12. 9. 88 Official Journal of the European Communities No C 237/21 
Opinion on the proposal for a Council Directive supplementing the common system of value 
added tax and amending Directive 77/388/EEC, approximation of VAT Rates (^ (2) 
(88/C 237/07) 
On 11 September 1987 the Council decided to consult the Economic and Social Committee, 
under Article 198 of the EEC Treaty, on the abovementioned proposal. 
The Section for Economic, Financial and Monetary Questions, which was responsible for 
preparing the Committee's work on the subject, adopted its Opinion on 17 May 1988. The 
rapporteur was Mr Broicher. 
At its 257th plenary session (meeting of 7 July 1988) the Economic and Social Committee 
adopted the following Opinion by a large majority, with eight dissenting votes and three 
abstentions. 
1. General comments 
1.1. The aim of the Commission proposal is to align 
the level and number of tax rates and stipulate which 
rates are to apply to which products. It is a crucial part 
of the package of proposals for harmonizing the value 
added tax (VAT) system. The effects of the planned 
alignment will stretch way beyond Member States' 
financial and budgetary policies: economic and social 
policies may be radically affected too. These general 
issues have been discussed in detail and dealt with in the 
Opinion on the Commission's global communication. 
1.2. It is to be assumed when examining the Com­
mission proposal that imports will no longer be taxed 
and exports will no longer qualify for tax remissions 
from 1993 onwards. The conditions and formalities 
governing VAT will be the same for all entrepreneurs 
throughout the Community. 
The discussion took into account the Opinion produced 
by the Committee on the global communication from 
the Commission. In particular, it noted the opening 
paragraph of the Conclusion of that Opinion that 
'The Committee welcomes the Commission's prag­
matic approach in its proposal on the approxi­
mation of indirect tax rates and harmonization of 
indirect tax structure whereby fiscal frontiers will 
be able to be abolished by 1992. 
Whatever decisions are finally made should permit 
as much flexibility to the Member States (to reflect 
their revenue, social and economic objectives), as is 
compatible with the attainment of free competition 
in the internal market. The Commission should 
reconsider the need for approximation of VAT rates 
on goods and services which are not normally traded 
across borders by non-VAT-registered persons and 
(1) OJ No C 250, 18. 9. 1987, p. 2. 
(2) OJ No L 145, 13. 6. 1977. where different VAT rates within the Community 
will not distort competition. In determining pre­
cisely what margin of flexibility might be permitted 
to Member States, the Commission should consider 
alternatives to their calculation based on the current 
rates prevailing.' 
The discussion also produced the following comments, 
despite the Commission's failure to present any stat­
istics on the financial impact of the changes in each 
Member State making it very difficult to form any 
opinion, in particular, on the number of rates to be 
applied. 
2. Specific comments 
Article 1(1) 
a) Number of tax rates 
2.1. The proposed restriction of the number of rates 
to two met with very wide approval. However, there 
would be practical problems. Six of the twelve Member 
States would have to abolish the higher rates they 
charge at present, one Member State would have to 
introduce a reduced rate and five Member States would 
have to amalgamate two or more reduced rates in one. 
2.2. The ending of these tax gradations will have an 
undeniable effect, inter alia, on the relevant Member 
States' wage, price and social policies. However, it 
would seem right to opt for two rates on administrative 
grounds, too (and especially with a view to the clearing 
procedure). If there is to be a wide variety of rates, the 
classification of goods and services alone may pose 
great problems. For example, views on what should be 
regarded as a luxury will vary considerably from 
country to country and will make it even more difficult 
to agree on a definition. 
No C 237/22 Official Journal of the European Communities 12. 9. 88 
b) Level of tax rates 
2.3. The Commission does not propose uniform 
rates but merely specifies an upper and lower limit in 
each case. The standard rate will be able to vary by six 
percentage points (between 14 and 20%) and the 
reduced rate by five points (between 4 and 9%). How­
ever, these bands appear to be too wide for goods and 
services supplied to final customers. They are as high 
as, and in some cases higher than, the average net 
profits of industry in the Member States measured as 
a percentage of turnover. 
2.4. Since after the abolition of intra-Community 
frontiers final customers will be able to purchase goods 
freely in any Member State, competition may be serious­
ly distorted by such differences in rates. This will apply 
in particular to high-value goods (e.g. motor vehicles, 
jewellery and furs), mail-order selling and the sale of 
goods and services to final consumers in border areas. 
It must not be forgotten here that final consumers 
include not only private individuals but also public 
authorities, other organizations not entitled to deduct 
input tax and firms which, by virtue of being small etc, 
are not entitled to deduct input tax. There are also 
cases where the deduction of tax is not allowed at all 
on the purchase of goods and services. The Commission 
should also seize this opportunity to harmonize the 
indirect taxation of banking, financial and insurance 
operations and to discuss whether the exemptions 
which exist in this field are really justified. 
2.5. The proposed bands should therefore be nar­
rowed. Two partly conflicting sets of interests should be 
taken into consideration when the requisite adjustments 
are made. 
Because of their budgetary situations or the other afore­
mentioned reasons, Member States will not always be 
in a position to go through with such an approximation 
as a matter of course. However, if the aim is to be that 
VAT on goods and services in an internal market free 
of tax barriers should be neutral, a reduction in the 
differences between rates to around three percentage 
points would normally be likely to make tax-related 
distortions of competition bearable. However, one 
exception to this would be large orders which are placed 
by public authorities or other non-taxable persons, i.e. 
by customers who are not entitled to deduct input tax. 
This category includes banks, insurance companies and 
also religious or charitable organizations. A price 
advantage of as little as one percentage point can be 
decisive in securing such an order, and the governments 
of Member States where a higher tax rate operates may 
be under immense pressure in such instances to agree 
to further alignment. This may cause considerable 
budgetary problems. 2.6. If not all Member States can approve an immedi­
ate reduction in the bands, the Commission proposal 
should be regarded as only a transitional scheme. The 
bands would then be gradually reduced by laying down 
a schedule for their further phased approximation, 
which would force Member States to act by a certain 
deadline without depriving them of the chance to adjust 
beforehand. It is to be hoped that the transitional nature 
of the proposed wide bands will deter industry from 
capitalizing on competitive advantages on a large scale 
and, for example, setting up supply depots in Member 
States where taxes are lower. 
c) The assignment of tax rates to goods 
and services 
2.7. The proposal to confine the reduced rate to 
major everyday goods and services is welcomed. The 
obligation to align tax rates should also not apply to 
the sale of goods and services which are not likely to 
distort competition (e.g. building plots, water, hospital 
services). The individual items call for the following 
comments: 
— Foodstuffs: All foodstuffs for human consumption 
and animal feedingstuffs should qualify for the 
reduced rate. For the sake of simplicity it does not 
seem right to draw a distinction between basic and 
luxury foodstuffs. The existing zero rating for food­
stuffs can be retained providing that it can be 
reasonably established that distortions of compe­
tition will not result. At the end of a certain period 
a check should be made to see whether competition 
is distorted. If necessary adjustments will have to 
be made. 
— Energy products for heating and lighting: All 
sources of primary energy (coal, crude oil, natural 
gas, etc.) and secondary energy (electricity, heat, 
etc.) should be included under this heading. 
— Water supplies: This is taken to include water for 
domestic and industrial consumption. 
— Pharmaceutical products: A precise definition is 
required here in keeping with Directive 65/65/ 
EEC(1). Apart from medicines, prostheses (e.g. arti­
ficial limbs and hearing aids) and other appliances 
for the sick (e.g. wheelchairs) must also qualify 
for the reduced rate. The same applies to dental 
(') OJ No 22, 9. 2. 1965. 
12. 9. 88 Official Journal of the European Communities No C 237/23 
prostheses. The Committee has already rejected 
complete exemption of dental prostheses from VAT 
in an Opinion of 3 July 1985 (*) on the proposal for 
an 18th Directive on the harmonization of Member 
States' VAT legislation. 
— Books, newspapers and periodicals: The application 
of the reduced rate to these items meets with 
approval. Audio-visual media should also be eli­
gible. 
— Passenger transport: The application of the reduced 
rate to passenger transport is also approved in prin­
ciple, provided that no new aspects emerge from 
the passenger transport Directive on which the 
Committee still has to deliver its Opinion. 
Work in the housing sector should also be added to the 
list of goods and services to which the reduced rate is 
to apply, with the Commission being left to determine 
the eligibility criteria. 
OJ No C 218, 9. 8. 1985. Article 2 
2.8. Article 2 is too sweeping and cannot be 
approved. Although 31 December 1992 should be retai­
ned in principle as the date for the approximation of 
tax rates and the abolition of intra-Community borders, 
certain exemptions and special schemes for individual 
Member States should not be ruled out. As pointed out 
above, both the reduction in the number of tax rates 
and the alignment of tax levels may cause considerable 
problems in the fields of taxation and economic and 
social policy in some Member States. Mention should 
be made at this point of the zero-rating practised in 
some Member States. In order that these Member States 
can give their fundamental approval to the approxi­
mation of VAT rates, special temporary schemes must 
be possible on a case-by-case basis, as provided for in 
Article 15 of the Single European Act. 
Thus, the Commission ought to be able to propose 
special temporary schemes (e.g. tax charged at the rate 
applicable in the country of destination) during the 
transitional period in areas where competition is likely 
to be most heavily distorted (in particular public pro­
curement and mail-order selling). 
Done at Brussels, 7 July 1988. 
The Chairman 
of the Economic and Social Committee 
Alfons MARGOT 
APPENDIX 
to the Opinion of the Economic and Social Committee 
The following amendments, which received a quarter of the total votes cast, were rejected in the course of 
the discussions: 
Point 2.7. - fifth indent (books, newspapers and periodicals) 
After 'with approval', insert: 
'However, several Member States currently apply a zero rate, on the principle that it is wrong to tax 
knowledge, information, education and literacy. As in the case of foodstuffs (see above), this right should be 
retained.' 
Reasons 
Self-explanatory. 
Voting 
For: 22, against: 47, abstentions: 6.