Extension of the Domestic Reverse Charge Mechanism to prevent VAT fraud

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On the 2nd of October, the European Council agreed on the proposal that will extend the derogation in Article 199a of the VAT Directive which allows Member States to apply the domestic reverse charge mechanism (DRCM) to transactions in electricity, gas and emission allowances until 30 June 2022 [1].

Weaknesses in the current VAT system leave member states vulnerable to fraud, sometimes with serious consequences for government treasuries. This is particularly the case with cross-border transactions. A common fraud scheme is 'missing trader' or 'carousel' fraud, where supplies are purchased and resold without payment of VAT. The DRCM helps to prevent fraud in highly liquid energy and emissions markets in Europe by shifting the liability for VAT payments from the supplier to the customer.

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