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

(presented by the Commission)

EXPLANATORY MEMORANDUM

INTRODUCTION

In a request submitted in the form of two letters addressed to the Commission, registered by the Commission's Secretariat-General on 9 January 2002, the Government of the Federal Republic of Germany sought authorisation under Article 27 of 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 [1] (hereinafter "the Sixth Directive") to apply a measure derogating from Article 21(1)(a) of the Directive, as amended by Directive 2000/65/EC of 17 October 2000. The purpose of the derogation, which applies to transactions inside the country, is to make the recipient of goods liable in certain cases for the tax due where the supplier is in financial difficulties.

[1] OJ L 145, 13.06.1977, p. 1. Directive last amended by Directive 2001/115/EC (OJ L 15, 17.01.2002, p. 24).

PURPOSE OF THE DEROGATIONS SOUGHT

The German authorities cite two instances in which the person legally liable for the tax is generally prevented by financial difficulties from paying the VAT invoiced, but the recipient of the supply is still able to deduct that unpaid VAT. These two instances are: (i) the supply, outside a judicial liquidation procedure, of goods provided as security by one VAT taxable person to another in execution of that security and (ii) the supply of building plots sold at public auction to another VAT taxable person in the course of the judicial liquidation of the enterprise that owned the plots sold. This situation can arise both in cases of fraudulent bankruptcies and in cases where there has been no fraud.

Current German legislation does, admittedly, as Article 21(3) of the Sixth Directive allows, make the purchaser of the goods supplied jointly and severally liable for payment of the tax. Joint and several liability is not, however, a satisfactory solution for those purchasing the goods of the enterprise in difficulties, who can actually find themselves having to pay the invoiced VAT twice.

- The invoiced amount paid to the enterprise in difficulty includes VAT.

- The VAT is paid a second time by virtue of the joint and several liability for the VAT not paid by the enterprise that supplied the goods.

The recipient, however, may only exercise the right of deduction once.

DESCRIPTION OF THE REQUESTED DEROGATIONS

The derogation would apply in two instances, namely:

- the supply, outside a judicial liquidation procedure, of goods provided as security by one VAT taxable person to another in execution of that security;

- the supply of building plots sold at public auction to another VAT taxable person in the course of the judicial liquidation of the enterprise that owned the plots sold.

- The derogation would not, however, apply to supplies to non-taxable persons.

In these two instances the derogation requested by Germany would enable the recipient, by derogation from Article 21(1)(a) of the Sixth Directive, to be made liable for the tax in place of the supplier.

In practice, this measure would cover transactions inside the country involving the supply of goods provided as security. In the case of intra-Community transactions, the purchaser is already liable under Article 21(1)(e) of the Sixth Directive for the tax on intra-Community acquisitions.

In the case of the building plots, the measure would concern supplies in Germany in so far as Article 8(1)(a) of the Sixth Directive stipulates that the place of the taxable transaction for goods not dispatched or transported is the place where the goods are when the supply takes place.

Germany would repeal the current national legislation making the purchaser jointly and severally liable for the payment of the VAT owed by the vendor.

OPINION OF THE COMMISSION

Article 27 of the Sixth Directive allows for derogations in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance.

The measure that Germany is considering represents a simplification in that the tax administration very often has difficulty recovering tax from taxable persons in serious financial difficulties.

Applying the normal rules determining the person liable for the tax incontestably poses problems, especially the obligation for the purchaser to pay the tax twice when the financial circumstances of the person normally liable limit its capacity to settle its tax debt.

The measure envisaged also seems proportionate to the objective pursued: it deviates from the general principles laid down in Article 21 only to the extent strictly necessary to attain that objective.

Germany's request does not concern a blanket derogation from the principles of Article 21 but rather a derogation in two instances of limited importance in which the application of the normal rules would pose problems.

The measure envisaged by Germany would eliminate the difficulties cited above in the two instances concerned by the derogation:

- The enterprise in difficulty supplying the goods concerned by the derogation would no longer be liable for the tax. The risk of non-payment arising from the financial difficulties would be removed. By the same token, the risk that the purchaser might have to pay the VAT invoiced twice would also be removed.

- The purchaser would apply the reverse charge mechanism. He would pay the tax on the goods supplied to him and then exercise his right to deduct that tax in the usual way.

Note that the proposed derogation has no effect on the amount of tax due. The amount of VAT due under the derogation would therefore be exactly the same as if the normal rules of Article 21 of the Sixth Directive were applied.

This is why the Commission is proposing that the Council authorise Germany to apply, in the two instances mentioned, the requested derogation from Article 21(1)(a).

The Commission does, however, believe that this derogation should apply only to 31 December 2006. This will offer an opportunity to assess whether the derogation should be maintained in the light of the experience accumulated by Germany over that five-year period.

Proposal for a

COUNCIL DECISION

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

(only the German text is authentic)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes - common system of value-added tax: uniform basis of assessment, and in particular Article 27(1) thereof, [2]

[2] OJ L 145, 13.06.1977, p. 1. Directive last amended by Directive 2001/115/EC (OJ L 15, 17.01.2002, p. 24).

Having regard to the proposal from the Commission, [3]

[3] OJ C ...

Whereas:

(1) In a request submitted in the form of two letters addressed to the Commission, registered by the Commission's Secretariat-General on 9 January 2002, Germany sought authorisation to apply a measure derogating from Article 21(1)(a) of Directive 77/388/EEC.

(2) The other Member States were informed of Germany's request by letter of 16 January 2002.

(3) Article 21(1) of Directive 77/388/EEC, as amended by Article 28g thereof, stipulates that, under the internal system, the taxable person supplying taxable goods or services is normally liable to pay value added tax.

(4) The purpose of the derogation requested by Germany is to make the recipient liable for the value added tax due on the supply, outside a judicial liquidation procedure, of goods provided as security by one VAT taxable person to another in execution of that security and the supply of building plots sold at public auction to another VAT taxable person in the course of the judicial liquidation of the enterprise that owned the plots sold.

(5) This derogation is intended to simplify the collection of the tax since, in practice, the person normally liable for the tax is, in the instances for which the derogation is sought, generally prevented by financial difficulties from paying the VAT invoiced.

(6) This state of affairs adversely affects public finances in that the recipient of the goods can deduct the value added tax invoiced to him, even though it has not been paid by the taxable person who supplied the goods.

(7) By designating the recipient of the goods as the person liable for the value added tax, the derogation removes the difficulties encountered without affecting the amount of tax due.

(8) The authorisation should be granted until 31 December 2006, which will enable the derogation to be reviewed in the light of experience.

(9) This derogation does not adversely affect the Communities' own resources from VAT,

HAS ADOPTED THIS DECISION:

Article 1

By derogation from Article 21(1)(a) of Directive 77/388/EEC, as amended by Article 28g thereof, Germany is hereby authorised to designate the recipient of the supplies of goods referred to in Article 2 of this Decision as the person liable to pay value added tax.

Article 2

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

1. The supply, outside a judicial liquidation procedure, of goods provided as security by one VAT taxable person to another in execution of that security;

2. The supply of building plots sold at public auction to another VAT taxable person in the course of the judicial liquidation of the enterprise that owned the plots sold.

Article 3

This Decision shall expire on 31 December 2006.

Article 4

This Decision is addressed to Germany.

Done at Brussels, [...]

For the Council

The President

[...]