Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2009/1008/EU authorising the Republic of Latvia to extend the application of a measure derogating from Article 193 of Directive 2006/112/EC on the common system of value added tax
Date: 2021-11-30
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Latvia, VAT, derogation from EU law, provision of services, supply, taxpayer, wood product

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   EUROPEAN COMMISSION  Brussels, 30.11.2021  COM(2021) 736 final 2021/0386 (NLE)  Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2009/1008/EU authorising the Republic of Latvia to extend the application of a measure derogating from Article 193 of 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  (‘the  VAT  Directive’1),  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 4 April 2021, the Republic of Latvia (hereinafter 
Latvia)  requested  the  authorisation  to  continue  to  apply  a  measure  derogating  from 
Article 193  of  the  VAT  Directive,  which  determines  the  person  liable  for  the  payment  of 
VAT. With the same letter, Latvia sent a report on the application of that measure.  

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other 
Member States by letters dated 9 August 2021, and Spain by letter dated 10 August 2021, of 
the request made by Latvia. By letter dated 10 August 2021, 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 VAT. 

Pursuant to Article 395 of the VAT Directive, Member States may apply measures derogating 
from the provisions of the VAT Directive to simplify the procedure for collecting VAT or to 
prevent certain forms of tax evasion or avoidance if they have been authorised by the Council. 

Latvia  requested  to  continue  to  apply  the  reverse  charge  mechanism  to  timber  transactions 
that  entails  to  make  the  person  to  whom  these  goods  or  services  are  supplied  liable  for  the 
payment of VAT. 

for 

Latvia 

derogating  measure 

by 
The 
Council Decision 2006/42/EC2  until  31 December  2009  and  by  Council  Implementing 
Decision 2009/1008/EU3 until 31 December 2012. The authorisation to apply the derogation 
has  subsequently  been  extended  by  Council  Implementing  Decision  2013/55/EU4  until 
(EU)  2015/23965  until 
31 December 2015,  by  Council 
31 December 2018,  and  by  Council  Implementing  Decision (EU)  2018/20066  until  31 
December 2021. 

Implementing  Decision 

initially 

granted 

been 

had 

1 
2 
3 
4 
5 
6 

OJ L 347, 11.12.2006, p. 1. 
OJ L 25, 28.1.2006, p. 31. 
OJ L 347, 24.12.2009, p.30. 
OJ L 22, 25.1.2013, p.16. 
OJ L 332, 18.12.2015, p.142. 
Council  Implementing  Decision  (EU)  2018/2006  of  11  December  2018  amending  Implementing 
Decision  2009/1008/EU  authorising  the  Republic  of  Latvia  to  extend  the  application  of  a  measure 
derogating from Article 193 of Directive 2006/112/EC on the common system of value added tax (OJ L 
322, 18.12.2018, p. 20–21). 

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According  to  Latvia,  the  timber  market,  which  is  one  of  the  most  important  sectors  of  its 
economy, is particularly sensitive to VAT fraud, because it is dominated by a great number of 
small  local  operators  and  individual  suppliers,  and  because  it  is  very  difficult  to  trace  the 
movements of materials and related transactions. The businesses active in the sector may be 
not  due  to  fulfil  recording  obligations  and  this  may  lead  to  undeclared  transactions  with 
private  individuals  for  the  supply  of  timber.  Thus,  there  is  a  significant  risk  that  some 
operators could evade payment of VAT. The nature of the market and of businesses involved 
has generated VAT fraud, which the Latvian tax authorities have found difficult to control. In 
order  to  combat  this  abuse,  they  have  introduced  the  reverse  charge  mechanism  to  timber 
transactions,  which  has  proven  to  be  very  effective  and  has  decreased  VAT  fraud  in  this 
sector significantly. 

Moreover, this special measure does not have a negative impact on the total amount of VAT 
revenues  collected  at  the  final  stage  of  consumption  and  thus,  does  not  affect  the  Union's 
VAT own resources in a negative way, according to Latvia. 

Derogations  are  in  general  granted  for  a  limited  period  of  time  as  to  allow  an  assessment 
whether the special measure is appropriate and effective and in order to grant Member States 
time to introduce other conventional measures at  national level to monitor the movement of 
materials,  the payment of VAT, and the compliance of taxable persons  which should tackle 
the respective problem until the expiry of the derogating measure, thus making an extension 
of  the  derogation  redundant.  A  derogation  allowing  making  use  of  the  reverse  charge 
mechanism is only granted exceptionally for specific fraudulent areas and constitutes a means 
of last resort.  

Taking into consideration the unchanged legal and factual situation, it is therefore proposed to 
extend the derogating measure, allowing Latvia to continue to apply this derogating measure 
until  31 December 2024.  Until  the  expiry  of  this  derogation,  Latvia  should  implement  other 
conventional measures at national level to monitor the movement of materials, the payment of 
VAT, and the compliance of taxable persons which would underpin the fight and prevent the 
VAT fraud in the sector of timber.  

• 

Consistency with existing policy provisions in the policy area 

Similar derogations in relation to Article 193 of the VAT Directive have been granted to other 
Member States, Portugal7, Romania8 and Lithuania9. 

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

7 

8 

9 

Council  Implementing  Decision  (EU)  2019/1592  of  24  September  2019  authorising  Portugal  to 
introduce  a  special  measure  derogating  from  Article  193  of  Directive  2006/112/EC  on  the  common 
system of value added tax, OJ L 248, 27.9.2019, p. 67–68. 
Council  Implementing  Decision  (EU)  2019/1593  of  24  September  2019  amending  Implementing 
Decision  2013/676/EU  authorising  Romania  to  continue  to  apply  a  special  measure  derogating  from 
Article 193 of Directive 2006/112/EC on the common system of value added tax (OJ L 248, 27.9.2019, 
p. 69–70). 
Council  Implementing  Decision  (EU)  2018/1920  of  4  December  2018  amending  Implementing 
Decision  2010/99/EU  authorising  the  Republic  of  Lithuania  to  extend  the  application  of  a  measure 
derogating from Article 193 of Directive 2006/112/EC on the common system of value added tax (OJ L 
311, 7.12.2018, p. 34–35). 

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 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.  

• 

Choice of the instrument 

Proposed instrument: Council Implementing Decision. 

Under Article 395 of the VAT Directive, a derogation from the common VAT provisions is 
only  possible  upon  authorisation  of  the  Council acting  unanimously  on  a  proposal  from  the 
Commission. A Council Implementing Decision is the most suitable instrument since it can be 
addressed to an individual Member State. 

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. 

• 

Impact assessment 

The proposal for a Council Implementing Decision authorises Latvia to continue to apply the 
reverse  charge  mechanism  to  timber  transactions.  The  situation,  on  which  the  initial 
derogation was based, continues to exist. Latvia claims that despite the fact that there has been 
a reduction in the number of cases of fraud involving VAT and VAT evasion on the timber 
market since the introduction of the reverse charge procedure, the risk is not eliminated.  

The measure has previously been authorised in the 2003 Act of Accession10, in particular in 
Chapter  7,  point  1(b)  of  Annex  VIII  thereto,  and  by  Decision  2006/42/EC11  under  the  then 
applicable  Sixth  Directive  77/388/EEC.  However,  over  time,  fraud  in  the  timber  sector  has 
moved to include transactions that were not subject to the VAT reverse charge procedure. For 
instance, transactions relating to wood by-products. Accordingly, the scope of application of 
the VAT reverse charge procedure was further broadened, in  order to  reduce the number of 
opportunities for fraud. Furthermore, as of 1 January 2020, the recipient of timber must pay 

10 
11 

OJ L 236, 23.9.2003, p. 33. 
OJ L 25, 28.1.2006, p. 31. 

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for  the  goods  received,  and  the  recipient  of  services  for  the  services  rendered,  by  means  of 
non-cash payments. These modifications were made to standardise payment requirements in 
all cases where the reverse charge procedure is applied, in order to enhance the effectiveness 
of the measure aimed at combating VAT fraud. 

Latvia  submits  that  the  extension  of  the  derogating  measure  is  necessary  to  fight  fraud 
occurring  in  the  timber  sector.  The  timber  market  in  Latvia  is  dominated  by  small  and 
medium-sized  traders  and  taxable  persons,  which  buy  or  sell  timber  and  provide  or  receive 
related  services.  The  VAT  reverse  charge  procedure  is  applied  for  domestic  timber 
transactions  and  specific  services  only  when  the  supplier  and  the  recipient  of  the  goods  are 
both  registered  for  VAT  purposes  in  Latvia.  According  to  the  request,  the  timber  sector  is 
particularly  vulnerable  to  VAT  fraud,  because  it  is  very  difficult  to  trace  the  movements  of 
materials  and  related  transactions.  Initially  the  reverse  VAT  charge  procedure  was  applied 
only to  timber supplies. Gradually the risk of fraud grew due to  the evolution  of the timber 
market,  therefore  as  of  1  April  2001  the  reverse  charge  procedure  was  extended  to  certain 
services  provided  as  part  of  timber  transactions.  However,  over  time,  fraud  in  the  timber 
sector has shifted to other related transactions that were not subject to the reverse VAT charge 
procedure, for instance, transactions relating to wood by-products. Accordingly, the scope of 
application  of  the  VAT  reverse  charge  procedure  was  extended  to  other  supplies,  thus 
reducing the number of opportunities for fraud.   

According  to  the  estimates  included  in  the  request,  based  on  data  provided  by  the  Central 
Statistical  Bureau  for  2020,  intermediate  consumption  in  the  sector  accounts  for  69%  of 
products  produced  and  related  services  rendered  in  the  forestry  and  logging  sectors  (NACE 
Rev. 2, code 02). Exports account for 18.9%, while just 10.5% of production volume goes to 
household  consumption.  In  the  production  of  wood,  wood  and  cork  products,  except  for 
furniture (NACE Rev. 2, code 16), 59.9% are destined for export. 37.4% of products are used 
in  intermediate  consumption  in  the  sector,  and  just  1.4%  of  products  go  to  the  final 
consumption of households. According to the information provided by experts in the sector, 
timber  transactions  subject  to  the  reverse  VAT  charge  procedure  represent  approximately 
EUR 2.0 billion.  

As at 1 January 2021, there were 5 389 taxable persons (legal persons) registered in the timber 
sector, off which 3 418 persons were subject to VAT. 

The extension of this  measure will not  have a negative impact  on the total amount of VAT 
revenue collected at the final stage of consumption and thus, does not affect the Union's VAT 
own resources in a negative way. 

4. 

BUDGETARY IMPLICATIONS 

The proposal has no implication on the EU budget.  

5. 

OTHER ELEMENTS 

The proposal is limited in time. 

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2021/0386 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

amending Implementing Decision 2009/1008/EU authorising the Republic of Latvia to 
extend the application of a measure derogating from Article 193 of 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) 

1 
2 

3 

4 

5 

Council  Decision  2006/42/EC2  authorised  Latvia  to  apply  a  special  measure 
derogating  from  Article  21(1),  point  (a),  of  Directive  77/388/EEC3,  to  designate  the 
recipient as the person liable to pay value added tax (VAT) on the supply of timber or 
the  provision  of  related  services  until  31 December 2009.  By  Council 
on 
Implementing Decision 2009/1008/EU4 Latvia was, by way of derogation from Article 
193  of  Directive  2006/112/EC,  authorised  to  continue  to  designate  the  recipient  of 
timber  or  related  services  as  the  person  liable  to  pay  VAT  in  the  case  of  timber 
transactions  until  31 December 2012  (‘the  special  measure’).  Following  successive 
extensions, that authorisation is due to expire on 31 December 20215.  

By  letter  registered  with  the  Commission  on  4  April  2021,  Latvia  requested  the 
authorisation  to  continue to  apply  the special  measure. Along with that  letter,  Latvia 
submitted a report on the application of that special measure. 

In  accordance  with  Article  395(2),  second  subparagraph,  of  Directive  2006/112/EC, 
the  Commission  informed  the  other  Member  States  by  letters  dated  9 August 2021, 

OJ L 347, 11.12.2006, p. 1. 
Council  Decision  2006/42/EC  of  24  January  2006  authorising  Latvia  to  extend  the  application  of  a 
measure derogating from Article 21 of the Sixth Council Directive 77/388/EEC on the harmonisation of 
the laws of the Member States relating to turnover taxes (OJ L 25, 28.1.2006, p. 31). 
Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member 
States relating to turnover taxes - Common system of value added tax: uniform basis of assessment (OJ 
L 145, 13.6.1977, p. 1). 
Council Implementing Decision 2009/1008/EU of 7 December 2009 authorising the Republic of Latvia 
to  extend  the  application  of  a  measure  derogating  from  Article  193  of  Directive  2006/112/EC  on  the 
common system of value added tax (OJ L 347, 24.12.2009, p. 30). 
Council  Implementing  Decision  (EU)  2018/2006  of  11  December  2018  amending  Implementing 
Decision  2009/1008/EU  authorising  the  Republic  of  Latvia  to  extend  the  application  of  a  measure 
derogating from Article 193 of Directive 2006/112/EC on the common system of value added tax (OJ L 
322, 18.12.2018, p. 20). 

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and  Spain  by  letter  dated  10  August  2021,  of  the  request  made  by  Latvia.  By  letter 
dated 10 August 2021, the Commission notified Latvia that it had all the information 
necessary to consider the request.  

According to Latvia, the timber market, which is one of the most important sectors of 
its economy, is particularly sensitive to VAT fraud, because it is dominated by a great 
number of small local operators and individual suppliers. The nature of the market and 
of  businesses  involved  has  generated  VAT  fraud,  which  the  Latvian  tax  authorities 
have  found  it  difficult  to  control.  In  order  to  combat  that  abuse,  the  Latvian  tax 
authorities have introduced the reverse charge mechanism for the payment of VAT in 
timber transactions, which has proven to be very effective and has decreased fraud in 
that market significantly according to the report submitted by Latvia.  

Derogations are in general granted for a limited period of time to allow an assessment 
whether  the  special  measure  is  appropriate  and  effective.  Derogations  grant  Member 
States time to introduce other conventional measures  at national level to  monitor the 
movement of materials, the payment of VAT, and the compliance of taxable persons 
which should tackle the respective problem until the expiry of the derogating measure, 
thus making an extension of the derogation redundant. A derogation allowing making 
use  of  the  reverse  charge  procedure  is  only  granted  exceptionally  for  specific 
fraudulent areas and constitutes a means of last resort. Therefore, before the expiry of 
the extension of the special measure under this Implementing Decision, Latvia should 
implement other conventional measures to fight and prevent VAT fraud in the timber 
market that another extension of the special measure would no longer be needed.    

Latvia  should  therefore  be  authorised  to  apply  the  special  measure  only  until 
31 December 2024.  

The  special  measure  will  have  no  adverse  impact  on  the  Union's  own  resources 
accruing from VAT. 

(4) 

(5) 

(6) 

(7) 

(8) 

Implementing Decision 2009/1008/EU should therefore be amended accordingly, 

HAS ADOPTED THIS DECISION:  

Article 2 of Implementing Decision 2009/1008/EU is replaced by the following:  

Article 1 

This Decision shall apply until 31 December 2024.’ 

‘Article 2 

This Decision is addressed to the Republic of Latvia. 

Article 2 

Done at Brussels, 

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For the Council 
The President 

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