fulfilled, Latvia cannot apply the reverse charge 
mechanism based on point (h) of Article 199a(1) of Directive 2006/112/EC.  

By letter registered with the Commission on 15 November 2017, Latvia has requested 
an  authorisation to  apply  a  measure  derogating from  Article  193  of  that  Directive  in 
order  to  make  the  recipient  liable  for  the  payment  of  VAT  for  the  supply  of  game 
consoles  

In  accordance  with  Article  395(2)  of  Directive  2006/112/EC,  the  Commission 
informed the other Member States, by letter dated 23 November 2017, of the request 
made by Latvia. By letter dated 24 November 2017, the Commission notified Latvia 
that it had all the information necessary to consider the request.  

(7) 

According to  information  provided by  Latvia  VAT  fraud  increased  in  relation  to  the 
supply of game consoles following the introduction of the reverse charge mechanism 

1 

OJ L347, 11.12.2006, p.1. 

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for  the  supply  of  mobile  phones,  tablet  PCs,  laptops  and  integrated  circuit  devices. 
Games consoles are particularly susceptible to VAT fraud as they are relatively small 
in size, with a relatively high value and have a well-developed market on the Internet. 
Based  on  the  information  submitted  by  Latvia,  a  number  of  conventional  measures 
have  been  introduced  by  Latvia  to  combat  the  VAT  fraud.  Nevertheless,  Latvia 
considers that it is necessary to introduce the reverse charge mechanism for the supply 
of game consoles in order to prevent VAT revenue losses to the public budget.  

Latvia  should  therefore  be  authorised  to  apply  the  reverse  charge  mechanism  to 
supplies of game consoles for a limited period.  

The  derogation  has  no  adverse  impact  on  the  Union's  own  resources  accruing  from 
VAT,  

(8) 

(9) 

HAS ADOPTED THIS DECISION:  

By  way  of  derogation  from  Article  193  of  Directive  2006/112/EC,  Latvia  is  authorised  to 
designate the recipient of the supply as the person liable to pay VAT in the case of the supply 
of game consoles.  

Article 1 

This Decision shall take effect on the day of its notification. 

This Decision shall expire on 31 December 2018. 

Article 2 

This Decision is addressed to the Republic of Latvia. 

Done at Brussels, 

Article 3 

For the Council 
The President 

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