The reverse charge mechanism is a measure that shifts liability for final VAT payment to the government budget from the vendor to the customer. In this way it aims to reduce the risk of VAT fraud. The aim is to help some member states that are particularly affected by VAT fraud and do not have sufficient measures to combat it, which could be the case in instances of VAT fraud schemes such as the ‘carousel’ or ‘missing trader’ schemes.
Member States will be able to use the generalised reverse charge mechanism only for domestic supplies of goods and services above a threshold of EUR17,500 ($20,329) per transaction only until June 30, 2022 and under very strict technical conditions. In particular, in a member state that wishes to apply such measure, 25% 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 authorised by the Council. The application of this measure is also subject to strict EU safeguards.
The mechanism is to be implemented, as a pilot project, in the Czech Republic, considering that the country has expressed interest in using this simplified measure for several years. Depending on the outcome of the pilot project, EU Member States, including Romania, will be able to request the Council to approve the implementation of the mechanism, provided they meet the eligibility criteria.
The proposal was made following a request by the EU member states that are particularly affected by loss of revenue due to VAT fraud, especially carousel fraud. According to the European Commission, the VAT gap (the difference between the expected VAT revenue and the VAT actually collected by tax authorities) in the EU has reached nearly EUR160 billion, of which about EUR50 billion is attributable to cross-border fraud (in 2013).