No C 237/24 Official Journal of the European Communities 12. 9. 88 
Opinion on completing the internal market: The introduction of a VAT clearing mechanism 
for intra-Community sales 
(88/C 237/08) 
On 11 September 1987, the Council decided to consult the Economic and Social Committee, 
under Article 198 of the Treaty establishing the European Economic Community, on the 
abovementioned matter. 
The Section for Economic, Financial and Monetary Questions, which was responsible for 
preparing the Committee's work on the subject, adopted its Opinion on 17 May 1988. The 
rapporteur was Mr Delia Croce. 
At its 257th plenary session of 7 July 1988, the Economic and Social Committee adopted by 
a large majority, with 2 dissenting votes and 8 abstentions, the following Opinion. 
1. Introduction 
As part of measures to complete the internal Com­
munity market described in the White Paper of 14 June 
1985, and with the aim of abolishing tax frontiers, the 
Commission is proposing a value added tax (VAT) 
clearing mechanism to ensure that tax collected in the 
exporting country is reimbursed to the importing 
country. 
The removal of fiscal frontiers will mean abolishing 
controls on the carriage of goods from one Member 
State to another, with intra-Community sales and pur­
chases being subject to the same treatment as trans­
actions conducted within Member States. 
VAT would consequently be paid at the point of pur­
chase, and would later be reclaimed by the taxable 
purchaser. 
The proposal therefore consists of the following: 
1.1. Output VAT would be charged by the vendor 
in the Member State of exportation, and input VAT 
would be reclaimed by the taxable purchaser in the 
Member State of importation. 
1.2. A clearing mechanism would be introduced 
whereby the output tax collected on export sales in a 
Member State would be reimbursed to the other Mem­
ber States in which input tax is reclaimed. 
1.3. The mechanism would essentially consist of a 
central account managed by the Commission services. 
Net exporting countries would be required to pay into 
this account and net importing countries would receive 
payments from it. 
Payments and refunds would be made on the basis of 
a monthly declaration from each Member State of 
its total VAT (input plus output) figures for intra-
Community trade. 
Net exporting Member States would be debited because 
output VAT on exported goods would exceed input VAT on imported goods. Conversely, net importing 
countries would be credited. 
Each Member State would be responsible for calculat­
ing its final position vis-a-vis the clearing account. 
1.4. Payments and reimbursements would be calcu­
lated by each Member State on the basis of VAT 
declarations submitted by taxable exporting and 
importing firms. 
1.5. As declarations would only be made on the basis 
of applications by taxable persons seeking to reclaim 
input VAT paid on imported goods and could not 
include VAT on sales to private persons and companies 
eligible for exemption, the central account would regis­
ter a constant surplus. 
1.6. This surplus is to be distributed amongst the 
Member States in proportion to the volume of trade 
undeclared by importers. The method of calculation 
has not yet been specified and will be worked out in 
greater detail at a later stage. 
2. General comments 
2.1. We are dealing with a Commission working 
paper—and a rather confusing and intricate one at 
that—as opposed to a draft directive. 
2.2. As a result, it consists more of a descriptive 
analysis of the proposal, based on general rather than 
specific aspects. 
The Commission proposal is divided up into a number 
of points, which will have to be examined individually. 
2.3. The Commission has set out its overall plans to 
harmonize indirect tax structures in doc. COM(87) 320 
final/2, and has issued a draft Directive for the removal 
of fiscal frontiers [doc. COM(87) 322 final/2]. 
12. 9. 88 Official Journal of the European Communities No C 237/25 
As the clearing mechanism is part and parcel of the 
Commission scheme and, by extension, of the specific 
proposal to remove fiscal frontiers, it can only by 
examined by the Committee on the assumption that the 
overall scheme and proposal set out in doc. COM(87) 
322 final/2 will meet with general approval. 
2.4. The terminology used by the Commission in its 
proposal for the removal of fiscal frontiers is likely to 
arouse considerable interest and enthusiasm. However, 
we must remain aware of the difficulties and constraints 
that lie ahead, and avoid illusions. As Europe is still far 
from being a political unit, the single market will have 
to make allowances for the autonomy and prerogatives 
of the Member States. One of their main prerogatives 
is that of raising taxes. 
On the other hand it must be remembered that any 
system of raising taxes on business turnover will pose 
complex problems when it comes to monitoring. 
Checks are vital in order to ensure fair and equal 
competition. 
Nevertheless, the Member States have officially under­
taken to form a single European market. A market 
guaranteeing freedom of competition and reducing the 
administrative obligations of firms is therefore in the 
interests of all. 
2.5. The elimination of tax barriers and introduction 
of rules to ensure that VAT is collected as if the Com­
munity were one and the same country, is scheduled 
for 1991; it might therefore seem that definiton of a 
clearing system is not urgent. 
However, there are two reasons for making an immedi­
ate start laying down the details of the clearing system: 
(a) it is a key component of the overall blueprint and 
(b) Member States need to be given specific assurances 
that the new system will not place VAT revenue from 
imported goods in jeopardy and that VAT will continue 
to be charged on end consumption. 
2.6. The Commision's format for a clearing mechan­
ism is not the only one possible, and there are a number 
of alternatives to a clearing mechanism. 
It should however be added that other proposals should 
be examined in conjunction with the global communi­
cation or in the light of specific suggestions arising from 
criticisms of doc. COM(87) 322 final/2. 
2.7. We shall therefore confine ourselves here to an 
Opinion on the proposal as it stands, regardless of 
possible alternatives and, most importantly, starting 
from the premise that the VAT mechanism is to operate 
as if transactions were being carried out domestically. 
2.8. There does not seem to be much point in the 
Committee discussing the possibility of doing without a clearing system; in view of the inevitable opposition 
that would come from net importing countries, this 
does not seem realistic. 
3. Specific comments 
3.1. The proposed system is straightforward in 
appearance only. In practice it will require extremely 
strict checks by national governments and the setting 
up of a sizeable Community administrative body. 
3.2. The Commission should take this opportunity 
to ascertain whether there are grounds for some exemp­
tions in the field of banking, financial and insurance 
transactions. 
3.3. Only taxable persons wishing to reclaim tax 
would be covered by individual Member States' calcu­
lations of credit due. This would exclude: 
— all goods exported as a result of the movement of 
persons, 
— all goods delivered to non-taxable bodies or per­
sons, 
— all goods exported by small firms with a turnover 
of less than 35 000 ECU. 
3.4. This would lead to a substantial surplus in the 
central account, which the Commission envisages distri­
buting amongst Member States on the basis of macro-
economic calculations. It will prove extremely difficult 
to make such calculations without collecting statistical 
data at frontiers. 
3.5. The Commission makes it clear that mail order 
sales among Member States will be covered by the 
cleairng system. However, it does not explain how. 
3.6. Net-exporting Member States, which would 
immediately collect VAT on all exports, would not be 
adversely affected. 
A special effort should be made to increase the efficiency 
of tax authorities with the most scant resources (in 
many cases these are located in the less-developed, net-
importing Member States). 
If it is not to be detrimental to net-importing Member 
States, however, the mechanism will have to function 
flawlessly and the effects of any obvious defects or 
hidden loopholes will have to be assiduously rectified. 
3.7. The Commission does not explain how VAT 
refunds are to be calculated for transactions involving 
more than two Member States ('triangular' trade) or 
passing through a non-Member State. 
No C 237/26 Official Journal of the European Communities 12. 9. 88 
3.8. One advantage of the proposed mechanism for 
firms is that their obligations will be very modest, 
mainly the addition of two extra columns in the VAT 
declaration forms, covering the amount of tax relating 
to purchases and sales. 
The main disadvantage for importing firms is that VAT 
on imports has to be paid in cash at the time of purchase 
and cannot be reclaimed until later, by which time 
exchange rates may have fluctuated considerably (in 
addition, interest rates may be high). 
Similarly, exporters will be saddled with the cost of 
paying VAT to the national government before they 
themselves are paid for their goods (credit of between 
90 and 120 days is frequently allowed). This may be 
aggravated by the different rates specified by the VAT 
bands. 
3.9. The Commission claims that the Member States 
will have the advantage of being able to calculate their 
own debits and credits and settle them quickly with the 
central fund, rather than having to deal with their 
various trading partners. 
However, this will be offset by a total lack of trans­
parency in bilateral trade between two given Member 
States. 
3.10. Considerable checks will be required to ensure 
that the mechanism operates correctly. The Com­
mission itself proposes coordinated control measures 
at Community level, including clearly defined audit 
requirements, administrative cooperation between 
Member States, greater use of sampling techniques and 
reliability checks. 
Accompanying national measures will be required; the­
se will have to be harmonized at Community level 
to permit checks and enable effective administrative 
cooperation. 
3.11. A legal system of monitoring and assistance is 
therefore needed; as things stand, it is reasonable to 
question Member States' intentions of taking prompt 
action in this direction as they make little use of existing 
directives in this field. 
3.12. It must be stressed that the mechanism 
demands meticulous accuracy on the part of all Member 
States and complete mutual trust. Errors or carelessness 
would disrupt the central account, necessitating ex post facto investigations and checks in all Member States, 
which would pose enormous difficulties. 
3.13. All Member States should make a special effort 
to eradicate tax evasion and fraud. The new mechanism 
could offer greater opportunities for VAT fraud, which 
is already common, for whereas at present individual 
Member States can check on both exporting firms and 
importing firms, under the proposed system they would 
only be able to check on the latter. 
The question arises whether it should not be one of 
the Community administration's tasks to cooperate in 
curbing such fraud and whether the Commission should 
not be given certain powers to this end. This is all the 
more necessary in that a tax authority which detects 
fraud by one of its nationals with respect to another 
Member State will generally be required to pay the 
amount in quesiton into the clearing fund. 
Conversely, once transfrontier transactions are treated 
in the same way as domestic ones, false invoices and 
non-invoice sales could become more common unless 
an additional series of measures is introduced, which 
would be far from easy to apply. 
3.14. In additon to opening a central account, a 
complex Community administrative body, as described 
in paragraphs 10.2.1 to 10.2.5 of the Commission docu­
ment, would have to be set up in order to run the whole 
scheme. 
This would certainly be fairly expensive. What is less 
certain is whether the cost could be offset by a reduction 
in the administrative burden of national governments. 
4. Conclusions 
Despite having decided not to study possible alterna­
tives, the Section would offer guarded support to the 
Commission proposal, especially as the aim is to create 
a single European market where commercial trans­
actions may be conducted under the same conditions 
as domestic transactions within an individual Member 
State. 
4.1. Measures to harmonize indirect taxes and intro­
duce a clearing mechanism, as with any other solution, 
will be effective only if they are backed up by a new 
body of rules facilitating trade between Member States, 
reducing to a minimum any bureaucratic obstacles and 
abolishing the documents at present required for border 
crossings. 
12.9.88 Official]ournalofthe European Communities l^oC2^7B27 
^.2. In any e^ent, the difficulties outlined inChap 
ter^must be resolved before the clearing mechanism 
(if it is finally adopted) can work properly. 
LooneatBrussels,7]ulyl988 
1, Introduction 
LI. On211^o^ember 1985, the Commission presents 
ed the Council withaproposalforaPoirecti^e imposing 
astandstillon^alueaddedta^(VAL) and excise duties. 
1.2. PheEuropean parliament generally supported 
the proposal, but asked foranumber of amendments to 
be made. One ofthese was accepted by the Commission, 
which altered its original proposal. 
1B^. LheEconomicandSocial Committee issued a 
favourable Opinion (^), rapporteur Mr Poella Croce, 
but noted that^ 
a) the adoption of the Poirecti^e should not ser^e as an 
excuse for curbing or slowing down the harmonica 
tion which was ^ital for the building of the iniernal 
market, 
^oie^e^om^i^^ ^oi^De^7,^^i^^ ^, Eor the long term at least, we must aim for 
single rates of indirect ta^ationthroughout the Com 
mumty,to simplify matters and facilitate competition. 
b) the term^standstilPwas inappropriate for the pro 
posal of an optional procedure for bringing rates 
closer together, 
c) it was regrettable that the proposal did not include 
provision for the drawang^up of lists of goods and 
services subject to the various VAf rates in the 
Member States'systems, 
d) the proposal did no^t consider the problem of goods 
and services which were perorated in some Member 
States, 
e) an effective, formal obligation should be placed on 
the Member States to mo^e towards convergence, 
f) the number ofVALrates should be reduced, 
g) theappro^imationof standard VAL ratesshould 
be based on the average standard rate in the Com 
mumty, and should be weighted to take account of 
trade levels, Opinion on the proposal foraCouncdfOirectiveinstitutingaprocess of convergence of rates 
ofvalue added ta^ and excise duties^) 
(88^C 2-37^9) 
On 11 Septemberl987 the Council decided to consult the Economic and Social Committee, 
under Article 198 of thelreaty estabhshingtheEuropean Economic Community, on the 
abovementioned matter. 
TheSectionforEconomic,EmancialandMonetary Questions, which wasresponsiblefor 
preparing the Committee'sworkon the subject, adopted its Opinion on!7May!988.Lhe 
rapporteur was Mr PoellaCroce. 
At its 257th plenary session(meetmgof7]uly 1988),the Economic and Social Committee 
adopted the following Opinion by a substantial majority, with ^ dissenting votes and 
^abstentions.