Conseil UE Council of the European Union Brussels, 22 December 2015 (OR. en) PUBLIC 15517/15 LIMITE FISC 198 ECOFIN 1002 NOTE From: To: Subject: Incoming Dutch Presidency Permanent Representatives Committee/Council Combatting VAT fraud in the EU: use of the reverse charge mechanism - Exchange of views 1. At the meeting of the Committee of Permanent Representatives of 18 December 2015, the delegation of the Czech Republic requested that this item is included in the agenda of the ECOFIN Council of 15 January 2016. 2. In view of this discussion, the delegation of the Czech Republic tabled a note "Combatting VAT fraud in the EU: use of the Reverse Charge Mechanism", which is set out in doc. 15196/15 FISC 189 ECOFIN 971 LIMITE. 3. The incoming Dutch Presidency has therefore prepared this note to steer the exchange of views concerning this agenda item, to be tabled for the ECOFIN Council of 15 January. 15517/15 JB/mpd 1
ANNEX I. INTRODUCTION 1. The fight against value added tax (VAT) fraud presents a major issue to the EU as a whole. The European Council of 26-27 June 2014 has adopted the "Strategic Agenda for the Union in Times of Change", where to "guarantee fairness: by combatting tax evasion and tax fraud so that all contribute their fair share" is one of the Union priorities for the five years to come. 1 2. The ECOFIN conclusions of 15 May 2012 "On the future of VAT in general" contain a number of guiding priorities for further work in the field of VAT and call for a simpler, more efficient, more robust and fraud-proof VAT system, that is tailored to the single market. 2 3. While a number of measures have been already implemented, both at national and international level, more could possibly be done in this area. As an illustrative example, the VAT gap 3 numbers in the EU remain large, and significant part of these amounts are the result of fraudulent activities. According to the latest report published by the European Commission, the overall VAT Gap in the EU saw an increase in absolute values, to reach 168 billion EUR. As a percentage, the overall VAT Gap was evaluated at 15.2 percent and the median VAT Gap rose by 1.6 percentage point, to reach 13.9 percent. 4 1 2 3 4 See doc. EUCO 79/14 CO EUR 4 CONCL 2, page 14, point 2. See doc. 9586/12 FISC 63 OC 213 + COR 1. The VAT Gap is defined as the difference between the amount of VAT actually collected and the VAT Total Tax Liability (VTTL), in absolute or percentage terms. See "Study to quantify and analyse the VAT Gap in the EU Member States. 2015 Report"; TAXUD/2013/DE/321; FWC No. TAXUD/2010/CC/104, page 7; at http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/vat _gap2013.pdf 15517/15 JB/mpd 2
4. As one of the legislative measures to tackle VAT fraud, and, more specifically, the missing trader intra-community fraud (MTIC fraud or "carousel" fraud) a reverse charge mechanism (RCM) for VAT has been designed. As a general rule, the VAT Directive 5 specifies that value added tax (VAT) shall be payable by any taxable person carrying out transactions involving the taxable supply of goods or services. For cross-border transactions and for certain domestic high risk sectors, however, the VAT Directive (Articles 194 to 199b) provides for a reverse charge mechanism, which shifts the obligation to pay VAT to the person to whom the supply is made. II. STATE OF PLAY 5. The ECOFIN Council of 5 June 2007 in its conclusions 6 has covered, as part of more far reaching measures to combat VAT fraud, the issue of introduction of a general RCM. In its statement to the minutes of that Council meeting, the Commission agreed to analyse the possibility of making a proposal to enable an interested Member State to run a pilot project for a limited period of time. 7 6. In February 2008, the Commission presented a Communication on its analysis of measures to change the VAT system to fight fraud, 8 covering, inter alia, the possibility of introducing a general RCM. In that communication, the Commission indicated that it "believes that a general reverse-charge system should either be introduced on a mandatory basis throughout the EU or be disregarded as a concept." 7. Nevertheless, in its February 2008 Communication referred to above, the Commission also demonstrated its willingness, under certain conditions, to work out a pilot project in order to establish whether a reverse charge could be an appropriate response to tackle VAT fraud or not. 5 6 7 8 Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, OJ L 347, 11.12.2006, p. 1., as amended. See doc. doc. 9803/1/07 FISC 81 LIMITE. See doc. 9803/1/07 FISC 81 ADD 1 LIMITE. COM(2008)109 final, 22.2.2008 and SEC(2008)249, 22.2.2008. 15517/15 JB/mpd 3
8. The ECOFIN Council held an exchange of views on the fight against VAT fraud in its meetings of 4 March 2008 and 14 May 2008 but no Council conclusions were adopted on those occasions. In December 2008, the Commission presented a Communication on a coordinated strategy to improve the fight against VAT fraud in the European Union, where it indicated that "in the absence of political agreement on the more 'far reaching' measures, the Commission has decided to concentrate its efforts exclusively on the so-called 'conventional' measures to enhance the traditional methods in the fight against tax fraud. 9 9. The Commission presented in 2009 10 a proposal to amend the VAT Directive regarding an optional application of the VAT reverse charge mechanism in relation to supplies of certain goods and services susceptible to fraud. The Council amended the VAT Directive in 2010 11 (the amendment was limited to greenhouse gas emissions trading) and in 2013 12. While, at that time, many Member States agreed that broader application of RCM could serve as a viable and effective anti-fraud measure, there were a number of concerns raised that broadening the scope of RCM might have negative effects on the integrity of the existing VAT system in the EU. 13 10. Since then, work and policy debate has continued but no new legislative proposals with regard to further (optional or mandatory) extension of application of the RCM have been made by the Commission. 9 10 11 12 13 See doc. 16776/08 FISC 180 and COM(2008) 807 final. See doc. 13868/09 FISC 121. Council Directive 2010/23/EU of 16 March 2010 (OJ L 72, 20.3.2010, p. 1). Council Directive 2013/43/EU of 22 July 2013 (OJ L 201, 26.7.2013, p. 4). See doc. 11507/13 FISC 138 ECOFIN 636 CO EUR-PREP 31, points 9 to 13. 15517/15 JB/mpd 4
11. More recently, on 29 October 2015 the Commission has objected to the request by the Republic of Austria, the Republic of Bulgaria, the Czech Republic and the Slovak Republic pursuant to Article 395 of the VAT Directive to be authorised to derogate from Article 193 of the VAT Directive as regards the person liable for the payment of the VAT to the tax authorities and to apply the RCM. 14 The Commission in its commmunication has inter alia indicated that, given a request for derogation of a wide scope such a measure goes beyond the scope of a derogation under Article 395 of the VAT Directive. The Commission also indicated that, in its view, any substantial change to the principles of the VAT system should be decided at EU level in the context of the reform of the VAT system, and not through stand-alone national solutions. 12. Most recently, at the initiative of the Czech Republic, the issue of possible wider use of the reverse charge mechanism in the EU as a potential measure against VAT carousel fraud has been discussed at the High Level Working Party on Tax Issues (HLWP) meeting of 19 November 2015. In the light of the discussion, which covered the questions of a general application of the RCM, delegations took note of the European Commission's intention to examine this issue early next year within the "Future of VAT" Group and in the context of the Action Plan on the Definitive VAT Regime. The semi-annual ECOFIN report to the European Council also indicated that "orientation from the Ministers of Finance on how to reduce VAT fraud might be useful." 15 13. Further on, at the time of formal adoption of a Council Directive amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation, the Czech republic made a statement to the minutes, where by it called on the Commission, "while working towards VAT definitive regime", to analyse "various options, including wider application of RCM". The Czech Republic also volunteered "to test this respective option through a pilot project similar to that outlined by the Commission in 2008" and indicated that it "expects the Commission to set the parameters to frame the pilot project." 14 15 See doc. 13560/15 FISC 143. See doc. 15187/15 FISC 187 ECOFIN 968 Co EUR-PREP 50, point 46. 15517/15 JB/mpd 5
14. The European Commission also made a statement to the minutes of the ECOFIN, and indicated that "the fight against tax fraud, including VAT fraud, is one of its main priorities", that it will present next year (in 2016) "new initiatives on a fraud-proof VAT system". The Commission also mentioned that it is "currently examining different options, including a wider use of the reverse charge mechanism. This analysis should be carried out and discussed with all Member States in this framework." 16 15. The Czech Republic has consequently tabled a note for discussion at ECOFIN level, set out in doc. 15196/15 FISC 189 ECOFIN 971 LIMITE. This note presents the technical and policy aspects of its request to use the RCM for a wider scope of transaction, at national level. The note also outlines a number of specific questions for an exchange of views at ECOFIN level. 16. In this context, the Dutch delegation also observes, that besides evaluating economic questions with regard to the impact of a possible RCM pilot scheme that the Czech Republic describes in its note (doc. 15196/15 FISC 189 ECOFIN 971 LIMITE), it is important to clearly determine whether such measure would be in line with the existing framework of the EU legislation, including the specific requirements of TEU and TFEU. 17. On this basis, the Dutch delegation believes that an exchange of views on the wider application of the reverse charge mechanism would be useful, especially in the context of the ongoing wider debate on how to best address the increasing levels of VAT fraud, which has the potential to damage the economies of many Member States. 16 Full texts of both statements can be found in the Annex to doc. 14207/15 FISC 152 ECOFIN 858. 15517/15 JB/mpd 6
III. THE WAY FORWARD 18. Against this background, the Committee of Permanent Representatives is invited to suggest that the ECOFIN Council at its forthcoming meeting: a) exchange views on the basis of this steering note as well as the note by the Czech Republic, set out in document 15196/15 FISC 189 ECOFIN 971 LIMITE; b) discuss whether wider application of reverse charge mechanism for domestic supplies is a possible solution to fight VAT fraud; c) exchange views whether an authorisation to the countries, which so wish, to engage into a pilot project on application of such a scheme, designed within the limits of the existing legal framework, would cause any serious concerns; d) invite the Commission to continue examination of this issue and present its findings to the Council in the context of future initiatives. 15517/15 JB/mpd 7