Keeping EU energy and emissions markets protected from VAT fraud beyond 2018
Urgent need to confirm the extension of the derogation for a domestic reverse charge mechanism for electricity, gas and emission allowances in Art. 199a of the VAT Directive.
Brussels, 4 September 2018 - Missing Trader Intra-Community Value Added Tax fraud remains a persistent threat to the integrity and well-functioning of electricity, gas and emission allowance markets in Europe1. Billions of euros had been defrauded from European Exchequers before the Council of the EU decided on the introduction of a derogation from the VAT Directive2 for electricity, gas and emission allowance transactions. The derogation enables Member States to apply the Domestic Reverse Charge Mechanism (DRCM) to these goods and services. Should the existing derogation not be proactively prolonged by the Council before the end of the year, it will automatically expire at midnight on 31 December 2018 as stipulated in the built-in sunset clause in Article 199a3 of the VAT Directive.
As eighteen representative associations of the energy sector, we therefore call on the Council, and in particular the Austrian Council Presidency, to prioritise the decision on the European Commission’s legislative proposal of 25 May 20184 on a prolongation of the derogation in Article 199a of the VAT Directive. This will prevent fraudsters from again successfully implementing large-scale VAT fraud carousels in highly liquid energy and emissions markets in Europe. It will also ensure that market participants can maintain trust in the integrity and safety of electricity, gas and emission allowance markets as an essential part of the economic value chain in Europe.
In this context, and in order to keep the EU’s energy and emissions markets protected from VAT fraud beyond 2018, we would like to recommend the following four measures:
1. Adopt the extension in timely fashion
A timely adoption of the prolongation is essential to help tax administrations and businesses in the concerned Member States to continue with the current practice without a need to prepare for a possible change by the beginning of next year. The Commission proposal of 25 May 2018 is a good basis for this.
2. Extend the end of the derogation by at least five years
The proposed prolongation of Article 199a by only three and a half years until 30 June 2022 is very short. While there is indeed an ongoing legislative process for the introduction of a Definitive Reverse Charge Mechanism for Goods, it would be preferable to define at least another five-year term, meaning a prolongation until 31 December 2023.
3. Explicitly include Guarantees of Origin
In addition, it should be specified that Guarantees of Origin5, which are very similar in nature to emission allowances, can also benefit from the derogation in Article 199a of the VAT Directive which is currently interpreted differently in different Member States. Austria and Ireland, for instance, have already specified in their national tax guidance that Guarantees of Origin indeed fall under the domestic reverse charge mechanism as stipulated in Article 199a of the VAT Directive. Hence, for the sake of clarity and to foster the harmonisation of VAT rules across Europe, Article 199a should be amended accordingly and Guarantees of Origin should be explicitly mentioned.
4. Apply comprehensively the DRCM across all Member States
Importantly, as not all Member States are currently making use of the derogation, the decision on a prolongation should be used to call for a comprehensive application of Article 199a (a) (b) (f) across all Member States and equally for electricity, gas, emissions and guarantees of origin. In order to eradicate the possibility of VAT fraud under the current VAT system, it is important that the protective shield is applied comprehensively. Otherwise, the risk of fraud in non-protected markets will increase significantly.
1 The significance of the threat and the importance of the derogation for the European energy sector have also been recognised in a report from the European Commission to the Council and the European Parliament on the effects of Articles 199a and 199b of Council Directive 2006/112/EC on combatting fraud which was published on 8 March 2018:
2 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32006L0112 (hereafter: the VAT Directive)
Updated: 10:13 on 04/09/2018