Proposal for a COUNCIL IMPLEMENTING DECISION authorising 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: 2018-07-02
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Latvia, VAT, basis of tax assessment, derogation from EU law, ferrous metal, non-ferrous metal, supply

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   EUROPEAN COMMISSION  Brussels, 2.7.2018  COM(2018) 509 final 2018/0270 (NLE)  Proposal for a COUNCIL IMPLEMENTING DECISION authorising 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 9 April 2018, Latvia requested a derogation from 
Article 193 of the VAT Directive in order to apply the reverse charge mechanism to supplies 
of  ferrous  and  non-ferrous  semi-finished  metals.  In  accordance  with  Article  395(2)  of  the 
VAT  Directive,  the  Commission  informed  the  other  Member  States  by  letter  dated  4  May 
2018  of  the  request  made  by  Latvia.  By  letter  dated  7  May  2018  the  Commission  notified 
Latvia that it had all the information necessary to consider the request. 

1. 

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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 ferrous and non-ferrous semi-finished metals are included in point 
(j) of Article 199a, paragraph 1.  

Latvia did not make use of the option of Article 199a (1)(j) of the VAT Directive and did not 
apply  the  reverse  charge  mechanism  to  supplies  of  ferrous  and  non-ferrous  semi-processed 
metals. However, due to recently discovered fraud schemes in the supplies of these products 
Latvia would like to introduce the reverse charge mechanism to domestic supplies of ferrous 
and non-ferrous semi-finished metals.  

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 ferrous and non-ferrous semi-
finished metals based on Article 395 of the VAT Directive.  

Latvia submits that during tax audits VAT fraud schemes have been identified in the sector of 
metal products. When assessing the tax audits whereby tax evasion in relation to transactions 
with metal products was detected, Latvia found out that they systematically led to significant 
amounts of additional tax be paid. These additional assessments mounted up to the double of 
average additional assessments following audits. According to Latvia, this points to the high 
risk of fraud in transactions involving metal products.  

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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 fraudulent deletion of registered transactions, 
a  detailed  breakdown  of  transactions  must  be  given  in  the  VAT  declaration  and  particular 
attention  is  also  given  to  improving  the  standard  controls  and  administrative  measures. 
Despite all these measures, Latvia considers it nevertheless necessary to introduce the reverse 
charge  mechanism  for  the  supplies  of  ferrous  and  non-ferrous  semi-processed  metals  to 
prevent VAT revenue losses to the public budget.  

Supplies of ferrous and non-ferrous semi-finished metals are considered to be susceptible to 
fraud and are therefore included in Article 199a(1)(j) of the VAT Directive. 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)(j)  of  the  VAT  Directive,  the  reverse  charge  mechanism  may  be 
applied to the supplies of ferrous and non-ferrous semi-finished metals. 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  ferrous  and  non-ferrous  semi-finished  metals  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. 

• 

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 

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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Commission.  Moreover,  a  Council  Decision  is  the  most  suitable  instrument  since  it  can  be 
addressed to individual Member States. 

3. 

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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  ferrous  and  non-ferrous  semi-finished  metals.  The 
reverse charge mechanism should help Latvia to stop further spreading of the VAT fraud with 
the  supplies  of  metal  products.  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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2018/0270 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

authorising 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) 

(7) 

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 (j) of Article 199a(1) of Directive 2006/112/EC, Member States may 
provide  that  the  person  liable  for  payment  of  VAT  on  supplies  of  ferrous  and  non-
ferrous  semi-finished  metals  is  the  taxable  person  to  whom  the  supply  is  made 
("reverse charge mechanism"). Latvia has not availed of this option.  

Latvia has recently discovered a high risk of VAT fraud in the sector of  ferrous and 
non-ferrous  semi-processed  metals  and  would  therefore  like  to  introduce  the  reverse 
charge mechanism to domestic supplies of these products.  

Pursuant to 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 the two year period can no longer be fulfilled, Latvia cannot apply the 
reverse  charge  mechanism  based  on  point  (j)  of  Article  199a(1)  of  Directive 
2006/112/EC.  

By  letter  registered  with  the  Commission  on  9  April  2018,  Latvia  has  requested  in 
accordance with Article 395(2) of Directive 2006/112/EC 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  ferrous  and  non-ferrous  semi-
processed metals.   

In  accordance  with  the  second  subparagraph  of  Article  395(2)  of  Directive 
2006/112/EC, the Commission, by letter dated 4 May 2018, transmitted the request to 
other Member States and by letter dated 7 May 2018, notified Latvia that it had all the 
information necessary to consider the request.  

According  to  information  provided  by  Latvia,  VAT  fraud  schemes  have  been 
identified  in  the  sector  of  metal  products.  Although  a  number  of  conventional 
measures have been introduced by Latvia to combat the VAT fraud, Latvia considers 

1 

OJ L 347, 11.12.2006, p.1. 

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that  it  is  necessary  to  introduce  the  reverse  charge  mechanism  for  the  supplies  of 
ferrous and non-ferrous semi-finished metals 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 ferrous and non-ferrous semi-finished metals 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 ferrous and non-ferrous semi-finished metals.  

Article 1 

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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