COMMUNICATION FROM THE COMMISSION TO THE COUNCIL in accordance with Article 395 of Council Directive 2006/112/EC
Date: 2018-11-08
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Romania, VAT, derogation from EU law, financial solvency, liquidation, payment, public institution, tax collection, taxpayer

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 8.11.2018  COM(2018) 666 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 28 November 2017, Romania requested 
to introduce a special measure derogating from Title XI of the VAT Directive for the 
implementation  of  the  VAT  split  payment  mechanism  for  certain  categories  of 
persons. A number of exchanges took place between the Commission and Romania 
whereby the  Commission  asked  for further  clarifications and pointed Romania to  a 
number of elements that the Commission considered disproportionate and difficult to 
justify. At the same time the Commission invited Romania to modify its request for 
derogation  taking  into  account  the  concerns  raised  by  the  Commission.  Romania, 
however, indicated it could not agree with the arguments and concerns presented by 
the Commission and refused to adapt its derogation request.  

In accordance with Article 395(2) of the VAT Directive, the Commission transmitted 
the Romanian request to other Member States by letter dated 4 July 2018. By letter 
dated 5 July 2018, the Commission notified Romania that it had all the information it 
considered necessary for the appraisal of the request. 

2. 

THE ROMANIAN REQUEST AND THE SPLIT PAYMENT MECHANISM 

Romania submitted a request for derogation from Title XI of the VAT Directive to 
be  authorized  to  impose  a  mandatory  split  payment  mechanism  on  taxable  persons 
and  public  institutions  which  have  tax  arrears  or  which  are  subject  to  insolvency 
proceedings.  The  split  payment  mechanism  should  apply  to  B2B  transactions  and 
should not apply to taxable persons falling under the exemption for SMEs. The split 
payment  applies  if  the  tax  arrears  are  above  RON 15 000  (around  EUR 3 200)  for 
large taxpayers, above RON 10 000 (around EUR 2 150) for medium taxpayers and 
RON 5 000 (around EUR 1 080 EUR) for other taxpayers and they are unpaid after 
60 working days from the due date. 

Romania started applying the split  payment  mechanism on 1 January 2018 without 
awaiting the Commission reply to its request. 

The  split  payment  mechanism  is  an  alternative  VAT  collection  system.  Under  the 
standard  procedure,  for  a  given  transaction,  a  VAT  taxable  person  collects  the 
payment of the taxable base and VAT (if applicable) from its client (or a third party). 
The  VAT  taxable  person  then  reports  this  transaction  in  its  periodical  VAT  return. 
Depending on the outcome of the VAT return, VAT is due by the taxable person or it 
could be refunded. If VAT is due, the VAT taxable person pays the VAT to the tax 

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authorities  of  its  Member  State  on  a  defined  periodical  basis  (monthly,  quarterly, 
etc.).  

The  use  of  the  split  payment  introduces  a  change  as  a  split  is  made  between  the 
payment  of  the  VAT  amount  due  and  the  taxable  amount.  In  case  of  Romania,  the 
purchaser pays the taxable amount to  the supplier, whereas it pay the VAT due on 
this  supply  not  directly  to  the  supplier  but  to  a  VAT  account  at  the  Romanian 
Treasury or at a Romanian financial institution.  

According  to  Romania,  the  special  measure  is  requested  in  order  to  increase  the 
collection  of  VAT  and  to  combat  VAT  evasion,  by  increasing  the  voluntary 
compliance  to  VAT  payment  by  taxable  persons.  Romania  considers  that  the 
application  of  the  VAT  split  payment  will  stop  the  fraud  whereby  some  economic 
agents do not transmit the VAT received from customers to the tax authorities. 

3. 

THE COMMISSION'S VIEW 

When the Commission receives requests in accordance with Article 395 of the VAT 
Directive,  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  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. 

The split payment mechanism is not a common system of payment of VAT but rather 
a novelty. There is a growing interest in the mechanism among Member States who 
regard it as a tool to help them in the fight against VAT fraud. Different designs of 
such  split  payment  model  are  possible  and  every  model  needs  to  be  assessed 
separately in order for the Commission to conclude that it can be justified based on 
Article 395 of the VAT Directive.  

The Commission takes the view that certain elements of the Romanian split payment 
model raise serious concerns regarding their proportionality.  

The  Romanian  split  payment  system  is  applicable  to  taxable  persons  and  public 
institutions  which  have  tax  arrears  above  given  thresholds  or  which  are  subject  to 
insolvency proceedings. The Commission considers that defining the thresholds at a 
fixed level for three categories of taxable persons does not ensure the equal treatment 
of  taxable  persons  within  the  same  category.  It  is  a  fact  that  the  threshold  of 
RON  15 000 would not have the same impact for all large taxpayers or the threshold 
of RON 5 000 will not have the same impact for all small taxable persons given the 
differences  within  these  groups.  The  Commission  therefore  considers  that  the 
proportionality  of  such  system  of  fixed  thresholds  cannot  be  justified  and  that  a 
threshold linked to a percentage of the turnover could be a better criterion.  

Furthermore  under  the  Romanian  split  payment  system  the  customer  is  obliged  to 
verify  the  register  of  taxable  persons  to  which  the  split  payment  applies  and  act 
accordingly,  meaning  split  the  net  amount  and  the  VAT  amount.  At  the  same  time 
the notification about the inclusion in the register is sent by the tax authorities to the 

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supplier  and  not  to  the  customers.  Romania  does  not  consider  it  necessary  that  the 
supplier informs the customer of the necessity to apply the split payment mechanism 
by including an appropriate mention on the invoice. Moreover, if the customer does 
not  apply  the  split  payment  mechanism  and  pays  VAT  to  another  account  than  the 
VAT account of the supplier, a penalty of 0.06% per day of the amount wrongly paid 
is imposed on the customer, if not corrected within 30 working days. However, it is 
the supplier (and not the customer) who can correct the situation and transfer the sum 
in  question  from  its  main  account  to  its  VAT  account  and  inform  his  customer  of 
this,  thereby  avoiding  any  sanctions  on  the  customer.  Romania  clarified  that  such 
transfer by the supplier is only a possibility, not  an  obligation, as the responsibility 
for paying VAT into the correct VAT account remains with the customer. 

Such split payment system puts an unjustifiable and disproportionate burden on the 
customer.  Even  if  the  obligation  for  the  customer  to  consult  the  register  of  taxable 
persons  falling  under  the  split  payment  mechanism  were  maintained,  the  supplier 
should at least be obliged to inform the customer of the obligation to apply the split 
payment mechanism by including a mention on the invoice. Since Article 226 of the 
VAT  Directive  enumerates  the  details  which  are  to  be  included  on  the  invoice,  the 
inclusion of an additional mention requires a derogation from this Article. However, 
by  letter  of  17  May  2018  Romania  informed  the  Commission  that  it  considers 
unnecessary the inclusion on the invoice of a reference to the application of the split 
payment mechanism.  

The  penalty  imposed  on  the  customer  in  case  of  the  non-application  of  the  split 
payment is in the Commission's view disproportionate, in case the supplier remains 
liable  for  the  payment  of  VAT1.  Such  penalty  should  rather  be  imposed  on  the 
supplier, particularly in the view that the supplier can at any time correct the mistake 
by transferring the VAT received to his VAT account.  

It  should  be  noted  that  Article  273  of  the  VAT  Directive  allows  Member  States  to 
impose  other  obligations  which  they  deem  necessary  for  the  correct  collection  of 
VAT  and  for  the  prevention  of  evasion.  However,  the  proportionality  test  also 
applies to the measures adopted under that Article.  

In  light  of  the  above,  the  Commission  considers  that  the  Romanian  split  payment 
mechanism is not proportionate to the objectives pursued, namely those of ensuring 
the correct collection of VAT and preventing tax evasion.  

The Commission informed Romania that the obligation for non-established traders to 
open a bank account with a Romanian financial institution would not be compatible 
with  Article  56  TFEU  on  the  free  movement  of  services.  The  Commission  also 
suggested that Romania could instead oblige such traders to open an account with the 
Treasury, but that would need to be available also in foreign currency. By its reply, 
Romania  restated  that  it  is  not  possible  to  make  payments  in  foreign  currency  by 
using a Treasury account.  

The Commission requested Romania to address its concerns on the proportionality of 
the  above  elements  of  the  split  payment  system  and  to  modify  the  split  payment 

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Romania informed the Commission that there is no change of liability and it is the supplier who remains 
liable for the payment of VAT.  

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mechanism  accordingly.  However,  Romania  did  not  react  positively  to  the 
Commission's requests.  

4. 

CONCLUSION 

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

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