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Brussels, 19 July 2006

Value Added Tax: Commission believes that German and Austrian requests to apply a generalised reverse charge mechanism cannot be allowed as special derogations

The European Commission has objected to the derogation requests made in accordance with Article 27 of the Sixth VAT Directive by Austria and Germany for a general application of the reverse charge mechanism. Article 27 provides for derogation from the harmonised general rules of VAT if those derogations are targeted, restricted and proportionate. The requests were made in the context of a desire by Austria and Germany to tackle the phenomenon of businesses disappearing without paying their VAT liabilities. The only way to introduce very broad measures to change the VAT system would be by amending the Sixth VAT Directive under Article 93 of the EC Treaty (which requires consultation of the European Parliament and the European Economic and Social Committee).

"While combating fraud is a priority of the Commission, and Member States could use the money not paid by the “missing traders” for accelerating economic growth, for creating new jobs, for increasing competitiveness by spending more on R&D, it is important that any measure taken by Member States to combat fraud is proportionate and does not impose new obligations on honest businesses" said Taxation Commissioner László Kovács. "The Commission always has to ensure that measures proposed by Member States are in line with the EU legislation".

The “reverse charge” mechanism allows the supplier of goods or services to not charge VAT to his customer. This means that the supplier does not pay the VAT to the Treasury, but the obligation to do so is passed on to the customer who will thus be in a position to offset this payment against the input tax deduction. Thus any flow of money which is currently being exploited by fraudsters is avoided.

Requests from Germany and Austria

Germany and Austria asked for derogations under Article 27 of the Sixth VAT Directive in order to obtain authorisation to apply the reverse charge on their territory.

Under Article 27 of the Sixth VAT Directive, the Council, acting unanimously on the basis of a proposal from the Commission, and without consulting either the European Parliament or the European Economic and Social Committee can authorise a Member State to apply specific measures derogating from the normal rules in order to combat fraud. The Commission has now decided not to make such a proposal.

As this Article 27 procedure provides for derogations from the harmonised general principles of VAT, in accordance with the consistent rulings from the European Court of Justice, such derogations should be targeted, restricted and proportionate.

The Commission has previously proposed to the Council that individual Member States be authorised to apply reverse charge, but previous applications were generally different insofar as they applied to specific sectors (construction, waste, wood etc). However, these authorisations were generally limited to supplies by smaller, untrustworthy and ephemeral suppliers to bigger, easier to control businesses.

The German and Austrian requests foresaw the introduction of a generalised use of the reverse charge mechanism. It would be applied to all Business to Business (B2B) supplies of goods or services where the invoice value exceeds €5,000 and €10,000, respectively.

If they would have been approved, these measures would have made a fundamental change to the VAT system, and in so doing, eliminated one of the characteristics of VAT, which is the fractionated payment, whereby the total amount of VAT due to the treasury is paid in stages during the production/distribution chain.

The Commission believes that the only legal basis which would allow Member States to introduce such very broad measures which are intended to counter VAT fraud would be Article 93 of the Treaty. A proposal on this basis would result in giving the option of modifying the VAT system to all Member States, but would have to be agreed unanimously by the Member States in the Council, after consultation of the European Parliament.

Link to the general anti-fraud strategy of the Commission

In its Communication on the need to develop a co-ordinated strategy to improve the fight against fiscal fraud (see IP/06/697), the Commission highlighted the fight against VAT fraud as one of its major preoccupation.

This Communication opens the debate inter alia on the need to modify or not the Common VAT system by extending the use of the reverse charge system, an issue that the Commission is prepared to consider.

The Commission and the Member Sates have already started the discussions on this issue. However, it is too early to give preliminary conclusions. In any case, Member States have agreed that any change to the VAT system must reduce considerably the possibilities for fraud, exclude new risks and above all generate no disproportionate administrative burden for companies, especially those with a clean record, or the authorities, and ensure tax neutrality and non-discriminatory treatment of operators.
For further information on the fight against fraud see:

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