Proposal for a COUNCIL DECISION authorising the Federal Republic of Germany to apply measures derogating from Articles 6 and 17 of the sixth Directive (77/388/EEC) on the harmonisation of the laws of the Member States relating to turnover taxes

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. By letters registered at the Commission's Secretariat-General on 8 January and 27 August 1999 the German authorities requested authorisation, under Article 27 of the Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes - common system of value added tax: uniform basis of assessment, [1] to apply measures derogating from Articles 6 and 17(2) of the Directive.

[1] OJ L 145, 13.06.1977, p. 1. Directive last amended by Directive 99/85/EC (OJ L 277, 28.10.1999, p. 34).

2. As required under Article 27(3) of the Sixth Directive, the Commission, in a letter dated 11 October, informed the other Member States of the request of the Federal Republic.

3. The first special measure the German Government wishes to introduce consists in completely excluding the VAT which is charged on expenditure on goods and services from the right to deduct when less than 10% of those goods and services are used for business purposes.

4. Article 27 allows the introduction of special measures derogating from the Sixth Directive which either simplify the procedure for charging tax or prevent certain types of tax evasion or avoidance. Such a measure, which is designed to prevent "consumption without taxation", is justified under the terms of this provision since it simplifies administration by relieving the tax administration of the need to supervise taxable persons who exercise the right to deduct the VAT charged on expenditure on goods and services where non-business use of those goods and services accounts for over 90% of total use.

5. The second German derogation aims to limit to 50% the amount that may be deducted from the VAT charged on all expenditure relating to vehicles (purchase, hire, running a vehicle). However, it is not intended to include vehicles used by taxable persons solely for business purposes, particularly vehicles which taxable persons put at the disposal of employees free of charge as part of an employment contract. The German authorities have indicated that the flat-rate ceiling for the right to deduct VAT will replace the VAT charged on the use of a vehicle for non-business (mainly private) purposes.

6. The German authorities indicate that, in the course of verifications carried out at business premises, their administrations uncover irregularities in almost every file which involves calculating the amount of tax due on the use of vehicles for private purposes. In the authorities' view this demonstrates that application of the usual rules on the right to deduct does not ensure fair taxation of the private use of business vehicles. The authorities consider that applying a ceiling to the right of deduction is the only way of adequately combating the wholesale tax evasion and tax avoidance practised in this area.

7. The German authorities also consider the measure fair since they calculate that, on average, business vehicles are used for private purposes 50% of the time. Those most affected by the measure would therefore be those taxable persons who act in bad faith.

8. In its proposal for a directive on the rules governing the right to deduct value added tax [2], presented to the Council on 17 June 1998, the Commission summarised the problems caused by particular derogations, especially those applicable to vehicles used for tourist purposes, which, even when used for normal business transactions, frequently include some element of private and final consumption. The Commission pointed out that usually it was not really possible to verify the breakdown of this expenditure into professional and private use, which meant that there was a risk of abuse or tax evasion.

[2] OJ C 219, 15.7.98, p. 16.

9. Because of the difficulties pointed out by the German authorities in connection with the recent amendments to their laws on the subject, and pending adoption and implementation of the directive, the only thing that would allow this Member State to derogate from the general principle of the right to deduct, as set out in Article 17(2) of the Sixth Directive, would be a Council Decision issued under Article 27 of the Directive.

10. On several occasions the Court has judged that national derogations intended to prevent tax evasion or avoidance must be strictly interpreted and must be subject to the principle of proportionality. Such measures may derogate from the provisions of the Sixth Directive only in so far as is strictly necessary to achieve their objective. In particular, in Case C-63/96 [3] of 29 May 1997, the Court judged that a provision which includes generalities and abstract principles and therefore does not exclude cases where objective facts show that the taxable person has acted correctly, was not covered by Article 27 because it did not limit itself to derogations which were strictly necessary to prevent the risk of tax evasion or avoidance.

[3] Compendium of Court Cases 1997, p. I - 2847.

11. In their request the German authorities themselves have restricted the flat-rate 50% ceiling on the right to deduct to particular cases, indicating that the measure was not to apply to vehicles which a taxable person uses exclusively for business purposes, and particularly not to vehicles which such a party makes available free of charge to employees as part of a contract of employment.

12. To comply with the principle of proportionality, the Commission considers that the situations where the flat-rate 50% ceiling on the right to deduct are not to be enforced should be precisely defined, namely those situations where a vehicle is a taxable person's stock in trade or is strictly necessary to his activities. Neither, given case law on the point, does the Commission consider that a flat-rate 50% ceiling on the right to deduct should apply where a taxable person is able to prove that he usually uses the vehicle for business purposes more than 50% of the time. In such cases the normal rules on the right to deduct, as set out in Article 17(2) of the Sixth Directive, will still apply.

13. Finally, insofar as both these measures concern ceilings on the right to deduct VAT (which are also covered in the proposal referred to above, forwarded to the Council on 17 June 1998 and currently under discussion), the end of the period of validity of the German derogations should be such as to coincide with the date when the said directive becomes applicable or be limited to 31 December 2001 at the latest. This long period of validity would allow time to evaluate the advisability of the derogations in the light of any discussion in the Council on the proposal for a directive, should the proposal not be adopted.

Proposal for a

COUNCIL DECISION

authorising the Federal Republic of Germany to apply measures derogating from Articles 6 and 17 of the sixth Directive (77/388/EEC) on the harmonisation of the laws of the Member States relating to turnover taxes

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes - common system of value added tax: uniform basis of assessment [4], and in particular Article 27 thereof,

[4] OJ L 145, 13.6.1977, p. 1. Directive last amended by Directive 99/85/EC (OJ L 277, 28.10.1999, p. 34).

Having regard to the proposal from the Commission [5],

[5] OJ C , , p. .

Whereas:

(1) By letters registered at the Commission's Secretariat-General on 8 January and 27 August 1999 the Government of the Federal Republic of Germany communicated a request, under Article 27 of the Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes - common system of value added tax: uniform basis of assessment, to apply measures derogating from Articles 6 and 17 of the Sixth Directive.

(2) Under Article 27(1) of the Sixth VAT Directive the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce, or extend the period of validity of, special measures derogating from the provisions of the Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance.

(3) As required under Article 27(3) of the Sixth Directive, the Commission, in a letter dated 11 October 1999, informed the other Member States of the request of the German authorities.

(4) The first derogation is intended completely to exclude the VAT which is charged on expenditure on goods and services from the right to deduct when over 90% of the goods and services are used for the private purposes of the taxable person, or of his employees, or for non-business purposes in general. The measure represents a derogation from Article 17 and is justified by the need to simplify value added tax.

(5) The second request to derogate from Article 17(2) and Article 6 of the Sixth Directive is intended to limit to 50% a taxable person's right under Article 17(2) to deduct value added tax in respect of all expenditure on vehicles not used solely for business purposes, and also to permit the authorities not to charge the VAT due on tourist industry vehicles used for private purposes. This ceiling is justified by the proven difficulty of actually verifying the breakdown between business and private expenditure on this type of good and by the consequent likelihood of tax evasion or abuse.

(6) Nevertheless, the ceiling may not be applied to expenditure on vehicles which represent a taxable person's stock in trade nor to expenditure on vehicles that are absolutely necessary to the taxable person's activities. Furthermore, the flat-rate ceiling may not be applied where a taxable person provides proof that he uses a given vehicle for business purposes more than 50% of the time. Here the normal rules on deduction set out in Article 17(2) remain applicable.

(7) These provisions ensure that this derogation from a taxable person's right to deduct all the tax paid in connection with his taxable activities does not go beyond what is needed to counteract the risk of tax evasion or avoidance as defined in the Court's case law [6] interpreting the provisions of Article 27 of the Sixth Directive.

[6] See Case of 29 May 1997, Werner Skripalle (C-63/96, 1997 Compendium, p. I - 2847).

(8) Finally, on 17 June 1998, the Commission submitted a proposal for a Council directive [7] amending the Sixth Directive as regards the right to deduct VAT. The purpose of the proposal is to harmonise definitively some of the disparate rules regarding ceilings on the right to deduct currently applied in the Member States as these could distort competition in international trade insofar as such differences are reflected in prices for goods and services.

[7] OJ C 219, 15.7.1998, p. 16.

(9) The authorisation to apply the derogations should therefore limit their period of validity so that this ends with the entry into force of the above proposed directive, or on 31 December 2001 if the directive is not yet in force by then. Such a maximum period of validity would allow evaluation of the derogation in the light of progress in discussions in the Council at the time.

(10) The derogation would have no negative effect on the European Community own resources provided from value added tax.

HAS ADOPTED THIS DECISION:

Article 1

By derogation from Article 17(2) of Directive 77/388/EEC, as amended by Article 28(f) of that Directive, the Federal Republic of Germany is authorised to exclude from the right to deduct the VAT charged on expenditure on goods and services where more than 90% of those goods and services are used for the private purposes of a taxable person or of his employees or, more generally, for non-business purposes.

Article 2

By derogation from Article 17(2) of Directive 77/388/EEC, as amended by Article 28(f) of that Directive, and from Article 6(2)(a) of that Directive, the Federal Republic of Germany is authorised to limit to 50% the right to deduct the VAT charged on expenditure on vehicles not used exclusively for business purposes and not to treat as services provided free of charge the use for private purposes of vehicles belonging to a taxable person's business.

The provisions of the previous paragraph shall not apply where a vehicle represents a taxable person's stock in trade, where it is essential to his activities or where the taxable person can provide proof that he uses the vehicle for business purposes more than 50% of the time.

Article 3

This decision shall cease to be applicable on the date the directive on expenditure not giving rise to the right to deduct value added tax enters into force or shall expire on 31 December 2001 at the latest.

Article 4

This Decision is addressed to the Federal Republic of Germany.

Done at Brussels,

For the Council

The President