EN Official Journal of the European Union C 65/103

Opinion of the European Economic and Social Committee on the ‘Proposal for a Council Directive amending Directive 77/388/EEC as regards certain measures to simplify the procedure for charging value added tax and to assist in countering tax evasion and avoidance, and repealing certain Decisions granting derogations’

(COM(2005) 89 final — 2005/0019 (CNS))

(2006/C 65/19)

On 14 April 2005 the Council decided to consult the European Economic and Social Committee, under Article 93 of the Treaty establishing the European Community, on the abovementioned proposal.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 8 November 2005. The rapporteur was Mr Páleník.

At its 422nd plenary session, held on 14 and 15 December 2005 (meeting of 15 December), the European Economic and Social Committee adopted the following opinion by 69 votes to 1 with 3 abstentions.

1. Introduction

1.1 In March 2005 the Commission presented a proposal for a Council Directive (1) amending the Sixth VAT Directive (77/388/EEC) in order to simplify the collection of VAT and to assist in countering tax evasion and avoidance.

1.2 Under Article 27 of the Sixth VAT Directive, the Council, acting on a proposal from the Commission, may allow Member States to introduce special measures for derogation from the provisions of the Sixth VAT Directive in order to simplify the procedure for collecting the tax or to prevent tax evasion. This provision has been used very frequently and at present Member States can make use of more than 140 derogations. The Commission anticipates that the number of derogations granted will continue to rise in the near future due to the new Member States.

2. The Commission proposal — COM(2005) 89 final

2.1 As part of the strategy to improve the operation of the VAT system in the internal market (2), the Commission has undertaken to rationalise the large number of special derogations. Many of these have proved themselves effective and have been used in more than one Member State. However, the Council examines each application for these special derogations individually and the process is therefore very lengthy. The Commission document therefore proposes that frequently used derogations be made available to all Member States through an amendment to the Sixth VAT Directive.

2.2 The Commission document proposes inserting the following measures into the Sixth VAT Directive: — changes to the rules on ‘grouping’ and ‘transfers of going concerns’ to prevent unjustified benefit or disadvantage to those involved, — measures to prevent the avoidance of VAT on gold held as an investment which is then used as a raw material for making consumer goods, — re-valuation in special cases of the taxable value of goods or services on the basis of their open market value, — clarification and highlighting of the status of capital services, — changes to the reverse charge mechanism in certain sectors of industry.

2.3 In the case of grouping of businesses and the transfer of going concerns, the Commission takes the opportunity to strengthen the powers of Member States in areas which can be exploited for tax avoidance and evasion. In its proposal, therefore, it allows the Member States to take steps to ensure that the operation of the rules leads to a fair result which does not unjustifiably benefit or prejudice those concerned.

2.4 Investment gold, held in the form of bars or wafers, for example, is exempt from VAT. When the gold is sold in a form in which it no longer qualifies as investment gold, for example when it is used for jewellery, VAT is payable. If a customer provides his own gold for working, only the service is taxable. The gold itself will not be taxable even though it has lost its status as investment gold and no longer qualifies for exemption. This is the abuse which a number of existing derogations seek to counteract, and the Commission is therefore submitting a proposal for an optional rule allowing all Member States to rule that the gold contained in the product shall also be taxable on the basis of its current open market value.

2.5 In order to counter tax avoidance and evasion, the Commission proposal enables Member States to revalue supplies, providing further criteria are met. This revaluation can be done in three precisely defined circumstances only and only if there is some connection between the parties involved. Member States will have to define this connection in terms of the categories set out in the Directive in order to apply the rule. The proposal requires revaluation on the basis of the open market value. The open market value means the full amount that a customer would have to pay to obtain the goods or services in question at the marketing stage at which the supply takes place, at the time of the supply and under conditions of fair competition. The proposal explicitly states that, unless justified by market conditions, the open market value shall not be less than the cost to the supplier of making the supply.

2.6 The Commission specifies that the adjustment of deductions of input VAT on capital goods under Article 20 of the Sixth VAT Directive may equally apply to services of a capital nature which are treated as having a continuing asset book value.

2.7 At the same time, the Commission extends the use of an optional reverse charge mechanism to specified supplies made to taxable persons in sectors of the economy which have proved difficult to police. The application of this mechanism transfers the obligation to pay tax to the recipient of a service. The areas covered are services relating to buildings, supplies of staff relating to building services, the supply of land and buildings as referred to in Article 13(B)(g) and (h) where the supplier has opted for taxation of the supply pursuant to point (C)(b) of that Article, and supply of waste, scrap and recyclable material from some treatment services. Member States may similarly use the reverse charge mechanism in special cases when the supply is made by a vendor in financial difficulties who is unable to honour his debts, including his obligations to the tax authorities. Use of the reverse charge mechanism in the Member States is subject to consultation with the VAT Committee.

2.8 According to the Commission, there are ten decisions under Article 27 of the Sixth VAT Directive to which the proposal would apply and which would be repealed by the Directive as a result. It has determined that there are seven decisions to which the proposal would apply, but which would not need to be repealed.

3. The EESC's remarks on the proposal

3.1 The EESC supports simplification of the VAT system in the internal market in line with the provisions of Commission Communication COM(2000) 348 final.

3.2 The EESC agrees with the Commission that the number of special measures for derogations from the provisions of the Sixth VAT Directive should be rationalised, as they make it difficult for those trading across borders to understand the tax system. The EESC supports making some frequently used derogations available to all Member States by amending and expanding the Sixth VAT Directive.

3.3 The EESC takes the view that these changes and additions to the Sixth VAT Directive, if correctly implemented in the Member States, will be an effective instrument in countering the problem of tax evasion and avoidance.

3.4 The EESC has no objections to the Commission's proposal where it relates to the grouping of businesses, transfers of going concerns and taxation of investment gold used, for example, for making jewellery, and the Committee sees it as a logical solution to previous shortcomings.

3.5 The EESC recognises that in a few cases, where there is suspicion of tax evasion by over- or undervaluing transactions, the taxable amount should be set at the open market value. Difficulties may arise in practice, however, in determining a significant difference between the value of the transaction and the open market value, as there is no clear definition of either open market value, which depends on the assessment of the parties involved, or of a significant difference of value. The EESC is concerned that lack of clarity could cause uncertainty for businesses. The use of the instrument in the legislation of Member States should, therefore, be conditional upon a precise definition of open market value and quantification of what is deemed a significant difference.

3.6 The EESC shares the Commission's view that it needs to be made clear that the adjustment of deductions of input VAT on capital goods also applies to services of the same character.

3.7 The EESC considers the reverse charge mechanism to be a tool that could be needed for preventing tax avoidance and evasion. It is particularly apt where the vendor is in financial difficulties and there are real doubts about his ability to meet his tax obligations. Experience with the reverse charge mechanism in practice may suggest other areas in which its optional use could be considered.

4. General remarks of the Committee

4.1 The proposal for a Council Directive is realistic in terms of implementation and meets the Commission's aim — to which it committed itself in its Communication to the Council and the European Parliament of 7 June 2000 — of rationalising some of the large number of derogations from the Sixth VAT Directive currently in force. The EESC points out, however, that a more comprehensive overhaul of VAT law and further harmonisation of tax rules would do far more to make the common VAT system simpler and more effective.

4.2 It should be pointed out that the undue complexity of EU laws and directives generally hampers their correct and prompt implementation and effective enforcement in the Member States. In this sense, the proposal, assuming it is implemented in the Member States correctly and quickly enough, is a step in the right direction. The EESC takes the view that it should be followed by further steps to simplify the common VAT system.

Brussels, 15 December 2005. The President of the European Economic and Social Committee Anne-Marie SIGMUND

(1) COM(2005) 89 final.

(2) COM(2000) 348 final and COM(2003) 614 final.