Czech Republic to apply “reverse charge” VAT mechanism as broadly as possible

The European Council on Tuesday approved a proposal that will allow EU member states that have a problem with carousel tax fraud to apply a generalized reversal of VAT liability. This is something Czech Prime Minister Andrej Babiš has fought for for four and a half years on the argument that use of reverse charge could save the EU a large part of the around 170 billion euros lost every year in unpaid VAT.

Photo: Pixabay / Public Domain

The Czech Republic loses more than 80 billion crowns in unpaid VAT every year as a result of sophisticated tax scams and carousel fraud. This involves importers bringing in goods free of VAT, selling them with the tax added and disappearing without paying the VAT to the local tax office in the given country. Carousel fraud refers to a chain of companies involved in an intra-community supply of goods where the goods are traded among VAT payers, and someplace in the chain the VAT is neither declared nor paid and the respective economic subject ceases to exist or becomes untraceable. They are hard to detect since they frequently jump from one area of business to another.

For years the Czech tax authorities have been more or less helpless in fighting this type of tax fraud and Prime Minister Babiš –formerly the country’s finance minister – believes that reverse charge, where the tax is paid by the consumer and not the seller, is the most efficient way to get on top of the problem.

However winning approval for the Czech Republic to have the widest possible remit to use the so-called reverse charge VAT has not been easy. Brussels has a mandate to work towards tax unification within the EU and some member states have been lukewarm on the idea.

Now the Council has agreed to allow temporary derogations from normal VAT rules in countries where VAT fraud is a serious problem. Member states will be able to use the generalized reverse charge mechanism only for domestic supplies of goods and services above a threshold of 17, 500 euros (around 450,000 crowns) per transaction and only up until June 30, 2022, when the outcome of the exemption will be reviewed. Countries which wish to apply reverse charge will also have to meet strict technical requirements. Finance Minister Alena Schillerová told reporters on Tuesday the Czech Republic would make the widest possible use of the exemption.

“The introduction of a generalized reversal of VAT liability is something we have pushed for for four and a half years. We believe it will be an effective instrument against carousel fraud without harming small and medium-sized businesses.”

Alena Schillerová, photo: archive of Czech Finance Ministry

Critics are not so optimistic. They argue that the big tax-fraudsters will always be a step ahead and that the introduction of the reverse charge mechanism will not only mean changes to legislation but will be an added administrative burden on VAT payers who will be bound by electronic reporting obligations from which they were hereto exempted. Tax experts likewise warn that adding more and more exemptions to areas where reverse charge will apply will make the VAT tax system increasingly complicated, which in turn will provide new opportunities for fraudsters.

The Council’s decision will have to be approved by the European Parliament and the Parliament of the Czech Republic before the Czech Finance Ministry can officially request to introduce a generalized reversal of VAT liability in this country.