Proposal for a Council Directive Amending Directive 77/388/EEC as regards the rules governing the right to deduct value added tax (98/C 219/11) COM(1998) 377 final - 98/0209(CNS)

(Submitted on 17 June 1998)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 99 thereof,

Having regard to the proposal from the Commission,

Having regard to the opinion of the European Parliament,

Having regard to the opinion of the Economic and Social Committee,

Whereas the arrangements for the refund of tax to non-established taxable persons laid down by the eighth Council VAT Directive 79/1072/EEC (1), as last amended by the Act concerning the conditions of accession of the Kingdom of Norway, the Republic of Austria, the Republic of Finland and the Kingdom of Sweden and the adjustments to the Treaties on which the European Union is founded, in practice pose considerable problems for both business and the national administrations of Member States;

Whereas the Commission's report on the second phase of the SLIM initiative recommends examination of methods of radically reforming the arrangements for refund now laid down by the eighth Directive;

Whereas the only change which can effectively make a major simplification to the common system of VAT in general, and to the refund procedure in particular, is to authorise the taxable person to deduct the VAT paid in a Member State where he is not established, by directly setting it off against the amount of VAT for which he is liable in a Member State where he carries out transactions eligible for a deduction;

Whereas in order to provide for every taxable person established in the Community the right to deduct the VAT paid in a Member State where he is not established, it is necessary in particular to amend Article 17 of the sixth Council Directive 77/388/EEC (2) of 17 May 1997 on the harmonisation of the laws of the Member States relating to turnover taxes - common system of value added tax: uniform basis of assessment.

Whereas such amendment requires the introduction of a system of refund between the Member States, so that the Member State where the taxable person is established can recover the amount of VAT deducted from the Member State where this VAT has been paid;

Whereas, for the requirements of the refund and verification system, it is appropriate to require taxable persons to present a specific document to be attached to their periodic returns, on which they enter, for each Member State, the amounts of VAT paid in other Member States for which they are exercising their right to deduct and to require them to attach a copy of the invoices or import documents to this specific return;

Whereas, on the other hand, all the administrative formalities laid down by the eighth Directive become redundant and therefore this new requirement does not undermine the objective of simplifying the entire procedure nor the opportunity to repeal the current Directive;

Whereas the steps to be taken by traders to recover the VAT in a Member State where they are not established are considerably simplified;

Whereas in addition administrative management is simplified while providing the best opportunities for verification;

Whereas these changes are nevertheless only temporary, since they will become redundant when the new common system of VAT, based on the principle of a single place of taxation and deduction, is introduced;

Whereas, with a view to respecting the neutrality of the tax, it is appropriate for the procedure for recovering the tax paid in another Member State where the taxable person is not established to be simplified at the same time as the rules for limiting the right to deduct are approximated;

Whereas the recommendation made in the Commission's report on the SLIM initiative also makes the link between these two subjects;

Whereas certain items of expenditure, even when incurred in connection with the normal operation of a business, are often also liable to meet private needs and therefore have the characteristics of final consumption;

Whereas the apportionment of such expenditure between business and private use cannot always be accurately verified, so presenting the risk of abuse or fraud;

Whereas, in the present situation, the existing exclusions from, and limitations to the right to deduct in the Member States are very dissimilar, and this may be a source of distortions of competition;

Whereas this diversity is not a new problem, but whereas the operation of the Single Market since 1993 has made it more obvious that diversity can lead to distortions of competition in international trade insofar as its effects are passed on to the price of goods and services;

Whereas the problem of the dual business and private nature of expenditure and the resulting difficulties of verification exist in particular for expenditure on passenger cars, accommodation, food or drink, and that on luxuries, amusements or entertainment;

Whereas, in taking into account the different possibilities of intended use for business needs and the verification difficulties, a variety of arrangements must be established for the above categories of expenditure, but the normal deduction rules must apply for all expenditure for which this Directive does not provide specific rules;

Whereas, as regards expenditure relating to passenger cars, it is appropriate to provide for an optional arrangement, so that Member States which so wish can determine the part of the non-business use of passenger cars in a simplified manner, while leaving a certain margin of discretion under this optional arrangement;

Whereas, as regards expenditure on accommodation, food and drink, a flat-rate limit to the right to deduction has been considered the most appropriate to take account of the dual business and private nature which such expenditure has;

Whereas, expenditure on luxuries, amusements and entertainment should be excluded from the right of deduction, given that this expenditure is not strictly business expenditure;

Whereas the purpose of approximating national laws on the expenditure referred to in this Directive is to confirm the general rules governing the right to deduct resulting from the sixth Directive 77/388/EEC, by limiting all exceptions to those rules solely to the cases explicitly considered,

HAS ADOPTED THIS DIRECTIVE:

Article 1

Directive 77/388/EEC is hereby amended as follows:

1. Article 17(6) is repealed.

2. The following Articles 17a, 17b and 17c are inserted:

'Article 17a

Limitations of the right of deduction

1. As regards expenditure relating to passenger cars which are not used solely for business purposes, Member States may provide that the deduction of the value added tax charged on such expenditure shall be calculated within the limit of a ceiling to be set by the Member States at not less than 50 % of the said tax.

The provisions contained in the above subparagraph shall not apply to passenger cars which constitute the taxable person's stock in trade nor to those which are strictly necessary for the exercise of the business activity, nor to the goods and services connected with these cars, where their non-business use is less than 10 %.

"Passenger car" means any road vehicle (including any trailer) other than one which, by its design and equipment, is intended solely for the transport of goods or is intended for industrial or agricultural use or has a seating capacity of more than nine persons including the driver.

"Expenditure relating to passenger cars" means expenditure on the purchase, including under contracts to make up work and the like, manufacture, importation, leasing or hire, use, modification, repair or maintenance, and expenditure on supplies or services performed in relation to such vehicles.

2. Value added tax charged on expenditure on accommodation, food or drink, other than that incurred by a taxable person in relation to the supply for consideration by that taxable person of accommodation, food or drink shall be deductible at the rate of 50 %.

3. The provisions of paragraphs 1 and 2 shall apply without prejudice to Article 17(5).

Article 17b

Exclusions from the right of deduction

The following expenditure is excluded from the right of deduction:

(a) expenditure relating to passenger cars as defined in Article 17a(1) in respect of which the business use is less than 10 %.

(b) expenditure on luxuries, amusements or entertainment.

Article 17c

Transitional provision

The provisions referred to in Articles 17a and 17b apply only to the value added tax which became chargeable after the said provisions entered into force in that Member State.`

3. The following third and fourth subparagraph are added to Article 20(3):

'The adjustment referred to in the first subparagraph shall also be applied in the case of the resale of a passenger car in respect of which the purchase, manufacture or importation had been subject to value added tax which the taxable person was authorised to deduct in accordance with the first subparagraph of Article 17a(1).

The adjustment referred to in the previous subparagraph may in no circumstances exceed the amount of the tax obtained by applying the rate of tax in force for passenger cars to the taxable amount of the resale.`

4. Article 28f is modified as follows:

(a) The opening sentence of Article 17(3) is replaced by the following:

'Subject to paragraph 3a, Member States shall also grant every taxable person the right to the deduction or refund of the value added tax referred to in paragraph 2 insofar as the goods and services are used for the purposes of:`

(b) Paragraphs 3a, 3b and 3c are inserted in Article 17:

'3a Insofar as the goods and services are used to make taxed transactions or transactions referred to in paragraph 3, Member States shall also grant every taxable person the right to deduct:

(a) value added tax due or paid in a Member State where that taxable person is not established in respect of goods or services supplied or to be supplied to him by another taxable person;

(b) value added tax due or paid in respect of goods imported into a Member State where that taxable person is not established.

When the taxable person is identified for VAT purposes in several Member States, the right to the deduction shall be granted in the Member State where the taxable transactions or the transactions referred to in paragraph 3 for which the goods or services are used are carried out. Insofar as the goods and services are used in the general framework of the taxable person's economic activities and it is not possible to attribute them to taxable transactions or transactions referred to in paragraph 3, the right to deduct shall be granted in the Member State where the taxable person has established the seat of his economic activity.

3b For the purposes of applying the previous provision, "a taxable person not established in the territory of country" shall mean a taxable person who has had in that country neither the seat of his economic activity nor a fixed establishment from which the goods or services are supplied nor, if no such seat or fixed establishment exists, his domicile or normal place of residence, and who has supplied no goods or services deemed to have been supplied in that country, with the exception of:

(a) transport services and services ancillary thereto exempted pursuant to Article 14(1)(i), Article 15 or Article 16(1)B, C and D;

(b) supplies of goods and services to a person who has been designated as the person liable to pay the tax in accordance with Article 21(1)(a);

(c) supplies of services in cases where the tax is due solely by the person to whom the services are supplied in accordance with Article 21(1)(b).

When the VAT which the taxable person is authorised to deduct pursuant to paragraph 3a is expressed in a currency other than that of the Member State where the right to deduct arises, and provided that one of the two States issuing these currencies does not use the euro as national currency, the exchange rate shall be determined, at the time when the chargeable event takes place, according to the Community provisions in force for calculating the customs value.

For the purposes of applying paragraph 3a and the first and second subparagraphs of this paragraph, Member States shall ensure that a taxable person is not prevented from exercising his right to deduct when he holds an invoice which contains at least all the information listed in Article 22(3)(b).

3c The Council, acting in accordance with the procedure provided for in Article 99 of the Treaty, shall adopt measures on the refund system and the administrative-cooperation measures necessary to ensure that the deduction arrangements of paragraphs 3a and 3b function properly.`

(c) Article 17(4) is replaced by the following:

'4. The refund of value added tax referred to in paragraph 3 shall be effected to taxable persons who are not established within the territory of the Community, in accordance with the detailed implementing rules laid down in Directive 86/560/EEC.

The taxable persons referred to in Article 1 of Directive 86/560/EEC shall also be considered for the purposes of applying the said Directive as taxable persons who are not established in the Community when, inside the territory of the country, they have only carried out supplies of goods or services to a person who has been designated as the person liable to pay the tax in accordance with Article 21(1)(a).

Directive 86/560/EEC shall not apply to supplies of goods which are, or may be, exempted under Article 28c(A) when the goods supplied are dispatched or transported by the acquirer or for his account.`

5. Article 28h is modified as follows:

The following point (d) is added in Article 22(4)

'(d) Insofar as the taxable person exercises a right to deduct which arose pursuant to Article 17(3a), the taxable person shall supplement the declaration by a specific document which must show the amount of deductions to be made, broken down by Member State.

The taxable person shall attach a copy of the invoices or import documents to the specific document in order to provide proof of these amounts.

The taxable person shall certify in the specific document provided for in the first subparagraph that he has no value added tax identification number in the Member State where the VAT deductible pursuant to Article 17(3a) is due or paid.`

Article 2

Directive 79/1072/EEC is repealed with effect from 1 January 1999.

Article 3

1. Member States shall bring into force the necessary laws, regulations and administrative provisions in order to comply with this Directive on 1 January 1999. They shall forthwith inform the Commission thereof.

When Member States adopt these measures, they shall contain a reference to this Directive or shall be accompanied by such reference on the occasion of their official publication. The methods of making such reference shall be laid down by Member States.

2. Member States shall communicate to the Commission the texts of the provisions of national law which they adopt in the field governed by this Directive.

Article 4

This Directive shall enter into force on the 20th day following its publication in the Official Journal of the European Communities.

Article 5

This Directive is addressed to the Member States.

(1) OJ L 331, 27.12.1979, p. 11.

(2) OJ L 145, 13.6.1977, p. 1, as last amended by Directive 96/95/EC (OJ L 338, 28.12.1996, p. 89).