Brussels, 19/07/2006 (Agence Europe) - On Wednesday the European Commission rejected requests by Germany and Austria to apply a generalised reverse charge mechanism. The two countries' requests were underpinned by a desire to tackle fraud and the phenomenon of businesses disappearing without paying their VAT liabilities. 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.
The requests made in accordance with Article 27 of the Sixth VAT Directive, stipulate that 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 - including the generalised reverse charge mechanism. Under Article 27, such derogations should be “targeted, restricted and proportionate”. The Council has previously authorised to apply reverse charge, but they were applied to specific sectors (construction, waste, wood etc). 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. The Commission believes that in this case Article 27 of the Sixth VAT Directive is not the appropriate legal basis and 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 EP.