amending Directive 2006/112/EC on the common system of value added tax, with regard to the obligation to respect a minimum standard rate

EXPLANATORY MEMORANDUM

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Value-added tax (VAT) is Europe’s longest-standing consumption tax. In 1967, the commitment was made to establish a definitive VAT system operating within the European Community in the same way as it would within a single country without agreeing specific rules on VAT rates apart from the application of a standard VAT rate, but no lower or upper rate limits were imposed. The abolition of fiscal frontiers between Member States by the end of 1992 made it necessary to reconsider the way in which trade in goods was taxed within the Community. The goal was that goods would be taxed in the country of origin, perfectly reflecting the idea of a genuine internal market. Since the political and technical conditions were not ripe for such a system, transitional VAT arrangements were adopted. The transitional system required rules on VAT rates to avoid distortions in cross-border shopping and trade following the abolition of fiscal frontiers. In October 1992 the Council agreed on rules limiting the discretion of Member States to set VAT rates. Member States were required to apply a standard VAT rate of a minimum of 15% until 31 December 1996.

The minimum of 15% for the standard VAT rate has been prolonged six times since then. Currently, Article 97 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (hereinafter "the VAT Directive") provides that from 1 January 2016 until 31 December 2017 the standard rate may not be less than 15%.

In its 2016 VAT Action Plan the Commission proposed replacing the current transitional arrangements for the taxation of trade between Member States by definitive arrangements based on the principle of taxation in the Member State of destination in order to create a robust single European VAT area. Meanwhile, also the place of taxation of services had progressively changed to the country of destination since 2010. The decision was taken in 2008, when the Council adopted a proposal with a view to prevent distortions of competition between Member States operating different VAT rates.

On 4 October 2017 the Commission adopted the first proposal introducing the definitive system for the taxation of trade between Member States and outlined successive steps and sub-steps for introducing this system in its follow-up to the VAT Action Plan. It also announced that it would propose a reform of VAT rates, which would be consistent with the definitive arrangements based on the destination principle that will gradually replace the current transitional arrangements.

Although a definitive VAT system based on the principle of taxation in the Member State of destination would allow to grant Member States more flexibility in setting VAT rates, a minimum for the standard VAT rate should be maintained in such a definitive VAT system and therefore be made permanent.

Considering that all Member States currently apply a standard rate of at least 17%, the current arrangement for a minimum standard rate of 15% remains appropriate. It will permanently implement an agreed limit that ensures the proper functionning of the internal market whilst leaving flexibility for Member States in setting the standard VAT rate at the same time.

•Consistency with existing policy provisions in the policy area

By making permanent an existing, temporary provision (Article 97 of the VAT Directive), the proposal is consistent with current legislation.

•Consistency with other Union policies

Not relevant.

2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

•Legal basis

The Directive amends the VAT Directive. The legal basis is Article 113 of the Treaty on the Functioning of the European Union (TFEU). This Article provides for the Council, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, to adopt provisions for the harmonisation of Member States’ rules in the area of indirect taxation.

•Subsidiarity (for non-exclusive competence)