Opinion of the Economic and Social Committee on the 'Proposal for a Council Directive amending Directive 77/388/EEC on the common system of Value Added Tax (level of the standard rate)` ()

(96/C 204/22)

On 5 March 1996, the Council decided to consult the Economic and Social Committee, under Article 99 of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for Economic, Financial and Monetary Questions, which was responsible for the preparatory work, adopted its Opinion on 1 April 1996. The Rapporteur was Mr Walker.

At its 335th Plenary Session (meeting of 25 April 1996), the Economic and Social Committee adopted the following Opinion by 65 votes in favour, 7 against with 10 abstentions.

1. Commission proposal

1.1. The purpose of the proposal is to enable the Council to take a decision on the level of the minimum rate of the standard rate as it is required to do under the Sixth Council VAT Directive 77/388/EEC, as last amended by Directive 95/7/EC.

1.1.1. This Directive lays down that, on the basis of the report on the operation of the transitional arrangements and proposals on the definitive arrangements to be submitted by the Commission, the Council shall decide unanimously before 31 December 1995 on the level of the minimum rate to be applied after 31 December 1996 with regard to the standard rate.

1.2. The Commission proposal is for the creation of a rate band from 15 % to 25 % for standard rates of VAT with the effect that from 1 January 1997 to 31 December 1998 all Member States would be required to have a standard rate of VAT falling between these two limits.

1.2.1. The Commission points out that all Member States are currently operating a standard rate within this band and that the proposal would not, therefore, require any Member State to alter its existing arrangements. It would, however, serve to prevent any further divergence in the existing levels of standard rates in Member States.

1.2.2. The proposal may thus be seen as a progressive step in the process of approximation of VAT rates and as facilitating eventual harmonisation, should that be decided upon.

2. General comments

2.1. The ESC notes that the Council is required to take a decision on the level of the minimum rate but that there is nothing in the sixth VAT Directive which requires it to fix a maximum rate. The creation of a proposed rate band thus represents an initiative by the Commission which goes beyond the requirements of the sixth VAT Directive and should therefore be justified by reference to its perceived utility.

2.2. The ESC further notes that, in its report on the functioning of the VAT rate system following the abolition of fiscal frontiers on 1 January 1993 (), the Commission concluded that 'with regard to the application of various types of reduced VAT rates (super-reduced rates, zero rates, "parking" rates, etc.) no major distortions of competition had been ascertained under the transitional arrangements for taxation of intra-Community trade that could be attributed to the application of various types of reduced VAT rates`, but that 'widening discrepancies between the standard rates of various Member States can, in principle, always give rise to structural imbalance and distortions of competition in certain sectors of economic activity`.

2.2.1. The Commission argues that 'it is important to ensure that at least the level of harmonisation achieved to date is maintained, thereby ensuring that the transitional arrangements continue to function properly. As far as the standard rate is concerned, the logical conclusion from this is, therefore, that further divergence in the existing levels of standard rates in Member States must be avoided by creating a rate band comprising minimum and maximum levels...`.

2.3. The Commission document goes on to state 'It goes without saying that any change in the transitional arrangements must also serve for the preparation of the subsequent definitive system...`. The ESC accepts this proposition. The Commission then propounds that 'Moreover, it is evident that this definitive system will in any case require a fairly rigorous approximation of VAT rates. Such an approximation of VAT rates follows conclusively from the country of origin principle and is, therefore, an intrinsic requirement of any taxation system as envisaged for the definitive regime...`.

2.3.1. At its 331st Plenary Session on 21 December 1995 the ESC adopted an own-initiative Opinion on direct and indirect taxation () for which the Rapporteur was Mr Janssen. In this Opinion it gave qualified approval in principle to a definitive VAT system based on taxation in the country of origin but subject to certain provisions. The Opinion asked that 'Detailed proposals should be worked out in conjunction with the social partners and the business community`. In particular, the Opinion stipulated that, 'An adequate timetable should be allowed for full consultation after the proposals have been specified in detail, including the avoidance and evasion counter-measures, and before any political decision in principle to proceed. A definitive system should be introduced only if clear benefits (both initial and on-going) have been identified which are of sufficient magnitude to warrant the cost of change`.

2.3.2. The ESC reiterates this position; it urges that the consultations for which it has called should take place in an objective and pragmatic manner, without any preconceived assumptions on the nature of the system to be introduced.

2.3.2.1. However, it is accepted that a system based on taxation in the country of origin is one of the possible solutions and it is equally undesirable to pre-empt the decision by taking any steps which would militate against the adoption of such a system or would hamper a free discussion of its merits.

2.3.2.2. The ESC stated in its Opinion on Direct and Indirect Taxation that 'a generalised application of this principle would be incompatible with excessive differences in VAT...` and went on to conclude that 'Without aiming at complete harmonisation of rates ... it is necessary to bring rates into a narrower band...`.

2.3.2.3. The ESC therefore endorses the Commission's present proposal as being entirely consistent with the position adopted by the ESC.

2.4. The ESC notes that the proposed minimum level and the maximum level of the standard rate are not intended to be definitive but that they are - on Commission initiative - subject to revision after a two-year period. It is evidently envisaged that the introduction of a definitive system may require a timescale in excess of two years. The ESC seeks amendment to Article 1 whereby the ESC is consulted as well as the European Parliament on the level of the standard rates to be applied after 31 December 1998 in accordance with Article 99 of the Treaty establishing the European Community.

2.4.1. The ESC accepts the estimate of the likely timescale for the introduction of a definitive system and urges that any proposed date for its introduction should not be regarded as a 'deadline` which must be observed regardless of circumstances; it is more important to ensure that the correct system is adopted than to adhere to any predetermined date for its implementation.

2.5. Given this possibly extended timescale, the ESC also considers that the proposed introduction of a definitive system should not be allowed to obscure the need for further interim reforms of the existing transition system, which should then be carried forward into the new definitive system.

2.5.1. One such reform which the ESC considers to be highly desirable is that the group registration provisions allowing associated companies to conduct intra-group transactions without charging VAT, which at present only apply within a single Member State, should be extended to groups of associated companies in different Member States. This, of itself, would greatly simplify a large measure of intra-EU trade.

2.6. The use of the word 'definitive` to describe the new system should not be allowed to act as a bar to amending or up-dating it. Changing patterns of trade, the needs of small and large businesses, changes in the scope of the public and the private sectors and the impact of technological innovation will all require that the new definitive system should be regarded as adaptable, flexible and dynamic rather than static or rigid and that it be kept under constant review.

3. Conclusion

3.1. The ESC approves the Commission proposal to introduce a band with a lower rate of 15 % and an upper rate of 25 % for the standard rate of VAT in Member States from 1 January 1997 to 31 December 1998.

Done at Brussels, 25 April 1996.

The President

of the Economic and Social Committee

Carlos FERRER

() OJ No C 73, 13. 3. 1996, p. 22.

() COM(94) 584 final, 13. 12. 1994.

() OJ No C 82, 19. 3. 1996, p. 49.