COMMISSION OF THE EUROPEAN COMMUNITIES 
COM(92) 582 final 
Brussels, 22 December 1992 
COMMISSION REPORT TO THE COUNCIL 
PRESENTED IN ACCORDANCE WITH ARTICLE 3 OF 
THE COUNCIL DECISION 89/683/EEC 
OF 21 DECEMBER 1989 
(Application of a measure derogating from Article 2 
of the sixth Directive (77/388/EEC) on the 
harmonization of the laws of the Member States 
relating to turnover taxes - Common system of value added tax) 
Proposal for a 
COUNCIL DECISION 
authorizing the French Republic to extend the application 
of a measure derogating from Article 2 of the 
sixth Council Directive (77/388/EEC) of 17 May 1977 
on the harmonization of the laws of 
the Member States relating to turnover taxes 
(presented by the Commission) 
>Cc^ 
COMMISSION REPORT TO THE COUNCIL 
PRESENTED IN ACCORDANCE WITH ARTICLE 3 OF 
THE COUNCIL DECISION 89/683/EEC 
OF 21 DECEMBER 1989 
(Application of a measure derogating from Article 2 
Of the sixth Directive (77/388/EEC) on the 
harmonization of the laws of the Member States 
relating to turnover taxes - Common system of value added tax) 
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I. INTRODUCTION 
Bv Council Decision 89/683/EEC of 21 December 1989, France was authorized, 
on the basis of Article 27 of the sixth VAT Directive and following the 
entry into force of the eighteenth VAT Directive, to introduce special VAT 
arrangements derogating from the sixth Directive in respect of taxable 
transactions involving fresh industrial waste and récupérable material. 
Pursuant to Article 1 of that Decision, the authorization expires on 
31 December 1992. 
In addition, Article 3 of the Decision stipulates that the Commission is to 
present to the Council, prior to the date of expiry of the derogation, a 
report on its application, accompanied, where appropriate, by a proposal for 
a Council Decision providing for its extension. 
The purpose of the present report is, therefore, to give an account of the 
application of that derogation and to examine the request for an extension 
of that derogation submitted by the French Republic by letter registered by 
the Secretariat-General of the Commission on 22 October 1992. 
II. APPLICATION OF THE DEROGATION 
1. Background 
By virtue of Article 1(2)(a) of the eighteenth VAT Directive, France was 
obliged to abolish with effect from 1 January 1990 the derogation it 
applied on a transitional basis to supplies of récupérable material and 
fresh industrial waste pursuant to Article 28(3)(b) of the sixth 
Directive, read in conjunction with point 20 of Annex F. 
However, point 4 ("Re Article 2, point F20") in the minutes adopting the 
eighteenth Directive contains the following declaration: 
"The Council and the Commission agree that they will consider with an 
open mind a request from France, on the basis of Article 27(1) to (4) of 
Directive 77/388/EEC, concerning a derogation based on the following 
principle: 
1 OJ No L 398, 30.12.1989. 
2 Council document 6016/89, Annex II, p. 8. 
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Sales, commission and brokerage operations relating to fresh 
industrial waste and récupérable material shall be subject to value 
added tax on the authorization of the competent tax authority. 
This authorization may be subject, inter alia, to the following 
conditions: permanent installation, adequate annual turnover, the 
possible provision of a sufficient security*" 
At the time, the taxation of transactions involving fresh industrial 
waste and récupérable material were liable to give rise to substantial 
fraud, particularly in the "metal materials" sector. Such fraud 
consists in the issuing of false invoices designed to transfer a 
notional entitlement to tax deduction ("taxis") or in the invoicing of 
taxes never paid to the Treasury. In both cases, the revenue losses for 
the Treasury are considerable, with the waste-recovery sector in France 
having a total turnover of some FF 18 billion in 1989, a figure which 
this year will rise to FF 25 billion, and this for IS million tonnes of 
recovered product and 5 000 waste-recovery firms. 
2. Entry into force in France 
The derogation was transposed into national law by Article 33 of 
Law No 90-1168 of 29 December 1990 (1991 Finance Law), with 
Articles 260, 261, 277, 273, 256, 290 and 1784 of the French General Tax 
Code being amended. 
Administrative Instruction 3-A-1-91 of 27 December 1990, which was 
published in Official Tax Gazette No 9 of 14 January 1991 (Series 3 CA), 
contains a commentary on the provisions of national law arising from the 
derogation. Those provisions entered into force on 1 January 1991. 
3. pjjPQfflrHPP of tfre special arrangements, introduced, jn France u^der cover 
of the derogation 
The arrangements consist of the following three provisions: 
3.1 Automatic taxation of supplies in respect of fresh industrial waste 
or récupérable material made by firms that satisfy the following two 
conditions simultaneously: 
- existence of a permanent establishment 
and 
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- turnover, exclusive of taxes, in respect of fresh industrial 
waste or récupérable material of not less than FF 6 million in the 
previous calendar year. 
3.2 A "limited" exemption applicable in the case in point solely to 
supplies of fresh industrial waste and récupérable material made by 
firms: 
- which either do not have a permanent establishment 
- or which, although they have a permanent establishment, have 
achieved in the previous year a turnover figure, exclusive of tax, 
in respect of such supplies of less than FF 6 million. 
This exemption carries an option for taxation, subject to 
authorization, that is available only to firms with a total annual 
turnover, inclusive of all taxes, of more than FF 500 000. In other 
words, the exemption is compulsory only for firms with an annual 
total turnover, inclusive of all taxes, of less than FF 500 000. 
3.3 Compulsory suspension of payment of VAT in respect of supplies to 
taxable persons of fresh industrial waste and récupérable material 
in the form of non-ferrous metals and their alloys where these 
supplies attract tax automatically or subject to authorisation, i.e. 
where they cannot be exempted. 
Firms in the sector which make supplies under a suspension 
arrangement are not entitled to invoice VAT but, instead, they 
retain their entitlement to tax deduction, such entitlement being 
exercised by way of imputation where they carry out taxable 
transactions or by way of refund. 
In addition, all imports of fresh industrial waste and récupérable 
material are exempt from VAT. 
Commission operations in respect of fresh industrial waste or 
récupérable material rank as supplies of goods, unlike brokerage 
operations, which, as a result, are not covered by the derogation. 
4. Position of the French admj.n4stratj.0n op the application 9*. , tftf 
fljgoqfrUpn, 
The French administration has made the following observations! 
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"1. The waste-recovery sector in France has a turnover of some 
FF 25 billion, of which over a third is accounted for by exports, 
and this for a total of 15 million tonnes of recovered product. 
Some 5 000 firms are engaged in waste-recovery operations as their 
main activity. 
Half of the firms in this sector are small firms with an annual 
turnover of less than FF 500 000. They account for some 10% of 
total turnover in the sector. 
These firms differ very widely in nature (specialized small firms, 
charitable organizations, migrants, etc.), and the exemption in 
respect of supplies of fresh industrial waste or récupérable 
material made by them is quite consistent with the dual objective of 
simplification and repression of fraud, which led to the 
introduction of the arrangements provided for by the derogation. 
The other firms, which are firms with an annual turnover exceeding 
FF 500 000 and should, therefore, attract VAT automatically or on 
authorization, account for 90% of total turnover in the sector. 
Of the latter firms, some 60% are taxable automatically and account 
for over two thirds of turnover in this category. 
The remaining firms in this category, which are liable to attract 
VAT subject to authorization, are those that do not have a permanent 
establishment or generate a turnover of between FF 500 000 and 
FF 6 million. 
Of those firms without a permanent establishment, a relatively low 
percentage (some 8%) have a turnover of more than FF 6 million. 
Over half of the firms liable to attract VAT subject to 
authorization have, at their request, been authorized to charge VAT 
on their supplies of fresh industrial waste and récupérable 
material. Very few requests for authorization are rejected. 
Authorization may be conditional on the provision by the firm 
seeking authorization of good security. However, in 80% of cases, 
firms show themselves to be sufficiently solvent and are not 
required to provide any security. 
Lastly, the VAT-suspension arrangement for fresh industrial waste 
and récupérable material in the form of non-ferrous metals is a 
useful complement to the system since the high value of such metals 
increases the risks of fraud. 
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2. Analysis of tax control statistics reveals that the firms in the 
sector that attract VAT present a lower-than-average risk of fraud 
as compared with other firms in France. 
Moreover, if the average size of adjustments generally increases 
with firm size, it does so much less rapidly in the case of firms in 
this sector. 
Lastly, the reasons for carrying out adjustments have more to do 
with errors in applying the tax rules (unjustified deductions) than 
with fraud proper (concealment of, or failure to report, taxable 
transactions). 
This situation stems from the VAT arrangements applicable to firms 
in the sector and to the increased supervision by the administration 
authorized under the arrangements. 
3. No particular difficulties have been encountered in administering 
the arrangements applicable to these firms (monitoring by the tax 
authorities of authorizations granted and securities provided). 
Furthermore, the firms have welcomed the arrangements and are 
appreciative of them since, among other things, they safeguard 
against the risks to which they might be exposed as a result of 
fraudulent practices on the part of certain firms and for the 
consequences of which they might be liable vis-à-vis the 
administration." 
III. REQUEST FOR EXTENSION OF THE DEROGATION 
France is seeking an extension in full of the derogation for the entire 
transitional period defined in Article 281 of the sixth Directive, as 
amended by Directive 91/680/EEC of 16 December 1991 with a view to the 
abolition of fiscal frontiers. 
It would also like to see the exemption currently applicable to all imports 
of fresh industrial waste and récupérable material being applied as from 
1 January 1993 both to imports and to intra-Community acquisitions of such 
products. 
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IV. OPINION OF THE COMMISSION DEPARTMENTS 
1. Application of the derogation by France 
The transposition of Article 1 of the Council Decision calls for the 
following observations: 
It is not stipulated in the legal instrument amending Article 261-3-
2 of the French General Tax Code that the exemption which is 
applicable in any event: 
* to firms whose annual turnover is less than FF 500 000 
* to firms not qualifying for the arrangements governing taxation 
subject to authorization 
is limited over time and valid only until 31 December 1992. 
Only Article 260F of the French General Tax Code, which deals with 
the authorization for taxation, expressly stipulates that such 
taxation subject to authorization is valid until 31 December 1992. 
However, it should be pointed out that the administrative comments 
restore the limitation over time applicable to the limited exemption 
arrangements provided for in the Council Decision (see point 1, 
second subparagraph of Instruction 3-A-1-91); 
- Only firms in the sector with a turnover, inclusive of all taxes, of 
between FF 500 000 and FF 6 million may be authorized to pay VAT, 
that is to say, to invoice it and, in so doing, to transfer an 
entitlement to tax deduction. These provisions are consistent with 
Article 1 of the Council Decision; they result from the combined 
provisions of the first indent of that Article. Accordingly, and 
this was the very purpose of the derogation, small firms necessarily 
remain exempt since, in the past, it was basically small waste-
recovery operators that perpetrated fraud by using "taxi" systems. 
It should also be pointed out that the authorization to tax is 
generally granted only to firms which beforehand provide a security 
which, jointly and severally with the firm, must undertake to pay to 
the tax authorities the VAT invoiced in respect of transactions 
carried out during the period covered by the authorization. 
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Although there is no express provision to that effect in Article 1 
of the Council Decision, the third recital to that Decision 
stipulates that the authorization procedure "may involve the 
provision of a guarantee"; 
- The examination made by the Commission departments has confirmed 
that supplies of fresh industrial waste and récupérable material 
which are exempt from VAT are not included in the numerator of the 
general deductible proportion in cases where the firm in the sector 
under consideration is a taxable person entitled to deduct tax in 
part. However, it would seem that such supplies, where made by the 
manufacturer himself and involving waste produced on his own 
premises, may be included in both the numerator and the denominator 
of the deductible portion, something which, at first sight, is 
contrary to the general principles of VAT. The Commission 
departments would, therefore, ask the French authorities to adapt, 
as appropriate the applicable provisions in this context. 
2. Case for extending the temporary derogation granted to France 
The Commission departments would note that the transitional period 
provided for in Article 281 of the sixth VAT Directive, as amended with 
a view to the abolition of fiscal frontiers, will not necessarily end on 
31 December 1996. Since the derogation which the French Republic is now 
seeking to extend was initially granted for a period of two years, the 
Commission departments propose that it be extended for a further period 
of four years, so that it will expire on a definite date set in advance, 
namely 31 December 1996. This will make it possible, in particular, to 
ascertain whether extension of the exemption to the new category of 
intra-Community acquisitions is giving rise to any specific difficulties 
or fraudulent practices. 
Proposal for a 
COUNCIL DECISION 
authorizing the French Republic 
to extend the application of a measure 
derogating from Article 2 of the sixth Council Directive 
(77/388/EEC) of 17 May 1977 
on the harmonization of the laws 
of the Member States relating to 
turnover taxes 
(presented by the Commission) 
EXPLANATORY MEMORANDUM 
1. By letter registered by the Secretariat-General of the Commission on 
22 October 1992, the Government of the French Republic requested an 
extension of the derogation previously granted to it for a limited 
period by Council Decision 89/683/EEC of 21 December 1989. That 
Decision, which was based on Article 27 of the sixth VAT Directive, 
authorizes France to introduce special VAT arrangements in respect of 
fresh industrial waste and récupérable material. The authorization 
expires on 31 December 1992. 
2. Article 3 of the Decision stipulates that, in the light of a report from 
the Commission on the application by France of that Decision, the 
Council may, on the basis of a proposal from the Commission, decide 
before 31 December 1992 that the authorization is to be extended. 
3. The report presented by the Commission on the application of that 
Decision over the period 1991-92 finds that the provisions of the 
Decision should be extended until 31 December 1996. The Commission will 
have to present to the Council before that date a new report on the 
application of the authorization in question, in particular with a view 
to ascertaining whether extension of the authorization to the new 
taxable category of intra-Community acquisitions is giving rise to any 
specific difficulties or fraudulent practices. 
4. In accordance with Article 27(3) of the sixth VAT Directive, the other 
Member States were informed of the French request by letter dated 
20 November 1992. 
1 OJ No L 398, 30.12.1989. 
2 OJ No L 145, 13.6.1977. 
M-
Proposal 
for a 
Council Decision 
authorizing the French Republic to extend the 
application of a measure derogating from Article 2 
of the sixth Council Directive (77/388/EEC) of 17 May 1977 
on the harmonization of the laws of the Member States 
relating to turnover taxes 
THE COUNCIL OF THE EUROPEAN COMMUNITIES, 
Having regard to the Treaty establishing the European Economic Community, 
Having regard to the sixth Council Directive (77/388/EEC) of 17 May 1977 on 
the harmonization of the laws of the Member States relating to turnover 
taxes - Common system of value added tax: uniform basis of assessment, and 
in particular Article 27 thereof, 
Having regard to Council Decision 89/683/EEC of 21 December 1989, 
Having regard to the Commission report on the application of the 
aforementioned Decision over the period 1991-92, 
Having regard to the ensuing Commission proposal, 
Whereas, under Article 27(1) of the sixth VAT Directive, the Council, acting 
unanimously on a proposal from the Commission, may authorize any 
Member State to introduce or extend special measures for derogation from 
that Directive in order to simplify the procedure for charging the tax or to 
prevent certain types of tax evasion or avoidance; 
Whereas the Commission report on the application of the said derogation over 
the period 1991-92 has demonstrated the latter's usefulness and 
effectiveness in the waste-recovery sector, which is particularly vulnerable 
to fraud; 
Whereas the said report finds that there is no reason to oppose extension of 
the derogation provided that the derogation is clearly limited over time and 
expires in the short term; 
1 OJ No L 145, 13.6.1977. 
2 OJ No.L 398, 30.12.1989 
-I*-
Whereas the other Member States were informed on 20 November 1992 of the 
request from the French Republic, 
HAS ADOPTED THIS DECISION: 
Article 1 
..fe.. • 
By way of derogation from Article 2 of the sixth Directive (77/388/EEC), the 
French Republic is hereby authorized, until 31 December 1996 and in respect 
of fresh industrial waste and récupérable material, to exempt from value 
added tax (hereinafter referred to as "VAT"): 
on the one hand, supplies made by: 
undertakings whose annual turnover is less than FF 500 000, 
-• undertakings which do not have a permanent establishment or which, 
although they have a permanent establishment, have achieved in the 
previous year a turnover figure in respect of such products of less 
than FF 6 million, unless they are authorized to subject such 
transactions to VAT, 
- on the other hand, imports and intra-Community acquisitions. 
Article 2 
By way of derogation from Article 10(2) of the sixth Directive (77/388/EEC), 
the French Republic is hereby authorized until 31 December 1996 to introduce 
in respect of supplies to taxable persons of fresh industrial waste and 
récupérable material in the form of non-ferrous metals and their alloys, 
where these supplies are not exempt from VAT on the basis of Article 1, 
arrangements suspending payment of the tax relating to these transactions. 
The taxable persons receiving these supplies shall pay the tax on them where 
these products are intended neither for the export as such nor for the 
manufacture or resale as such of products liable to VAT. 
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Article 3 
In the light of a report from the Commission on the application of the 
authorization referred to in Articles 1 and 2, accompanied, where 
appropriate, by a proposal for a Decision extending the said authorization, 
the Council, acting on the basis of that proposal, shall decide, before 
1 January 1995, whether the said authorization is to be extended. 
Article 4 
This Decision is addressed to the French Republic. 
Done at Brussels, 
For the Council 
The President 
Il 
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COM (92) 582 final 
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