Monday, January 7, 2019
EU legislation providing for the introduction of the "generalised reverse charge mechanism," to enable member states to better counter value-added tax fraud, has been published in the EU's Official Gazette and will become effective from January 16, 2018.
Council Directive (EU) 2018/2057 of December 20, 2018, will allow member states that are most severely affected by VAT fraud to temporarily apply a generalised reversal of VAT liability. This so-called generalised "reverse charge" mechanism involves shifting liability for VAT payments from the supplier to the customer, to prevent suppliers from charging VAT on onward supplies and failing to remit VAT collected to the relevant tax agency. The most pervasive and costly version of this fraud is carousel fraud.
Member states will be able to use the generalised reverse charge mechanism (GRCM) only for domestic supplies of goods and services above a threshold of EUR17,500 (USD19,950) per transaction, until June 30, 2022, and under very strict technical conditions.
In particular, in a member state that wishes to apply such measure, 25 percent of the VAT gap has to be due to carousel fraud. Among other requirements, this member state will have to establish appropriate and effective electronic reporting obligations on all taxable persons, in particular those to which the mechanism would apply.
The generalised reverse charge mechanism may only be used by a member state once it meets the eligibility criteria and its request has been authorized by the Council.
The reverse charge mechanism can already be applied on a temporary basis, but not in a generalized manner. Under the current rules, it is limited to a predetermined list of sectors. It may only be used by a member state that has made a specific request and if authorized to do so by the Council.
The directive will offer a short-term solution for containing fraud by the most affected member states, pending ongoing negotiations on a new and definitive VAT system where supplies would be taxed in the country of destination – the so-called definitive VAT system.
Provisions governing the generalised reverse charge mechanism have been newly included in a new Article 199c to the EU VAT Directive (Directive 2006/112/EC).