COMMUNICATION FROM THE COMMISSION TO THE COUNCIL in accordance with Article 395 of Council Directive 2006/112/EC
Date: 2020-06-22
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Italy, VAT, derogation from EU law, non-standard employment, provision of services, staff, supply, taxpayer

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 22.6.2020  COM(2020) 243 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  tax1  (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 derogation from the general principles of VAT, 
in accordance with the case-law of the Court of Justice of the European Union (CJEU), 
the national derogating measures referred to in Article 395 of the VAT Directive which 
are allowed ‘in order to simplify the procedure for charging the tax or to prevent certain 
types of tax evasion or avoidance’, must be interpreted strictly and those measures must 
also be necessary and appropriate for realising the specific objective which they pursue 
and  have  as  little  effect  as  possible  on  the  objectives  and  principles  of  the  VAT 
Directive2. 

By  letter  registered  with  the  Commission  on  17  December  2019,  Italy  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 5 May 2020 of the request made by Italy. By letter 
dated  6  May  2020,  the  Commission  notified  Italy  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 or services. 
The purpose of the derogation requested by Italy 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  all  contracts  that  involve  atypical  supply  of  staff,  meaning  the  provision  of 
services  carried out  by  means of procurement  contracts,  sub-contracting, entrustment  to 
consortia or other associated companies, characterized by a predominant use of labour at 
the customer’s business premises, with the use of capital goods owned by the customer, 
or in any case attributable to him. 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.  The  reverse  charge  is  often  used  in  order  to  tackle  VAT  fraud  taking  place  in 
targeted  sectors  of  the  economy,  in  particular  through  the  use  of  ‘missing  trader’ 
structures. 

1 OJ L 347, 11.12.2006, p. 1 
2 See judgment of 27 January 2011 in case Vandoorne C-489/09, EU:C:2011:33, paragraph 27. 

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Missing trader 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. 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 

Italy  requests,  under  Article  395  of  the  VAT  Directive,  that  the  Council, acting  upon  a 
proposal  of  the  Commission,  authorises  it  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 services involving the atypical  supply of 
staff.  

The  request  therefore  covers  the  provision  of  services,  carried  out  by  means  of 
procurement  contracts,  sub-contracting,  entrustment  to  consortia  or  other  associated 
companies,  characterized  by  a  predominant  use  of  labour  at  the  customer's  business 
premises, with the use of capital goods owned by the latter or in any case attributable to 
him. It does not include supplies of services to public administrations and cases of staff 
leasing  by  the  Agenzie  per  il  lavoro  (certified  employment  agencies),  governed  by 
Legislative Decree No 276 of 10 September 2003 and authorized to carry out the activity 
of labour intermediation and staff leasing, recruitment and outplacement.  

Italy submits that the introduction of the derogating measure is necessary to fight  fraud 
occurring in the sector of atypical supply of staff. According to the request, the pattern of 
the fraud involves several actors, notably the suppliers of staff, which are producers’ and 
workers’  cooperative  societies,  and  the  customers,  which  are  usually  well-established 
companies that subcontract the workforce they need to carry out their activities. Between 
both parties, there are consortia, which act as intermediary between the suppliers and the 
customers.  

The  cooperative  societies  invoice  the  services  provided  (the  supply  of  staff)  charging 
VAT on the total cost of the service. Given the nature of the services supplied (mainly, 
workforce),  the  main  cost  for  these  companies  is  the  payment  of  the  salaries  to  their 
workers, which does not entail any input VAT. Thus, the total amount of input VAT paid 
by them is very low. As a result, these companies usually have little input VAT, which 
they can deduct from their output VAT. This should normally lead to a position of debt 
towards the Treasury regarding VAT. However, it has been observed that, in practice, an 
important number of these suppliers of staff do not remit VAT to the Tax Authorities. In 
some instances,  they  artificially increase their input VAT in  order to  create a tax credit 
through non-existent input operations. This fictitious tax credit is used to offset3 tax debts 
related  to  VAT,  social  security  contributions  and  other  taxes  these  companies  should 

3 The offsetting of tax credits is regulated by Member States’ national legislation. 

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withhold.  In  other  instances,  they  underreport  the  VAT  due  or  simply  do  not  pay  the 
amount of VAT due. 

According to the estimates included in the request, 30% of the fraud is caused by VAT 
unpaid by the companies providing the atypical supply of staff, which would be affected 
by  the  reverse  charge  mechanism,  and  the  other  70%  is  caused  by  fake  input  VAT, 
misused to pay social security contributions and withholding taxes on the remunerations 
of the contracted staff through an offsetting mechanism. 

By designating the person to whom the services are supplied as the person liable for the 
payment of VAT, Italy would like to combat the above fraud, which occurs in the sector 
of atypical supply of staff. 

Aside from the reverse charge mechanism, Italy will introduce other anti-fraud measures 
concerning  other  direct  taxes.  In  particular,  it  will  introduce  a  mechanism  whereby  the 
tax debt would fall on the customer rather than on the business that supplies the worker, 
similar to the mechanism for social security contributions. Finally, a measure prohibiting 
the  offsetting  of  credits  (including  VAT  credits)  for  the  payment  of  social  security 
contributions and withholding taxes will also be implemented. This measure will prevent 
that artificially created VAT credits are used for the payment of the debts related to social 
security contributions and withholding taxes. 

4.  

THE COMMISSION´S VIEW 

When  the  Commission  receives  requests  in  accordance  with  Article  395  of  the  VAT 
Directive, these are examined with a view to ensure that the basic conditions for granting 
a  derogation  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 fractioned 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. These conditions do not seem to be met in 
the case at hand, for the reasons explained below. 

Point  (b)  of  Article  199(1)  of  the  VAT  Directive  allows  Member  States  to  apply  the 
reverse  charge  mechanism  to  the  supply  of  staff  engaged  in  the  construction  sector,  a 
measure that Italy has already implemented. The request submitted by Italy in relation to 
the supply of staff has a much wider scope, as it would be a cross-cutting measure that 
would potentially affect ample sectors of the economy, applying to different production 
and distribution stages. It should be noted that any company in any sector of the economy 
could be affected, as a recipient of the service, by this measure, wherever they decide to 

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outsource the workforce they need for a concrete task. Further, any company providing 
staff  as  part  of  its  business,  should  verify  if  it  complies  with  the  criteria  laid  down  to 
determine when a company is providing atypical supply of staff and consequently subject 
to  the  application  of  the  reverse  charge.  Thus,  it  is  a  measure  of  a  general  nature  that 
seems not to be sufficiently targeted to combat a concrete fraud situation. 

It should be noted that Italy has already been granted two special measures of a general 
nature to combat VAT fraud: the split payment mechanism4 for the supplies of goods and 
services  to  public  authorities,  to  companies  controlled  by  public  authorities  and  to 
companies listed on the stock exchange that are included in the FTSE MIB index, and the 
mandatory  generalised  electronic  invoicing5.  Granting  another  special  measure  like  the 
one  requested  would  imply  an  increased  de-harmonization  of  the  Italian  VAT  system 
from  the  common  system  of  VAT  established  by  the  VAT  Directive,  and  a  further 
complication  for  businesses,  increasing  their  administrative  burden,  therefore  going 
beyond what  is  necessary to  address  a particular fraud situation. For the suppliers, they 
will  have  to  verify  first  if  the  company  to  which  they  are  supplying  the  service  is  a 
company under the scope of the split payment mechanism. If that is not the case then they 
will  have  to  verify  whether  the  supply  they  are  carrying  out  qualifies  as  an  atypical 
supply of staff. If that is the case they will have to apply the reverse charge mechanism; 
otherwise,  the  normal  VAT  arrangements  apply.  Therefore,  they  could  be  confronted 
with  three  possible  ways  to  charge  VAT  on  their  daily  operations,  increasing  the 
possibilities for mistakes, litigation and penalties. For the recipients of the service, they 
will  also  have  to  verify  whether  the  supply  they  are  receiving  qualifies  as  an  atypical 
supply of staff, potentially creating the same problems regarding mistakes, litigation and 
penalties. 

Moreover,  according  to  the  request,  the  fraud  the  measure  aims  to  tackle  has  two 
components.  About  30%  of  the  fraud  is  caused  by  VAT  unpaid  by  the  companies 
providing the atypical supply of staff , while the other 70% is caused by fake input VAT 
used to pay social security contributions and withholding taxes on the remunerations of 
the  contracted  staff  through  an  offsetting  mechanism.  The  reverse  charge  mechanism 
applied  to  the  atypical  supply  of  staff  would  only  aim  at  tackling  the  30%  of  the  total 
fraud,  the  one  stemming  from  the  lack  of  payment.  However,  it  would  not  avoid 
companies  artificially  increasing  their  input  VAT  to  create  undue  tax  credits  for  the 
payment  of  social  security  contributions  and  withholding  taxes,  therefore  leaving 
unresolved 70% of the total fraud.  

4 Council Implementing Decision (EU) 2017/784 of 25 April 2017 authorising the Italian Republic to apply a special 
measure derogating from Articles 206 and 226 of Directive 2006/112/EC on the common system of value added tax 
and repealing Implementing Decision (EU) 2015/1401, OJ L 118, 6.5.2017, p. 17-19. 
5 Council Implementing Decision (EU) 2018/593 of 16 April 2018 authorising the Italian Republic to introduce a 
special measure derogating from Articles 218 and 232 of Directive 2006/112/EC on the common system of value 
added tax, OJ L 99, 19.4.2018, p. 14-15. 

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According to  information  submitted by  Italy, a  mechanism whereby the tax debt  would 
fall on the customer  rather than on the business  that  supplies the worker,  similar to  the 
mechanism  for  social  security  contributions  is  foreseen  for  direct  taxes.  Further,  a 
measure prohibiting the offsetting of credits (including VAT credits) for the payment of 
social security contributions and withholding taxes will also be implemented. Given that 
such measures would tackle the most significant percentage of the VAT fraud linked to 
the  supply  of  atypical  staff,  the  introduction  of  an  exceptional  mechanism  such  as  the 
reverse charge becomes more difficult to justify. 

Regarding the first component of the fraud, the VAT unpaid by the companies providing 
the atypical supply of staff, this is a problem that should be tackled through conventional 
measures  such  as  routine  inspections  and  auditing.  In  this  regard,  the  mandatory 
generalised electronic invoicing should be an extremely useful tool for the early detection 
of this fraud in order to address it. 

Therefore, the measure requested by Italy does not seem limited in scope, necessary and 
proportionate to address the specific fraud situation linked to the atypical supply of staff. 
It would be advisable to analyse first the results of the measures implemented in relation 
to  direct  taxes  and  compensation  of  credits,  together  with  the  use  of  mandatory  e-
invoicing and control measures on this sector.  

5.  

CONCLUSION 

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

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