COMMISSION OF THE EUROPEAN COMMUNITIES 
COM (19) 260 final 
Brusstls, 14 June 1989 
COMPLETION OF THE INTERNAL MARKET AND APPROXIMATION 
OF INPIRECT TAXgg 
COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 
ANO TO THE EUROPEAN PARLIAMENT 
COMPLETION OF THE INTERNAL MARKET AND APPROXIMATION 
OF INDIRECT TAXES 
COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 
AND TO THE EUROPEAN PARLIAMENT 
1. Following the Commission communication of 4 August 1987 
and the accompanying proposals (C0MC87) 320 to 328), a wide-
ranging debate has taken place on ways and means of removing 
tax obstacles to the establishment of the internal market. 
There have been discussions on several occasions within the 
Council (Economic and Financial Affairs) and, on the 
initiative of the Council and the Commission, a number of 
working parties have looked into the matter. Particular 
mention should be made here of the work of the Economic 
Policy Committee and, since the beginning of 1989, of the 
deliberations of two working parties, one on the clearing 
system, which completed its work in April 1989, and the 
other, whose work is still continuing, on the allocation of 
UAT rates to different product categories. 
2. As to oh i ecti ves. a broad consensus has emerged on the 
prime importance for the internal market of the reforms to 
be undertaken in the field of indirect taxation. This 
consensus was reflected earlier in the new wording of 
Article 99 of the Treaty that resulted from the Single 
European Act. 
General agreement has also been reached on the two main 
aspects of any action to be taken by the Community: 
- approximation of the UAT and excise duty rates applicable 
in Member States: 
- removal of tax frontiers incompatible with a genuine 
si ngle market. 
In this context, the views expressed on the Commission's 
proposed system, which ensures that goods circulate al ways, 
hearing UAT. have not called into question the major 
qualitative advance which the system represents in two 
respects: 
- on the ont? hand, progress towards the achievement of a 
true internal market, since goods will circulate within 
that market under the same conditions as within a Member 
State; 
on the other hand, progress towards a fundamental 
elimination of one of the major causes of tax evasion, 
notably that which stems from the existence of two 
separate but far from watertight channels for the movement 
of goods - depending on whether they arc taxed or untaxed. 
In these circumstances the Commission is entitled to 
consider that such a method of taxation is best adapted to 
the idea of an economic space without internal frontiers. 
3. As to method. however, major disagreements still exist, 
adding to the difficulties facing the undertaking. Where 
UAT is concerned, the discussions under way must be 
energetically pursued in order to reach a consensus. As for 
excise duties, the Commission has already indicated that it 
will be presenting new proposals to increase the flexibility 
of the measures to be taken. 
The purpose of this communication is to clarify the new 
guidelines agreed by the Commission in connection with the 
objectives proposed in 1987. In order to help bring about 
an agreement within the Council as speedily as possible, the 
essential aim is to adopt a pragmatic approach to the main 
problems and to the possible solutions. 
This suggests the need for a threefold strategy: 
introduction at the earliest possible opportunity of a 
transitional phase for the approximation of indirect taxes 
that will last until the end of 1992; a new approach to the 
UAT clearing arrangements; and new proposals on excise duty 
rates. 
I. Transitional phase 
4. The abrupt transition, on 1 January 1993, from the 
present arrangements for UAT rates and excise duty amounts 
to a new system without internal frontiers is bound to be a 
source of disruption for economic agents and for the conduct 
of national economic policies. The introduction of a 
transitional period will be conducive to the effective entry 
into force of the reforms on the envisaged date, with the 
necessary adjustments being accommodated in the meantime. 
Evidently, the bulk of the preparatory adjustments ar& a 
matter for individual Member States, due regard being had to 
their own priorities and to national circumstances. Such is 
the case with the convergence of UAT and excise duty rates, 
already under way or planned in a number of Member States. 
In this context it is worth emphasizing that in its 
reflections on the necessary modifications to be made to its 
initial proposals, the Commission has attached particular 
and r 
has importance to foreseeable budgetary consequences, 
favoured measures which reduce the importance of these 
consequences to the greatest possible extent. 
However, it is essential that the definition at Community 
level of a transitonal period should be accompanied by steps 
to give practical shape to Member States' commitment to 
complete the internal market in the field of indirect 
taxation, especially as regards 
rates by the end of 1992. the approximation of UAT 
5. This period would allow economic agents to prepare for 
the operational arrangements of the reform that would apply 
to them. It would also enable the introduction of certain 
procedural simplifications, so as to reinforce the 
preparatory nature of this transitional phase as a prelude 
to complete abolition of frontiers. In this context, 
proposals would be made to simplify Community transit 
procedures by abolishing the transit advice note. 
6. Finally, in order to reinforce the process of market 
integration and the credibility of progress towards the 
single market as far as public opinion is concerned, the 
Commission proposes that this period should be marked by a 
gradual and substantial increase in travellers' allowances. 
Such an increase, which is being urged by Parliament, is 
entirely consistent with the prospect of a Peoples' Europe. 
Furthermore it ought to be attractive to the majority of 
economic operators: 
- in foreshadowing the unlimited allowances and liberty of 
purchase, tax-paid, which will be the rule in the internal 
market from 1993; 
- in accelerating the alignment of fiscal conditions, and in 
particular of UAT and excise rates, between the Member 
States. 
To this end, the Commission intends to propose in three 
stages, beginning on 1 January 1990, 1 January 1991 and 1 
January 1992 an increase of the order of: 
- quadrupling the value of the UAT allowances; 
doubling the specific quantitative allowances for 
excisable products. 
II. y£X 
A. ftpproxiwatjon <*f rates 
7. The Commission's proposal for two rate bands <4-9* for 
the reduced rate, and 14-20% for the standard rate) 
constitutes the basis for the discussions within the Council 
and the Parliament. 
These discussions are concerned in particular with t h r ec 
matters: the width of the bands, which is often regarded as 
excessive and likely to bring about distortions of 
competition, notably in the case of the standard-rate band; 
the products to be charged with UAT at the reduced rate; 
aiv.i ' -My, i;-, & pro bis m of zero-rated products. 
&Yiifitiitrp rave 
8. An alternative to the rate band would be to replace it-
wit h a minimum rate applicable from 1 January )99S without 
any upper limit being set for Member States insofar as the 
standard rate is concerned. Each Member State would choose 
a rate at least equal to the minimum rate, having regard not 
only to the national budgetary implications of its choice 
but also to the "competitive pressure" that would stem from 
the rates chosen by 'neighbouring Member States or by the 
Member States which were its main trading partners. 
Such a minimum rate should make for a balanced sharing of 
the burden as between Member states with the highest UAT 
rates and the other Member States. This formula for a 
minimum rate is, therefore, simpler to apply than a rate 
band and takes better account of the autonomy and specific 
situation of each Member State. 
9. It must also be acknowledged that, in the case of 
neighbouring Member States with widely differing rates and 
an important cross-frontier commercial traffic, it would be 
necessary to achieve a particularly close alignment of 
rates. 
The Member States concerned could seek an agreement alone 
these lines, in a form still to be determined. Their 
specific problem could thus be resolved without all the 
Member States being required to make an unnecessary effort. 
KECIUCBQ: rats, 
10. The Commission considers that the proposed band (4-9;) 
best meets the needs of the situation and that the essential 
task is to agree on the products to be taxed at the reduced 
rate relative to those chargeable at the standard rate. FOP 
the Commission, it is indispensable to reach agreement from 
the outset of the preparatory phase on the fact that a 
common structure based on two rates is the necessary 
condition for attaining a sufficient degree of alignment. 
Zero-rated ppoduttsd ) 
11. Existing Community legislation has regarded the zero-
rating of certain products in several Member States as not 
constituting MAT rates proper but rather as being temporary 
derogations from the genera? principles of UAT, derogations 
that ara associated with the continuation of a transitional 
situation. 
However, in its initial proposals, the Commission did not 
rule out the possibility of retaining zero-rating after 1992 
in the for» of derogations linked to a new transitional 
period. 
Since there is a twofold need to reduce the present coverage 
of zero-rating and to take account of the social role 
assigned to UAT in some Member States, a relaxation of the 
Commission's position could be envisaged provided a number 
of conditions were met. 
It would be necessary, in the framework of a final 
compromise, to authorize Member States who so wish, to 
maintain zero-rating for a ver^ limited number of products 
currently subject to the reduced rate, provided this did not 
pose any risks of distortion of competition for the other 
Member States. Such a measure could only be envisaged by 
the Commission if the Council reached an agreement on the 
respective coverage of the standard rate and the reduced 
rate. 
B. Differentiated approach 
12. The main criticism levelled at the Commission's initial 
proposals concerned, on the one hand, the complicated and 
centralized nature of the clearing-house mechanism which is 
a potential source of budgetary conflict between Member 
States, and on the other hand, the risks of distortion of 
competition resulting, in so far as the purchases of final 
consumers are concerned, from rate differences which remain 
excessive for certain Member States. For private 
individuals the problem centres notably on mail order 
purchases and car purchases. For non-taxable institutional 
bodies and for exempt taxable persons the problem relates to 
their high-value purchases (for example, investment goods). 
(1)It is important to note that, unlike exemption which 
leaves the final consumer to bear input tax paid by the 
supplier, the zero rate involves the reimbursement of input 
tax, and consequently the product to which it applies is put 
into consumption totally untaxed, i.e. it is liable to no 
fiscal charge at all. 
In order to help bring about an agreement within the 
Council, the Commission is suggesting in this communication 
a new approach whereby a number of transactions would be 
treated differently, at least while the rates are 
insufficiently aligned, and whereby a system of clearing or, 
rather, of refunds would be envisaged only for residual 
transactions between taxable persons.(2) 
Mail-order (distance) selling 
13. Most Member States have systems of selling by mail 
order, operated by large, specialised firms which base their 
activity on direct sales to final consumers and are also in 
direct contact with consumers in other Member States. It is 
important to avoid allowing differences in indirect taxation 
to become a source of distortion or of relocation of these 
enterpri ses. 
The Commission is prepared to propose that for specialised 
operators, such sales should be taxed under the conditions 
applicable in the country of destination of the goods. 
This system would not affect the principle under which any 
private individual can acquire goods, tax-paid, in the 
Member State of his choice. 
Sales of cars 
14. Sales of cars have often been cited as the typical 
example of transactions where distortions might arise due to 
disparities in tax rates that were considered to be 
excessi ve. 
There is a possible technical solution which hinges on one 
of the characteristics specific to such items, viz. the fact 
that they are registered in the owner's country of 
residence. For UAT to be chargeable in the purchaser's 
country of residence, the place of supply would be defined 
as the place of registration. In such cases, the chargeable 
event would be the moment of registration. 
In order to avoid any risk of tax evasion or arbitrary 
treatment, the conditions governing a change of residence 
would be those set out in existing Community legislation 
(Directive 83/183/EEC). 
(2)A taxable person is a physical or moral person carrying 
out economic activities liable to UAT. 
Sales ta ittSt.itlit.itna? aon-taxafale persons and exempt 
taxable persans* 
15. It has also been pointed out that risks of distortion 
could arise from sales to such categories of "final 
consumers'* as institutional non-taxable persons (bodies 
governed by public la» and those treated as such) and exe»pt 
taxable persons (banks, insurance companies, etc:.). 
The purchases of these economic agents, and in particular 
their purchases of capital goods, in fact account for a 
considerable proportion of the sales of certain productive 
sectors. The danger of a shift of purchases from one 
country to another primarily for tax reasons, cannot 
therefore be ruled out, at least for purchases of 
considerable economic importance. 
16. Here again, specific technical solutions can be found 
to counteract the potential consequences of rate differences 
in these special cases. 
It could be stipulated, for example, that purchases in 
another Member State by these categories of operator should 
give rise, in the country in which these operators are 
established, to a self-supply procedure which would be 
taxable under the conditions applicable at the place of 
supply; or again that a differential tax should be 
instituted which would be equal to the difference between 
the UAT paid on purchase and the national UAT chargeable on 
similar goods or services. 
These various solutions would help to reduce both the 
commercial and the budgetary risks to minimal proportions, 
while at the same time ensuring that the tax barriers to 
trade were removed. 
It goes without saying that, over the long term, these 
specific arrangements would become progressively less 
necessary the more rates tended to converge. 
Transactions of enterprises linked within the same group 
17. One of the features of i ntra-Communi ty trade is the 
considerable volume of trade between operators involved in 
the same industrial process, a significant proportion of 
which is carried out by enterprises within the same group. 
These enterprises offer a high degree of security because of 
the regularity of the flows of their transactions and the 
controls to which they are subject. This fact has already 
led a number of Member States, at national level, to suspend 
application of VAT to such transactions between linked 
companies, pursuant to Article 4(4)of the Sixth UAT 
Directive. 
Subject to the necessary guarantees being provided, this 
possibility could usefully be extended to a portion of 
intra-Community trade. This arrangement should also be 
extended to associated small and medium-sized firms whose 
cross-frontier trade flows justify such action. 
Intra-Community sales between approved members of a group 
woud take place without UAT bei ng^ appl i ed. The 
chargeabi 1 ity of the tax would be deferreqp to the moment of 
resale by one of the associated enterprises to a non-
approved non-associated purchaser. Enterprises would be 
able to operate under this arrangement only on the basis of 
the prior and conditional authorization of the Member State 
in which they were established. 
The treatment of other transactions between taxable persons 
18. The measures described above would provide a pragmatic 
solution to the principal difficulties which have arisen in 
the process of abolishing fiscal frontiers. 
On the one hand this would be achieved by introducing ad hoc 
provisions to reduce the risk of competitive distortions in 
the most significant cases; on the other hand it would be 
achieved by operating a system of UAT suspension on intra-
Community sales between associated companies. As a result, 
the question of deciding what formula to adopt for the 
"residual" operations of taxable persons should be capable 
of being dealt with in a reasonably dispassionate manner. 
19. One of the implications of the movement of products 
"inclusive of UAT" is a so-called clearing mechanism. Given 
that the aim is for all of the UAT revenue to continue to 
accrue to the country of final consumption, it is necessary 
for the exporting country to pass on to the importing 
country the proportion of UAT collected in respect of the 
cross-frontier transaction. It should be noted that this 
requirement exists independently both of the abolition of 
fiscal frontiers and of the approximation of rates and would 
continue to exist even if rates were to be unified. 
Serious reservations have been expressed by national fiscal 
administrations concerning the mechanism proposed by the 
Commission: on the one hand, it would not offer all the 
necessary guarantees as to control and might therefore be a 
source of dispute between countries; on the other hand, it 
would imply an excessively centralized administration. 
However, the measures suggested above, which would reduce 
the volume of residual transactions substantially, open the 
way for a new approach to this question. 
In these circumstances, it would seem that a macroeconomic 
approach to the clearing operation, which would present 
appreciable operational advantages, could also become 
politically acceptable. 
20. The resultant simplification would be very substantial 
both for firms and for the tax authorities, since the Member 
States' debits and credits would no longer be calculated on 
the basis of the UAT returns of taxable persons but on the 
basis of trade statistics. 
The mechanism thus set up could be easily operated, since 
the method of calculating transfers would be no more complex 
than that used for the new own resources. 
There would be no central clearing fund but only an 
accounting exercise designed to establish the surplus 
balances to be refunded. 
This mechanism would in addition be efficient because it 
would solve at a stroke a number of controversial technical 
problems: the problem of distributing the surplus resulting 
from the transactions of non-taxable persons and exempt 
taxable persons would be solved naturally; similarly, the 
statistical base would ensure a regular flow of transfers. 
It goes without saying that an essential condition of such a 
system would be the maintenance of a high quality 
statistical system in the Community, the principle of which 
has been proposed by the Commission(3) . 
in. Excise duties 
21. The main criticism which the Commission has encountered 
here is that its initial 1987 proposal based on single rates 
per product for the whole Community lacks flexibility. More 
than in the case of UAT, the attempt at harmonization in 
this field highlights the continuing diversity of situation 
which persists in the Community. 
In the case of the duties on tobacco and alcohol, this 
diversity is made all the more difficult to reduce due to 
the different circumstances of the Member States, according 
to whether they are producers or not. Finally, the degree 
to which public health requirements are reflected in the 
level of excise duties varies widely from one Member State 
to another. 
(3)C0M(88) 810 Final. Proposal for a regulation (EEC) of 
the Council, on the statistics for trade in goods between 
Member States. 
1 0 
As it has already indicated, the Commission considers that 
flexibility is necessary and that this flexibility can var^f 
according to the product in question, but that it must in no 
case result in putting at risk the principle of abolishing 
fiscal fronti ers. 
A. Gradual approximation 
22. The different arrangements proposed should be based on 
reference values, Jonfl-terffi targets which reflect the 
Community's determination to move towards greater 
integration. These could be defined on the basis of the 
single rates established in 1987. 
In this matter the Commission is aware that the recent 
development of health policies and of the need to protect 
the environment, justifies higher long-term targets than was 
the case i n 1987. 
The flexibility would take the form of minimum rates or rate 
bands based on these targets, according to the products in 
questi on. 
Alcohol and tobacco 
23. The Commission will propose that differentiated minimum 
rates. which would varv according to the principal products, 
should be compulsory from the end of the transitional 
period, i.e. from 1 January 1993. 
In fixing the minimum rates, particular attention will be 
paid to countries with low excises so as to ensure that the 
effort they have to make remains reasonable. The solution 
reached cannot take the form of frontier controls. 
The existence of these minimum rates would not prevent those 
Member States which apply the highest duties on such 
products from progressively aligning their duties on the 
long-term reference values adopted for each category of 
product. 
Mineral Oils 
24. It is important to pay particular attention to the 
risks of competitive distortion which are greater in this 
area than for alcohol and tobacco and result from excessive 
divergences between the duties applied to the different oil 
products by the Member States. For this reason the 
Commission will propose that either single rates or rate 
bands should be applied to the different products in the 
mineral oils sector, without rejecting a priori the fixing 
11 
of minimum rates in certain circumstances. In making its 
choice the Commission will pay particular attention to the 
links existing with other sectoral policies (transport, 
energy, environment). 
B. Rules governing movement 
25. It is an established principle that frontier 
should also be abolished for excisable products. checks 
Individuals should thus be able to buy such products where 
they see fit and to transport them freely provided that 
commercial operations are not involved. 
In order to facilitate intra-Community commercial operations 
and to guarantee that Member States are actually paid the 
duties due to them, proposals will have to be put forward 
concerning the conditions under which "interconnected" 
warehouses would function. These would enable operators to 
arrange for the movement of products while duties were 
suspended; duties would not become chargeable until the 
goods were definitively released from the warehouse 
procedure and put into consumption. 
Finally, control measures will have to be implemented within 
Member States to prevent fraud based on the differences in 
duties between Member States, resulting from the flexible 
arrangements. These measures could take the form of tax 
stamps (bands, permits, etc.) guaranteeing that the 
appropriate duties had been paid in respect of the products 
marketed in a Member State. 
Amended and supplementary proposals relating to excise 
duties are to be transmitted to the Council before August. 
Conclusion 
26. In order to ensure the success of the negotiations in 
progress on the crucial issue of tax frontiers, the 
Commission considers it necessary to make a number of 
suggestions and amendments to its proposals. These concern: 
the establishment of a transitonal convergence phase 
operational from now until the end of 1992, during which: 
% Member States will be given every incitement to 
accelerate the approximation of their rates of UAT 
and excises; 
1 2 
procédural simplifications will 
of the final objective; be introduced in view 
. freedom to buy, tax-paid, in another Member State, 
will be introduced progressively by means of A 
gradual but substantial raising of the travellers' 
al1owances ; 
the adoption, as an alternative to the standard UAT rate 
band, of a system involving only one minimum rate 
applicable from 1 January 1993 and, in this context, 
encouragement for the reaching of agreements between 
certain Member States designed to reduce further the 
divergences between their rates; 
the introduction of specific arrangements 
clearly defined commercial operations 
. Mail order (distance) selling for certain 
Sal es of cars 
Sales to institutional 
exempt taxable persons non-taxable persons or to 
definition of a system of UAT suspension for intra-
Community sales between associated enterprises; 
for the remaining transactions, a new macro-economic 
approach to the mechanism for refunding UAT balances; 
amendments to the proposals relating to excise duties 
designed to give them the maximum possible flexibility 
compatible with the requirements of completing the 
internal market. 
Commission of the European Communities 
COM(89) 260 final 
Communication from the 
COMMISSION TO THE COUNCIL AND TO THE PARLIAMENT 
Completion of the internal market and approximation of indirect taxes 
14.6.1989 
Office for Official Publications of the European Communities 
L - 2985 Luxembourg 
Series: DOCUMENTS 
1989 — 13 pp. — Format: 21.0 * 29.7 cm 
EN 
ISSN 0254-1475 
ISBN 92-77-50965-1 
Catalogue number CB-CO-89-250-EN-C 
ISSN 0254-1475 
COM(89) 260 final 
DOCUMENTS 
Communication from the 
COMMISSION TO THE COUNCIL AND TO THE 
PARLIAMENT 
Completion of the internal market and 
approximation of indirect taxes 
09 
Catalogue number: CB-CO-89-250-EN-C 
ISBN 92-77-50965-1 14.6.1989 
€ 
COMMISSION OF THE EUROPEAN COMMUNITIES