COMMUNICATION FROM THE COMMISSION TO THE COUNCIL in accordance with Article 395 of Council Directive 2006/112/EC
Date: 2019-06-17
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Lithuania, VAT, adjuvant, biofuel, derogation from EU law, petroleum product, supply, taxpayer

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  EN 

   EUROPEAN COMMISSION  Brussels, 17.6.2019  COM(2019) 277 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 19 November 2018, Lithuania 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 2 April 2019 of the request made 
by Lithuania. By letter dated 3 April 2019, the Commission notified Lithuania that it 
had all the information it considered necessary for the 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 Lithuania 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 petroleum products 
and additives. 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 

Lithuania requests, under Article 395 of the VAT Directive, that the Council, acting 
upon a proposal of the Commission, authorises Lithuania 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  petroleum  products 

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(gas  oil  and  petrol)  including  additives  (fatty  acid  methyl  ester  (FAME)  and 
bioethanol).  

By designating the person to whom the goods or services are supplied as the person 
liable  for  the  payment  of  VAT,  the  domestic  reverse  charge  mechanism  has  been 
found  to  eliminate  the  opportunity  to  engage  in  certain  forms  of  tax  fraud  such  as 
'missing trader fraud'.  

Lithuania  submits  that  the  introduction  of  the  derogating  measure  is  necessary  to 
fight  fraud  occurring  in  the  sector  of  petroleum  products.  These  products  are 
purchased from taxable persons in other Member States and before they are supplied 
to retailers or directly to consumers, multiple transactions are included in the chain 
between missing traders who do not pay VAT due to the state budget. According to 
Lithuania  approximately  5-6%  of  petrol  and  gas  oil  on  the  Lithuanian  market  is 
traded fraudulently depriving the Lithuanian state budget of around 20 million EUR 
per year.  

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 proportionate1. 

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 in case the reverse charge is introduced, the 
fraud has a tendency to move further down the supply chain (to retail level). This is 
due  to  the  fact  that  the  retailer  acquires  the  products  VAT  free  and  after  charging 
VAT on the subsequent supply can disappear with the amount of VAT received from 
the customer. Given the higher numbers of traders at the retail level this will be even 
more difficult to control.  

In the second place, it should be noted that petrol and gas oil are consumable goods 
which are particularly sensitive to price changes with consumers/buyers prepared to 
cross the border to obtain the best price. Given this sensitivity of the market, there is 
a  risk  of  fraud  to  move  to  neighbouring  Member  States.  The  introduction  of  the 
reverse charge creates an incentive for dishonest traders from neighbouring Member 
States to  buy petrol VAT free in  Lithuania which could  then be resold  in  the other 

1   C-395/11 BLV Wohn- und Gewerbebau, ECLI:EU:C:2012:799, paragraph 40.  

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Member States. The neighbouring Member States will not be informed of the arrival 
on their territory of petrol purchased VAT free elsewhere by these dishonest traders.  

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.  Lithuania 
introduced  a  number  of  control  measures  and  some  of  them  appeared  effective.  In 
particular, the rules on trading of petroleum products have been tightened up and the 
traders need to dispose of a licence. It appears that in 2017 there were 71 companies 
holding  such  wholesale  licence,  so  it  should  normally  be  possible  for  Lithuania  to 
control such limited number of traders.  

Other  measures  could  still  be  envisaged,  such  as  for  instance  a  better  control  of 
refund claims including checks of the business premises, holding the customer of the 
missing trader jointly and severally liable if he knew or should have known that by 
his purchase he was participating in a transaction linked to VAT fraud, etc. 

Finally,  it  should  be  noted  that  in  the  past  the  Commission  communicated  its 
intention  to  refuse  a  request  for  derogation  by  another  Member  State  in  order  to 
apply  the  reverse  charge  mechanism  to  the  same  products.  That  Member  State 
subsequently decided to withdraw its request.  

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 
petroleum  products  and  additives  could  have  adverse  impacts  on  fraud  at  the  retail 
level  and  on  other  Member  States.  Therefore,  it  is  not  considered  an  appropriate 
solution to tackle the fraud occurring in this sector.  

A  solution  would  have  to  be  found  at  a  wider  level  involving  appropriate  control 
measures,  including  measures  for  more  expedite  investigation  and  effective 
prosecution. The Commission remains available to provide Lithuania 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 Lithuania. 

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