Proposal for a COUNCIL DIRECTIVE amending Directive 77/388/EEC on the common system of value added tax, with regard to the length of time during which the minimum standard rate is to be applied

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. The second subparagraph of Article 12(3)(a) of Directive 77/388/EEC [1] stipulates that, on a proposal from the Commission, and after having consulted the European Parliament and the Economic and Social Committee, the Council shall decide unanimously on the standard rate of value added tax to be applied.

[1] OJ L 145, 13.6.1977, p. 1. Directive as last amended by Directive 2000/17/EC (OJ L 84, 5.4.2000, p. 24).

2. This provision relies on Article 93 of the EC Treaty, which states that the Council shall adopt provisions for the harmonisation of legislation concerning turnover taxes to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market. For this purpose it has always been considered essential to set the standard rate, both with regard to the transitional measures currently in force and with a view to the definitive arrangements for the common system of value added tax.

3. As early as 1987, as part of the work programme to establish the single market by January 1993, the Commission presented proposals to set up a definitive system of tax harmonisation. The key components of these proposals, which were designed to achieve a genuine internal market by means of taxation in the country of origin, were, as regards rates, as follows: a harmonised tax structure with two rates of VAT and harmonisation, within a band, of the rates applied by the Member States.

4. However, by 1989, it had become clear that it would be impossible to adopt the Commission's proposals before 1 January 1993 and the ECOFIN Council therefore decided that it should adopt a transitional system. With regard to rates, Directive 92/77/EEC, approximating rates, was adopted [2].

[2] Directive 92/77/EEC (OJ L 316, 31.10.1992, p. 1).

5. That Directive, introducing a system of minimum rates, stipulated that from 1 January 1993 the standard rate could not be set at less than 15%. Member States were, however, given the option of applying one or two reduced rates, equal to or greater than 5%, to a limited list of categories of goods and services. Some transitional derogations were also provided for, to take special situations into account.

6. At the same time, however, the Council legally and politically re-affirmed its April 1967 commitment to the achievement of a definitive system of taxation based on taxation of goods and services in the Member State of origin, and set itself a new target date of 31 December 1996 to attain this goal.

7. The programme adopted by the Commission in July 1996 envisaged a gradual transition to the definitive system. The first stage was to be the modernisation and more uniform application by the Member States of the existing system, together with amendments designed to lead to the definitive system. At the time the Commission stressed the need to approximate rates of VAT within a harmonised structure. Moreover, a certain degree of harmonisation of the rates is also necessary to ensure that tax has a neutral impact on business competition. However, it very soon became clear, as in 1987, that this degree of harmonisation could not be achieved because of differing domestic arrangements in the Member States.

8. Consequently, to maintain the degree of harmonisation of the rates already achieved, on the one hand, and on the other to open the way to the definitive system of VAT based on the principle of taxation by origin, which would require full approximation of VAT rates, the Commission presented a new proposal for a Directive, [3] on 20 December 1995, as provided for in the 1992 Directive on approximating tax rates. That proposal provided for a standard rate band with a minimum level of 15% and a ceiling of 25%. Given the transitional nature of the prevailing taxation system, the arrangements were to apply for only two years (from 1 January 1997 to 31 December 1998).

[3] COM(95) 731 (OJ C 73, 13.3.1996, p. 22).

9. The band was derived from the rates applied in practice in the Member States, where the standard rates had always varied between 15% and 25%. Even now, the 15% rate is applied in one Member State (Luxembourg) and the 25% rate is applied in two Member States (Denmark and Sweden).

10. The Commission presented an identical proposal to the Council for the period 1 January 1999 to 31 December 1999.

11. These proposals to approximate rates, based on establishing a band for setting standard rates, were rejected by the Council. In both cases the proposals were amended by the Council, [4] which kept only the principle of the minimum rate, referring to a 15% threshold comparable to the system introduced by the 1992 Directive, and which set an expiry date of 31 December 2000.

[4] Council Directive 96/95/EC of 20 December 1996 (OJ L 338, 28.12.1996, p. 89) and Council Directive 1999/49/EC of 25 May 1999 (OJ L 139, 2.6.1999, p. 27).

12. Since then, the Commission has recently adopted a new strategy aimed at improving the operation of the VAT system in the internal market. [5] This strategy does not call into question the idea of a definitive system of taxation or harmonisation of the rates as long-term objectives.

[5] COM(2000) 348 final. Communication from the Commission to the Council and the European Parliament - A strategy to improve the operation of the VAT system within the context of the internal market.

13. However, in the interests of improving the functioning of the internal market in the short term, it was necessary to reappraise the programme that the Commission had proposed in 1996. Therefore the Commission proposed a phased strategy, geared to four major objectives, namely simplification and modernisation of current rules, more uniform application of the existing legislation and closer administrative cooperation.

14. During this period, however, it is important to prevent growing divergence in the standard rates of VAT applied by the Member States from leading to structural imbalances in the EU and distortions of competition in certain sectors of activity.

15. In these circumstances, it therefore appears appropriate to maintain temporarily the principle of a minimum standard rate of 15%, and to propose that the legislation in force be extended.

16. Since the application of this rate under Article 12(3)(a) of Directive 77/388/EEC, expires on 31 December 2000, the object of this proposal is to enable the Council to extend the period of application of the minimum standard rate. The minimum level for the standard rate is therefore set at 15% for a period of five years, from 1 January 2001 to 31 December 2005.

Notes on the Articles

Article 1

The first paragraph proposes that the current minimum standard rate of value added tax in the various Member States, set at 15%, be extended from 1 January 2001 to 31 December 2005.

Paragraph 2 sets 31 December 2005 as the expiry date for the minimum level proposed for the standard rate. This provision will be subject to revision, given that the Council, acting on a proposal to be submitted by the Commission not later than 31 December 2005, must decide what the standard rate is to be after that date.

Articles 2 to 4

These Articles provide for the entry into force of the Directive.

2000/0223 (CNS)

Proposal for a COUNCIL DIRECTIVE amending Directive 77/388/EEC on the common system of value added tax, with regard to the length of time during which the minimum standard rate is to be applied

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 93 thereof,

Having regard to the proposal from the Commission [6],

[6] OJ C

Having regard to the opinion of the European Parliament [7],

[7] OJ C

Having regard to the opinion of the Economic and Social Committee [8],

[8] OJ C

Whereas:

(1) Article 12(3)(a) 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 [9], lays down that the Council shall decide on the level of the standard rate to be applied after 31 December 2000.

[9] OJ L 145, 13.6.1977, p. 1. Directive as last amended by Directive 2000/17/EC (OJ L 84, 5.4.2000, p. 24).

(2) While the standard rate of value added tax currently in force in the various Member States, combined with the mechanism of the transitional system, has ensured that this system has functioned to an acceptable degree, it is nonetheless important to prevent a growing divergence in the standard rates of VAT applied by the Member States from leading to structural imbalances in the Community and distortions of competition in some sectors of activity, at least in the period in which a new VAT strategy is being implemented to simplify and modernise current Community legislation on VAT, as set out in the Commission Communication of 7 June 2000 [10].

[10] COM(2000) 348 final.

(3) It is therefore appropriate to maintain the current minimum standard rate at 15% for a further period long enough to allow the strategy for simplification and modernisation to be implemented,

HAS ADOPTED THIS DIRECTIVE:

Article 1

The first and second subparagraphs of Article 12(3)(a) of Directive 77/388/EEC are replaced by the following:

"The standard rate of value added tax shall be fixed by each Member State as a percentage of the taxable amount and shall be the same for the supply of goods and for the supply of services. From 1 January 2001 until 31 December 2005, this percentage may not be less than 15%.

On a proposal from the Commission and after consulting the European Parliament and the Economic and Social Committee, the Council shall decide unanimously on the level of the standard rate to be applied after 31 December 2005."

Article 2

1. Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive by 1 January 2001 at the latest. They shall forthwith inform the Commission thereof.

When Member States adopt those provisions, they shall contain a reference to this Directive or be accompanied by such a reference on the occasion of their official publication. Member States shall determine how such reference is to be made.

2. Member States shall communicate to the Commission the text of the provisions of domestic law which they adopt in the field covered by this Directive.

Article 3

This Directive shall enter into force on the third day following that of its publication in the Official Journal of the European Communities.

It shall apply from 1 January 2001.

Article 4

This Directive is addressed to the Member States.

Done at Brussels,

For the Council

The President