Proposal for a COUNCIL DIRECTIVE amending Directive 77/388/EC by reason of the accession of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. Introduction and Background

On 22 October 1999, as part of its implementation of the recommendations of the European Council of 11 and 12 December 1998, and in particular the "Vienna Strategy for Europe", the Council adopted Directive 1999/85/EC [1] amending Directive 77/388/EEC [2] (the 6th VAT Directive) as regards the possibility of applying on an experimental basis a reduced VAT rate on labour-intensive services. Its purpose is to allow Member States that so wish to test the impact of a targeted reduction of VAT on these services in terms of job creation and a reduction of the underground economy.

[1] OJ L 277, 28.10.1999, p.34.

[2] OJ L 145, 13.6.1977, p. 1 - Directive last amended by Directive 2000/15/EC of 10 February 2004, OJ L 52, 21.2.2004, p. 61.

Member States wishing to introduce the measure had to inform the Commission before 1 November 1999. [3]

[3] The applications submitted were the subject of Council Decision 2001/185/EC of 28 February 2000: OJ L 59, 4.3.2000, p. 10.

Article 28(6) of the 6th VAT Directive authorised the experimental application of a reduced rate of VAT on labour-intensive services up to 31 December 2002. The period was then extended to 31 December 2003 by Directive 2002/93/EC [4] of 3 December 2002 to allow for thorough evaluation of the results of the experiment.

[4] OJ L 331, 7.12.2002, p. 27.

On the basis of the assessment reports submitted by the Member States that have applied the reduced rate, the Commission submitted a global evaluation report [5] on the experiment to the European Parliament and the Council. The evaluation report on the experimental application of reduced rates for labour-intensive services adopted by the Commission on 2 June 2003 concluded that it was impossible to identify with any certainty any beneficial impact on employment or a reduction in the black economy as a result of reducing VAT rates under this experiment. Compared with measures which directly target labour costs, the impact of a reduction in VAT rates on employment always has a higher budgetary cost for each job created. However, the measure did not appear to jeopardise the smooth functioning of the internal market.

[5] COM(2003) 309 final, 2.6.2003.

On 23 July 2003 the Commission adopted a proposal for a Directive introducing a general review of reduced rates of VAT [6] with a view to simplifying and rationalising them. The proposal takes account of the conclusions of the evaluation report and fits into the framework defined in the Commission's Communication on a strategy to improve the operation of the VAT system within the context of the internal market. [7]

[6] COM(2003) 397 final, 23.7.2003.

[7] COM(2000) 348 final, 7.6.2000. COM(2003)614 final, 20.10.2003.

Since the Council has not yet been able to reach an unanimous decision to adopt the proposed Directive, in order to avoid legal uncertainty from 1 January 2004 and give the Council time to take a decision on the general proposal regarding reduced rates of VAT, the first subparagraph of Article 28(6) of Directive 77/388/EEC and the first paragraph of Article 1 of Decision 2000/185/EC should be amended to extend the validity of the authorisation by two years up to 31 December 2005. [8] This would allow the nine Member States currently applying a reduced rate of VAT on labour-intensive services to continue to do so for another two years under the same conditions, without changing or extending the scope of the experiment.

[8] Directive 2004/15/EC of 10 February 2004, OJ L 52, 21.2.2004, p. 61.

2. consultation of the acceding countries

In the period preceding enlargement, an information and consultation procedure for the 10 acceding countries was introduced for the adoption of certain Council decisions that could be considered new Community acquis.

When the extension of the experimental application of reduced rates for labour-intensive services was adopted, some accession countries expressed their concern at the fact that they could not request a similar authorisation to apply reduced rates to the services in question in the same conditions as the current Member States, since as the experiment was due to end on 31 December 2003, Annex K to the Sixth VAT Directive was to disappear definitively before 1 May 2004 (the date of accession to the Community).

Article 57 of the Act concerning the conditions of accession for the 10 countries and the adjustments to the treaties on which the EU is founded [9] provides that:

[9] OJ L 236, 23.9.2003.

" 1. Where acts of the institutions prior to accession require adaptation by reason of accession, and the necessary adaptations have not been provided for in this Act or its Annexes, those adaptations shall be made in accordance with the procedure laid down in paragraph 2. These adaptations shall enter into force as from accession.

2. The Council, acting by a qualified majority on a proposal from the Commission, or the Commission, according to which of these two institutions adopted the original acts, shall to this end draw up the necessary texts."

Following the extension of Annex K to 31 December 2005, the Czech Republic and Poland expressed their wish to apply reduced rates to certain labour-intensive services.

3. Opinion of Commission departments

Council Directive 2004/15/EC was adopted on 10 February 2004. [10] It entered into force on the day of its adoption and is applicable as of 1 January 2004.

[10] OJ L 52, 21.2.2004.

At the time of the pre-accession negotiations the possibility of applying reduced rates to labour-intensive services was not considered relevant, since the experiment was due to end on 31 December 2003 (i.e. before EU enlargement) and so no specific measure needed to be considered for the acceding countries.

The extension of the measure constitutes a new element calling for a review of the situation, since it is a new acquis that could not be taken into account previously.

The Commission considers that the same possibility should be offered to the new Member States. Otherwise labour-intensive services currently subject to the reduced rate would have to go from the reduced rate to the normal rate, which would not be the case in the current Member States since they can benefit from the extension up to 31 December 2005, as provided for by the Directive of 10 February 2004.

Consequently the acceding countries who have expressed the wish may, as was the case for the current Member States, opt for the application of a reduced rate on labour-intensive services listed in Annex K. All the current Member States had the opportunity to take part in the experiment if they applied before 1 November 1999.

The Commission is therefore presenting a proposal for a directive, on the basis of Article 57 of the Accession Treaty, amending Directive 77/388/EEC with a view to authorising acceding countries who have so requested to apply a reduced rate to certain services listed in Annex K, provided they comply with the limits and conditions laid down in Directive 1999/85/EC of 22 October 1999 when the experiment was launched.

Comments on the articles

Article 1

This article adds a new paragraph 7 to Article 28 introducing an authorisation procedure by the Council, acting unanimously, for the new Member States that wish to apply a reduced rate to labour-intensive services.

Articles 2 to 4

These Articles provide for entry into force and application.

Proposal for a COUNCIL DIRECTIVE amending Directive 77/388/EC by reason of the accession of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty of Accession of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia, and in particular Article 2(3) thereof,

Having regard to the Act of Accession of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia and in particular Article 57(1) thereof,

Having regard to the proposal from the Commission, [11]

[11] OJ C, , p. .

Whereas:

(1) Article 28(6) of Council Directive 77/388/EC 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, [12] as amended by Directive 2004/15/EC, allows the reduced rates provided for in the third subparagraph of Article 12(3)(a) also to be applied to the labour-intensive services listed in the categories set out in Annex K to that Directive for a maximum period of six years, from 1 January 2000 to 31 December 2005.

[12] OJ L 145, 13.6.1977, p. 1. Directive last amended by Directive 2004/15/EC (OJ L 52, 21.2.2004, p. 61).

(2) Council Decision 2000/185/EC of 28 February 2000 authorising Member States to apply a reduced rate of VAT on certain labour-intensive services in accordance with the procedure provided for in Article 28(6) of Directive 77/388/EEC, [13] as last amended by Decision 2004/161/EC, [14] authorised certain Member States to apply a reduced rate of VAT on labour-intensive services up to 31 December 2005.

[13] OJ L 59, 4.3.2000, p. 10.

[14] OJ L 52, 21.2.2004, p. 62.

(3) The new Member States who have expressed the wish to do so should be given the possibility of applying a reduced rate to certain labour-intensive services provided they comply with the limits and conditions laid down in Directive 77/388/EEC.

(4) The necessary amendment to Directive 77/388/EEC must be adopted before accession so that it enters into force at accession.

(5) Directive 77/388/EC should be amended accordingly,

HAS ADOPTED THIS DIRECTIVE:

Article 1

In Article 28 of Directive 77/388/EEC, the following paragraph 7 is added:

"7. Should the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia wish to introduce as of 1 May 2004 the measure provided for in paragraph 6, they shall inform the Commission thereof before 1 May 2004 and communicate to it before that date all relevant information, in particular that referred to in the fourth subparagraph of paragraph 6."

Article 2

The Member States concerned shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive by 1 May 2004 [at the latest]. 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 a reference on the occasion of their official publication. Member States shall determine how such reference is to be made.

Article 3

This Directive shall enter into force subject to, and as from the date of, the entry into force of the Treaty of Accession of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia.

Article 4

This Directive is addressed to the Member States.

Done at Brussels,

For the Council

The President