Proposal for a COUNCIL DECISION authorising Austria 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 addressed to the Commission, registered by the Commission's Secretariat-General on 7 May 2002, the Government of Austria 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 referred to as "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 is to make the person to whom the services are provided liable for the tax due where these services consist in construction work carried out by subcontractors.

[1] OJ L 145 of 13.6.1977, p. 1. Directive last amended by Directive 2002/38/EC (OJ L 128 of 15.5.2002, p. 41).

PURPOSE OF THE DEROGATIONS SOUGHT

The Austrian authorities stress that they have recorded considerable revenue losses in the construction sector. These losses occur in the business transactions between the general contractor and the subcontractor. The subcontractor charges VAT to the general contractor but fails to pay the tax to the Treasury. At the same time, the general contractor may exercise its right to deduct VAT, since it holds a valid invoice corresponding to services actually provided.

According to the Austrian authorities, this type of tax evasion is difficult to curb by applying the normal rules of the common VAT system because in many cases it is virtually impossible to recover the VAT from the subcontractor. Experience has shown that it is extremely difficult to trace the subcontractors concerned, especially in the construction sector, for the following reasons: either the subcontracting company is set up, mostly as a limited company, by a person having no stake in the company, or the subcontracting company acquires a pre-registered company. As soon as the company is set up, a very high level of turnover is achieved; the VAT entered on the invoice is not paid; after a short period bankruptcy proceedings are initiated against the company; the addresses of the company directors are unknown, or the directors have officially moved abroad; it is not known who is really controlling the whole operation.

DESCRIPTION OF THE REQUESTED DEROGATIONS

The derogation requested would mean that Austria would be able to designate as the person liable to pay tax the person to whom the services are provided, by derogation from Article 21(1)(a) of the Sixth Directive, instead of the person supplying the services, in the following cases:

- where construction work and labour are provided by a subcontractor to a general contractor;

- where construction work and labour are provided by a subcontractor to a company which carries out its own construction work;

- where construction work and labour are provided by a subcontractor to another subcontractor.

Under this arrangement, subcontractors would no longer charge VAT for the services they supply. This would therefore solve the problem of non-payment of the tax owed by a subcontractor, who is in practice often not traceable.

However, the normal taxation rules would apply to all other operations in the construction industry, especially those carried out by general contractors for clients.

OPINION OF THE COMMISSION

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

Although the measure does simplify the work of the tax authorities, which very frequently have major problems collecting tax from subcontractors in the construction sector, the Commission is of the opinion that the measure envisaged by Austria is to be considered first and foremost as a measure aiming at preventing certain types of tax evasion or avoidance.

The planned measure also seems proportionate to the objective pursued, since it would not apply to all taxable operations in a given sector (here the construction sector) but would merely target specific operations which pose real and considerable problems of tax evasion or avoidance. The measure therefore deviates from the general principles laid down in Article 21 of the Sixth Directive only to the extent strictly necessary to attain that objective.

Note that the proposed derogation would have no effect on the amount of tax due. The amount of tax 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 Austria to apply the requested derogations from Article 21(1)(a).

The Commission does, however, believe that this derogation should apply only up to 31 December 2007. This will offer an opportunity to assess whether the derogation should be maintained in the light of Austria's experience over that five-year period.

Proposal for a COUNCIL DECISION authorising Austria 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, [2] and in particular Article 27(1) thereof,

[2] OJ L 145 of 13.6.1977, p. 1. Directive last amended by Directive 2002/38/EC (OJ L 128 of 15.5.2002, p. 41).

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

[3] OJ C

Whereas:

(1) In a request addressed to the Commission, registered by the Commission's Secretariat-General on 7 May 2002, Austria 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 Austria's request by letter of 21 June 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 requested derogation is to enable Austria to designate the person to whom the services are provided as the person liable to pay tax, in the following cases: where construction work and labour are provided by a subcontractor to either a general contractor, a company which carries out its own construction work, or another subcontractor.

(5) The requested measure is to be considered first and foremost as a measure to prevent certain types of tax evasion or avoidance in the construction sector, such as subcontractors who fail to pay the invoiced VAT to the Treasury and then disappear. The measure also has the effect of simplifying the work of the tax authorities, which very frequently have major problems collecting the VAT due by subcontractors in that sector; the measure has no effect on the amount of tax due.

(6) The measure is proportionate to the objectives pursued, since it would not apply to all taxable operations in the sector concerned but would merely target specific operations which pose real and considerable problems of tax evasion or avoidance.

(7) The authorisation should be granted until 31 December 2007, which will enable the derogation to be reviewed in the light of experience.

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

HAS ADOPTED THIS DECISION:

Article 1

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

Article 2

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

(1) where construction work and labour are provided by a subcontractor to a general contractor;

(2) where construction work and labour are provided by a subcontractor to a company which carries out its own construction work;

(3) where construction work and labour are provided by a subcontractor to another subcontractor.

Article 3

This Decision shall expire on 31 December 2007.

Article 4

This Decision is addressed to Austria.

Done at Brussels,

For the Council

The President