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COM (83) 426 
 
 
 
Vol. 1983/0 161 
  
 
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concernant l'ouverture au public des archives historiques de la Communauté économique 
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In accordance with Council Regulation (EEC, Euratom) No 354/83 of 1 February 1983 
concerning the openi ng to the public of the historical archives of the European Econom ic 
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amended by Regulation (EC, Euratom) No 1700/2003 of 22 September 2003 (OJ L 243, 
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file have been declassified in conformity with Article 5 of the aforementioned regulation.  
In Übereinstimmung mit der Verordnung (EWG, Euratom) Nr. 354/83 des Rates vom  1. 
Februar 198 3 über die Freigabe der historischen Archive der Europäischen  
Wirtschaftsgemeinschaft und der Europäischen Atomgem einschaft (ABI. L 43 vom  15.2.1983,  
S. 1), geändert durch die Verordnung (EG, Euratom) Nr. 1700/2003 vom 22. Septem ber 2003  
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COMMISSION OF THE EUROPEAN COMMUNITIES
C O M (83) 426 final
Brussels, 14 September 1983
F IR S T  R E P O R T  F R O M  T H E  C O M M IS S IO N  T O  T H E  C O U N C I L
on the application of the c o m m o n  system of 
value added tax, submitted in accordance with Article 34 
of the Sixth Council Directive (77/388/EEC) of 17 M a y  1977)

COMMISSION O F THE EUROPEAN COMMUNITIES
C O M (83) 426 final
Brussels, 14 September 1983
F IR S T  R E P O R T  F R O M  T H E  C O M M IS S IO N  T O  T H E  C O U N C I L
on the application of the c o m m o n  system of 
value added tax, submitted in accordance with Article 34 
of the Sixth Council Directive (77/388/EEC) of 17 M a y  1977)
C O M (83) 426 final

-  1  -
C O N T E N T S
Page
IN T R O D U C T IO N  5
P A R T  I 9
D IV E R G E N C E S  N O T  R E M O V E D  B Y  T H E  D IR E C T IV E  9
C H A P T E R  I 1 0
- D ivergen ces arising fr o m  certain options p erm itted
by the Directive: 10
A . Pow er to derogate from  the definition of taxable
person 10
B . P o w e r  to derogate fr o m  th e definition of taxable
amount upon importation 13
C . Power to derogate from  the provisions governing the
adjustment of deductions 1 5
D . Powers in connection with the special schem e for
small undertakings 17
E. Pow er to fix flat-rate compensation percentages for
farmers 1 9
F . P o w e r  to retain o r  in trod u ce simplification
procedures that derogate from  the Sixth Directive 22
C H A P T E R  II
- Divergences arising from the rights of option for
taxation: 2 5
A . Justification for the right of option 2 5
B . Rights of option under Article 28 2 5
C . Rights of option under Article 13 C  26
a) Letting and leasing of im m ovable property 26
b) Supply of buildings 26
c) Banking and financial transactions 27

- 2  -
Page
D IF F IC U L T IE S  C O N N E C T E D  W I T H  T H E  IN T E R P R E T A T IO N  O F  C E R T A IN  
P R O V IS IO N S  IN  T H E  D IR E C T IV E  28
C H A P T E R  I 29
Problems in classifying certain economic activities 29
C H A P T E R  II
Criterion of activities engaged in by bodies as public 
authorities 30
C H A P T E R  III 32
Questions of interpretation concerning the place where
services are supplied 32
A . Hiring out of movable tangible property other than
m eans of transport 32
B . F o r m s  of transport 3 4
C . Definition of certain services 35
C H A P T E R  IV  36
Questions of interpretation concerning the taxable amount 36
A . M in im u m  taxable am ount 36P A R T  II 28
B . S u p p ly  of a  n e w  item  w ith  a  u se d  item  t a k e n  in  p art-exch an ge 36
C . Subsidies 37
D . Incidental exp en ses 39
E . First place of destination 4 0
C H A P T E R  V  42
Questions of interpretation concerning exemptions 42
A . General difficulty of interpretation concerning the 
meaning of the introductory paragraph (Articles 13,
14 and 1 5  of the Sixth Directive) 42
B . Difficulties of interpretation concerning certain
exemptions under Article 1 3 A  43
a ) P ublic postal services 4 3
b) Hospital and medical care 44
c) Medical and paramedical professions 4 5
d) Non-profit-making organizations 45
e) Services closely linked to sport and cultural services 47
C . Difficulties concerning exemptions under Article 13B: 48
a) Gold coins 48
b) Paym ent cards 49
c) Gambling 50

- 3  -
Page
D . Difficulties concerning exemptions under Articles
14 a n d  1 5  5 2
a) Re-importation of property which has undergone w ork
outside the country of origin 52
b) Inclusion of vessels intended for breaking up 54
E. Questions of interpretation concerning the scope of the
right to deduct a n d  the calculation of the deductible proportion 5 5
P A R T  III 57
P R O B L E M S  H E L D  O V E R  B Y  T H E  S IX T H  D IR E C T IV E  57
C H A P T E R  I 58
Exemptions in respect of imports, exports and international 
goods traffic for which the rules have still to be harmonized 58
C H A P T E R  II
Refund of V A T  to taxable persons not established in the 
territory of the country 66
C H A P T E R  III
Non-deductibility of certain expenditure incurred by firms 67
C H A P T E R  IV
Passenger transport 68
C H A P T E R  V
Special scheme for second-rhand goods 68
C H A P T E R  V I
Mutual assistance between fiscal administrations 70
C O N C L U S IO N  73
A N N E X E S
- A N N E X  I 77
Notifications given pursuant to Article 27(5) of the 
Sixth Directive 77

-  4 -
Page
- A N N E X  II 90
Options allowed under Article 13 C :
. Table N o  1: Letting and leasing of immovable property 9 1
. Table N o  2: Supply of "old" buildings and of land which
has not been built on 92
. Table N o  3: ranking and financial transactions 93
- A N N E X  III 94
List of judgments of the Court of Justice concerning V A T  94

- 5  -
IN T R O D U C T IO N
T he final provisions of the Sixth Council Directive of 17 M a y  1977 
on the c o m m o n  system of value added tax (1) stipulate, in Article 34, that:
"For the first time on 1  January 1982 and thereafter every tw o years, the 
Com m ission shall, after consulting the M em b er States, send the Council 
a report on the application of the c o m m o n  system of value added tax in 
the M em b er States. This report shall be transmitted by the Council to 
the European Parliament."
A  similar provision had appeared in the Commission's proposal for 
a Directive, but the last sentence w as added at the express request of 
Parliament and this amendment, supported by the Com m ission w as accepted 
by the Council. The definitive text of Article 34 thus reflects the full 
importance, commensurate with the objectives of the Sixth Directive, that 
the C om m unity institutions attach to the application of the c o m m o n  system 
of value added tax.
Progress in tax harmonization has not been without its setbacks and 
problems - as can be seen from  a  comparison of the Commission's original 
proposal with the text of the Directive finally adopted by the Council.
The gap between the ambitious intentions at the outset and the relatively 
modest final outcome is basically due to the fact that an instrument on 
tax matters such as the Sixth Directive inevitably impinges on areas of 
national Legislation in which each M e m b er State is particularly sensitive.
Securing the convergence of nine different sets of national laws 
entailed concessions on all sides, and in m an y  cases involved a reshaping 
of attitudes that were rooted in the past and which reflected differing 
fiscal, economic and social structures.
Such essential factors could not be ignored by the Council w hen it 
w as adopting the Sixth Directive, and for its part the Com m ission w as 
duty-bound to facilitate the adoption of a text that would not lead to a
(1) O J  N o  L  1 4 5  of 1 3 June 1977.

-  6 -
sh a rp  a n d  im m e d ia te  legal ca esu ra  at national level whilst at the s a m e  
tim e ensuring that th e Directive w o u ld  b e c o m e  a n  essential p a rt of th e  
establishm ent of a  E u r o p e a n  structure in  b o th  the e c o n o m ic a n d  fiscal  
spheres.
T he difficulties encountered by most M em b er States in complying 
with the deadline of 1  January 1978 laid do w n  in Article 1  of the Sixth 
Directive subsequently illustrated these general considerations.
Belgium and the United K ingdom  were the only M em b er States to m eet 
the original deadline, and the Ninth Council Directive of 26 June 1978 (1) 
w as needed in order to authorize the other seven M em b er States to defer 
application of the Sixth Directive until 1  January 1979. In the case of 
G erm any and Luxembourg, it w as not until 1  January 1980 that national 
legislation aligned on the Directive cam e into force.
This staggering of the deadlines and phasing in of the Directive 
resulted in a period of confusion, with som e taxable persons claiming 
rights by virtue of the primacy of C om m unity law  and others complaining 
about the coexistence in a num ber of M em b er States of differing tax rules. 
These disputes have been brought before national courts, and som e matters 
have been referred to the Court of Justice of the European Communities 
for a preliminary ruling.
(1) 0J N o  L  194 of 1 9  July 1978.

- 7  -
There have been a  Large num ber of decisions by the Court as 
regards the direct effects of C om m unity legislation and which deal with 
the following tw o problems:
- firstly, the applicability of provisions in cases where directives
have not been implemented by the deadline set or have not been correctly 
transposed into national legislation; and
- secondly, the extent to which the provisions of directives can be 
invoked directly by a  private individual.
T he problem of the direct effect of C om m unity directives has been 
examined m ore than once by the Court of Justice i.e. in the judgments in 
Cases 9/70, 20/70 and 23/70. In these judgments, the Court gave an 
unequivocal answer to the question of the extent to which a  taxpayer m a y  
rely on a C om m unity directive that has not been implemented by the dead­
line set or that has not been correctly transposed into national law.
In another connection, the Court reasserted an individual's right 
to invoke the direct effects of C om m unity directives where they are clear- 
cut and unconditional. T he cases in question were Cases 8/81 and 255/81, 
which were concerned with references for a preliminary ruling on the 
interpretation of Article 13(B)(d)(1) of the Sixth Directive.
T he Court ruled that, as from  1  January 1979, it w as possible for 
the provisions of Article 1 3  concerning the exemption from  turnover tax 
of transactions consisting of the negotiation of credit to be relied upon 
by a credit negotiator where he had refrained from passing that tax on 
to persons following him  in the chain of supply, and failure to implement 
the directive could not be used as an argument against him.

-  8 -
Application of the Directive "in space" has proved less tricky than 
its application "over time", the reason being that the geographical scope 
of the Sixth Directive as defined in Article 3  is directly based on 
Article 227 of the Treaty. In other words, any difficulties likely to 
arise will stem from the interpretation of Article 227 and not from that 
of the Directive itself.
Exclusion of the French overseas departments from the scope of the 
Directive typifies this situation. O n  the basis of a certain interpretation 
of Article 227 of the Treaty, the Council and the Commission were of the 
opinion that these departments were automatically excluded from the scope 
of the Directive and, consequently, need not be mentioned in Article 3(2) 
thereof. It w as only in response to a differing interpretation of Article 
227 given by the Court of Justice in a  tax dispute sphere that 
the Council w as obliged to adopt the Eleventh Directive of 26 M arch 1980 (1), 
which added the French overseas departments to the List of territories 
excluded from the scope of the c o m m o n  system set out in Article 3(2) of 
the Si xth D i rective.
N o  further com m ent need be m ade on the external difficulties which 
surrounded or which have arisen following adoption of the Sixth Directive, 
and the m ain body of this report will be devoted to the internal d iffi­
culties of the c o m m o n  value added tax system.
T o  this end, the difficulties encountered in the application of 
this system have been broken d o w n  into the following three headings:
- P a r t I;
Difficulties stemming from the divergence which exists between 
national laws that the Directive expressly left untouched;
- P a rt II:
Difficulties to do with the interpretation of the Directive;
- Part I I I :
Difficulties arising from problems which have been deferred or left 
in abeyance.
(1) 0J N o  L  90 of 3  April 1980.

- 9  -
P A R T  I
D I V E R G E N C E S  N O T  R E M O V E D  B Y  T H E  D IR E C T IV E
A s  complete harmonization of value added tax has never been 
regarded as an end in itself, progress in this sphere can and ought 
to be m ade only as the need arises, and there w as therefore no question 
of bringing about changes in national legislation that were not 
considered absolutely necessary. Thus m an y  tax provisions have been 
left untouched by the harmonization process, with the upshot that there 
are a  num ber of divergences w hich can be classified into three groups:
- divergences arising from  certain optional provisions permitted by 
the Directive;
- divergences arising from  the right to opt for taxation authorized 
by the Directive;
- divergences arising from  temporary derogations.
T he problems in the first tw o groups are examined in Chapters I 
and II below. Those in the third group are discussed in an earlier 
report on the transitional provisions applicable in M em b er States 
under Article 28 of the Sixth Directive (doc. C0M (82)885).

- 1 0  -
C H A P T E R  I
Divergences arising from  certain options permitted by the Directive
It is n o t th e C o m m issio n 's intention in this ch ap ter to rev iew  all
the discretionary powers permitted by the Directive but simply to draw
attention to those that m a y  create distortions which are in compatible
with the objectives of the c o m m o n  V A T  system:
A . Pow er to derogate from the definition of taxable person 
(second subparagraph of Article 4(4));
B . Pow er to derogate from the definition of taxable am ount upon 
importation (Article 11(B)(2));
C . Pow er to derogate from the provisions governing the adjustment of 
deductions (Article 20(5));
D . Powers in connection with the special schem e for small undertakings 
(Article 24);
E . P o w e r  to fix flat-rate co m p en sa tio n  percentages for farm ers;
F. P o w e r  to retain or introduce simplification procedures that derogate 
from the Directive (Article 27).
A . Pow er to derogate from the definition of taxable person permitted by the 
second subparagraph of Article 4(4) of the Sixth Directive:
Recognition of "groups of undertakings"
Five M em b er States have availed themselves of the consultation procedure 
provided for in Article 29 of the Sixth Directive in order to include 
in their national legislation the right to "treat as a single taxable 
person persons established in the territory of the country who, while 
legally independent, are closely bound to one another by financial, 
economic and organizational links".
In the Netherlands, natural persons and bodies within the meaning 
of the General T ax C ode w h o  have their domicile or are established in 
the territory of the country and w h o  have a  permanent establishment 
there are considerable to be a  single taxable person where they are 
bound to one another by financial, economic and organizational links 
in such a w ay  that they constitute a single entity. T he V A T  L a w  caters

- 1 1  -
expressly for the "single taxable entity", a  long-standing concept in the 
Netherlands which has been enlarged upon by case law. There are abount 
4,000 such entities in the country comprising 16,000 persons, companies, 
etc. This compares with a  total of around 400,000 taxable persons as 
defined for V A T  purposes.
In Denm ark, undertakings subject to the registration requirement and 
not ow ned by the sam e person m ay, if they so request, be registered as a  
single taxable person. Consequently, no tax is charged on transactions 
between undertakings covered by such a  joint registration. In 1979, there 
were 889 joint registrations covering 3,554 undertakings; this compares 
with a total of 370,561 taxable persons as defined for V A T  purposes.
In Ireland, the tax authorities m ay, at their request, decide to 
regard tw o or m ore taxable persons as a  single taxable person if they are 
satisfied that their business activities are so closely interlinked that 
it would be expedient, in the interests of the efficient administration of 
the tax, to treat them  in this way. Under this system, a  group of taxable 
persons m ad e up, for example, of interlinked companies is exem pt from  the 
requirement to issue invoices in respect of transactions carried out 
amongst themselves. Com panies established abroad m a y  belong to such a  
group. There are around 800 groups comprising 2,500 companies and 
representing 2,9 %  of all taxable persons.
In the United K ingdom , tw o or m ore legal persons are eligible to be 
treated as m em bers of a  group if one of them  controls each of the others, 
or if one person (whether a  legal or natural person) controls all of them, 
or if tw o or m ore natural persons carrying on a  business in partnership 
control all of them. T he effect of group registration is that the 
business carried on by the several m em bers of the group is treated for 
V A T  purposes as being carried on by one of them, w h o  is k n o w n  as the 
representative m em ber and w h o  is registered for tax purposes. Supplies 
by one m em ber of the group to another m em b er are not liable to V A T . T he 
representative m em ber is responsible for submitting returns and for 
paying tax or claiming refunds for the whole group.

- 12 -
A L L  m em bers of the group are LiabLe jointLy and severaLLy for any tax 
due from  the representative m em ber. A n  undertaking estabLished abroad m a y  
beLong to a  group provided it has a  physicaL presence in the United K ingdom .
A t 1  ApriL 1978, there w ere 1 5  6 4 5  group registrations, representing so m e 1 .2 %  
of a L  L  registrations. T he average num ber of m em bers per group w as 3.74. For 
the financiaL year 1977/78, groups accounted for around 40 %  of totaL turnover 
decLared in the United K ingdom .
In Germ any, the concepts of "Organschaft" and "united company", 
which w ere appLicabLe L o n g  before the Sixth Directive w as adopted, have 
been retained. T he term "company" is taken to m ean a  L  L  the industriaL, 
com m erciaL or professionaL business carried on by the trader. IndustriaL, 
com m erciaL or professionaL business is not carried on independentLy :
- where the actuaL circumstances d io w  a  L eg aL  person to be financiaLLy, 
economicaLLy and organizationaLLy incorporated into an undertaking 
(subsidiary com pany - OrgangeseLLschaft);
- where naturaL persons, individuaLLy or as a  group, are bound to an 
undertaking in such a  w a y  that they are obLiged to co m p L y  with the instruc­
tions of the entrepreneur; a  "united com pany" thus exists w h en  the interest 
in tw o or m ore associations of equaL rank (i.e. neither of them being 
controLLed by or controLLing the other) is heL d in the sam e proportions
by the sam e persons, and uniform decision-making is guaranteed for a  L  L  
associations. In the case of bodies with this status in L aw , to w hich 
foreign companies m a y  beLong, suppLies of goods and services between the 
Linked persons need not be invoiced and controL is effected by a  
singLe tax office (Finanzamt), thereby simpLifying tax administration.
It w o u L d  not be appropriate here to offer any vaLue judgement on 
such pragmatic bodies that appear to operate satisfactoriLy in the five 
countries mentioned. However, because of their very fLexibi Lity, these 
bodies, which have a  L e g a L  status based on non-LegaL criteria, harbour a  
danger in that they couL d be given an internationaL dimension that w o u L d  m ak e 
it possibLe for them  to frustrate certain ruLes of the c o m m o n  V A T  system.

- 13 -
T he Com m ission w ould emphasize that compliance with the consultation 
procedure instituted by Article 2 9  should not be regarded as rendering inope­
rative the conditions laid d o w n  in the second subparagraph of Article 4(4) of 
the Sixth Directive. O f the five countries applying in their legislation the 
"single trading entity" principle, only the Netherlands has adopted the con­
dition of territorial scope set out in the Directive, whereas G erm any has in­
troduced a  "single trading entity" arrangement that is expressly open to un­
dertakings established abroad. Accordingly, the Com m ission has instituted infrin­
gement proceedings against G erm any on the basis of Article 169 of the Treaty.
Denm ark, Ireland and the United K ingdom  have not included in their 
legislation the condition of territorial scope for "single trading entities" 
prescribed in the second subparagraph of Article 4(4) of the Sixth Directive.
For this reason, the Commission, whilst reserving the right to initiate any 
future action, has already em barked on a  closer analysis, with the administra­
tions concerned, of the different arrangements in force in order to gauge 
whether, at a  practical level, administrative provisions permit waivers from  
the Directive.
B . Pow er to derogate from  the definition of taxable am ount upon importation 
(Article 11(B)(2))
T he purpose and effect of Article 1 1  of the Sixth Directive is to 
create perfect parallelism between the concepts of "taxable am ount" appli­
cable, on the one hand, within the territory of the country, (Articles 11(A )
(1), (2) and (3)) and, on the other, upon importation (Articles 11(B)(1), (3) 
and (4)). A t the sam e time, this Article attempts to reconcile these concepts 
with those of "customs value" in cases w here goods are subject to customs 
duties (definition of open market value virtually identical to that of customs 
value at the time the Directive w as introduced).
Article 11(B)(1) stipulates that the taxable am ount upon importation 
(like that applicable within the territory of the country) is the price paid 
or to be paid by the importer w here this price is the sole consideration for 
the imported goods, or the open market value where no price is paid or where 
the price paid or to be paid is not the sole consideration for the imported 
goods. "O pen market value" is defined as the am ount which an importer would 
have to pay, under conditions of fair competition, to a  supplier at arm's 
length in the country from  w hich the goods are exported at the time w h en  the 
tax becomes chargeable in order to obtain the goods in question.

- 1 4  -
This attempt to achieve parallelism is a  step along the road to 
eventual completion of a  c o m m o n  market since, according to the note on 
Article 8(c) in A nnex A  to the Second V A T  Directive, "M em ber States shall 
endeavour to apply to importations of goods (from other M em b er States) 
a basis of assessment which corresponds ... to that used for supply m ad e 
within the territory of the country" (the latter rarely being the customs 
value). However, there w as a  danger, prior to 1  July, 1980, that 
Article 11(B)(2), which confers on M em b er States the power to adopt as 
the taxable am ount the value defined in Regulation (E E C ) N o. 803/68, 
might hamstring the harmonization process in so far as this provision 
could be invoked by M em b er States wishing to apply special rules to 
imports in som e instances. This power which w as not confined to goods 
on which customs duties were chargeable, w as able to be used as a m eans 
of subjecting imports from C om m unity countries to the sam e assessment 
criteria as imports from non-member countries. This is a glaring 
illustration of the inadvisability of this particular option, or for 
that matter, any power w hose scope is not clearly defined.
T he evolution of customs legislation within the G A T T  multi­
lateral negotiations offered a solution to som e of the problems. Thus, 
Regulation (E E C ) N o. 1224/80 of 28 M a y  1980, which superseded Regulation 
(E E C ) N o. 803/68 from  1  July 1980, stipulates that the customs value 
of goods must, as far as possible, be based on the transaction value of 
the goods to be valued (Article 3). W h e n  customs value cannot be 
determined by application of the transaction value method there are 
five alternative methods.
Quite apart from the fact that, psychologically speaking, customs 
valuation is a  relic from the days before establishment of the customs 
union, it m ay  also give rise to distortions in treatment as between the 
taxation of imports and that of supplies of goods within the territory of

-  15 -
the country. Accordingly, the Com m ission will at the earliest opportunity 
propose to the Council that M e m b e r States n o  longer be em pow ered to rely 
on the provisions of the customs Regulation w h en  valuing goods imported from  
another M e m b er State.
T he Com m ission has also found that the criteria for determining the 
taxable am ount upon importation are not complied with by one M e m b er State 
where the importation (but also the supply) of valuable horses is concerned. 
T he M em b er State in question fixes a  flat-rate taxable am ount for such horses 
on the basis of the slaughter price and on the horse's age. Since this flat- 
rate am ount bears no relationship to the horse's real value, it is incompa­
tible with the rules laid d o w n  in the Sixth Directive. Accordingly, the 
Commission has initiated Article 169 proceedings and the matter w as referred 
to the Court of Justice on 2 2  M arch 1982 (Case 95/82).
C . Pow er to derogate from  the provisions governing the adjustment of deductions 
(Article 20(5))
T ax charged on purchases b y  a  taxable person is immediately, i.e. 
in the first tax return following the purchase, deducted by that person to 
the extent that the goods are used for the purposes of a  taxable activity.
This rule also applies to capital goods (e.g. immovable property, plant and 
machinery). In the case of capital goods, however, Article 20(2) of the 
Sixth Directive provides for annual adjustments of the deduction initially 
m ade that are designed to reflect changes that occur in the extent to w hich the 
goods are used for purposes of a  taxable activity over a  period of five years,” '  
including the year of purchade (standard period regarded as the normal depre­
ciation period for capital goods). E ach annual adjustment results in a  
credit or debit for the taxable person.
Article 20(5), under w hich M e m b e r States m ay, subject to certain 
conditions, forgo application of the adjustment rule during the five-year 
period stipulated for capital goods, has given rise to implementing difficul­
ties. T he tw o M e m b er States (the United K ingdom  and Ireland) which announced 
their intention of availing themselves of this provision had difficulty in 
proving that the conditions laid d o w n  therein w ere met.
This period m a y  be extended to ten years in the case of im m ovable property.
( 2 )

- 1 6  -
Consultation of the V A T  Committee, which is necessary in order to 
derogate from  the adjustment principle, has brought to light the confusion 
caused by the application of Article 20(5).
This is because it is virtually impossible to ascertain whether the 
three conditions mentioned in that provision are in fact m et in a particular 
country, viz:
1. "insignificant practical effect" of applying the adjustment rule 
"having regard to the overall tax effect in the M em b er State concerned";
2. "need for due econom y of administration";
3. "need to avoid distortion of competition".
W hile the second condition, being purely pragmatic, poses no 
particular problem, the sam e cannot be said of the other two conditions.
In the absence of any specific tax statistics covering a suffi­
ciently long period, it is difficult to assess h o w  "insignificant" would be 
the effect of applying a  rule which, it m ust be assumed, is not being applied 
in the country concerned.
In the absence of complaints from undertakings considering themsel­
ves to have been penalized by the non-adjustment of tax initially deducted, 
it is difficult to say whether or not the conditions of competition have 
been impaired.
In the M e m b er States w hich apply this derogation, the deduction 
initially m ad e is not reviewed (except, of course, at the end of the year 
or purchase in order to m ak e a  provisional assessment of the deductible 
proportion as provided for in Article 19(3) of the Directive). F ro m  a  tax 
angle, this m a y  be to the benefit or detriment of a  particular taxable 
person and m ay, therefore, give rise to inequalities as between taxable per­
sons at national and international levels alike. Clearly, assessment of the 
effect on competition will depend on the extent and frequency of variations 
in the degree of allocation of capital goods at macroeconomic level. For our 
purposes, this takes in all "mixed" undertakings (i.e. carrying on both taxed 
and exempt activities). These are all factors which cannot be taken into

- 17 -
account a priori.
These drawbacks w ould have been m u c h  less far-reaching if, instead 
of empowering M e m b er States to derogate generally from  the adjustment rule, 
the Directive had laid d o w n  threshold values below which taxable persons w ould 
have been exem pt from  this rule. T he Com m ission intends to propose an am end­
m ent to the Directive along these lines.
D . Powers in connection with the special schem e for small undertakings (Article 24)
U nder Article 24(1) of the Sixth Directive, M e m b er States m a y  intro­
duce special V A T  arrangements for small undertakings. Although it does not 
specify the details of these arrangements, Article 24 does stipulate that such 
simplified or flat-rate procedures m ust not lead to a  reduction in tax.
The considerable flexibility M e m b e r States thus enjoy in this respect 
has resulted in the introduction of widely differing simplified procedures 
such as collective flat-rate amounts for determining input or output V A T , 
individual flat-rate amounts, and simplified arrangements for calculating tax. 
T he experience gained in the years in which these different procedures have 
been in force could form the basis for a  harmonized schem e featuring both the 
flat-rate and simplified arrangements applicable in all M e m b er States.
In addition, Article 24(2) of the Sixth Directive em pow ers M e m b er 
States to introduce exemptions and graduated tax reliefs.
M em b er States w hich applied an exemption ceiling equivalent to less 
than 5/000 E C U  and those w hich introduced an exemption upon entry into force 
of the Sixth Directive w ere allowed to increase its value up to that figure 
but have not been authorized to raise it since, even to take account of 
inflation. E ven so, Germany, w hich applied an  exemption equivalent to n o  m ore 
than 5,000 E C U  prior to entry into force of the Sixth Directive, raised it 
to the equivalent of 7 , 900 E C U  on 1  January 1980.
O n  the other hand, M e m b e r States w hich upon entry into force of the 
Sixth Directive applied an exemption equivalent to m ore than 5,000 E C U  have 
been able to increase it in order to maintain its value in real terms. This

- 18 -
power has been used to the full by the United Kingdom, which doubled its 
ceiling from the quivalent of 14,000 E C U  in 1978 to 28,000 E C U  in 1981, 
and by Ireland, which upped its celings from  the equivalents of 3,000 E C U  
and 18,000 E C U  in 1979 to 15,000 E C U  and 30,000 E C U  respectively in 1981, 
and this despite the political undertaking written into the Council 
minutes that this option would be used with moderation.
Bearing in m ind that an upper limit had been imposed on M e m b er States 
with exemption ceilings equivalent to less than 5,000 E C U , this development 
flouts the principle of the Sixth Directive, which w as designed to restrict 
any increase in exemptions.
Then again, the value of the graduated tax relief that m a y  be administered 
alongside the exemption arrangements m a y  not, pursuant to the third subpara­
graph of Article 24(2)(a), be raised in those M em b er States that applied this 
mechanism together with an exemption equivalent to less than 5,000 E C U  at the 
time of the entry into force of the Sixth Directive.
O n  the other hand, there does not appear to be a  similar restriction 
on the graduated tax relief applied by those M em b er States that introduced 
such a mechanism w h en  the Sixth Directive entered into force.
Similarly unaffected is the right of M em b er States that applied an 
exemption equivalent to m ore than 5,000 E C U  upon entry into force of the 
Sixth Directive to introduce graduated tax relief and to adjust its level 
as and w hen necessary in order to maintain its value in real terms.
Article 24(4) lays d o w n  a  mechanism for fixing the exemption by 
reference to the turnover exclusive of tax, although this m eans that the 
beneficiary will not be able to invoice V A T  an deduct input V A T .
Even so, G erm any has set a  turnover ceiling of D M  20,000 inclusive
of tax.
It was, nevertheless, agreed
by the Council that M e m b er States which applied, at the time of entry into 
force of the Sixth Directive, an exemption calculated by reference to the 
am ount of tax could retain this arrangement. Application of this facility, 
however, resulted in non-compliance with Article 24(5), which stipulates that 
taxable persons exem pt from V A T  m a y  neither deduct V A T  charged on their inputs 
nor show  V A T  on their invoices. T he M em b er States concerned claimed that 
recognition of exemption arrangements based on the am ount of tax payable ne­
cessarily m eant the invoicing of V A T  and deduction of input V A T . This

- 1 9  -
mechanism, the effect of w hich is to remit tax collected on behalf of the 
Treasury by small undertakings qualifying for the exemption, creates dis­
tortions as compared with the exemption arrangements based on turnover. 
Closer harmonization is thus needed in this area.
The broad latitude described above has led to marked divergences 
between M e m b er States" administrative arrangements which should be ironed 
out by the end of the transitional period by m eans of a  c o m m o n  simplified 
scheme system of exemptions. T he Com m ission intends to draw up a  fuller 
report on the situation in M e m b e r States.
E . Pow er to fix flat-rate compensation percentages for farmers (Article 25: 
C o m m o n  flat-rate schem e for farmers)
Pursuant to Article 25(1) of the Sixth Directive, M e m b er States m a y  
introduce for farmers a  flat-rate schem e to offset input V A T  paid by them  on 
their purchases.
T w o  sets of problem have arisen in the implementation of this scheme, 
concerning respectively its scope and the basis of assessment used.
1. Limiting the scope of Article 2 5
This scheme, which w as devised as an alternative to the normal V A T  
scheme or to the special V A T  schem e for sm aLl undertakings covered by 
Article 24, w as to apply essentially to small farmers unable to com ply 
with the obligations im posed by the other tw o schemes.
Since Article 25(2) goes n o  further than to give a  functional 
definition of "farmer" and hence of "flat-rate farmer" without setting 
any quantitative criteria for output or annual turnover, the M e m b er 
States generally have adopted this schem e as the normal one for farming, 
and in som e cases even for certain ancillary or secondary activities 
such as equipment cooperatives, processing cooperatives and cooperatives 
providing artificial insemination or marketing services.

- 20 -
In som e instances, certain activities such as the provision of farm 
services, horticulture, fish farming, etc. have been excluded, but only 
rarely has the scope of the schem e been limited by reference to the 
size of farms. Only France excludes large cattle farmers, w h o  are defined 
as such by reference to the num ber of animals sold or in stock at the 
end of the year, and, since 1  January 1982, farmers with a  turnover of 
m ore than F F  300,000. For its part, G erm any is planning to exclude 
limited companies from  the flat-rate schem e with effect from 1982.
Since no C om m unity limit has been laid down, M e m b er States have lost 
sight of the fact that this mechanism w as devised for small farmers. For 
this reason, it is necessary to propose the introduction of a ceiling in 
terms of output or turnover.
M em b er States need also to be reminded that the definition of 
"agricultural undertaking" m ust not be taken to include related activi­
ties and that, accordingly, transactions carried out by cooperatives as 
well as the resale of second-hand capital goods used in agriculture m ust 
be excluded from the scheme.
These departures from  the basic rules laid do w n  in the Sixth 
Directive m ust be rectified.

-  21 -
2. Problems relating to the basis of assessment
Article 25(3) lays d o w n  the principles for calculating flat-rate 
compensation percentages. These principles are based onthepremise that 
flat-rate farmers m ust not be given refunds in excess of the V A T  charge 
on inputs.
Supervision of the correct application of the provisions in question 
has brought to the Commission's notice the fact that, in one M em b er 
State, the flat-rate refund for certain products is m u c h  higher than the 
amount of input tax and thus constitutes a hidden subsidy to the farmer. 
Accordingly, the Com m ission has initiated infringement proceedings 
against that M em b er State on the basis of Article 169 of the Treaty.
T w o  other problems have arisen concerning the justification for the 
basis of assessment and the w ay  in which exports are taken into account.
a) Justification for the basis of assessment used in calculating flat-
rate percentages
T he requirement that M em b er States m ust notify the Com m ission of the 
percentages they fix has been found to be insufficient: it is also 
necessary to spell out the implied obligation to show, at the time 
of notification, h o w  the percentage or percentages chosen have been 
calculated, so that the Commission, which does not possess any 
statistics on flat-rate farming specifically, is in a position to 
determine whether they are well founded. It should be added here 
that m ost M em b er States have had difficulty in applying the c o m m o n  
method of calculation set out in A nnex C , to which Article 25(12) 
refers. M ore often than not they have no separate statistics on 
flat-rate farmers, such data being included in statistics on farming 
in general. N e w  methods for compiling specific statistics are needed 
that will separate out, for the purpose of calculating the flat-rate 
percentages, the farmers subject to the normal scheme, w hose 
structures are essentially different. W here appropriate, it will 
also have to be spelt out that V A T  corresponding to the rates in 
force w hen the calculation is m ade m a y  be applied to the reference 
basis m ade up of the average of the macroeconomic data for the 
preceding three years. This will permit an adjustment that m ore 
accurately reflects the actual V A T  charge on inputs;

-  22 -
b) lak 2.n2_2Qto_account_e x q orts_b^_fj.at— rate_farmers
Because full harmonization has not been achieved in this field, 
distortions have been discovered in the w ay  in which direct 
exports by flat-rate farmers are taken into account. In som e 
M em b er States, flat-rate compensation does not apply to direct 
exports by such farmers, while in others exports do qualify for 
those arrangements. W here this involves invoicing the foreign 
taxable person to w h o m  the products are sold, this person is 
unable to deduct the V A T  in question since it has been paid in 
another M em b er State.
Harmonization is needed, therefore, in order to rem ove these 
anomalies.
F . Pow er to retain or introduce simplification procedures that derogate 
from  the Sixth Directive
1. T he purpose of such measures must be to simplify the procedure 
for charging the tax or to prevent certain types of tax evasion or 
avoidance. In addition, they m ust not have any significant effect on 
the am ount of tax due at the final consumption stage.
Article 27 draws a  distinction between measures of this kind that 
were already in force in M em b er States before 1  January 1977 and those 
that M em b er States would like to introduce. T he former, referred to in 
Article 27(5), were to be notified to the Commission by 1  January 1978, 
while the latter are covered by a special procedure laid do w n  in 
Articles 27(2) to (4).
2. T he pre-existing measures notified to the Com m ission pursuant to 
Article 27(5) are listed in A nnex I to this report.
Although the deadline w as not m et by all M em b er States, the 
Commission takes the view that, since the date laid do w n  in Article 1  
of the Sixth Directive w as deferred by the Ninth Directive of 26 June 
1978, no essential procedural requirement has been infringed.

-  23 -
O n  the other hand, the Com m ission attaches particular importance to 
compliance with the substantive rules set out in Article 27(1). It thus 
reserves its position on certain of these measures and in fact has 
instituted infringement proceedings in respect of a num ber of them.
Belgium: m inim um  taxable am ount for new , second-hand and ex-demonstration
cars and for buildings and construction work;
Denmark: exemption for the barter of stamps without cash adjustment,
irrespective of the status of the parties to the contract; exemption for 
supplies of food and beverages by catering firms, canteens, etc.; 
exemption for the supply and hiring out of vessels other than pleasure 
boats, with a capacity of m ore than 5  tonnes; sam e exemption for repair 
w ork and fitting out and for the importation of vessels, whether intended 
for international or domestic service; sam e exemption for aircraft 
(not notified);
France:  flat-rate assessment of m a x im u m  taxable amounts for the
importation and supply of valuable horses;
Ireland: refunds to non-registered farmers of V A T  charged on certain
buildings and on land drainage and reclamation schemes;
Luxembourg: application of the flat-rate schem e for farmers to the supply
and sale of goods, including capital goods, that have been used for the 
purposes of their agricultural undertaking.
3. M ost of the n e w  measures covered by the procedure set out in 
Articles 27(1) to (4) have so far been approved without any difficulty. 
They include:
Germany: m inim um  taxable am ount for certain supplies of goods and
services delivered for a very lo w  consideration; suspension of appli­
cation of the tax to dealings in precious metals;
Belgium: flat-rate assessment of travel agents' margins; deferral of the
requirement to pay V A T  in the property development sector at the stages 
preceding that involving the m ain contractor;

- 24 -
Netherlands: the main contractor m ad e liable for payment of V A T  normally
payable on w ork performed by sub-contractors in the building, metal­
working and shipbuilding sectors.
4. For the measures notified to it under Article 27(2) as well as for 
the pre-existing measures, the Com m ission is anxious to ensure that the 
conditions laid do w n  in Article 27(1) are met. After receiving a further 
request for a derogation that seemed to infringe the basic V A T  principles, 
the Com m ission decided to stipulate the basic limits within which a  
derogation would be deem ed admissible. In particular, it takes the view 
that the effect of derogation must not be to render V A T  rules inoperative 
in an entire sector. Such would be the case if a derogation were sought 
that would have the effect of systematically relieving taxable persons 
at the final stage of the economic cycle in a particular sector from 
payment of tax and of making the final consumers liable to pay the V A T  
in question.

- 2 5  -
C H A P T E R  II
f
Divergences arising from  the rights of option for taxation
A . Justification for the right of option
The co m m o n  V A T  system includes a c o m m o n  list of exemptions, 
enumerated in Articles 1 3  to 16 of the Sixth Directive. Moreover, 
under the transitional provisions of Article 28, M em b er States m a y  
continue to exempt the transactions listed in A nnex F  to the 
Directive. Taken together, these provisions m ean that a large num ber 
of economic activities qualify for exemption from  V A T , and this is 
bound to create difficulties.
It is worth remembering that, except where otherwise stipulated, the 
performance of exempted transactions excludes the taxable person 
from the right to deduct V A T  charged on his inputs (cf. in particular 
Article 1?(2)). T he drawback of such exclusion from the right to 
deduct input V A T  is that goods and services supplied for the 
purposes of an exempt activity carry a hidden and indeterminate tax 
burden that is apt to be passed on in their selling prices. Under 
these circumstances, the requirement that V A T  be proportional to the 
price paid or to be paid, which is one of the fundamental principles 
of the co m m o n  V A T  system, is no longer met.
A  further drawback is that the purchaser of such goods or services 
w h o  uses them  for the purposes of his business cannot deduct this 
hidden tax burden in any w ay. This results in cumulative taxation 
which again runs counter to the objective of V A T  neutrality.
B. Rights of option under Article 28
T he rights of option for taxation that M em b er States were entitled to 
retain under the transitional provisions of Article 28 are discussed 
in the report on the transitional provisions that has been sent to the 
Council (doc. C0M (82)885).
These rights of option are mentioned here only for information.

-  26 -
C . Rights of option under Article 13(C)
Being permanent, these rights of option for taxation under Article 13(0 
merit special attention. They are applicable to the following trans­
actions:
- letting and leasing of im m ovable property;
- the supply of buildings after first occupation and the supply of land 
which has not been built on other than building land;
- banking and financial transactions.
A nnex II to this report provides an overall picture of the situation in 
the individual M em b er States. It contains three tables corresponding to 
the three categories of transaction referred to above.
a) Letting and leasing of im m ovable property
W here the leasing of immovable property is concerned, the conditions 
and procedures for exercising the right of option in the six M em b er 
States concerned are such as to restrict its application to the 
commercial, industrial and professional sectors, and the possibility 
of abuse seems to be ruled out. There is reason to believe that the 
exercise of such rights of option actually ties in with the objective 
pursued by the Directive in Article 13(B)(b), which, in practice, 
permits exemptions only in respect of the leasing of residential 
property. A s  and w hen the situation in the M em b er States changes, 
the Com m ission m a y  decide to propose a m ore detailed and m ore 
restrictive wording for this exemption, thereby obviating the use of 
the option scheme.
b) Supply of buildings
Three M em b er States have chosen to permit the right of option in 
respect of the supply of eligible buildings or immovable property, 
with quite different operational rules. This power simply adds to 
the list of those authorized by the Directive in respect of immovable 
property, namely the flexible definition of the concepts of

- 27 -
"new  buildings" and "building land" in Article 4(3), both of which 
M em ber States m a y  continue to exempt during the transitional period. 
Under the circumstances, and although this right of option does not 
dovetail with the Directive's objectives, there would seem  to be n o  
possibility of abolishing it in the short or m edium  term other than 
by m eans of a general clarification of the application of value added 
tax in the immovable property sector.
c) Banking and financial transactions
T he right to opt for the taxation of banking and financial transactions, 
exempt under Article 13(B)(d), has been exercised by three M em b er 
States. W hile the scope of the option is confined in Belgium to 
receipt and payment transactions, it ex ten d s in G erm any and France to 
virtually the entire range of transactions that are normally exempt, 
although the operational rules are quite different. In G erm any the 
option m a y  be exercised only if the person to w h o m  the service is 
supplied is himself a  taxable person; this inevitably works to the 
benefit of the person exercising the option and produces a loss of tax 
revenue. In France, the option m ust be applied across the board and is 
irrevocable; this creates an element of uncertainty and the advantage 
of the schem e is less clear-cut for the undertaking exercising the 
option, just as its incidence on tax revenue is difficult to gauge.
A  situation of this kind runs against the general objectives of the 
Directive, particularly in a sector where, as a rule, virtually all 
transactions are exempt. E ven if the exemptions depart from  the 
principle of tax neutrality, this is no reason for introducing option 
schemes that run counter to other basic principles such as that of tax 
equity.
A  point worth noting is that, whereas the other options examined above 
were introduced because of imperfect harmonization in a particular 
sector, this is not true of banking and financial transactions. 
Consequently, the situation in this sector should be looked at m ore 
closely with a view to securing uniform application of the arrangements 
in question.

-  28 -
P A R T  II
D IF F IC U L T IE S  C O N N E C T E D  W I T H  T H E  IN T E R P R E T A T IO N  
O F  C E R T A IN  P R O V IS IO N S  IN  T H E  D IR E C T IV E
Since Council directives are authentic in the languages of the 
M em ber States to which they are addressed, they must of necessity try to 
avoid wherever possible the use of legal concepts or expressions which 
m ean different things in different countries. Unfortunately, this rule 
cannot always be observed; and in any case, blind observance might well 
produce an intelligible phraseology which itself could give rise to 
divergent interpretations. T he Sixth Directive w as unable wholly to avoid 
both these tw o pitfalls peculiar to C om m unity law, as well as the 
difficulties of interpretation inherent in m ost national legislative texts.
These various types of problems are the bread and butter of the 
Value A dded T ax Committee set up under Article 29 of the Sixth Directive, 
consisting of representatives of the M em b er States and of the Commission. 
Since its inaugural meeting on 23 N ovem ber 1977, the Committee had held 
13 meetings by 3 1  Decem ber 1981 and 77 working papers had been discussed, 
29 of these under the consultation procedure.
The Com m ission presents in this report a num ber of problems which 
are typical of the situation which has just been described:
- classification of certain economic activities (Article 4(2));
- delimitation of activities engaged in by public authorities 
(Article 4(5));
- questions of interpretation concerning the place where services 
are supplied (Article 9);
- questions of interpretation concerning the taxable amount (Article 11);
- questions of interpretation concerning exemptions (Articles 13, 14 
and 15);
- questions of interpretation concerning the scope of the right to deduct 
(Article 17) and the calculation of the deductible proportion 
(Article 19).

- 29 -
C H A P T E R  I
Problems in 6lassifying certain economic activities (Article 4(2)) during 
the transitional period laid d o w n  in Article 28
Article 4(2) of the Sixth Directive provides a general definition 
of the economic activities on which V A T  is liable to be charged:
"all activities of producers, traders and persons supplying services 
including mining and agricultural activities and activities of the 
professions". A  definition so drawn should have exhausted, for all 
practical purposes, discussions and disputes as to the distinction between 
commercial and other activities, or between commercial and agricultural 
activities, which had been c o m m o n  in the M e m b er States where as a  rule 
only commercial and industrial activities had hither to been subject to 
V A T .
Unfortunately, this type of difficulty has not yet disappeared 
completely, given that the M e m b er States m a y  continue toexempt, during 
the transitional period laid d o w n  in Article 28, "services supplied by 
authors, artists, performers, lawyers and other m em bers of the liberal 
professions" (see A nnex F , point 2, to the Sixth Directive).
In this context the Com m ission cam e to consider the position of 
race-horse trainers, w hose activities were not subject to V A T  in France 
or in Ireland. The French authorities justified the exemption from 
taxation on the ground that the activity w as a  profession whilst the 
Irish authorities justified it by claiming that the activity w as generally 
exercised as ancillary to an agricultural activity and that in consequence 
if cam e under the special schem e for farmers.
After consulting the V A T  Committee, where delegations were divided 
on this matter, the Com m ission decided that in the absence of a C om m unity 
definition of the professions it could not object to the temporary 
retention of the exemption in France, since Article 28(3)(b), in con­
junction with A nnex F , point 2, authorized such exemption "under 
conditions existing in the M em b er State concerned".
T he Irish authorities, for their part, have am ended their 
legislation to bring it into line with C om m unity law.

-  30 -
C H A P T E R  II
Criterion of activities engaged in by bodies as public authorities 
(Article 4(5))
T he first subparagraph of Article 4(5) runs: "States, regional 
and local government authorities and other bodies governed by public law  
shall not be considered taxable persons in respect of the activities or 
transactions in which they engage as public authorities, even where they 
collect dues, fees, contributions or payments in connection with these 
activities or transactions."
It is left to the M em ber States to define the activities engaged 
in by public bodies "as public authorities". It w as not possible to 
produce a  C om m unity definition because of the wide divergencies between 
M em b er States on this point. This situation gives rise to a num ber of 
difficulties, albeit limited in extent by the list given in A nnex D  to 
the Directive, concerning the activities in respect of which the above 
bodies are considered taxable persons.
A  significant example of this problem is the taxable position of 
certain professions whose m em bers m a y  authenticate acts in their capacity 
as public officers (e.g. notaries). In tw o M em ber States (Belgium and 
the Netherlands), these public officers are regarded as non-taxable 
persons in respect of those duties whereby they have a certain share in 
the judicial powers of the State.
In the V A T  Committee, a majority of the delegations w as of the 
opinion that the m em bers of those professions were indeed professional 
people and accordingly liable for V A T  on all their transactions, with 
the proviso that their services might be exempted during the transitional 
period under Article 28 and A nnex F , point 2. O n  the budgetary front, this 
is no m ere academic debate, since the question of financial compensation 
under the o w n  resources system arises only in the case of liability for 
taxation (with exemption during the transitional period). Belgium does 
in fact pay compensation in respect of V A T  o w n  resources covering all 
activities of notaries and bailiffs.
Another source of difficulty lies in the provision contained in 
the second subparagraph of Article 4(5), by which bodies governed by

-  31 ~
public law, w hen they engage in activities or transactions referred to 
in the first subparagraph, "shall be considered taxable persons in 
respect of these activities or transactions where treatment as non- 
taxable persons would lead to significant distortions of competition."
It is sometimes difficult in practice to determine whether or not that 
last condition is met.
T he Com m ission considers that this situation is unsatisfactory 
and that the conditions and limits of liability for tax of bodies 
governed by public L a w  should be spelt out in m ore specific terms.
Under G erm an law, for instance, land-registry offices were not 
considered taxable persons, although so m e of their duties were the 
sam e as those performed by quantity surveyors w ho, as m em bers of a  
profession, were Liable for V A T . T he professional association of quantity 
surveyors attacked the exemption of land-registry offices. Since the 
situation could lead to "significant" distortions of competition, the 
German authorities m ade the transactions performed by these offices 
subject to V A T  at the standard rate with effect from  1  January 1982.
(3)

-  32 -
C H A P T E R  III
Questions of interpretation concerning the place where services are
supplied (Article 9)
A . Aggl 2cation_of_Arti cle_9(l)_to_the_hi r ; 2nc|_out_of_mo\/able_tan 2i_ble 
grogert^_other_than_means_of_transgort
Pursuant to Article 9(1) of the Sixth Directive, the place where a  
service is supplied (and taxed) is deem ed to be the place where the 
supplier has established his business or has a fixed establishment 
from which the service is supplied or, failing that, the place where 
he has his permanent address or usually resides. Since the aim  w as to 
tax the supply of services at the place where they were actually m ade 
available to the customer (economic criterion) and not at the place 
where a purely statutory place of business w as located, this provision 
w as not thought likely to cause any serious difficulties. It w as 
assumed w hen the text w as drafted that at the place where a service w as 
supplied there w as bound to be,in m ost cases at least,a "place of 
business", however rudimentary, with which that service w as connected.
However, it has been pointed out that in the application of Article 
9(1) as worded at present a difficulty would arise if a taxable service 
w as supplied in a country in which there w as not the slightest vestige 
of a  place of business (or fixed address) belonging to the supplier.
T he case in m ind w as that of a foreign firm which had de facto no 
actual place of business, fixed establishment, permanent address or 
residence in a given country in which it purchased an item of movable 
tangible property for the purpose of hiring it out in that country.
In such a case, an excessively literal interpretation of Article 9(1) 
could lead to the non-taxation of the hiring in the country in which, 
in accordance with the principle on which this provision is based, it 
should be taxed, that is to say the country in which the hiring out 
occurs.(It m ust be remembered that under the Directive even a  single 
transaction involving "the exploitation of property", such as hiring 
out, is considered an economic activity.) Furthermore, the sam e hiring 
out transaction would very probably also escape taxation in the country 
where the supplier has his m ain place of business, as the national tax 
authorities would be unlikely to becom e aware of a  transaction 
performed abroad. That is w h y  on 23 April 1979 the Commission presented

- 33 -
to the Council a proposal for a Tenth Directive on the harmonization of 
laws relating to turnover taxes, which aims to clarify beyond doubt that 
the supplier is established in the country in which the property hired out 
by him  is located at the time it is actually m ad e available to the 
customer. T he hiring out of m eans of transport w as expressly excluded for 
reasons of supervision, given that such property is by definition mobile 
and can easily cross frontiers.
This proposal for a  Directive, which has been approved by Parliament and 
by the Econom ic and Social Com m ittee subject to a  num ber of com m ents on 
the general thinking behind Article 9(of the Sixth Directive), should be 
adopted as soon as possible. It does not overturn Article 9(1) of the Sixth 
Directive, but, by supplementing and thus m aking that provision m ore 
specific, should obviate m ost of the difficulties arising w hen the place 
of establishment differs from  the place where the transaction is effected.
O nce the proposal for a  Tenth Directive is adopted, the Com m ission is 
prepared to propose that Article 9(2)(d) be deleted, since it will have 
becom e redundant.
Moreover, the Com m ission has discovered in the laws of several M e m b er 
States provisions concerning the place where services are supplied in the 
case of the hiring out of movable tangible property which do not seem  in 
accordance with Articles 9(1) and (2) of the Sixth Directive.
In G erm any the place of supply for the hiring out of such property, with 
the exception of all m eans of transport, is the place of utilization. 
Consequently, the G erm an legislation m eans that the hiring out of property 
is taxed from the m om ent such property is used in Germ any, even if it has 
been imported by the lessee and V A T  has been paid on it in the country 
in which it w as hired out.
France and Italy have also m ad e the criterion of utilization generally 
applicable, whereas the Directive specifies that criterion only where it 
is the lessor w h o  exports the property from  one M em b er State to another. 
T he application of different definitions leads to cases of double

-  34 -
taxation or sometimes non-taxation in the supply of services involving 
m ore than one country.
T he Com m ission has initiated the infringement procedure of Article 169 
of the E E C  Treaty against the Federal Republic of Germany, Italy and 
France for failure to comply with the Sixth V A T  Directive, but has 
reserved its position on any future action concerning Denm ark, since 
the provisions adopted in that country need to be discussed in m ore 
detail with the authorities concerned in order to verify whether they 
com ply with C om m unity law.
B. Scopg of the term "forms of transport" in Article 9(2)(d)
Article 9(2)(d) introduces a derogation from the general rule that the 
hiring out of movable tangible property is taxed in the country where 
the supplier is established, by shifting the place of taxation to the 
country where the hired property is utilized, w hen it has been exported 
by the supplier. However, the hiring out of "forms of transport" is 
expressly excluded from this derogation and is therefore governed by 
the general rule of the place where the supplier is established. H ence 
the importance of ensuring that the concept of "forms of transport" has 
an identical meaning in all M em b er States, for it is not difficult to 
see the practical consequences of allowing different criteria to be 
adopted, particularly with regard to property which is by its very 
nature Liable to cross frontiers and thus cause confusion as to the 
scope of Article 9(2)(d). These consequences will depend on the scope 
of the concept of "form of transport" in each M em b er State: if, for 
example, a container is hired out (and at the sam e time exported) by 
a lessor in one M em b er State to a customer in another M em ber State, 
a risk of double taxation or non-taxation arises if one of these States 
includes containers am ong "forms of transport" and the other does not.
A  C om m unity list of m eans of transport (covering those items m ost 
likely to cause problems) would help in most cases to prevent such 
difficulties. A  list of this kind should shortly be drafted by the

- 35 -
V A T  Committee, although it has not yet been possible to reach unanimous 
agreement on the concept of "m eans of transport" as applied to goods 
which cannot be classed as vehicles in the accepted sense of the word.
C . Defi.ni_t2on_of_certai_n_seryi ces_referred_to_i_n_Arti.cle_9.(2He2
This provision, which forms an exception to the general rule that 
supplies of services are taxable at the place of establishment of the 
supplier, sets out a list of services which are taxable at the place 
of establishment of the customer, subject to certain conditions 
(notably in intra-Community trade, w h en  a customer established in a  
different M em b er State from  that of the supplier is a taxable person).
In som e M em b er States the question has arisen whether supplies of 
certain services not mentioned explicitly in this List of exceptions 
could be treated in the sam e w ay  as those which do appear in it, with 
the consequence of transferring the taxation to the customer's country.
M ost of these difficulties of interpretation concern the second and 
third indents of Article 9(2)(e), particularly the definition of 
advertising services, the services of consultants and experts and 
those relating to the supplying of information.
O n e  M em b er State felt that it w as entitled to treat auctioneers as 
consultants, while another M e m b er State asked the V A T  Committee 
whether certain notices published in newspapers should be regarded 
as advertising. T he concept of the supplying of information, which 
follows that of data processing in the text of the Directive, also 
needs to be clarified, the question being whether it should include 
only the supplying of computerized information or whether it should 
be interpreted in the broadest sense of the word.
Without wishing to exaggerate the importance of the problems which 
have been encountered, the Com m ission nevertheless intends to continue 
the V A T  Committee's clarification work.

- 36 - 
C H A P T E R  IV
Questions of interpretation concerning the taxable amount (Article 11)
Determination of the taxable amount has given rise to a number 
of difficulties and disagreements, which are analysed below.
A . M inim um  taxable amount
The legislation of one M em ber State provides that the taxable amount 
to be applied for the supply or importation of new  cars m ay  not be 
less than the list price in force at the time the tax is payable.
In the Commission's view, this measure conflicts with:
- Article 11(A)(1)(a), which provides in particular that the taxable 
amount in respect of the supply of goods within the country shall 
be the consideration which has been or is to be obtained by the 
supplier; and
- Articles 11(A)(3)(a) and (b), which specify that the taxable amount 
shall not include price reductions by w ay of discount for early 
payment or price discounts and rebates allowed to the customer and 
accounted for at the time of the supply; and
- Articles 11(B)(1)(a) and (b) and 11(B)(4), which lay dow n the 
criteria for determining the taxable amount on importation, which 
are similar to those used to determine the taxable amount within 
the country.
The Commission has decided to refer this matter to the Court of Justice.
B. Supply of a new  item with a used item taken in part-exchange
Article 11(A)(1)(a) of the Directive also stipulates that the taxable 
amount in respect of supplies of goods and services shall normally 
be everything which constitutes the consideration which has been or 
is to be obtained by the supplier from the purchaser, the customer 
or a third party for such supplies.

-  37 -
The Legislation of two M em ber States provides that w hen a n ew  item is 
supplied and the supplier takes a used item of the sam e kind in part- 
exchange, the taxable amount is reduced by the value of the used item.
A s these provisions conflict with Article 11(A)(1)(a), the Commission 
has initiated the infringement procedure of Article 169 of the E E C  
Treaty in respect of both countries.
It has sometimes been advance in justification of this practice that 
it constitutes a special system, authorized temporarily under the 
second paragraph of Article 32, which provides that M em ber States m ay  
retain, until a Com m unity system becomes applicable, any existing 
special rules concerning used goods.
It is evident that such a claim cannot be accepted in the case in 
question. The supply of a n ew  item of movable property is a taxable 
transaction and the form of payment cannot in any w ay affect that fact. 
In any case Article 1 1  clearly states that the taxable amount shall be 
everything which constitutes the consideration, which implies that in 
cases where payment is m ade partly in cash and partly in kind, the 
taxable amount of the n ew  item must be the su m  of those two values.
C . Subsidies
Article 11(A)(1)(a) of the Directive stipulates that subsidies received 
by a taxable person which are "directly linked to the price" of the 
supplies m ade by that person must be included in the taxable amount as 
components of the prices paid by third parties. While it is relatively 
easy to decide straight aw ay that subsidies are "directly linked to 
the price" w hen their amount is determined either by reference to the 
selling price of the goods or services supplied, or in relation to the 
quantities sold, or again in relation to the cost of goods or services 
supplied to the public free of charge, it is extremely difficult to 
decide in the case of other types of subsidy such as deficit subsidies 
or operating subsidies, which are paid with the aim of improving a 
firm's economic position and which are granted without specific 
reference to any price. The absence of any substantial difference 
between these two types of subsidy (those "directly linked to the price"

-  38 -
are usually also aimed at improving a firm's position), together with the 
fact that a M em ber State can convert a subsidy of the first type into 
a subsidy of the second type, illustrate the fragility of a distinction 
based on purely formal criteria (the manner in which the subsidy is 
granted) and thus the inadequacy of the Directive in this respect.
A  further source of divergence between M em ber States lies in the second 
indent of Article 19(1) of the Directive, which permits M em ber States w h o  
so wish to include in the denominator of the deductible proportion the 
amount of subsidies which are not directly linked to the price. B y  
reducing the taxable person's right to deduct this is tantamount to a form 
of hidden and indeterminate taxation of subsidies excluded from the 
taxable amount.
A  comprehensive generic definition of the subsidies which it is desired 
to include in the taxable amount would not be the w ay to eliminate 
differences of interpretation as to the nature of each subsidy and the 
differences between schemes resulting from the second indent of 
Article 19(1). The ideal solution would be to draw up a Com m unity list 
of subsidies regarded as "directly linked to the price". The difficulties 
in compiling such a list could be overcome in the case of the large 
number of subsidies already covered by Community rules (E A G G F  and others). 
This would have the advantage of considerably reducing, as a first step, 
divergences between M em ber States, which would continue to exist only 
for subsidies under exclusively national jurisdiction. A s  a second step, 
these divergences would be eliminated one after the other as a result of 
surveys of particular sectors (transport, agriculture, public bodies, 
etc.). The disadvantage of this solution is that it would probably take 
a long time.
Another remedy to the present situation - albeit m uch more drastic - 
would be to refrain from including in the taxable amount all types of 
subsidy other than those remunerating services supplied to final 
consumers. However, this would require an amendment to the text of 
Article 1 1  of the Sixth Directive.

-  39 -
In any event, the Commission considers that the whole problem of 
subsidies, under the V A T  system needs to be thought out afresh for 
two reasons: firstly , as w e  have just seen, the provisions regulating 
this matter in the Directive are a source of divergences between 
M em ber States; and secondly, certain subsidies are so large that their 
impact on V A T  (and on o w n  resources) is too great for a lack of 
harmonization in this field to be allowed to continue.
D . Incidental expenses to be included in the taxable amount:  
problem of interest on hire-purchase sales
Article 11(A)(2)(b) lays dow n the principle that incidental expenses 
which the supplier charges to the purchaser are included in the 
taxable amount. This principle is strengthened by a provision 
permitting M em ber States to consider expenses covered by a separate 
agreement between the supplier and the purchaser to be incidental 
expenses.
It is in this context that the question has arisen as to what 
arrangement should be applied to the financing charges which a  
supplier charges to a purchaser over and above the cash price, in the 
case of a hire-purchase sale. This question is not insignificant, 
given that credit transactions are exempt under Article 13(B)(d).
If it is considered that such financing charges are preponderantly 
of the nature of incidental expenses, such charges will fail to 
qualify for the exemption of interest laid dow n by Article 13. T he 
problem becomes even m ore difficult to resolve w hen the arrangements 
for a hire-purchase sale are covered by an agreement separate from 
the sale of the goods themselves: in such a case are the charges to 
be classified as interest or as incidental expenses, which would be 
allowed under Article 11(A)(2)(b)?
A s the M em ber States have arrived at different answers to this 
question, the resulting situation is unsatisfactory since it runs 
counter to tax harmonization in an area directly affecting the final 
consumer. Measures must therefore be taken to end this divergence, 
in itially  by establishing a c o m m o n  interpretation of the concept of 
"incidental expenses". The Commission intends shortly to refer this 
matter to the V A T  Committee.

-  40 -
E. Definition of the first place of destination
Article 11(B)(3) specifies that the taxable amount for imports shall 
include the incidental expenses incurred up to the first place of 
destination within the territory of the country, this being the place 
mentioned on the consignment note or any other transport document or, 
in the absence of such indication, the place of the first transfer of 
cargo in the country of importation.
Council Regulation (E E C ) N o  1224/80 on the valuation of goods for 
customs purposes states that in determining the customs value, there 
shall be added to the price actually paid or payable, inter alia, the 
cost of transport and insurance, and loading and handling charges 
associated with the transport of the imported goods (Article 8(1)) to 
the place of introduction of the goods into the customs territory of 
the Community.
T he concept of the place of introduction does not correspond to that of 
the place of destination, since the customs value of imported goods does 
not include the cost of transport after importation into the customs 
territory of the Community, provided that such cost is distinguished 
from the price actually paid or payable for the imported goods. 
Accordingly, where goods are carried by the same means of transport, the 
costs are assessed in proportion to the distance covered outside and 
inside the customs territory of the Community. B y  contrast, for tax 
purposes such costs must be included in the taxable amount in so far 
as they are not already included (free-at-destination price), and 
M em ber States m ay  equally include in the taxable amount incidental 
expenses which result from transport to another place of destination 
within the country, if the second place is know n at the time w hen the 
chargeable event (importation) occurs.
These divergences in the method of calculating the components of the 
taxable amount show  that, even after the adoption of Regulation 
(E E C ) N o  1224/80 on customs valuation, differences remain between (
customs value and taxable amount for V A T  purposes w hen "the first place 
ofdestination" does not correspond to "the place of introduction" and 
that the option allowed to the M em ber States (in Article 11(B)(2)) of 
adopting the customs value as the taxable amount is ill-advised and 
a source of difficulties.

- 41 -
For the purpose of calculating the incidental expenses to be included 
in the customs value "to the place of introduction" into the customs 
territory of the Community, the customs Regulation (Articles 14 and 15) 
specifies what is meant by place of introduction and lays dow n all the 
rules needed to determine that place correctly by reference to the m ode 
of transport of the goods (by sea, inland waterway, rail, road, etc.).
The concept of "first place of destination", on the other hand, is 
defined in Article 11(B)(3) of the Sixth Directive, but all the rules 
needed to determine that place are not given. That concept should be 
clarified with reference to the m ode of transport of the goods, 
particularly if the place of destination is taken to be "the place of 
the first transfer of cargo".

-  42 -
C H A P T E R  V
Questions of interpretation concerning exemptions (Articles 13, 14 and 15)
The difficulties of interpretation relating to exemptions fall into 
two groups of unequal range, som e being of general significance and others 
occurring only in a specific context. The former can really be reduced to 
a single question, namely what is the exact meaning of the introductory 
paragraph which appears at the beginning of Articles 13(A), 13(B), 14 and 
15? This question is discussed at point A  below. The difficulties in 
specific areas are presented under the following headings:
B  - difficulties concerning certain exemptions under Article 13(A);
C  - difficulties concerning certain exemptions under Article 13(B);
D  - difficulties concerning exemptions under Articles 14 and 15;
E  - difficulties concerning the scope of the right to deduct (Article 17)
and the calculation of the deductible proportion (Article 19).
A . Genera^_cHffi.cult^_of_i.ntergretati.on_concermng_the_meani_ng_of_the 
iQ££ 2^y£t 2IZJ23IS9£§Rh_(Articles_13(A)^_13(B)^_14_and_15)
The text in question runs as follows:
"1. Without prejudice to other Community provisions, M em ber States 
shall exempt the following under conditions which they shall lay dow n 
for the purpose of ensuring the correct and straightforward application 
of such exemptions and of preventing any possible evasion, avoidance 
or abuse: .................................................................................."
This provision, which w as inserted into the Directive during 
discussions in the Council, might at first sight seem anodyne, for 
it is difficult to imagine a M em ber State legislating in this field 
without trying to ensure "the correct and straightforward application" 
of the exemptions it is enacting and to prevent any tax evasion, 
avoidance or abuse.
In fact, this provision reflects a major concern am ong M em ber States, 
namely to retain the greatest possible room  for manoeuvre over the 
conditions for applying Community exemptions. The intention is to

-  43 -
repeat, in a form appropriate to the objectives of the Directive, the 
principle enunciated in the third paragraph of Article 189 of the E E C  
Treaty, while at the sam e time acknowledging that such conditions can 
have no other objectives than that of clarification and combating tax 
evasion and avoidance.
This brief review of general considerations is not irrelevant to the 
legal proceedings initiated in certain M em ber States by persons claiming 
the application of a particular exemption laid dow n by the Directive, 
w hen that exemption has not yet been introduced into national 
legislation. T o  counter such claims, the competent authorities of the 
M em ber States concerned tend to invoke the introductory paragraph to 
Article 13, claiming that provision allows M em ber States a margin of 
discretion and that an exemption provided for in the Directive cannot 
therefore have direct effect in the absence of implementing measures 
adopted at national level.
The Court of Justice, having received a request for a preliminary 
ruling under Article 177 of the E E C  Treaty, gave an in itial judgment 
on this matter on 19 January 1982 in Case 8/81: the Court declared 
that certain provisions of the Directive m ay, under certain conditions, 
be directly applicable and be relied upon by individuals, even where 
national legislation had not been adjusted in line with the Directive.
B. 2lÎÎl£y!£l§§_ 2Î_l! 2£ergretat 2on_concerninç|_certain_exemgtions_under 
Art i_çle_13_(A ) Ç 12
The Commission would like to draw particular attention to the d iffi­
culties encountered in applying the exemptions covered by sub- 
paragraphs (a), (b), (1), (m ) and (n) of Article 13(A)(1).
In any case it has always considered that, since V A T  is a tax on goods 
and services, the exemptions provided for in the Directive should have 
been solely related to specific transactions, w h ic h  w o u ld  h a v e  obviated m a n y  
problems of interpretation and delimitation.
a) Exemption relating to the supply of services by the public postal 
services (Article 13(A)(1)(a))
This exemption relates to the supply by the public postal services 
of services other than passenger transport and telecommunications

- 44 -
services and the supply of goods incidental thereto.
It has been found that the legislation of one M em ber State extends 
this exemption to transport undertakings (railways and airlines) which 
carry mail on behalf of the public postal service.
The authorities of that country claim that the exemption instituted 
by the Sixth Directive must be viewed in the light of its objective, 
and that all services involved in the provision of the public postal 
service m ay  qualify for exemption, even if the firms concerned are in 
the private sector, provided that the latter are bound by a legal 
obligation to assist the public service.
This line of reasoning w as not endorsed by the Commission, which is 
opposed to such broad interpretation of exemptions; like any other 
firm which is exempted, the public postal service must bear V A T  on 
the inputs relating to its exempt activities.
The argument used by the M em ber State in question is also not devoid 
of impact on the determination of the basis for calculating the 
Communities' ow n  resources, which would suffer a reduction in this 
particular case.
The Commission has initiated the infringement procedure of Article 
169 of the E E C  Treaty in respect of the M em ber State in question.
b) Exemption concerning hospital and medical care undertaken by bodies
governed by public law  or by similar establishments (Article 13(A)(1)(b))
While the application of the exemption is relatively straightforward 
as regards public or semi-public hospitals, it is not so clear as 
regards other hospitals, centres for medical treatment or diagnosis, 
and other establishments of a similar nature. The latter m ay  benefit 
from the exemption provided that they are duly recognized and that 
they supply their services "under social conditions comparable to 
those applicable" in the public sector. The real difficulty lies in 
drawing the line between establishments fulfilling these conditions

-  45 -
and other establishments. It is true that under the transitional 
provisions (Article 28(3)(b) and A nnex F, point 10, of the Directive) 
M em ber States m ay  continue to exempt establishments which do not fulfil 
the conditions of Article 13(A)(1)(b). Nevertheless, the difficulty 
remains as regards calculation of the Communities' o w n  resources as 
the application by M em ber States of an exemption extended in this w ay  
must give rise to financial compensation in respect of transactions 
which would not normally be covered by the exemption provided for in 
Article 13(A)(1)(b).
The V A T  Committee's discussions on this point have not, unfortunately, 
brought things any further forward.
c) Exemption for the provision of medical care in the exercise of the 
medical and paramedical professions (Article 13(A)(1)(c)
The legislation of one M em ber State extends exemption to supplies of 
goods by members of the medical and paramedical professions in 
connection with their services: for example, supplies of pairs of 
spectacles under a medical prescription.
In the Commission's opinion, this stretches the interpretation of the 
text of the Directive, with direct repercussions on the Communities' 
ow n  resources. The Commission has accordingly initiated the procedure 
of Article 169 of the E E C  Treaty in respect of that M em ber State.
d) Exemption concerning supplies by non-profit-making organizations 
with aims of a political, trade-union, etc, nature
(Article 13(A)(1)(D)
The question has arisen as to the exact scope of this exemption, 
because there are certain differences between the several language 
versions of the text. S o m e language versions use the word "syndicat" 
or equivalent, which has a range of meanings, whereas others use the 
very specific term "trade union" or equivalent.

-  46 -
The Commission is of the opinion that these differences should have no 
practical consequences as regards non-profit-making organizations (whether 
professional, employers' or employees' organizations) which limit their 
activities to representing the collective interests of their members. In 
such a case, these organizations are in fact acting as the collective 
voice of their members, and the subscriptions paid by the latter are for 
membership of a collective organization, and do not represent a conside­
ration for services rendered. Such organizations should therefore fall 
outside the scope of V A T .
Organizations which do not limit their activities to the collective 
representation of their members m ay  become liable for the tax if the 
subscriptions they receive actually represent a consideration for 
individually identifiable services provided to their members.
T he Commission's view on this matter has been confirmed by the Court of 
Justice in Cases 154/80 and 89/81. In Case 89/81, the Court stated that: 
"where a person's activity consists exclusively in providing services for 
no direct consideration, there is no basis of assessment and the free 
services in question are therefore not subject to value added tax."
In Case 154/80, the Court declared that in order to decide whether 
servides provided had been remunerated, such remuneration must be capable 
of being expressed as a specific amount of money.
It is against this background that it is necessary to determine the scope 
of the exemption instituted by Article 13(A)(1)(l) of the Sixth Directive 
and, consequently, to draw conclusions from the differences in the 
language versions referred to above.
In the context of the analysis set out above, the Commission considers 
that the impact of such differences must be minimal since it could concern 
only services rendered to their members by trade associations or 
employers' organizations which:
1. fall within the scope of the tax;
2. receive subscriptions set by their o w n  rules which m ay  be regarded 
as the consideration for such services.

- 47 -
e) Exemptions concerning "certain services closely Linked to sport" 
(Article 13(A)(1)(m))  and "certain cultural services"
(Article 13(A)(1)(n))
The extremely vague wording of these two categories of exemption is 
not only puzzling to the teader but also, more importantly, leads 
to difficulties of implementation which are not without effect on 
the determination of the basis for calculating the Communities1  
o w n  resources.
It seems paradoxical to introduce cases of compulsory exemption and 
leave the substance to the discretion of each M em ber State. There is 
however no doubt that in adopting the text of these provisions the 
Council considered that the M em ber States should grant only limited 
exemptions in the two areas of sporting and cultural activities, 
for otherwise there would have been no reason to use the adjective 
"certain". The Commission considers that it is expecially necessary 
to achieve genuine harmonization in these areas as M em ber States 
m ay  continue, during the transitional period, to tax those services 
which should be exempt: confusion is therefore complete, since the 
substance of such services has not been determined.
*
* *
(4)

-  48 -
C ■ Diili£yi£l®s_concermn 2_certai^_exemgtions_under_Artlcle_13^B)
Difficulties arise in three areas under this head: gold coins;
the services provided by certain financial organizations which issue 
"payment cards"; and gambling.
a) Gold coins
According to Article 13(B)(d)(4), the exemption for transactions 
concerning coins used as legal tender does not apply to collectors' 
items, that is to say gold coins which are not normally used as 
legal tender or coins of numismatic interest.
This very broad definition of collectors' coins should apparently 
m ake it possible to tax gold coins which are not of obvious numis­
matic interest and which are acquired more as a form of investment. 
It should be noted in this respect that gold sold in the form of 
ingots, bars, etc. by a taxable person (other than a central bank) 
in the course of his business is also subject to V A T .
A  problem of interpretation has arisen in connection with the 
transitional measures; namely Article 28(3)(b) of the Directive, 
which in conjunction with point 26 of A nnex F, allows M em ber 
States to continue, as a transitional measure, to exempt 
"transactions concerning gold other than gold for industrial use". 
T w o  questions have arisen: firs t, whether this concept of non­
industrial gold could also cover gold coins which are not normally 
used as legal tender (if not, the scheme of immediate taxation 
would apply); and secondly, assuming the first question is 
answered in the affirmative, what criteria a M em ber State 
exercising the option in Article 28 could use to maintain 
exemption during the transitional period.
W ith regard to the first question, the V A T  Committee cam e out in 
favour of applying the option of exemption during the transitional 
period to gold coins. However, the Committee did not reach a

-  49 -
consensus on the uniform application of this transitional exemption 
(by agreeing, for example, that a M em ber State which opts to maintain 
the exemption for gold coins should exempt any gold coin as soon as 
it is quoted on one of the markets of the M em ber States).
The view which prevailed w as that the Directive allowed gold coins 
to be exempted only if they were already exempt w hen it entered 
into force, which implicitly confirms the absence of a uniform scheme 
during the transitional period. The resulting situation not only 
creates a serious risk of distortion of competition and deflection 
of trade in a sector as sensitive and important as the gold market, 
but also causes difficulties in determining M em ber States' contri­
butions to the Communities' o w n  resources.
However, the Commission notes that the situation is levelling out, 
since France and Luxembourg are n o w  the only countries which main­
tain exemptions in this sector.
b) Payment cards
A  problem of interpretation has arisen with reference to "travel 
and entertainment cards", which enable their holders to purchase 
goods and services without having to pay cash at the time of 
purchase. These cards are issued, against payment of a fixed annual 
subscription, by financial organizations which undertake to pay the 
suppliers of the goods or services the amount they are ow ed (after 
deducting an amount representing the issuing organization's 
remuneration), the card-holder being required to pay his debt to 
the issuing organization upon receiving a statement of his account.
This relatively complex situation, involving two distinct relation­
ships, one between the issuer of the card and its holder, and the 
other between the issuer and the suppliers of goods and services, 
is not explicitly covered in the Sixth Directive. The tax arrange­
ments applicable to it therefore depend on the interpretation, 
narrow or broad, of the rules in the Directive.

-  50 -
The V A T  Committee, to which the matter w as referred, considered 
unanimously that the service provided by the issuer of the card 
to its holder constituted a payment facility and thereforefell 
within the exemptions in Article 13(B)(d). The situation is less 
clear as regards the arrangements to be applied to the transaction 
between the issuing organization and the supplies of goods and 
services. S o m e M em ber States are inclined to see the transaction 
as a type of (taxable) advertising which the issuing organization 
performs for the benefit of the suppliers, in the form of business 
promotion and customer search activities. A  majority of M em ber States, 
on the other hand, together with the Commission, consider that this 
transaction is also covered by the exemptions in Article 13(B)(d).
The Commission notes that discussions in the V A T  Committee have 
produced a broad majority view in favour of the latter interpretation, 
and it intends to continue its efforts to eliminate the disparities.
c) Gambling
Under Article 13(B)(f). M em ber States must exempt "betting, lotteries 
and other forms of gambling, subject to conditions and limitations 
laid dow n by each M em ber State". The wording of this provision merely 
confirms the existing position, largely justified by the difficulty, 
both theoretical and practical, of determining the turnover of the 
activities in question, which are generally more suited to the 
application of specific taxes than to V A T . However, the Directive 
clearly states that the scope of this exemption m ay  be reduced by 
each M em ber State, which leaves open the possibility of divergences 
within the Community. Symptomatic divergences have emerged in 
particular in respect of one-armed bandits. S o m e M em ber States stress 
the gambling aspect of these machines (which in principle implies 
their exemption from V A T), while others consider that their gaming

-  51 -
aspect does not exclude a certain degree of mechanical and mental 
dexterity, at least sufficient for them to be considered as more 
than simply gambling machines, and therefore exclude them from the 
exemption.
The Commission notes that discussions in the V A T  Committee have 
produced abroad majority in favour of the latter viewpoint and it 
intends to continue its efforts to eliminate divergences in this 
area.
The procedure of Article 169 of the E E C  Treaty has been initiated 
in respect of one M em ber State which, in the Commissions' view, is 
applying the exemption broadly to all mechanical games.

-  52 -
D ■ ^iiiicuities_concerning_certain_exemgtions_under_Articles_14_and_15
a) Difficulty concerning exemption under Article 14: re-importation 
of property which has undergone work outside the country of origin
The provision referred to here is Article 14(1)(f), concerning 
exemption for the re-importation of movable property "where that 
property has while in another M em ber State undergone work which 
has been taxed without the right to deduction or refund".
S o m e M em ber States have found this exemption unnecessary on the 
grounds that it duplicates the exemption provided for in Article
14(1 He) concerning the "re-importation .........................of goods in
the state in which they were exported, where they qualify for 
exemption from customs duties or would qualify therefore if they 
were imported from a third country".
The Commission considers that the respective wording of sub- 
paragraphs (e) and (f) does not admit of such a conclusion, which 
would indeed run counter to the objectives, namely to prevent 
double taxation within the Community.
Admittedly, the risk of double taxation is designed to be prevented 
by Article 15(3), which exempts as a quasi-export "work on movable 
property acquired or imported for the purpose of undergoing such
work .................... and dispatched ....................... by the person providing
th
e services or by his customer w ho is not established within the 
territory of the country".
However, there remains a risk of double taxation in the case of 
property which has been imported temporarily and subsequently 
undergone work within the meaning of Article 15(3), without this 
being the intention of the importer at the time of importation.
In such a case, the work must be taxed in the country where it is 
carried out and the property must be exempted w hen re-imported 
into the country of consignment. This exemption is set out in 
Article 14(1)(f) as regards the re-importation of property which 
has undergone work that has been definitively taxed in the country 
where the work w as carried out. This exemption is useful in practice

-  53 -
for private individuals and taxable persons with exempt activities, 
and must ultimately be regarded as a tax exemption granted to private 
individuals within the Com m unity that offers the threefold advantage 
of eliminating double taxation, non-taxation and certain tax 
formalities at internal frontiers.
B y contrast, w hen the goods are re-imported by a person liable for 
V A T  w h o  is entitled to a deduction or refund in respect of the work 
carried out on the goods, exemption can only be granted, if at a ll, 
on the basis of Article 14(1)(e). That provision covers any re­
importation of goods in an unaltered state, under the sam e conditions 
as those laid dow n for exemption from customs duties. Exemption from 
customs duties, currently governed by Council Regulation (E E C ) N o  
754/65 (1), is granted only for certain types of work explicitly 
enumerated (treatment necessary to maintain the goods in good 
condition, repairs and restoration to good condition), and only if 
the work has not resulted in an increase in the value of the goods 
at the time of exportation.
It is thus perfectly clear to the Commission that each of these 
provisions (Articles 14(1) (f)  and 14(1) (e)) applies in a distinct 
set of circumstances, and accordingly that M em ber States cannot 
claim to be applying the one on the grounds that their legislation 
is in conformity with the other.
(1) O J L  89, 2.4.1976.

-  54 -
b) Difficulty concerning exemption under Article 15: inclusion of 
vessels intended for breaking up
The combined provisions of Article 14(1)(a), Articles 15(4)(a) and (b) 
and Article 15C5) permit the tax-free supply and importation of sea­
going vessels intended for a particular activity. The benefit of the 
exemption is granted only if two conditions are met:
- the vessels must be sea-going;
- such vessels must be intended for one of the activities expressly 
listed in Article 15(4)(a) or (b).
Consequently, the supply or importation of a vessel for breaking up 
cannot qualify for the exemption provided for in Article 15(5), if 
that paragraph is interpreted narrowly.
O n  the other hand, it should be noted that if the vessel is imported 
from a non-Community country, it m ay  qualify for exemption from 
customs duties only if it is for breaking up (Heading N o  89.04 of 
the CCT).
However, the exemption from customs duties granted on the importation 
of vessels for breaking up is based on certain economic considerations 
concerning the activities of shipyards that do not carry the sam e 
weight in respect of V A T , as the ship-breaker m ay  deduct the amount 
of tax paid (although the financing charges, which might m ake his 
activity less profitable, must not be forgotten).
The V A T  Committee, at the request of the representative of a M em ber 
State, studied all aspects of the tax treatment applied in the M em ber 
States to the purchase or importation of such vessels, and it w as 
found that most M em ber States grant an exemption, either under a  
broad interpretation of Article 15 or under other provisions of 
the Directive.

-  55 -
That study also revealed that the intention of the legislator,at the 
time the Sixth Directive w as adopted, w as to permit exemption, even 
if that w as not clearly expressed in the texts. For that reason it 
would be advisable to rem ove the ambiguities by amending Article 15(5), 
and thus ensure that this exemption is applied uniformly in all the 
M em ber States.

-  56 -
E. Questions_of_intergretation_concerning_the_scoge_of_the_ri 2ht_to_deduct 
(ArtieLe_17)_and_the_caLculation_of_the_deductibLe_grogortion 
(ArtieLe_19)
A number of difficulties concerning the arrangements for deduc­
ting input tax have arisen in connection with banks and financial 
institutions.
Considering that the majority of transactions effected in this 
sector are covered by the exemptions in Article 13(B)(d), the scope for 
deducting input tax is of necessity limited by application of the 
general rule that input tax is deductible only in so far as the goods 
and services are used for the purposes of transactions which are 
effectively taxable (Article 17(2)).
It has however been found that in several Member States certain 
administrative practices have come into being, based on an inter­
pretation which deviates to some extent from the letter, if not the 
spirit, of the Directive, and in particular from the provisions of 
Article 19 concerning the calculation of the deductible proportion.
These practices tend to substitute the concept of gross margin 
for that of turnover in the denominator of the fraction expressing the 
deductible proportion, which leads to an increase in the right to deduct 
for the firms concerned.
This question came up in the VAT Committee in connection with 
credit transactions, exchange transactions and dealings in securities.
At the present stage in the discussions it has not yet been possible to 
obtain unanimous agreement; however an almost unanimous consensus has 
emerged in favour of excluding the concept of gross margin in respect 
of interest.
On the other hand, the concept of gross margin has found some 
favour as regards dealings in securities and exchange transactions.
As regards dealings in securities, the Committee was virtually unanimous 
that gross margin alone should be taken into account, even if the bank 
was acting in its own name. A majority held the same view as regards 
exchange transactions.
An overall solution to this tricky problem is therefore emerging 
which should improve the neutrality of tax conditions affecting 
competition in the banking sector.

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PART III
PROBLEMS HELD OVER BY THE SIXTH DIRECTIVE
Since the Sixth Directive merely marks a further stage in the tax 
harmonization process, it was inevitable that a number of questions should 
be left in abeyance, with the Council confining itself to asking the 
Commission to present the necessary proposals, some by a specified deadline, 
others with no timelimit. It is on the basis of these time considerations 
that the Commission presents its progress report on the work which has 
been or is to be carried out in connection with :
1. Articles 14, 15 and 16 concerning exemptions on importation, exemption 
of exports and exemptions linked to international goods traffic;
2. Article 17(4) concerning the refund of VAT to taxable persons not 
established in the territory of the country;
3. Article 17(6) concerning non-eligibility for deduction of the 
tax charged on certain expenditure;
4. Article 28(5) concerning passenger transport;
5. Article 32 concerning the special scheme for second hand goods;
6. the prevention of tax evasion and avoidance.

-  58 -
CHAPTER I
1. Exemptions in respect of imports, exports and international goods 
traffic (Articles 14, 15 and 16 of the Sixth Directive) for which 
the rules have still to be harmonized
Under a number of Articles in the Sixth Directive (Articles 14(2), 
15(4), 15(10) and 16(3) the Council committed itself to laying down, on 
a proposal from the Commission, Community tax rules clarifying the scope 
and detailed rules for implementation of the exemptions granted in 
international trade.
These commitments, which were not given in the case of exemptions 
from VAT within the territory of the country, are due to a number of 
reasons:
- trade with non-Community countries: there was a need to supplement 
Community customs legislation with tax provisions which were suffi­
ciently precise and as close as possible to the customs provisions.
For administrative purposes, the various rules applicable to one
and the same transaction under different headings (customs and taxes, 
but also agriculture and statistics) must obviously be mutually 
consistent. However, given the different requirements, objectives 
and structure of each regime, basing the rules for applying VAT 
purely and simply on the customs rules could not be envisaged as 
a permanent solution and the approach adopted in the Sixth Directive 
should only be regarded as a temporary measure. Consequently, there 
must be a body of Community tax law alongside Community customs 
legislation, with the rules being in some cases less precise and in 
some cases simply referring back to the customs rules, but in any 
case taking account of the requirements of tax harmonization;
- intra-Community trade: Community rules must be designed to simplify 
to the utmost the rules currently in force, most of which date from 
the period before the common market was established. The proposals 
which the Commission is required to present to the Council must 
therefore simplify as far as possible the procedures and formalities 
applicable for tax purposes within the Community, in line with one 
of the goals of tax harmonization, namely the creation of a genuine 
internal market.

- 59 -
A. Proposals now before the Council
Three proposals have already been presented to the Council. The 
first two concern trade between non-Community countries and Member States, 
while the third applies only to intra-Community trade.
(a) The purpose of the proposal for a Directive presented bythe Commission 
on 23 January 1980^ is to establish the Community procedure applicable 
to tax exemptions for the stores of international means of transport 
(aircraft, vessels and trains). The principle of such exemption is 
already laid down in the Sixth Directive; the aim of the proposal is 
to establish the implementing arrangements for such exemption and to 
define its scope precisely. In addition, with a view to simplifying 
the tax rules applicable to one and the same transaction and achie­
ving genuine harmonization, the proposed procedure covers both VAT 
and excise duties and is similar to the procedure proposed for 
customs duties,^ which has been under discussion by the Council for
a number of years.
(b) The purpose of the proposal for a Directive presented to the Council 
on 13 June 1980 (3)(4) is to determine the scope of Article 14(1) Cd) of 
the Sixth, Directive, which provides for exemption in the case of 
"final importation of goods qualifying for exemption from customs 
duties other than as provided for in the Common Customs Tariff or 
which would qualify therefore if they were imported from a third 
country", while at the same time giving Member States "the option
of not granting exemption where this would be liable to have a 
serious effect on conditions of competition on the home market". The 
scope of this proposal is particularly wide, since it covers exemp­
tions as diverse as those granted in respect of the outfits and study 
requisites of students, the capital goods and stocks of firms 
transferring their activity from one Member State to another and the 
exemptions granted on certain goods imported by philanthropic organi­
zations. These are just a few examples taken from a text consisting
1  0J No C 31, 8.2.1980, p. 10
2 0J No C 73, 23.3.1978.
3 0J No C 171, 11.7.1980, p. 8
^ Directive adopted by the Council on 28/3/1983 (0J N o  L  105 of 23/4/83)

-  60 -
of some fifty articles.
As in the case of the stores of international means of transport, 
and for the same practical administrative reasons, the Commission 
decided to link as closely as possible the tax procedure >  and the 
procedure for customs duty relief laid down in a proposal presented 
on 14 March 1979. However, the objectives pursued and the problems 
posed in the two areas (customs duties and taxes) are different, and 
these differences are inevitably reflected in the drafting of the 
two texts. While certain custom duty reliefs, granted, for example, 
because of their negligible economic impact, can be transposed 
into the tax procedure, others cannot be carbon-copied for fear of 
distorting the conditions of competition. This is the case with the 
customs duty reliefs which the Commission proposed should be granted 
on goods of an educational, scientific and cultural nature, in line 
with the provisions of international agreements. Any such exemption 
granted in the tax field,however, could give rise to distortions of 
competition harmful to Community producers. For the same reasons, 
the Commission considers that the tax exemptions should be more 
restrictive than the customs duty reliefs in the case of goods im­
ported by charitable or philanthropic organizations in carrying 
out their general objectives or for the benefit of handicapped persons.
Moreover, whereas the proposal on customs duty reliefs is confined 
to imports from non-Community countries, the proposal on tax exemptions 
deals with both imports from non-Community countries and intra-Community 
transactions. With regard to intra-Community transactions, the 
Commission's aim was to simplify checks at internal frontiers by in­
troducing a number of tax exemptions (capital goods and stocks impor­
ted by firms transferring their activity from one Member State to 
another; study requisites imported by students; severely damaged 
vehicles imported following an accident occuring in a Member State, 
etc.) or by relaxing the conditions governing the exemptions.

-  61 -
Both this proposal and the customs proposal are hoped to make rapid 
progress in the Council.
(c) After lengthy discussions with national tax and customs authorities, 
the Commission presented a proposal for a Regulation concerning 
the temporary use of goods. ^ The aim of this proposal is to allow 
the free movement of goods acquired under the general conditions of 
taxation on the domestic market of a Member State and used temporari­
ly in one or more other Member States, replacing existing procedures 
by a Community procedure that will ease formalities and thus facili­
tate the freedom to provide services within the Community.
At present, the movement of goods sent from one Member State for tem­
porary use in one or more other Member States gives rise:
- either to a succession of national formalities (temporary expor­
tation - transit - temporary importation - re-exportation - 
transit - reimportation),
- or to the use of the ATA procedure introduced by the Customs 
Convention on the ATA Carnet for the Temporary Admission of Goods, 
concluded in Brussels in 1961 under the auspices of the Customs 
Cooperation Council.
This situation gives rise to numerous complaints by users and has 
been a focus of particular attention by Parliament.
The proposed arrangements comprise two procedures, a standard 
procedure and a simplified procedure, which may be summarized as 
follows :
- The standard procedure would apply to all goods which are
in free circulation within the meaning of the EEC and ECSC Treaties, 
have been acquired under normal conditions in the Member State 
from which they are sent and have not benefited by reason of their 
exportation from any exemption from turnover taxes or other taxes 
on consumption.
1  O J N o C  227, 8 .9 .1 9 8 1 , and O J N o C  247, 21.9.1982

-  62 -
So as to allow their movement within the Community, the goods are to be 
placed under cover of a Community temporary movement carnet issued free 
of charge by the customs authorities in the Member State of departure, 
without the lodging of a guarantee, to any person having a permanent 
establishment in the Member State of departure. The document must 
accompany the goods and will allow the authorities in the Member State 
in which goods are temporarily used to keep a check on the conditions 
under which such use takes place.
The movement arrangements will be terminated as soon as the Community 
movement carnet has been returned and the goods simultaneously presented 
to any competent customs office in the Member State of departure.
- The simplified procedure is intended to allow certain goods to be used 
temporarily within the Community for a period of twelve months with 
virtually no formalities at intra-Community frontiers. This procedure 
is to apply to goods to be exhibited or used at an exhibition, trade 
fair or similar event; to press, radio and television equipment; and 
to equipment to be used for gainful purposes and accompanying persons 
who have to travel frequently to other Member States in the course of 
their gainful activity.
The Commission, as well as the European Parliament and the Economic and 
Social Committee, attach special importance to the swift adoption of the 
proposed Regulation which should provide considerable practical facilities 
for craftsmen, reporters, journalists, exhibitors at fairs etc., who make, 
in the course of their profession, supplies of services in other Member 
States. By means of this Regulation, the Commission hopes to introduce 
facilities in an area where, as a large number of complaints show, many 
community citizens, particularly in border zones, are presently highly 
inconvenienced by complex formalities and procedures. The urgency of this 
matter has also been recognized by the European Council which, at its 
session at Copenhagen in December 1982, included this particular 
proposal in the programme of priority measures for the reinforcement 
of the European internal market.

-  63 -
B. Proposals still to be drawn up
A number of proposals have still to be drawn up pursuant 
to the Sixth Directive, and these are becoming a matter of 
increasing urgency.
The proposals will have to take account of the customs 
rules which form a common legal framwork governing each Community 
country's relations with countries outside the Community. Uniform 
application of value added tax to transactions connected with 
international trade in goods with non-Community countries can help 
the Community to present itself to such countries as a single entity, 
operating on a harmonized basis that is not confined to the rules 
for applying the CCT.
In addition, such harmonization should reinforce the 
economic interpenetration of Member States by introducing sufficient 
flexibility into the rules governing formalities at intra-Community 
frontiers. Such rules should meet the requirements of the collection 
of own resources and obviate any real distortion of competition, but 
they will also bring home to economic operators in the Community the 
reality of the common market, since they will no longer be subject to 
different tax rules depending on the country with which they are 
carrying out business.
( 5 )

-  64 -
The proposals to be drawn up relate to three groups or categories of
exemptions:
1. Rules governing the temporary admission procedure are called for 
by Articles 14(2) and 16(3). The temporary admission procedure 
is bound to be rather complex, in view of the transactions which 
may be involved during the period of importation of goods covered 
by it (supplies of goods and services) and in view of the constraints 
imposed by the provisions of the Sixth Directive concerning the 
chargeable event, the changeability of tax and the taxable amount 
for such goods when they are released from the temporary admission 
procedure and enter into home use.
Because of this complexity, the provisions which the Commission 
departments have drawn up, as part of one and the same exercise, 
are set out in several legal instruments, so as to deal individually 
with all the aspects of the procedure and pin down the various 
problems involved. Two proposals are now before the Council: 
a proposal for a Directive on the temporary importation of certain 
means of transport (private cars, pleasure craft, etc.) (1 ),and a proposal 
for a Regulation on the movement and use of goods (see under A(c) 
above), both these proposals being confined to intra-Community trade. 
Provisions have still to be drawn up on the temporary importation 
of commercial vehicles irrespective of the country of origin 
(Member States, non-Community countries); and on the movement and 
use of goods originating in non-Community countries.
2. Article 26(3) calls for harmonization of the arrangements governing 
the special exemptions linked to international goods traffic, the 
intention being that harmonized rules should at the earliest 
opportunity be laid down for the importation and supply of goods and 
for the supply of services connected with goods placed under such 
arrangements, namely the free zone, customs and fiscal warehousing 
and inward processing regimes. In view of their economic importance, 
the harmonization of such arrangements is not only desirable but 
essential if firms are not to enjoy tax advantages in one country 
which are unjustified as compared with the advantages open to them 
in other countries.
(1)Directive adopted by the Council on 28/3/1983 COJ No. L 105 of 23/4/83)

-  65 -
Special attention should be given to the exemption of imports 
and supplies of goods intended for a taxable person with a view 
to being exported in their unaltered state or after processing, 
and the exemption of supplies of services connected with the 
activity of regular exporters. Harmonization of the provisions 
governing such exemptions is all the more necessary as they 
differ in scope from Member State to Member State.
3. Article 14(2) calls for harmonization of the provisions governing
a third group of procedures, namely those connected with the re-impor­
tation of goods (Article 14(1)(e) and (f)). The harmonizing provi­
sions will have to cover, amongst other things, car repairs that 
have had to be carried out abroad and goods returned because the 
business contract has not been executed. In addition, care must be 
taken to avoid not only distortions of competition (Article 14(1)(g)), 
but also the non-taxation or double taxation which may result from 
the option given to Member States to consider certain transactions 
specified in Article 11(B)(5) as supplies of goods or services.
Such harmonization must be seen in conjunction with the exemption 
provided for in Article 15(3), which concerns the supply of servi­
ces consisting of work on movable property that is to be exported.

-  66 -
CHAPTER II
Refund of VAT to taxable persons not established in the territory of the 
country (Article 17(4))
Under this provision, the common rules for the refund of value 
added tax to firms established in a Community country other than that in 
which the goods or services have been invoiced and taxed are to be laid 
down in a specific Directive.
The Commission sent the Council its proposal in January 1978, and 
the Council adopted the Directive on 6 December 1979 (Eighth Council 
Directive on the harmonization of the laws of the Member States relating 
to turnover taxes^), after endorsement by the Economic and Social Committee 
and Parliament.
The Member States were to adapt their laws to give effect to the 
Eighth Directive as from 1  January 1981. Only Italy failed to meet the 
deadline, but made good the delay with Decree No 793 of 30 December 1981, 
which had retroactive effect as from 1  January 1981.
By and large, the implementation of this Directive is too recent to 
allow any critical appraisal of how the system has been operating. However, 
it has been found that there are a number of discrepancies in the intei— 
pretation of the provisions of Article 1, which states that "'a taxable 
person not established in the territory of the country' shall mean a
person ....... who ...... has had in that country neither the seat
of
 his economic activity, nor a fixed establishment from which business
transactions are effected ........  and who ....... has supplied
no
 goods or services deemed to have been supplied in that country
........... " Work is now in progress in the VAT Committee to reduce
th
ese difficulties.
It should be noted that the Eighth Directive applies only to 
"Community" taxable persons and not to taxable persons established outside 
the Community. As far as the latter are concerned, the Sixth Directive 
allows Member States full discretion, including total exclusion from 
eligibility for refund. During the discussions on the Eighth Directive, 
this situation was criticized sharply within the various Community
1OJ No L 331, 27.12.1979.

-  67 -
institutions, and the Commission undertook to send the Council as soon as 
possible a ,  proposal on the refund of VAT to taxable persons not 
established in Community territory.
The proposal for a Thirteenth Directive which the Commission 
recently sent the Council fulfills this undertaking (1).
CHAPTER III
Non-deductibility of certain expenditure incurred by firms (Article 17(6))
The right to treat certain categories of expenditure as non­
deductible has been allowed since the adoption of the Second Directive of 
11 April 1967, Article 11(4) of which provides for the option of excluding 
from the deduction system goods and services which are "capable of being 
exclusively or partially used for the private needs of the taxable person 
or of his staff".
Although the Second Directive was superseded by the Sixth Directive, 
tihe grounds for such an exclusion remain, and it is stated in Article 17(6) 
of the Sixth Directive that the Council, acting on a proposal from the 
Commission, "shall decide what expenditure shall not be eligible for a 
deduction of value added tax. Value added tax shall in no circumstances 
be deductible on expenditure which is not strictly business expenditure
II
It is against this background that the proposal for a Twelfth 
Directive (2), which the Commission recently sent the Council, must be 
seen; it should put an end to present disparities in Member States, by 
excluding from the right to deduct input tax certain categories of 
expenditure that do not necessarily have a direct link with the activity 
of the firm or which, by their nature, cannot be considered to have been 
incurred exclusively for business purposes, such as expenditure relating 
to passenger cars, travel expenses, entertainment expenses and expenditure 
on luxuries.
(1) O J No. C  223 of 27.8.82
(2) O J No. C  37 of 10.2.83

- 68 -
CHAPTER IV
Arrangements applicable to passenger transport (Article 28(5))
Article 28(5), states that at the end of the transitional period 
passenger transport shall be taxed in the country of departure for that 
part of the journey taking place within the Community according to the 
detailed rules of procedure to be laid down by the Council acting on a 
proposal from the Commission.
During the transitional period, Member States may, pursuant to 
Article 28(3)(b) and point 17 in Annex F, maintain the exemptions which 
they applied before the Sixth Directive was adopted.
All the Member States have made very extensive use of the 
transitional provisions in the case of international air and sea transport, 
and most of the Member States make use of them in the case of international 
land transport; some Member States also use them to maintain exemptions 
for domestic transport.
In this general context, those Member States which at present tax 
international transport in respect of the part of the journey taking place 
within their territory (in accordance with the principle laid down in 
Article 9(2)(b) of the Sixth Directive are paradoxically placed in a 
difficult position because of the obstacles thus placed in the way of 
persons wishing to cross their frontiers.
The Commission will in due course present a proposal to bring in the 
permanent arrangements envisaged for passenger transport.
CHAPTER V
Special scheme for second-hand goods
In jjanuary 1978, the Commission sent the Council a proposal for a 
Seventh Directive on the harmonization of the laws of the Member States 
relating to turnover taxes, thus fulfilling its obligations under Article 
32 of the Sixth Directive.

-  69 -
The proposal for a Sixth Directive made provision, in respect of 
works of art, collectors' items and antiques, for a special VAT scheme 
that would have allowed taxable persons purchasing goods deriving from 
the final consumption stage with a view to their resale, to exercise 
a right to deduct a given amount deemed to correspond to the input tax. 
However, the Council was unable to reach any decision on the matter because 
of the complexity of the problems involved.
The new proposal for a Directive provides that in the case of works 
of art and collectors' items and in the case of certain used goods, the 
taxable amount is to be reduced, so that it will consist of either a 
fixed percentage of the selling price or the difference between the sel­
ling price and the purchase price; in the case of other used goods, such 
as motor vehicles, the special deduction scheme originally put to the 
Council in the proposal for a Sixth Directive would apply.
After very careful examination over many meetings and despite all 
attempts to bridge the differences between the Member States, it has once 
again proved impossible to reach agreement on the two basic aspects of the 
proposal for a Directive, namely :
- its scope; and
- the practical implementing arrangements.
The basic question is which goods are to be covered by a special 
scheme whose aim is to prevent double taxation and to eliminate the 
distortions of competition which may arise as between sales of new and 
used goods, or as between sales carried out through commercial channels 
and those carried out through alternative channels. The Member States 
are deeply divided on this point :  while some are prepared to accept the 
scope proposed by the Commission, others wish to see a special scheme 
only for certain categories of goods, and not even the same categories.

-  70 -
With regard to the practical implementing arrangements, some Member 
States prefer the "tax-from-tax" or "base-from-base" methods of deduction 
to be applied to all goods included in the special scheme, because these 
methods are fairer to the taxable person. Other Member States wish to 
see only the flat-rate system applied, on the grounds that it is more 
reliable for tax revenue purposes and does not pose the same difficulties 
of supervision. Other Member States again would be prepared to apply 
different systems for different types of goods.
The failure to agree on the proposal for a Seventh Directive has 
serious consequences from the jurisdictional point of view as well as 
for- tax harmonization. This is because, under the second paragraph of Article 
32, Member States may not introduce any new special systems or amend their 
existing special systems in order to alleviate the effects of double taxa­
tion of distortion of competition on the national market. Furthermore, 
only the adoption of a Community system can prevent deflections of trade 
within the Community and allow the assessment basis of VAT in respect 
of the Community's own resources to be determined more fairly as between 
Member States, through identical application of VAT to taxable transactions.
The Commission urges the Council to take a decision soon on this 
proposal, which was presented more than four years ago and which the 
Commission has amended to take account of the comments made by Parliament.
CHAPTER VI
Prevention of tax evasion and avoidance
The Sixth Directive makes reference to tax evasion and avoidance 
only to justify the need for Member States to apply special measures at 
national level. These may be either measures which the Directive delibera­
tely excludes from the harmonization process, or measures which fall within 
the harmonization process, but which derogate from a particular provision 
of the Directive.
The first category includes measures relating to the conditions for 
granting the exemptions provided for in Articles 13, 14 and 15, and 
measures relating to the obligations of persons liable for payment imposed

-  71 -
pursuant to Article 22(8). The second category includes measures under 
"simplification procedures" introduced pursuant to Article 27.
This situation merely confirms the obvious, that the prevention of 
tax evasion and avoidance remains primarily the responsibility of the 
national authorities. However, this does not mean that the Community insti­
tutions are indifferent to a question which, in view of budgetary and 
economic difficulties, is of major importance today. Moreover, Article 35 
of the Sixth Directive allows the Community to expand its role in this 
area, since it provides for the adoption of further Directives to develop 
the common system of value added tax. A first step in combating tax evasion 
and avoidance at Community level is the Community framework that has been 
established for mutual assistance by the tax authorities of the Member 
States. This was introduced by Council Directive 79/1070/EEC, providing 
for mutual assistance in the exchange of information for the purposes
2of the correct assessment of VAT, and by Council Directive 79/1071/EEC, 
providing for mutual assistance in the recovery of VAT. These two 
Directives entered into force on 1  January 1981.
The state of progress in implementing these Directives in the 
Member States is as follows :
Mutual assistance in the exchange of information (Directive 79/1070/EEC)
Belgium :  Article 36 of the Law of 8.8.1980, published in the
Moniteur Beige of 15.8.1980 
Denmark :  Order No 6 of 2 January 1981
Germany :  Infringement proceedings initiated
France Article 11 of Law No 81-1179 of 31 December 1981 (JO of 1.1.1982)
Ireland :  Ministerial Regulations, S.I. No 407, 1980
Italy :  Decree No 506 of 5 June 1982 (G.U. 215 of 6.8.1982)
Luxembourg :  Law of 4 June 1981, Recueil de legislation A No 36 of 
11 June 1981, p. 855
1  0J No L 331, 27.12.1979, p. 8
2 0J No L 331, 27.12.1979, p. 10

- 72 -
Netherlands
United Kingdom:  Since the Dutch legislation previously in force already
allowed the exchange of information, no new legislative 
measure was required
:  Section 17(2) of the Finance Act 1980.
Mutual assistance in the recovery of VAT (Directive 79/1071/EEC)
Belgium :
Denmark :  
Germany :  
France :
Ireland :
Italy :  
Luxembourg :
Netherlands :  
United KingdomArticles 76 and77 of the Law of 8 August 1980, published 
in the Moniteur Beige of 15.8.1980
Law No 589 of 9.12.1980
Law of 7.8.1981 (BGB1 I p. 807)
Article 11 of Law No 81-1179 of 31 December 1981 (JO 
of 1.1.1982)
Ministerial Regulations, S.I. No 406, 1980 
Infringement proceedings initiated
Law of 4 June 1981, Recueil de legislation A No 36 of 
11 June 1981, p. 856
Law of 4.6.1981, published in Staatsblad 334.
Section 17(1) of the Finance Act 1980.
It is still too early to comment on the practical results of these 
two Directives, since they have not been in force for long. The Commission 
will endeavour to draw up an initial report in 1983, with the help of the 
authorities in the Member States. The relevant Working Party has already 
examined the scope for introducing automatic information exchange in 
respect of certain transactions. The Commission departments intend to 
carry this examination further.

- 73 -
CONCLUSION
In presenting this report, the Commission would stress the particular 
importance of what it regard as the first review of the implementation of 
the common ^stem of VAT since the Sixth Directive was adopted.
Any review covers both the positive and the negative aspects and 
since the body of the report focuses on the difficulties encountered in 
implementing the Directive, it might at first sight tend to suggest that 
the concluding assessment must be negative. However, any such view of the 
question would be arbitrary and wrong, for the difficulties met with are 
clearly nothing more than flaws identified for purposes of analysis 
in an overall system that is coherent and which is operating satisfacto­
rily.
Furthermore, as is evident throughout this report, the shortcomings 
largely stem either from divergences expressly permitted by the Directive 
(such as the powers, options and derogations analysed in Part I), or from 
problems deliberately held over (see Part III).
Consequently, it cannot be said that the common system of VAT is 
not operating properly on the grounds of difficulties that are attributable 
precisely to an absence of harmonization. On the question of the differences 
of interpretation examined in Part II, it was found that these can in 
general be overcome; some of them in fact are merely the result of broad 
drafting, reflecting to some extent a concern to maintain some degree of 
"non-harmonization" in particular instances. Wherever possible, the 
Commission has outlined a practical solution.
The gradual elimination of these divergences (both those "a priori" 
that are expressly provided for and those "a posteriori" resulting from 
differing interpretations of the Community rules) is first and foremost 
a precondition for improving the levying of VAT own resources.

-  74 -
The Commission would point out that the scope and in some cases 
the nature of the temporary derogations allowed unter Article 28 of the 
Sixth Directive have necessitated a complex set of corrective measures, 
some positive and some negative, which considerably increases the adminis­
trative burden on Member States and the Commission in the management of 
own resources.
Furthermore, the differences of interpretation, for which in theory 
no compensation arrangements are possible, run directly counter to the 
principle of equity on which the system of the Community's own resources 
is based.
In between the temporary derogations and the differences of inter­
pretation lies the nebulous area of permitted powers and options, whose 
real budgetary impact is difficult to measure since it varies over time.
Consequently, the budget function of the common system of VAT makes 
it imperative that harmonization efforts be pursued on all the points 
analysed in this report.
The budgetary aspect is not however the only one. Further harmoni­
zation of VAT is also a necessary condition for the creation of a true 
internal market in the Community. The guarantee of free movement of persons 
and goods within the Community depends entirely upon continuing the process 
of harmonization of VAT.
There are three types of measures here which appear to have 
particular political significance in view of the favourable impact they 
would have on public opinion:
- the simplification of formalities at frontiers;
- an increase in the tax and duty-free allowances granted to travellers;
- elimination of double taxation on used goods imported by private indi­
viduals.
With regard to the first point, the Commission has presented 
a proposal for a fourteenth VAT Directive (1) concerning the deferred 
payment of tax payable on importation by taxable persons.
The Sixth Directive provides for the taxation of goods at importation 
in the same way as for supplies of goods within the country. Tax at 
importation is, in principle, due when goods enter the territory of the 
country, but Member States have the option, in accordance with Article 23
(1) O J No. C  201 of 5 .8 .1 9 8 2 , p. 5

-  75 -
of the Sixth Directive, to defer payment to a Latter stage i.e. at the time 
of the regular return. Four Member States currently exercise this option 
with different procedures. This situation gives rise to a disparity in the 
way in which operations are treated for tax purposes in different Member 
States and runs counter to the development of intra-Community trade. The 
Commission's proposal provides for an obligatory Community procedure 
whereby payment of the VAT due at importation for goods coming from another 
Member State would be deferred to the moment when the taxpayer submits his 
regular return, at which moment this tax can be deducted from the tax due 
in respect of the whole of the taxpayer's activities.
This proposal represents an important element in the Commission's 
campaign to strengthen the internal market with a view to eliminating the 
obstacles to intra-Community trade (1).
As far as the second point is concerned, the Commission has likewise 
presented two proposals (2).
As for the last point, the Commission falls back upon the important 
judgment given by the Court of Justice in Case 15/81 (G. Schul). The Court 
ruled:
"Article 95 of the Treaty prohibits Member States from imposing 
value added tax on the importation of products from other 
Member States supplied by a private person where no such tax 
is levied on the supply of similar products by a private person 
within the territory of the Member State of importation, to the 
extent to which the residual part of the value added tax paid 
in the Member State of exportation and still contained in the 
value of the product when it is imported, is not taken into 
account."
This judgment gives rise to certain immediate practical consequences, 
on the one hand for the citizen who wishes to import a used good into one 
Member State from another and who can now take advantage of the fact that 
double taxation is prohibited, and on the other for Member States' tax 
administrations who must now, in accordance with the precedent set by the 
Court, take account of the VAT paid on used goods in another Member State. 
Against this background, the Commission is currently studying the need to 
present a proposal designed to allow the principles laid down by the Court 
to be applied in practice throughout the Community.
(1) Communication from the Commission to the Council on strengthening the 
internal market (Doc. C0M(82)399 final)
(2) OJ No. C 114 of 28.4.1983

- 76 -
Lastly, on a m ore general note, the Commission will initiate or 
pursue the measures which it feels are necessary in order to improve 
the transparency and neutrality of the tax under the proper conditions 
of competition. T he measures will be in the following areas:
- uniform interpretation of the Sixth Directive;
- phasing out of the "options" and "permitted powers";
- elimination of the temporary derogations;
- filling in the remaining gaps in the Directive.
T he Com m ission hopes to have the support of all the C om m unity 
institutions in so doing.

-  77 -
A N N E X  I
Notifications given pursuant to Article 27(5) 
of the Sixth Directive

ANNEX I
N O T IF IC A T IO N S  G IV E N  P U R S U A N T  T O  A R T IC L E  27(5) O F  T H E  S IX T H  D IR E C T IV E
M em ber State Date of
notiti cationRelevant
provision of
the Sixth DirectiveObject of the measure
G erm any 27.12.1977 Artie le 9(2)(b) Routes between tw o placed in foreign territory which 
pass through the territory of the country to be treated 
in the sam e w ay as international transport and vice-versa
27.12.1977 Article 10(2) Suspension of the tax for forward transactions carried 
out on the London futures market
27.12.1977 Article 28(2) 
(zero rate)Suspension of the tax for certain supplies of services 
by the G erm an railways to railways in neighbouring 
countries, at frontier stations (e.g. supply of staff 
or premises)
27.12.1977 Article 10(2) Suspension of the tax for certain supplies after 
importation (e.g. for imported fruit)
27.12.1977 Article 11(0(2) Conversion of foreign securities into D M  using the 
average rate for the m onth or the day's rate where use 
is m ade of the derogation from the general rule of 
conversion using the latest exchange rate recorded
Article 17 Flat-rate deductibility of the tax charged on travel 
expenses
Article 10(2) Special scheme under the Franco-German agreement to 
improve infrastructures on the Rhine
Article 10(2) Other similar international agreements

A N N E X  I
N O T IF IC A T IO N S  G IV E N  P U R S U A N T  T O  A R T IC L E  27(5) O F  T H E  S IX T H  D IR E C T IV E
M em ber StateDate of 
noti fi cationRelevant
provision of
the Sixth DirectiveObject of the measure
Germ any
(continued)27.12.1977 Article 16(1) Non-taxation of certain transactions intended for 
traders established in a free port w h o  do not have 
the right to deduct the tax
Article 11(A)(1)(a) Flat-rate determination of the taxable amount for 
foreign passenger transporters
B eLgium 23.12.1977 Arti c  le 2 1  (1  )  
Article 22(3)(a)Issuing of the invoice and payment of tax by the 
customer instead of the supplier
Article 10(2) 
Article 11(A)(1)(a)Payment of the tax at a preceding stage:
a) levying of V A T  on manufactured tobacco
b) door-to-door sales
Article 22(4) 
Article 21(1)(a)Other special methods of payment of the tax:
a) sale of entrance tickets
b) scheme for betting shops
c) payment of the tax by m eans of fiscal stamps 
(stockbrokers, artists (painters), etc.)
Article 11(A)(1)(a) T ax paid on a flat-rate basis:
a) foreign passenger transport undertakings
b) commissions granted by the organizers of football 
pools and the like
Article 2 1 T he V A T  due in respect of certain transactions to be 
paid at the time of another taxable transaction and 
calculated on the basis of a flat-rate am ount
Article 4(1)
I
Article 10(2)Non-payment of the tax at the stage in question:
a) door-to-door distributors of printed matter, press 
correspondents
b) recovery material (not subject to the tax)

ANNEX I
N O T IF IC A T IO N S  G IV E N  P U R S U A N T  T O  A R T IC L E  27(5)( O F  T H E  S IX T H  D IR E C T IV E
M em ber StateDate of 
noti fi cationRelevant
provision of
the Sixth DirectiveObject of the measure
Belgium
(continued)23.12.1977 Article 10(2)
Article 10(3) 
Article 10(2)
_  II _
—  II —
Article 10(2) or 
Article 28(2)c) simplified scheme for florists
d) companies representing authors and composers - payment 
of the tax by such companies, pre-author stage - 
com pany escaping the tax
e) sea fishing: non-taxation of the importation of fish 
brought ashore on fishing vessels and intended for sale
f) precious stones and pearls: exemption with right of 
deduction for supplies to dealers in such goods
g) special scheme applied to sales involving an inter­
mediate firm
h) temporary workers: exemption, subject to certain 
conditions, of the services which they supply
i) suspension of the tax for supplies of boats used for 
domestic commercial navigation and of associated 
services, and for the commissions of travel agents in 
respect of sales of international railway tickets
Article 11(A)(1)(a) M inim um  taxable amount:
a) new- second-hand and ex-demonstration motor vehicles; 
special scheme for spare parts
b) buildings and building w ork
Article 11(A)(1)(a) N o  adjustment of the taxable'amount in the event of the 
loss of the right to a cash discount

NOTIFICATIONS GIVEN PURSUANT TO ARTICLE 27(5) OF THE SIXTH DIRECTIVE
M em ber State Date of 
notificationRelevant
provision of
the Sixth DirectiveObject of the measure
Belgium
(continued)23.12.1977 First indent of 
Article 11(0(3)N o  adjustment of the taxable amount if the packing is 
not returned
Article 11(B ) N o  adjustment, within certain limits, where the tax on 
importation proves insufficient
D enm ark 21.12.1977
Article 2  
Article 2  
Articles 2  and 1 1
Article 2  
Article 2  
Article 2  
Article 2Exemption of the activity of certain categories of
enterprises:
a) the sale of dental prostheses etc. by dental labo­
ratories, dentists and dental technicians
b) the sale of certain goods by insurance companies 
and by banks and savings banks
c) stamps dealt in by means of exchange without any 
payment being m ade whatever the status of the parties 
to the contract
d) the distribution by associations of bulletins, trade 
journals, etc.
e) the sale of catalogues, photocopies, etc. by libraries* 
m useum s and the like
f) the sale of account books etc. by banks if the price 
of such articles does not exceed the purchase price
g) the supply of food and drink by canteens and the likeA N N E X  I

A N N E X  I A
N O T IF IC A T IO N S  G IV E N  P U R S U A N T  T O  A R T IC L E  27(5) O F  T H E  S IX T H  D IR E C T IV E
M em ber State Date of 
notiti cationRelevant
provision of
the Sixth DirectiveObject of the measure
D enm ark
(continued)21.12.1977 Article 2
Articles 5(6) and 
6(2)
Article 2,
Articles 15(4)(a), 
15(4)(b) and 15(5), 
and point 18 in 
A nnex F
Article 2,
Article 15(6) and 
point 3 in A nnex F
Article 22(3)(a)h) supplies of goods or services by blind persons
Fixing of flat-rate amounts of tax due in respect of 
ow n  consumption
Exemption of the supply and hiring out of ships, other 
than pleasure craft, of not tess than 5  gross register ton­
nes. S am e exemption for repairs and equipment and for 
importation, irrespective of the use to which the ships 
are to be put, in international or national traffic
S am e exemption for aircraft (not notified)
Invoicing and deduction for supplies of goods or 
services exchanged between taxable persons 
(barter transactions)
France 23.12.1977 Article 2
Article 10
Article 11(B)(1) 
and (2)Schem e applicable to petroleum and similar products:
a) payment of the tax suspended in respect of 
transactions involving these products carried out 
prior to their release for hom e use
b) chargeable event constituted by the release for h o m e 
use of these products after leaving the refineries 
and storage facilities
c) taxable amount at the time of release for ho m e use 
determined as a standard amount

ANNEX I
N O T IF IC A T IO N S  G IV E N  P U R S U A N T  T O  A R T IC L E  27(5) O F  T H E  S IX T H  D IR E C T IV E
M em ber State Date of 
notiti cationRelevant
provision of
the Sixth DirectiveObject of the measure
France 23.12.1977 Article 2
Article 2
Article 1 1  
Articles 2  and 2 1
Article 1 1
Article 1 1Schem e applicable to capital goods used by firms 
exploiting the continental shelf:
- payment of the tax suspended in respect of the 
acquisition of equipment
Schem e applicable to imports and resales in an unaltered 
state of sheepskins with w ool on, greasy w ool and raw  
vegetable fibres
- suspension of V A T
Flat-rate determination of the m ax im u m  taxable amounts 
for imports and supplies of high-value horses
Taxation of purchases by non-taxable persons of drinks 
subject to indirect duties, food preserves, precious 
pearls, etc.
Taxation of the total amount of transactions carried out 
by persons w h o  act as intermediaries in the supply of 
products by non-taxable persons
Option of taking the real current value instead of the 
price agreed between the parties for supplies of 
buiIdi ngs
Ireland 6.3.1979 Article 22(2) 
Article 17(3)Simplified schemes for retailers 
Repayments to foreign taxable persons

ANNEX I
N O T IF IC A T IO N S  G IV E N  P U R S U A N T  T O  A R T IC L E  27(5) O F  T H E  S IX T H  D IR E C T IV E
M em ber State Date of 
notifi cationRelevant
provision of
the Sixth DirectiveObject of the measure
Ireland
(continued)6.3.1979 Article 25(5)
Article 28(2) 
Article 4(1)
Article 12(4) 
Article 2  of the 
First V A T  Directive
Article 5
Article 6  
Article 12Repayment to unregistered farmers of V A T  borne on certain 
farm buildings and in respect of land drainage and 
reclamation
Zero-rating for fertilizers, animal feed stuffs and seeds
Exemption from V A T  of sales by fisherman of their catch 
to taxable persons
Application of zero and 1 0 %  rates to split proportions of 
the taxable amount for supplies of livestock and immovable 
goods, bringing the effective rates to 1 %  for livestock 
and 3 %  for immovable goods
Treatment of the supply of food and drink as a supply of 
services, with consequent application of the 1 0 %  rate 
instead of the zero rate
Treatment of the granting of leases as supplies of 
property
Imposition of tax at a higher rate on materials in 
certain circumstances
Italy 28.11.1979 Article 10(2) 
Article 11(A)(1)(a) 
Article 2 1Payment of the tax at a preceding stage 
Tobacco, matches, periodicals
Payment of the tax in respect of public telephones and 
urban transport at a single stage (respectively, by the 
concession holder or the operator of the transport 
service, even if there is an intermediary between them 
and the user) on the basis of the price paid by the user

ANNEX I
N O T IF IC A T IO N S  G IV E N  P U R S U A N T  T O  A R T IC L E  27(5) O F  T H E  S IX T H  D IR E C T IV E
Relevant
M em ber State Date of provision of Object of the measure
notification the Sixth Directive
Italy 28.11.1979 Articles 1 1  and 17 1. The taxable amount for entertainments, public
(continued) performances and gam es (excluding lotteries and
betting) is that used for calculating the tax on
entertainments
2. Input taxes in respect of the above events are calcu-
lated on a flat-rate basis (two-thirds of the tax due)
Article 6 Transactions such as the transfer etc. of copyright effec-
ted by authors or their heirs (except those relating to
cinematographic works, architecture and commercial
advertising) and the associated supply of services by
intermediaries do not constitute supplies of services,
since they are excluded from the scope of the V A T  L a w
Article 5 Zero-rating of supplies of gold ingots
Article 10 Payment of the tax suspended in respect of sales of
agricultural and fishery products to cooperatives for the
purpose of resale for the account of the producers
Article 6 Certain supplies of services consisting in controlling
the quality of products and applying quality control
marks are not taxable, since they are excluded from the
scope of the V A T  L a w
Article 15(5) Notification of the Italian Government's intention of
introducing exemption for the supply of boats intended
for demolition (exemption n o w  introduced in Italy)

ANNEX I
N O T IF IC A T IO N S  G IV E N  P U R S U A N T  T O  A R T IC L E  27(5) O F  T H E  S IX T H  D IR E C T IV E
M em ber State Date of 
notificationRelevant
provision of
the Sixth DirectiveObject of the measure
Luxembourg 29.12.1977 Articles 8 and 9 
Article 13(A)C1)(l)
Articles 21(1)(a) 
and (b)
Article 11(C)(2)
Article 1 1  
Article 9(2)(b)
Article 24
Article 10(2) 
Article 11(A)(1)(a)Assumption that, unless proof to the contrary is provided 
by the taxable person, taxable transactions have been 
carried out within the country
The activities carried out by non-profit-making organi­
zations for the benefit of their m em bers and in return 
for a subscription are excluded from the scope of the tax 
(exclusion transformed into exemption by L a w  of 1979)
T ax payable on supplies of goods and services by taxable 
persons not established within the territory of the 
country - tax representative
Conversion of foreign currencies into Luxembourg francs 
at the average rate for the m onth or at the day's rate 
where use is m ade of the derogation allowed to the 
general rule of conversion using the latest selling rate 
recorded on the national exchange market
Possibility allowed under the L a w  to fix flat-rate or 
m inim um  taxable amounts for certain taxable transactions
Transport operations where an insignificant part of the 
transport takes place abroad to be treated as national 
transport
Possibility, in determining the amount of input and 
output taxes, of establishing flat-rate amounts for 
certain categories of taxable persons
Application of a system of ’ collecting the tax at source 
in respect of imports and supplies of manufactured 
tobacco

ANNEX I
N O T IF IC A T IO N S  G IV E N  P U R S U A N T  T O  A R T IC L E  27(5) O F  T H E  S IX T H  D IR E C T IV E
M em ber State Date of 
notificationRelevant
provision of
the Sixth Directive'Object of the measure
Luxem bourg 29.12.1977 Article 2 5 Application of the agricultural flat-rate scheme to 
supplies of goods, including capital goods, used by the 
taxable person for the purposes of his agricultural 
undertaking
Netherlands 12.6.1979 Article 6
Article 10(2) 
Article 11(A)(1)(a)
Article 10(2) 
Article 14(1)(h)
Article 22 and 
possibly Article 24Special scheme for goods sold at auction
Application of a system of collecting V A T  at source 
in respect of manufactured tobacco
Zero-rating of imports and supplies by auction of fish 
landed by vessels returning from fishing
Methods for flat-rate calculation of V A T  receipts on the 
basis of specified rates
24.7.1980 Article 10(2)
Article 17 
Article 11(A)(3)(b)Deferment of the changeability of the tax for supplies 
of goods by foreign suppliers to consignees, until the 
time w hen the goods are supplied within the country
Special measures applicable to livestock dealers
Schem e applicable to trading stamps and coupons

ANNEX I
N O T IF IC A T IO N S  G IV E N  P U R S U A N T  T O  A R T IC L E  27(5) O F  T H E  S IX T H  D IR E C T IV E
M em ber State Date of 
notificationRelevant
provision of
the Sixth DirectiveObject of the measure
Netherlands
(continued)24.7.1980 Article 2(1)1. Application of the tax on forward transactions only to 
those transactions which result in an actual supply 
within the meaning of Article 2  of the Sixth Directive
2. Zero-rating of transactions relating to consignments 
of coffee, up to the time w hen they leave the ware­
house
'Article 11(A)(2) Exclusion of packing from the taxable amount without the 
adjustment provided for in the case of non-returnable 
packing (effective maintenance of the previous system 
despite the n ew  provisions of the L a w  introduced in 
accordance with the Sixth Directive)
United Kingdom 28.12.1977 Article 22 and 
possibly Article 24Flat-rate methods of calculating tax receipts on the 
basis of specified rates
Article 11(A)(3)(b) Special arrangements for trading stamps: the issue of 
trading stamps is considered to involve a promissory 
discount
Articles 2  and 28(2) System under which persons all of whose supplies are 
zero-rated m ay  be treated as not subject to V A T
Article 1 1Special scheme applicable to intermediaries involved in 
the sale of cosmetics: calculation of V A T  on the basis 
of the selling price to the. consumer
Articles 2(1) and 6 Zero-rating of "futures" transactions on terminal markets 
and to the supply of services to market m em bers

ANNEX I
N O T IF IC A T IO N S  G IV E N  P U R S U A N T  T O  A R T IC L E  27(5) O F  T H E  S IX T H  D IR E C T IV E
M em ber State Date of 
notificationRelevant
provision of
the Sixht Directive ‘Object of the measure -  I
United K ingdom  
(continued)28.12.1977 Articles 6, 1 1  and 
13(B)(b)Special scheme applicable in respect of long stays in I  
hotels: up to 80 % reduction in the taxable amount I

-  90 -
A N N E X  I I
(options allowed under Article 13 C )
Table N o. 1 - Right of option for taxation of the letting 
and leasing of immovable property
Table N o. 2 - Right of option for taxation of the supply 
of "old" buildings and of land which has 
not been buiIt on
Table N o. 3 - Right of option for taxation of banking and 
financial transactions

Table No 1
APPLICATION OF ARTICLE 13C(a) OF THE SIXTH VAT DIRECTIVE
SUMMARY TABLE OF THE RIGHT OF OPTION FOR TAXATION OF THE LETTING AND LEASING OF IMMOVABLE PROPERTY. EXCEPT FOR THE TRANSACTIONS ALREADY EXCLUDED UNDER ARTICLE 13BCb)
Member State
GERMANY
DENMARK
FRANCE
IRELAND
LUXEMBOURG
NETHERLANDSTransactions covered by 
national legislation
Leasing of immovable proper­
ty (except for the part 
intended for personal use)
Leasing of immovable proper- In respect of each
ty intended for business 
purposes (except for the 
part intended for personal 
use)
Leasing of bare immovable 
property for business pur­
poses (even if the buil­
ding comprises premises 
for residential use)
Leasing of immovable 
property
Leasing of immovable 
property under a re­
gistered leasing 
contract
Leasing of immovable 
property other than buil­
dings or parts of buil-Exercise of the right of 
option
For each transaction, at 
the discretion of the 
optant
Not applicable to :  
small traders exempt 
from the tax or 
- flat-rate farmers
In respect of each
premises
In respect of each 
premises or set of 
premises (the option 
does not exclude eligi­
bility for the full or 
partial relief allowed 
under the scheme for 
small traders)
General
In respect of any buil­
ding or part of a buil­
ding representing a se­
parate unit which is 
used entirely or, in the 
case of mixed use, main­
ly by a lessee entitled 
to deduct input tax. The 
schemes for small tra­
ders and flat-rate far­
mers are not applicable 
to the transactions in 
question
In respect of each item 
of immovable property. 
Not applicable to :
- small traders exempt 
from the tax or
- flat-rate farmersStatus of the lessee
Taxable person who 
will use the immo­
vable property for 
his undertaking 
(even for exempt 
transactions)
Not to be taken 
into consideration
Taxable person 
(even if exempt)
Not taken into 
consideration
Taxable person en­
titled to deduct tax
Not taken into 
considerationAgreement of 
the lessee
Not necessary
Not necessary 
unless the op­
tion is exerci­
sed during the 
lease
Not necessary
Not necessary
Not necessary
YesPrior notification or 
authorization
Not necessary: 
the relevant trans­
actions must, however, 
be recorded separa­
tely in the accounts
Prior notification
Prior notification
Prior authorization 
of the tax authori­
ties
Prior authorization 
of the tax authori­
ties
Upon j oint appli­
cation, prior 
authorization by 
the tax authoritiesPeriod
No limit
For at least two 
years
Valid up to the 
end of the fourth 
year; subsequent­
ly renewable by ta­
cit extension, by 
five-year periods
Unti l
termination
No limit
No limitTermination
Appears
possible
Possible
Not possible.
The option ceases 
automatically if 
the use of the 
premises is chan­
ged
Authorization of the tax authorities subject to the pay­ment of any excess amount as between the repayment ob­tained and the net tax paid during the period of option (maximum ten years) 
Appears possible, 
particularly if a .  
new leasing con­
tract is concluded
Appears possible, 
by mutual agree­
ment; the option 
lapses if there 
a change of 
lessor or lesseeParticular consequen­
ces for the optant
Possible adjustment 
for ten years follo­
wing first occupation 
by the optant
Possible adjustment 
for ten years follo­
wing acquisition
The optant obtains, 
inter alia, an initial 
credit, provided that 
he has not been able 
to deduct input tax . 
(1/10 per calendar yean
Possible adjustment 
for ten years after 
construction or 
acquisition
Possible adjustment 
for ten years after 
first occupation or 
acquisition
1 If the right of option is exercised, there is exemption from pay roll tax.
2 Irish law does not provide for any adjustment scheme for the tax deducted that has been 
charged on capital goods.

Table No 2
APPLICATION OF ARTICLES 13 B(o) and <h) OF THE SIXTH VAT DIRECTIVE
SUMMARY TABLE OH THE RIGHT OF OPTION FOR TAXATION OF THE SUPPLY OF "OLll" BUILDINGS AND OF LAND WHICH HAS NOT BEEN BUILT ON
Member State Transactions covered by 
national legislationExercise of the right of option Status of the 
purchaserAgreement of 
the purchaserPrior notification or 
authorizationPeriod Termination Particular consequences 
for the optant
GERMANY In principle, all the 
transactions coming under 
this heading (including 
the transfer of certain 
rights in rem over immo­
vable property)^In respect of each operation, at 
the discretion of optant. Not 
applicable to :
- small traders exempt from the 
tax or
- flat-rate farmersTaxable person 
who will use the 
immovable property 
for his undertaking 
(even for exempt 
transactions)Not necessary Not necessary: the 
relevant transactions 
must, however, be re­
corded separately in 
the accountsn.a. n.a.
LUXEMBOURG Supplies of immovable 
goods (including the 
transfer of certain 
rights in rem over immo­
vable property)!In respect of any building or 
part of a building representing 
a separate unit which is used 
entirely or, in the case of 
mixed use,? mainly by a purcha­
ser entitled to deduct input 
tax. the schemes for small tra­
ders and flat-rate farmers are 
not applicable to the transac­
tions in questionTaxable person 
entitled to deduct
the taxNot necessary Authorization of the 
tax authorities be­
fore the drawing up 
of the official re­
cordn.a. n.a.For ten years following 
construction or acqui-. 
sition subject to tax, 
non-deduction or partial 
deductionmay be the 
subject of adjustment 
(maintenance expenses 
are excluded from this)
NETHERLANDS Supplies of immovable 
property (including the 
transfer of certain 
rights in rem over immo­
vable property)^In respect of each item of 
immovable property.
Not applicable to :
- small traders exempt from the 
tax or
- flat-rate farmersNot taken into 
considerationYes Upon joint applica­
tion, prior authori­
zation by the tax 
authoritiesn.a. n.a.For ten years, as from 
fi rst occupation or 
acquisition subject to 
tax, non-deduction or 
partial deduction may be 
the subjecj of 
adjustment4
C1) Thesupply of new buildings an< i of building land is exempt.
(2) In the case of the supply of a building, the exemption applies only as from two years after first occupation.
(3) In this case, the option relates to the entire immovable property. This means that the purchaser or tenant may deduct input tax only proportionally. 
C4) The transfer of immovable property is exempt from transfer dutyMf the supply is subject to VAT and if the supplier:
1. has not used it for business purposes Ce.g., in the case of a trader in goods) or
2. has used it for business purposes, but if the person acquiring the property is not entitled to deduct input tax.

Table No 3
APPLICATION OF ARTICLE 13 BCd) OF THE SIXTH VAT DIRECTIVE
SUMMARY TABLE OF THE RIGHT OF OPTION fOR TAXATION OF BANKING AND FINANCIAL TRANSACTIONS
Member StateTransactions covered by 
national legislationExercise of the 
right of optionStatus of the purchaserAgreement 
of the 
purchaserPrior notification 
or authorizationPeriod Terminât ionParticular consequences 
for the optant
GERMANY Those coverd by Articles 
13(B)(d)(1) to (5)In respect of 
each transaction 
at the discretion 
of the optant 
- not applicable 
to small traders 
exempt from the 
taxTaxable person who will use it 
for his undertaking (even for 
exempt transactions)Not
necessaryNot necessary: however, the 
relevant transactions must 
be recorded separately in 
the accountsNo limit n.a.
BELGIUM
FRANCEPayment and encashment 
transactions
Transactions which were 
effectively subject to 
the tax on banking and 
financial activities 
(TFA, abolished on 
1.1.1979)1, carriedoutby 
persons who were or would 
have been subject to that 
tax2All transactions 
All transactionsNot taken into consideration
Not taken into consideration.
However, the option applies only
to transactions between :
- bodies governed by the "Chambre 
syndicale des banques populai­
res",
- "caisses de crédit mutuel" be­
longing to the "Confédération 
nat. du crédit mutuel",
- "caisses de crédit agricole 
mutuel".Not
necessary
Not
necessaryPrior notification to be 
attached to a periodic 
return
Prior notificationIrrevocable
Irrevocablen.a.
n.a.
The opt ion be­
comes nul l and 
void if the op­
tant no longer 
fulfils the 
conditions 
laid down (cf.  
footnote 2)The optant enjoys a 
reduced rate for the 
special annual tax on 
credit outstanding3
1
>©W
1
(1) This involves a number of transactions covered by Article 13 B(d) including:
- transactions involving accounts and cheques (commissions for keeping an account, closing an account, on certified cheques, etc.);
- transactions involving commercial paper (except collection of discount charges and like payments, etc.);
- credit and guarantee transactions (except in respect of interest and like payments, etc.);
- exchange transactions (except those relating to export financing);
- transactions involving gold coins, carried out by a person subject to TFA;
- the management of special investments funds;
- the issue of luncheon vouchers.
(2) The option is consequently available to banks, financial institutions, stockbrokers, money changers, discount brokers, intermediate brokers 
and any person engaged principally in transactions connected with banking or financial activities.
(3) This tax replaced TFA on 1.1.1979, to offset the budgetary cost of the abolition of TFA.

-  94 -
A N N E X  I I I
List of Judgments of the Court of Justice concerning the application of 
the Second and Sixth Directives on the c o m m o n  system of V A T
Case N o Subject
111/75 Article 6 of the Second Directive
51/76 Articles 1 1  and 17 of the Second Directive
126/78 Article 6(2) and point 5  in A nnex B  of the 
Second Directive
181/78 and 229/78 Article 4  and point 2  in A nnex A  of the 
Second Directive
154/80 Article 8 of the Second Directive
89/81 Article 4  and the first paragraph of 
Article 11(2) of the Second Directive
222/81 Subparagraph (b) in the first paragraph of 
Article 8 of the Second Directive
8/81 Article 13B(d)(1) of the Sixth Directive
15/81
255/81Point 2  in Article 2  of the Sixth Directive 
(and Article 95 of the Treaty)
Article 13B(a) of the Sixth Directive