Proposal for a COUNCIL DECISION authorising Germany to apply a measure derogating from Article 21 of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. Under Article 27 of the Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment, [1] the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of the Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance.

[1] OJ L 145, 13.6.1977, p.1. Directive last amended by Directive 2003/92/EC (OJ L 260, 11.10.2003, p.8)

2. In a request submitted in the form of two letters addressed to the Commission, registered by the Commission's Secretariat-General on 01.09.2003 and 12.11.2003, the German Government sought authorisation to introduce three measures derogating from Article 21(1) (a) of Directive 77/388/EEC.

3. In accordance with Article 27(3) of the Sixth Directive, the Commission informed the other Member States by letter of 09.12.2003 and 24.01.2004 of the request made by the German Government.

4. Article 21(1) of Directive 77/388/EEC, in the version of Article 28g of the said Directive, stipulates that, under the internal system, the taxable person supplying taxable goods or services is normally liable to pay value added tax (VAT).

5. The purpose of the derogation requested by Germany is to make the recipient liable for the value added tax due in three specific cases: Firstly on the supply of construction work except where the recipient of the supply exclusively rents not more than two residences, secondly on cleaning services for buildings and parts of buildings and thirdly for the supply of immovable property if the supplier has opted for taxation under Article 13 C of the 6th Directive. The requested measures are to be considered as measures to prevent certain types of tax evasion or avoidance in the described sectors.

6. The German Court of Auditors established considerable VAT losses in the construction and in the building cleaning businesses. These losses occurred in cases where VAT was openly invoiced but not paid to the fiscal authorities, while the recipient exercised his right to deduct. In these cases the recipient could not be refused his right to deduct and the supplier could not be held responsible because he was insolvent or had disappeared. In many of these cases bogus firms were the suppliers and concealment techniques were used for preventing the fiscal authorities to recover VAT. For these reasons fiscal and non-fiscal measures aiming at increasing administrative supervision of these businesses failed. The dilemma of the German fiscal administration is that it cannot identify non-compliant operators or that identification is achieved too late to recover lost VAT. The number of such cases has increased in a way which requires legal measures. The envisaged liability of the recipient for VAT only concerns businesses which can exercise their right to deduct and does not cover private persons. It is limited to two specific branches, where the losses in terms of VAT have achieved an intolerable dimension. A similar derogation has already been granted to Austria [2].

[2] Council Decision 2002/880/EC of 5 November 2002 (OJ L 306/24, 08.11.2002, p.24)

7. The German Court of Auditors has also drafted a special report on supplies of property; according to this report such supplies are particularly vulnerable to fraud and avoidance of VAT, where the supplier has used the option to make the supply taxable. In fact such supplies of immovable property are exempt under Article 13 part B letters (g) and (h) of the 6th Directive and only become taxable where the supplier exercises the option to render the supply taxable (Article 13 C of the 6th Directive). Two main scenarios of VAT losses were identified. In the first case the supplier is almost insolvent and therefore encouraged by his main creditor, usually a bank, to sell his immovable property and exercise his right to make this sale taxable. The sales price plus VAT is then transferred to the creditor. The effect is that the creditor gets more money paid back from his debtor than he would normally get if the sale had been exempt from VAT. The recipient can exercise his right to deduct and the supplier will pay no VAT to the fiscal authorities. The later cannot recover VAT from the supplier because in the meantime he has declared his insolvency. In the second scenario a newly established company acquires immovable property; the supply is invoiced with VAT. The acquirer recovers VAT. Then the entire transaction is cancelled and re-settled on the basis of contractual obligations in the agreement concluded between supplier and acquirer. The supplier is not obliged to pay VAT to the fiscal authorities because the cancelling (Article 11 C (1) of the 6th Directive). The VAT recovered by the acquirer is lost for the fiscal authorities because meanwhile the newly established company has declared its insolvency. Immovable property is a high value good; thus also the taxable amount and the losses in terms of VAT - even on one single transaction - are particularly high. Based on the number of cases discovered, the German Court of Auditors estimates that these losses achieve millions of Euros. The abolishing of the option to render a supply of immovable property taxable is no solution. The value of the immovable property usually contains hidden VAT and the maintaining of the option is therefore necessary to keep the VAT system neutral. Against this background it appears that the envisaged liability of the recipient for VAT is in fact the most appropriate solution in the specific circumstances and for the particularly high risk involved. For both problem scenarios described above it avoids the loss of VAT because there is no VAT paid from the fiscal authorities to one of the economic operators involved. The solution avoids a double tax responsibility of supplier and recipient, which would involve a higher economic risk for the recipient and burdensome recovery procedures for the fiscal authorities which could only address the recipient, when recovery from the supplier proved to be impossible. It avoids the fiscal responsibility of a third person like the notary, which would result in higher charges for supplier and recipient. As in practice the derogation will only cover supplies between taxable persons, it is limited to specific cases; in fact, the option to make the supply taxable, is only used, where the recipient can exercise his right to deduct.

8. In view of the above, the Commission considers that the derogations requested by the German Government should be authorised.

Proposal for a COUNCIL DECISION authorising Germany to apply a measure derogating from Article 21 of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment [3], and in particular Article 27 paragraph 1 thereof,

[3] OJ L 145, 13.6.1977, p.1. Directive last amended by Directive 2003/92/EC (OJ L 260, 11.10.2003, p.8)

Having regard to the proposal from the Commission [4],

[4] OJ C , , p. .

Whereas:

(1) In a request submitted in the form of two letters addressed to the Commission, registered by the Commission's Secretariat-General on 01.09.2003 and 12.11.2003, the German Government sought authorisation to introduce three measures derogating from Article 21(1)(a) of Directive 77/388/EEC,

(2) Considerable VAT losses were established in the construction and in the building cleaning businesses, where VAT was openly invoiced but not paid to the fiscal authorities, while the recipient exercised his right to deduct. The non-compliant operators could not be identified or identification was achieved too late to recover lost VAT. The number of such cases has increased to an extent requiring legal measures. The envisaged liability of the recipient for VAT only concerns businesses which can exercise their right to deduct and does not cover private persons. It is limited to two specific branches, where the losses in terms of VAT have achieved an intolerable dimension. A similar derogation has already been granted to Austria [5],

[5] Council Decision 2002/880/EC of 5 November 2002 (OJ L 306/24, 08.11.2002, p. 24)

(3) VAT losses were also identified for supplies of immovable property under Article 13 part B, letters (g) and (h), appearing particularly vulnerable to fraud and avoidance of VAT, where the supplier has exercised the option to make the supply taxable. Immovable property is a high value good; thus the taxable amount and the losses in terms of VAT - even on one single transaction - are particularly high. The maintaining of the option to render a supply of immovable property taxable is necessary to keep the VAT system neutral. In the specific circumstances of the supply of immovable property, the envisaged liability of the recipient for VAT appears the most appropriate solution for addressing the particularly high risk involved. It avoids a double tax responsibility of supplier and recipient, which would involve a higher economic risk for the recipient and burdensome recovery procedures for the fiscal authorities and prevents a fiscal responsibility of a third person like a notary, resulting in higher economic charges for suppliers and recipients. In practice the derogation will only cover supplies between taxable persons and is therefore limited to specific cases,

(4) The derogation in question does not affect the amount of value added tax due at the final consumption stage and has no impact on the European Communities' own resources from valued added tax,

HAS ADOPTED THIS DECISION:

Article 1

By way of derogation from Article 21(1) (a) of Directive 77/388/EEC, as worded in Article 28(g) thereof, Germany is hereby authorised, with effect from 1 January 2004, to designate the recipients of the supplies of services referred to in Article 2 of this Decision as the persons liable to pay VAT.

Article 2

In the following instances the recipient of the supply may be designated as the person liable to pay VAT:

1. where construction work and/ or building cleaning services are supplied to a taxable person, except where the recipient of the supply exclusively rents not more than two residences;

2. where immovable property is supplied to a taxable person under Article 13 part B, letters (g) and (h) and where the supplier has exercised his right to tax the supply.

Article 3

This Decision shall expire on 31 December 2008.

Article 4

This Decision is addressed to Germany.

Done at Brussels,

For the Council

The President