Explanatory Memorandum to COM(2024)543 - - Main contents
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| dossier | COM(2024)543 - . |
|---|---|
| source | COM(2024)543 |
| date | 21-11-2024 |
Pursuant to Article 395(1) of 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 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 10 June 2024, Hungary requested authorisation to continue to derogate from Article 193 of the VAT Directive regarding the person liable for payment of VAT in case of certain supplies carried out by taxable persons subject to liquidation or any other proceedings legally establishing its insolvency. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 7 August 2024 of the request made by Hungary. By letter dated 9 August 2024 the Commission notified Hungary that it had all the information it considered necessary for appraisal of the request.
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
Based on Article 199(1)(g) of the VAT Directive, Member States may provide that the person liable for the payment of VAT is the taxable person to whom the supply of immovable property sold by a judgement debtor in a compulsory sale procedure is made (the reverse charge mechanism). In 2017, Hungary requested the extension of the application of the reverse charge mechanism to supplies of capital goods and to supplies of other goods and services with an open market value exceeding HUF 100 000 (approximately EUR 250) at the time of supply, when the taxable person supplying the goods or services is subject to liquidation or any other proceedings legally establishing its insolvency. The derogation was authorised by Council Implementing Decision (EU) 2018/7891 until 31 December 2021.
The measure was further extended until 31 December 2024 by Council Implementing Decision (EU) 2021/1775 of 5 October 20212.
Capital goods are typically high value tools, machinery and objects. Furthermore, according to Hungary, there is a large number of transactions exceeding the threshold of HUF 100 000 carried out by insolvent taxable persons. The liquidator often fails to pay the VAT due, since that amount is used to settle earlier claims. At the same time, the purchaser, being a taxable person with the right of deduction, can still deduct the VAT incurred, which has a negative impact on the budget. Hungary also registered cases of fraud whereby companies in liquidation would issue fictitious invoices to active companies, greatly inflating the amount of deductible VAT without the guarantee that the issuer of the invoices would pay the VAT due.
Hungary therefore argues that there is a need to safeguard the tax revenue and the budgetary interests on account of the number of taxable persons in financial difficulties performing the above supplies. The reverse charge mechanism is, according to Hungary, an appropriate tool to this aim. The taxable person in liquidation would not be liable to pay the VAT due and the customer would not be penalised while losses to the public budget would be avoided.
Pursuant to Article 199a of the VAT Directive, there is the possibility, for all Member States, to apply the reverse charge mechanism for specific transactions prone to fraud. That Article is in force until 31 December 2026 and the Commission will assess whether supplies of capital goods and of other goods and services, when the taxable person supplying the goods or services is subject to liquidation or any other proceedings legally establishing its insolvency, should be included as well in the supplies covered by reverse charge mechanism, should there be a new proposal in this respect.
Consequently, even though Hungary requested the authorisation to be prolonged until 31 December 2027, it is proposed to authorise the extension of the derogation until 31 December 2026.
A derogation allowing a single Member State making use of the reverse charge mechanism, instead of general measures, constitutes a means of last resort and should be limited in time as much as possible. Moreover, that period should be sufficient to implement other conventional measures to reduce the losses to the public budget, in particular for those losses connected with fraudulent behaviours, thereby avoiding that this measure is prolonged again.
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 it 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, i.e. to simplify tax collection and combat tax evasion or avoidance. It does not go beyond what is required to fulfil these aims.
• Choice of the instrument
The instrument proposed is a Council Implementing Decision.
Under Article 395 of the VAT Directive, a derogation from the common VAT rules is only possible upon authorisation by the Council, which is 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 OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Stakeholder consultations
No stakeholder consultation has been conducted. The present proposal is based on a request made by Hungary and concerns only this particular Member State.
• Collection and use of expertise
There was no need for external expertise.
• Impact assessment
The proposal for Implementing Decision aims at safeguarding tax revenues and budgetary interests on account of companies under insolvency procedure in case they carry out supplies of capital goods or supplies of goods or services with an open market value exceeding HUF 100 000. According to Hungary, applying the reverse charge mechanism to these types of transactions has effectively simplified tax collection and prevented tax evasion or avoidance.
According to the Hungarian tax authority’s figures for 2021–2023, the number of taxable persons concerned in 2021 – following emergency measures introduced as a result of the COVID-19 pandemic – rose to 380, falling to 335 in 2022 and to 212 in 2023.
Supplies of goods and services recorded under the reverse charge mechanism stood at HUF 34 billion in 2021 and HUF 31 billion in 2022. In 2023, the figure rose to HUF 157 billion, of which HUF 109 billion was linked to a single large taxpayer.
Consequently – assuming the standard tax rate – the tax liability amounted to HUF 8.3–9.3 billion in 2021 and 2022, rising to an exceptionally high figure of HUF 42 billion in 2023.
Considering, therefore, that there is little chance of recovering VAT from taxable persons subject to liquidation proceedings, the Hungarian tax authority estimates at around HUF 3.6–4 billion (HUF 5.6 billion in 2023 if we exclude the outlier, or HUF 18 billion if we include it) the amount of VAT that would have been lost to the budget each year if the derogation had not been maintained for movable tangible property.
Therefore, the derogating measure has a positive impact. Given this limited impact, Hungary should implement other conventional measures to reduce the losses to the budget, which could achieve similar results.
Because of the narrow scope of the derogation and the limited application in time, the impact will in any case be limited.
4. BUDGETARY IMPLICATIONS
The proposal will have no negative implications for the EU budget.
5. OTHER ELEMENTS
The proposal includes a sunset clause set at 31 December 2026.