COMMISSION OF THE EUROPEAN COMMUNITIES 
COM(94) 584 final 
Brussels, 13.12.1994 
94/0324 (CNS) 
REPORT FROM THE COMMISSION TO THE COUNCIL 
in accordance with Articles 12(4) and 28(2)(g) of the 
Sixth Council Directive of 17 May 1977 
on the harmonization of the laws of the Member States relating to turn-over taxes-
Common system of value added tax: uniform basis of assessment 
Proposal for a 
COUNCIL DIRECTIVE 
amending Directive 77/388/EEC 
on the common system of Value Added Tax 
(taxation of agricultural outputs) 
(presented by the Commission) 

REPORT FROM THE COMMISSION TO THE COUNCIL 
in accordance with Articles 12(4) and 28(2)(g) of the 
Sixth Council Directive of 17 May 1977 
on the harmonization of the laws of the Member States relating to turn-over taxes-
Common system of value added tax: uniform basis of assessment 
Contents 
1. Introduction 4 
2. The historical context of the Council decisions on the approximation of VAT 
rates 5 
3. Approximation of VAT rates - changes in VAT rates applied in Member 
States 7 
4. VAT rates and the functioning of the internal market - the influence of VAT 
rates on cross-border purchasing patterns 8 
5. VAT rates and the functioning of the internal market - the influence of VAT 
rates on intra-Community trade by taxable persons 11 
6. The reduced VAT rate - reviewing the scope of Annex H 13 
7. The transitional VAT rate provisions 17 
8. Conclusions 20 
1. Introduction 
This document constitutes the reports that the Commission is required to submit to the 
Council in accordance with Articles 12 (4) and 28 (2) of the sixth VAT Directive as 
amended by Council Directive 92/77/EEC in particular. The objective of the report is to 
examine the action undertaken by Member States in 1993 and 1994 on the approximation 
of VAT rates having regard to the functioning of the internal market. The report seeks to 
establish whether distortions of competition as between Member States have arisen in this 
context, particularly in the light of the opening up of the single market to consumers 
wishing to make cross-frontier purchases. 
The report begins by recalling the significance of the Council decisions in 1991 and 1992 
on the approximation of VAT rates (Chapter 2). These decisions represented a historic first 
step by the Community in this area and paved the way for the abolition of Customs and 
fiscal controls at the Community's internal frontiers on 1 January 1993, the implementation 
of the transitional VAT regime and with that, the completion of the Single Market 
programme. The action taken by Member States in this regard is summarized in Chapter 
3. In this context, the role that VAT rate approximation plays in the functioning of a single 
market is examined particularly insofar as its influence on the pattern of cross-border 
purchasing behaviour of private individuals in that market is concerned (Chapter 4). The 
case of intra-Community trade by taxable persons is also briefly considered (Chapter 5). 
The report then goes on to deal with a number of specific issues on which the Council is 
required to carry out a review. The first of these concerns the scope of the reduced rate and 
the coverage of supplies of goods and services laid down in Annex H to the sixth Directive 
(Chapter 6). Article 12 (4) of the Directive lays down that the Council should review this 
list every two years to see whether any changes to its scope are desirable. The second issue 
concerns the operation of certain transitional VAT rate provisions which may be applied by 
Membef States during the transitional period referred to in Article 28 1 of the Directive 
(Chapter 7). Article 28 (2) (g) requires the Council to review these rates from the point of 
view of the risk of distortions of competition that their existence may create in relation to 
the functioning of the internal market. 
Finally, it should be noted that there are a number of rate-related issues which this report 
does not deal with in detail viz. (i) the harmonization of excise duties and the effect of 
present disparities in such duties on distortions of competition in the internal market, (ii) 
future action with regard to further approximation of VAT rates in the Community 
(including the level of the standard rate after 1996 and the scope of the reduced rate). 
These issues are matters to be dealt with separately in the context of the introduction of the 
definitive VAT regime.. 
The historical context of the Council decisions on the approximation 
of VAT rates 
In matters of VAT rate harmonization, the Commission has always taken the provisions of 
the Treaty of Rome as its touchstone. In this context Article 99 of the Treaty of Rome (as 
amended by the Single Act) states that 
"the Council shall adopt provisions for the harmonization of legislation 
concerning turnover taxes to the extent that such harmonization is necessary to 
ensure to ensure the establishment and functioning of the internal market within the 
time limit laid down in Article 8A" 
The position as enshrined in Community law was thus clear: completing the internal market 
within the agreed time frame (before 31 December 1992) was an absolute priority for all 
Member States. The Commission accordingly put forward a series of proposals aimed at 
meeting the challenge of completing the internal market programme on time through 
amongst other things, the abolition of fiscal controls at the Community's internal frontiers.1 
These proposals were very ambitious in their aims and intent. It was envisaged that all 
transactions in intra-Community trade would in future be subject to Value Added Tax levied 
in the country of origin and that the present system taxing imports and remitting tax at 
export would end for such trade. In the context of these proposals, a fairly rigorous 
approximation of VAT rates would be necessary both for a widespread application of an 
origin-based VAT system for trade amongst business and more particularly to allow private 
individuals the right to purchase goods for their own consumption tax-paid in any Member 
State and to return to their Member State of residence without being subject to controls at 
the borders or having to account there for any taxes on their purchases. Up to then Member 
States had been more or less free to set VAT rates at levels of their own choosing. This 
state of affairs would, however, have to change if the internal market was to become a 
reality. 
Progress in Council discussions proved slow initially. Eventually, a series of key meetings 
of the ECOFIN Council of Ministers took place from 1989 to 1991 during which the basic 
shape of the VAT arrangements to be applied to intra-Community trade after 1993 were 
agreed. As early as October 1989, the Council decided that there would be insufficient time 
before 1 January 1993 for the conditions seen as a necessary prerequisite for the 
introduction of a system of taxation in the country of origin, to be fulfilled. It was essential 
therefore that a taxation system should be devised for intra-Community trade between 
businesses based on the continued levying of VAT and excise duties in the Member State 
of destination, which would at the same time permit border controls to be abolished on 
schedule. This eventually led to the setting up of the VAT transitional regime. 
This decision inevitably had important consequences for the discussions on the 
approximation of VAT rates. Rate approximation was still seen as an absolute precondition 
for the abolition of travellers' allowances and border controls. Indeed Member States' 
concern over the potential distortive effects of disparities in VAT rates was such that the 
Council insisted on drawing up special regimes for both distance selling and sales of new 
Com (87) 320 to 329 
means of transport; under these schemes VAT would in principle continue to be payable in 
the Member State of final consumption for sales to private individuals. 
In March and June 1991, the Council reached agreement on the essential characteristics of 
the VAT rate system to be applied from 1993 onwards in the context of the transitional 
VAT regime. This agreement differed in some important aspects from the original 
Commission proposal of 1987. The idea of rate bands contained in the 1987 proposal was 
dropped in favour of minimum rates. A minimum of 15% would apply to the (one) standard 
rate permitted. Increased or luxury VAT rates would be prohibited. Member States would, 
in addition, have the option of applying one (or possibly two) reduced rates subject to a 
minimum of 5%. The optional nature of the reduced rate together with a considerably 
lengthened list of goods and services to which it might apply represented a second major 
departure from the 1987 proposal. Moreover, it was also agreed that Member States would 
be allowed to apply or continue to apply a series of other rates (super-reduced rates, zero 
rates, "parking" rates etc.) on a transitional basis i.e. until the introduction of the definitive 
VAT regime scheduled for January 1997. 
Despite this agreement, matters were not formalised until October 1992 by the adoption of 
Directive 92/77/EEC amending the sixth VAT Directive. The delay in adopting the Directive 
was due mainly to the difficulty that the Council had in resolving certain issues left 
undecided from 1991. In the end, the Council succeeded in adopting the Directive while 
deciding to defer decisions on some of the more difficult items until a later date e.g. 
decisions on the rates to be applied to agricultural outputs, works of art and gold. Otherwise 
the Directive faithfully reflected the earlier agreement. It made a clear distinction between 
those elements of the rates package which would become a long-term feature of Community 
VAT rates law (Article 12) and those which were transient in nature and thus liable to 
disappear at the end of the transitional period (Article 28). 
3. Approximation of VAT rates - Changes in VAT rates applied in Member 
States 
With the adoption of Directive 92/77/EEC, one of the last obstacles to the completion of 
the internal market programme in the VAT field had been overcome. In fact the Directive 
merely formalized a process of convergence of VAT rates which had already begun with 
the Council agreement of 1991. 
A glance at Table 1 will show the degree to which the process of convergence evolved 
between 1987 (the year in which the original proposals were tabled) and 1994. The most 
obvious difference in the structure and level of VAT rates applied in Member States 
between 1987 and the present is demonstrated by the reduction in the absolute number of 
rates applied by Member States as well as the general trend towards convergence in the 
level of the standard rate. In addition the abolition of the increased (or luxury) VAT rate 
(six such rates were in force in 1987) and the reduction in the number of reduced rates had 
contributed significantly to the process of convergence. 
Against this, the possibility left open to Member States under the Directive to maintain or 
create other rates on a transitional basis has meant that convergence still has some way to 
go to produce a consistent Community wide system of VAT rates. This is particularly 
evident from the number of super reduced VAT rates still in force in Member States and 
the (relatively modest) use of "parking" rates, all of which are scheduled to disappear at the 
end of the transitional period - these questions are considered in greater detail in Chapter 
7. 
As regards the level of the rates, it will be seen that levels of the standard rate vary between 
15% and 25% while reduced rate levels vary from 5% to 12.5%. However, the (simple) 
average of the standard rate applied across the Community is now just over 18% while the 
average reduced rate is just under 6%. 
The process of convergence has also had a small effect on the weighted average VAT rate 
calculated for the Community as a whole - as can be seen from the following estimates 
Weighted average rate 1992 1993 
(EC-12) 
all rates UJ6 13.89 
standard rate 16.79 17.14 
reduced rate 5.85* 5.70* 
increased rate 26.12 
^including zero rates 
The weighted average of the rates applied generally throughout the twelve Member States 
increased very slightly between 1992 and 1993. This results from an increase in the 
average standard coupled with a decrease in the average reduced rate applied Community-
wide. 
Clearly the question of further convergence in VAT rates will again be taken up in the 
context of the discussions to take place on the introduction of the definitive VAT regime. 
4. VAT rates and the functioning of the internal market - the influence of 
VAT rates on cross-border purchasing patterns 
The phenomenon of cross-border shopping by private persons is not something new which 
commenced with the lifting of frontier controls and the abolition of travellers' allowances 
in January 1993. In many ways the entry into force of the new VAT regimes "legitimized" 
existing intra-Community purchasing patterns which had evolved over a considerable period 
of time (i.e. decades). It had always been the Commission's concern that the completion of 
the internal market should create a dynamic economic opportunity for business, trade and 
industry to develop and expand in a market free of administrative obstacles and burdens. 
At the same time the Commission was anxious to ensure that the single market was built 
on solid foundations within an equitable and fair regulatory framework. In the field of 
indirect taxation for example it was essential to guarantee in a Community without border 
controls, that distortions of competition or deflections of trade did not occur as a result of 
fiscal factors such as wide disparities in VAT rates. 
In order to assess the effect of the abolition of fiscal frontiers on cross-border purchasing 
patterns, the Commission contracted an outside consultant to study this question on the basis 
of the available evidence since January 1993.2 The study had three key objectives 
1. to identify any discernible changes in the pattern of purchases made by private 
individuals brought about by the lifting of restrictions on cross-border purchases on 1 
January 1993; 
2. to identify the markets which may have experienced shifts in the terms of competition 
or the pattern of trade as a result of the remaining divergences of rates or excise duty 
between Member States 
3. to quantify as much as possible the main factors giving rise to any such distortions of 
trade and competition 
The study covered all internal borders of the Union; its scope for VAT purposes included 
goods listed in Annex H of the sixth Directive but excluded distance sales, sales of new 
means of transport, works of art and antiques. 
The overall conclusions of the study revealed that 
generally speaking, apart from the German/Danish frontier there were no major 
changes in the patterns of cross-border purchasing behaviour due to differences in 
VAT rates alone following the abolition of fiscal frontiers 
the non-harmonization of excise duties has always caused significant cross-border 
shopping decisions by individuals, although differences in tax-exclusive prices also 
contribute to this phenomenon. The freedom to purchase larger quantities of duty-
paid goods in other Member States since 1 January 1993 has compounded the effect 
2 "VAT and excise duties: changes in cross-border purchasing patterns following the abolition of fiscal 
frontiers on 1 January 1993" (Price Waterhouse) - August 1994 
of non-harmonization of the duty rates, and has led to some further changes in 
shopping patterns in certain cases. 
The findings of the study as it concerns individual categories of products will be commented 
upon in greater detail elsewhere in this report. As a general comment, however, it is 
noteworthy that as regards VAT, the study finds that no dramatic changes in purchasing 
patterns have taken place since January 1993 although the situation at the border between 
Germany and Denmark is described as "volatile". Cross-border shopping is of particular 
importance at the following borders viz. Germany/France (for domestic durable goods), 
Germany/Denmark (for domestic durable goods) and Luxembourg/Belgium (for jewellery 
and watches); however, no significant increases have taken place over the last eighteen 
months. In addition, as regards goods subject to reduced rates of VAT, cross-border 
shopping is only taking place on a limited scale with the exception of foodstuffs; the latter 
has, however, always been a feature of intra-Community shopping and again nothing of 
significance has been noted since January 1993. It is also worth noting that it has proved 
impossible to come up with recent reliable estimates of the magnitude of these cross-border 
shopping flows broken down by product. 
These findings can, in turn, lead one to conclude that a sufficient degree of VAT rate 
approximation had taken place by January 1993. Before reaching any definite conclusions 
on this matter it would, however, be prudent to bear a number of other relates issued in 
mind: 
firstly, it should be remembered that considerable restrictions on the freedom of 
business to carry out certain types of cross-border selling have also been in force 
since January 1993 as a result of the special regimes applicable to distance selling 
and sales of new means of transport. These regimes place considerable obligations 
on sellers such as the obligation for distance sellers to remit the tax receipts to the 
Member State of final consumption once sales have exceeded an annual threshold 
which in certain cases is as low as 35.000 ECU. In these circumstances distance 
sellers may not feel encouraged to seek extra sales in other Member States because 
of the associated fiscal obligations; 
secondly, the role played by differences in rates of indirect taxation compared to 
other factors in influencing a consumers decision to indulge in cross-border shopping 
needs to be examined. In this connection the study demonstrates that tax rate 
differentials will obviously have some influence on the price of a product but that 
this effect can be reduced or magnified through the influence of other factors. Tax 
differentials are an important factor, the contribution of which is particularly 
important in the case of excise products or where significant differentials in VAT 
rates may exist, Germany/Denmark being the most obvious case in question. 
The study also identifies, however, many other non-tax factors which also influence cross-
border shopping patterns. These factors include inter alia several distinct but interrelated 
categories such as 
other price-related factors - these include factors such as exchange rate fluctuations, changes 
in the price of petrol or other travel-related costs, reductions in cost brought about by more 
efficient wholesale or retail distribution networks; 
non-price-related factors - very often a consumers decision may be influenced by incentives 
such as more flexible opening hours, product range and quality, guarantee terms, after-sales 
service etc.; 
obstacles - language, distance and geographical barriers are the elements which constitute 
the single most significant factor in preventing the great majority of Community citizens 
from partaking in cross-border shopping activity 
These findings have been reinforced by the findings of a recent Eurobarometer poll carried 
out across the Community in April and May of 19943 on the Commission's behalf. In 
response to the question as to whether they had personally benefited from the abolition of 
travellers' allowances and customs controls since 1 January 1993, less than 20% of those 
who were aware that cross-border shopping could be carried out freely, responded 
positively. This reply indicates that cross-border shopping is by its very nature something 
which only a relatively limited number of people will ever be in a position to take 
advantage of. 
None of these conclusions are particularly surprising; indeed most are a matter of common 
sense. What needs to be noted is the fact that cross-border shopping is something that has 
always taken place since long before the single market was created. The abolition of border 
controls and travellers' allowances in January 1993 facilitated this process by allowing 
private citizens unrestricted access to the market. It did not, however, give rise to any 
unexpected VAT-induced distortions of competition or deflections of trade because, firstly, 
the necessary approximation of VAT rates had taken place for those product sectors liable 
to be subject to cross-border shopping and secondly, because of the introduction of the 
special regimes for distance selling. In consequence if there is insufficient evidence to 
justify major changes to the VAT rates system, the time has now come to give some 
thought to relaxing the rather restrictive conditions contained in the special regimes and in 
particular to the question of increasing the rather limited thresholds currently applied to such 
trade. 
Eurobarometer 41.0 of the European Commission by INRA (Europe), 5 July 1994 
10 
5. VAT rates and the functioning of the internal market - the influence of 
VAT rates on intra-Community trade by taxable persons 
In examining the effects of the abolition of fiscal frontiers on the functioning of the internal 
market, the Commission has tried to assess whether differences in VAT rates as between 
Member States has influenced behaviour of businesses (i.e. taxable persons) involved in 
intra-Community trade. Difficulties arise in making any assessment due to the lack of 
precise information on the pattern of behaviour of taxable persons making purchases from 
or sales to taxable persons in other Member States. Trade of this kind was not included 
within the scope of the study referred to in Chapter 4 on the grounds that under a 
destination-based taxation system, the rate of VAT applicable in the Member State of origin 
should not in principle influence the purchasing decision of an enterprise. 
Under the VAT transitional regime, VAT continues to be levied in the Member State of 
destination of the goods in trade between taxable persons. It is difficult to establish, 
therefore, why differences in rates should play any significant role in the decision-making 
process of businesses involved in such trade, 
However, there are a limited number of cases where certain types of taxable persons are 
permitted to purchase goods in another Member State and pay the rate of VAT applicable 
in the Member State of origin. These cases concern supplies made by taxable persons in 
one Member State to one of the following purchasers in another Member State 
small businesses operating under exemption thresholds 
flat rate farmers 
taxable persons carrying out transactions which are exempt under Article 13 of the 
Sixth VAT Directive 
non-taxable legal persons purchasing goods under an annual threshold of 
10,000 ECU. 
In all these cases, the purchasing decision made by one of these entities may be influenced 
by the rate of VAT applicable in the Member State where the purchase is made. These 
cases were the subject of a further study carried out on the Commission's behalf in a 
separate "own resources" related context4. This study found that there are no figures 
available relating to the volume of trade covered by these cases and that estimates of the 
amount of trade involved are difficult to make. The information available to the consultants 
suggested that the trade was unlikely to be significant particularly in the context of the 
overall volume of intra-Community trade. The study found that in almost all cases where 
firms might be tempted to purchase goods in other Member States as a result of lower VAT 
rates, the net effect of this trade on the calculation of own resources was still considered 
to be negligible. No evidence of significant changes in cross-frontier purchasing behaviour 
of taxable persons was found at any borders between Member States with important 
differences in VAT rates. 
4 The extent of transboundaiy transactions taxed according to the origin principle (Deutsches Institut 
fur Wirtschaftsforschung - September 1994) 
11 
The study did come across particular cases of German farmers subject to flat rate VAT 
schemes who consistently purchase chemical fertilisers and pesticides, which in Germany 
are subject to the standard rate, directly from Luxembourg, France, the Netherlands or 
Belgium where such products are taxed at reduced rates. In this case, however, the farmers 
in question are acting in the manner of a private person by purchasing at the most 
advantageous price that the market has to offer. The Commission does not believe that such 
cases can be considered to be creating distortions of competition. In any event, the solution 
to any problem in this specific area, if indeed there are problems, lies in the hands of the 
German authorities themselves because they can always avail themselves of the option to 
tax fertilisers and pesticides at the reduced rate in Germany on the grounds that these 
products come within the scope of Category 10 of Annex H. If the German authorities were 
to take this option however, they could also in consequence reduce the level of flat rate 
compensation currently available to German farmers under the German flat rate scheme. 
The Commission must conclude, therefore, that in the absence of any hard evidence of 
significant distortive effects on the competitive situation of taxable persons involved in 
intra-Community trade caused by differences in VAT rates, there is no reason to assume at 
present that the internal market is functioning in anything other than a satisfactory manner. 
12 
6. The reduced VAT rate - reviewing the scope of Annex H 
The third paragraph of Article 12 (3) (a) of the sixth VAT Directive states that 
"Member States may also apply either one or two reduced rates. These rates shall 
be fixed as a percentage of the taxable amount which may not be less than 5% and 
shall apply only to supplies of the categories of goods and services specified in 
Annex H." 
The second paragraph of Article 12 (4) states that 
"On the basis of a report from the Commission, the Council shall, starting in 1994, 
review the scope of the reduced rates every two years. The Council, acting 
unanimously on a proposal from the Commission, may decide to alter the list of 
goods and services in Annex H." 
This chapter examines the manner in which Article 12 (3) (a) has been applied by Member 
States in practice in order to determine whether any changes to the scope of the reduced 
VAT rates should be made under the two-year review procedure provided for in 
Article 12 (4). The chapter concentrates on whether any change to the present provisions 
are required to overcome problems of distortions of competition. Since the entry into force 
of the new provisions, the Commission has received numerous representations from various 
trade and industry federations pleading for the inclusion of their sector in the scope of the 
reduced rate at the occasion of the next review. The Commission view that it is too soon 
to consider changes in their scope for other reasons, not least because broader issues of rate 
coverage are likely to be more manageable against the background of Council conclusions 
on the shape of the 1997 definitive VAT system. The general question of what future 
action is necessary on the approximation of VAT rates in this connection, will be taken up 
in the context of the Commission's approach to the introduction of the definitive regime. 
Goods and services subject to the reduced rate 
It will be recalled that in its meeting of 18 December 1989, the ECOFIN Council decided 
that the reduced rates would be reserved in particular for essential goods and services 
meeting a social or cultural policy objective. The categories subsequently included in Annex 
H of the amended sixth Directive by and large reflected these criteria. In addition, the 
process of selection of the categories concerned by the Council generally followed the 
approach advocated by the Commission which was that the list should contain only those 
categories of goods and services which were taxed by a majority of Member States at 
reduced VAT rates. 
A glance at Table 2 will show that this pattern was and continues to be the case. The 
information available to the Commission indicates that in all but one of the seventeen 
categories set out in Annex H, the majority of Member States have availed themselves of 
the option provided by the Directive to tax the supply concerned at the lower rate. In certain 
categories, the practice has been for the overwhelming majority of Member States to use 
reduced rates (or zero rates) or exemptions (where the service is of a kind deemed to be in 
the public interest and as such covered by Article 13 of the 6th VAT Directive, e.g. 
admissions to public theatres, museums etc.). This practice is especially prevalent in the 
case of supplies of foodstuffs, water, pharmaceutical products, medical equipment, passenger 
13 
transport, admissions to cultural events and agricultural inputs. In the case of the other 
categories, the number of Member States opting to tax at reduced rates is somewhat smaller 
but with the exception of Category 15 (undertaker's services etc.) all categories have 
justified their inclusion on numerical grounds at least, by the fact that they reflect majority 
practice within the Community in regard to reduced rate taxation. 
It should not be forgotten of course, that Member States have extended the practice of 
selecting Categories from Annex H for inclusion in their reduced rate to choosing particular 
goods and services from within individual categories for this treatment. This means that 
while superficially there may seem to be a good deal of similarity between the practices of 
Member States in terms of Category selection, coverage of any individual category may in 
fact differ from Member State to Member State depending on how Member States choose 
to define goods or services from within any given category in their own national legislation. 
This outcome is not, however, particularly surprising. Once the Council abandoned the idea 
of making use of the reduced rate obligatory, the need to ensure that Member States would 
agree to apply each category in a uniform manner no longer made sense. Making the 
reduced rate optional did, however, facilitate the reaching of an agreement in the Council 
on category definitions. Instead of endless discussions about what should or should not be 
included in a category, it only became necessary for the Council to agree on the broad 
outline of a general définition for each category at Community level (i.e. essentially to 
decide what fell outside the scope of a category). Subject to respecting this general 
definition (by not enlarging the scope of a category) each Member State was subsequently 
free to use, in its implementing legislation, its own definition for categories depending on 
what particular group of products or services it wished to tax at the reduced rate. For 
categories referring to goods Member States have also the possibility of using the combined 
nomenclature to establish its precise coverage. However, not all Member States have 
adopted this practice or, at least, if they have, the information has not been included in the 
implementing legislation forwarded to the Commission for examination. 
Turning to the question of distortions of competition, in preparing this report the 
Commission was at pains to establish whether the introduction of an optional reduced rate 
had resulted in an increased potential for distortions of competition in the single market. 
In many ways, it can be argued that in drawing up the list of categories of goods and 
services eligible for optional reduced rating, the Council had in effect decided that none of 
the categories concerned were of a type liable to give rise to large-scale distortions of 
competition as a result of significant differences in VAT rates. The categories of services 
in Annex H by their very nature are not the kinds of economic activities which lend 
themselves to significant cross-border applications. As far as goods are concerned, it can 
also be argued that again, none of categories involved refer to the types of products which 
private persons would in the normal course of events, travel significant distances to 
purchase. 
These assumptions have in fact been borne out by the study referred to in Chapter 4 which 
was undertaken on the Commission's behalf with the object of examining this very question. 
The study looked in particular at those categories of goods contained in Annex H where the 
VAT rate applicable differed widely as between certain Member States viz. foodstuffs, 
pharmaceutical products, medical equipment, children's' car seats, books newspapers and 
periodicals. In most cases the study found that no discernible increases in cross-border 
purchasing patterns had taken place since January 1993. In certain cases, factors other than 
14 
differences in VAT rates play a more determining role in influencing a consumer's choice 
e.g. cultural or language considerations on the case of books, newspapers and periodicals, 
or prescription regimes and reimbursement schemes in the case of pharmaceuticals and 
medicines. 
The only category where significant cross-border shopping activity is taking place is in the 
category of foodstuffs. Such shopping has, however, always been a feature of intra-
Community trade in this sector. Moreover, the evidence shows that purchasers of foodstuffs 
tend in many cases to go against the pattern which VAT rate differences might lead one to 
expect, e.g. Germans tend to buy certain foodstuffs in Denmark despite the higher VAT rate 
applicable; in contrast, no significant purchases of foodstuffs in the UK by cross-border 
shoppers from France or Belgium has been reported even though most foodstuffs in the UK 
are zero-rated. 
Goods and services subject to the standard rate 
In addition to looking at the reduced rate, the study referred to above also examined the 
situation with regard to possible distortions of competition or changes in cross-border 
purchasing patterns in relation to goods subject to the standard rate. The following types of 
goods were surveyed viz. domestic electrical durable goods (domestic electric appliances, 
video/audio/photographic material, computer hardware and software and sporting goods and 
toys), furniture, glassware, etc. and jewellery, watches and the like. 
The study once again shows that cross-border shopping habits did not change in any 
significant way. The expected explosion in cross-border shopping in expensive consumer 
durables between Germany and Denmark following the abolition of travellers' allowances 
has not materialized despite the margin of difference in the respective VAT rates. In other 
cases, the abolition of travellers' allowances meant that cross-border shopping actually 
increased in Member States with VAT rates higher than their neighbours because of the 
availability of greater choice in the higher taxing Member State (Belgium/Luxembourg). On 
the Spanish/French border there were no great changes in the magnitude of cross-border 
shopping although the depreciation of the value of the peseta may have had an impact. No 
major change was noticed in purchasing patterns across the other sensitive borders. In all 
cases cross-border shopping has been an established feature of these border areas since long 
before the abolition of travellers' allowances and frontier controls in January 1993. 
The particular case of agricultural outputs 
The Council is required to take a decision before 31 December 1994 on the taxation of 
agricultural outputs other than foodstuffs after 1 January 1995. This was one of the issues 
left unresolved from the discussions of the fiscal package of 1992. At that time the Council 
decided that a standstill arrangement would apply under which those Member States which 
were already applying a reduced rate to supplies of agricultural outputs would be permitted 
to continue to apply them; those Member States which applied a standard rate would 
continue to apply this rate. 
The Commission will table a separate proposal on this issue which will be accompanied by 
an explanatory memorandum outlining the reasons why it has formulated the proposal in 
the manner it has. 
15 
In view of the foregoing, the Commission is satisfied that the provisions of Article 12 (3) 
of the amended sixth Directive are working well in practice thanks mainly to the degree of 
rate convergence which had taken place as between Member States since the Council 
agreement of 1991. There is no evidence of any significant changes in the pattern of cross-
border purchasing by private individuals following the abolition of border controls. In the 
absence therefore of any significant distortions of competition or deflections of trade caused 
by differences in VAT rates, the Commission sees no reason or justification to change the 
contents of Annex H of the sixth Directive at the present time on these grounds either 
through the addition of new categories of goods or services or the deletion of any of the 
existing categories. The Commission will, however, address the question of further 
approximation of VAT rates in the longer term in the context of the discussions on the 
changeover to the definitive VAT regime. 
16 
The transitional VAT rate provisions 
Article 28 (2) (g) of the sixth Directive reads as follows: 
"On the basis of a report from the Commission, the Council shall, before 31 
December 1994, re-examine the provisions of subparagraphs (a) to (f) above in 
relation to the proper functioning of the internal market in particular. In the event of 
significant distortions of competition arising, the Council, acting unanimously on a 
proposal from the Commission, shall adopt appropriate measures." 
Article 28 (2) subparagraphs (a) to (f) set out various VAT rate measures which Member 
States are permitted to maintain in force during the transitional period referred to 
Article 28 1 i.e. in principle up to 31 December 1996. This chapter examines the use that 
Member States have made of the provisions of these subparagraphs and the effects their 
continued application may have on the functioning of the internal market. 
The purpose of Article 28 (2) was to bring together all those measures which do not in 
principle form a permanent feature of the long-term VAT rates landscape of the 
Community. In most cases, it would have been impossible for the Council to reach 
agreement on the fiscal package in October 1992 had not some form of temporary 
derogation been conceded to Member States permitting them to maintain in force for a 
limited period after 1992 certain rates not covered by Article 12 (3). Article 28 (2), in 
consequence, covers a variety of temporary rate provisions including measures of 
considerable social and political importance to the Member States concerned, measures 
which enable Member States to defer full implementation of Article 12 (3) for the time 
being and measures covering certain goods and services for which Member States secured 
special treatment on a temporary basis. 
Article 28 (2) (a) deals with exemption with refund of the tax paid at the preceding stage 
and reduced rates lower than the minimum rate laid down in Article 12 (3) in respect of the 
reduced rates. In more common parlance, these are known as zero rates and super-reduced 
rates respectively. The Article allows Member States to maintain after 1992 those zero rates 
and super-reduced rates which were in force on 1 January 1991 in accordance with 
Community law. A list of Member States covered by this provision is set out in Table 3. 
It will be noticed that as regards zero rates, only the United Kingdom and Ireland maintain 
zero rates on a large scale following the decision by the Portuguese authorities to abolish 
zero rating in Portugal in 1992. 
The study on changes in cross-border purchasing patterns referred to earlier has also looked 
at the situation with regard to certain products covered by zero and super-reduced rates (e.g. 
foodstuffs, children's ciothing). However, in no case was any significant change in cross-
border purchasing patterns established. In fact in many cases cross-border shopping for the 
products concerned is negligible. The Commission is of the opinion therefore that it would 
not be justified at this stage for it to table a formal proposal abolishing or amending these 
rates. However, this is not to say that a similar conclusion should be drawn in the context 
of the definitive VAT regime. It is likely that a rate system with fewer (or no) exceptions 
to the general rule will then be appropriate, and the Commission would suggest that 
Member States themselves should examine the position to see whether any of these special 
rates might be abolished in advance of the deadline for changeover to the definitive regime. 
17 
Article 28 (2) (b) enables Member States wishing to abolish zero rates in respect of goods 
or services other than those specified in Annex H to apply a reduced rate to such supplies 
on a temporary basis. 
The United Kingdom has recently made use of this provision by its decision to abolish zero 
rating on domestic fuel and power and to replace it with an 8% rate initially and by the full 
rate in due course. In view of the comments under the preceding paragraphs on the 
eventual need to abolish zero and super-reduced rates the Commission is of the opinion that 
the provisions of Article 28 (2) (b) are useful and should remain in force. 
Article 28 (2) (c) applies to the two Member States i.e., Spain and Luxembourg, which had 
to increase their standard rate by more than 2% to respect the provisions of Article 12 (3). 
The Article enables these Member States to apply super-reduced rates to all the categories 
of goods and services specified in Annex H and, in addition, to restaurant services, 
children's' clothing and footwear and housing. 
Both Spain and Luxembourg have made extensive use of this provision (see Table 3) which 
was introduced to compensate for the potential increase in inflationary pressure as a result 
of increasing their standard rate by two points. The implementation of this provision has 
not, however, given rise to any major distortions of competition in the case of Spain 
although some complaints have been received in regard to the situation as between Belgium 
and Luxembourg where significant differences in VAT rates exist for the same category of 
supply. As these measures are meant to be temporary in nature, the Commission would 
suggest in line with its earlier comments that both Member States should themselves 
consider for how long these provisions need to continue to apply. 
Article 28 (2) (d) enables those Member States which applied a reduced rate to restaurant 
services, children's' footwear and clothing and housing on 1 January 1991 to continue to 
apply these rates on a transitional basis. 
The long term situation with regard to the appropriate rate to be applied to these goods and 
services should be discussed in the context of the review of Annex H referred to in 
Article 12 (4). Pending the outcome of this review the Commission has no suggestions to 
make at present on the desirability of maintaining these reduced rates. It would point out, 
however, that the present situation cannot continue indefinitely because it will otherwise 
create a structural inequality in VAT rates legislation. 
Article 28 (2) (o) enables Member States to apply a "parking" rate of a minimum of 12% 
to supplies of goods and services not listed in Annex H but to which the Member State 
concerned had applied a reduced rate on 1 January 1991. 
A number of Member States have made use of this provision (see Table 3 for details). The 
Article is useful in that it facilitates the transition to a more coherent long-term VAT rates 
structure throughout the Community. The Commission feels therefore that these provisions 
should continue in force for the time being. 
Article 28 (2) (f) enables Greece to continue to apply specially reduced rates to certain 
Greek Islands and Departments. 
18 
To the best of the Commission's knowledge the implementation of these specially reduced 
rates has not given rise to any distortions of competition in intra-Community trade. Their 
implementation was in fact a special measure designed to compensate for competition that 
these Islands and Departments may have faced from non-Community countries. The 
Commission is of the opinion that these measures may continue in force for the time being. 
skskskskïkstcjksk 
In conclusion, the Commission considers that the implementation of the transitional VAT 
measures has not given rise to any significant distortions of competition or deflections of 
trade. The Commission is of the opinion that these measures may continue in force for the 
duration of the transitional regime. 
The Commission would recall that in its initial proposals of 1987 on the approximation of 
VAT rates it had proposed that each Member State should be limited to two VAT rates 
within the framework of the internal market - a standard rate and a reduced rate - without 
any zero rates or super-reduced rates. The continued application of all of the derogations 
permitted to Member States, particularly those referring to super-reduced rates and zero 
rates, has resulted in a plethora of different VAT rates being applied across the Community 
with the risk of possible distortions in certain sectors. This situation is at odds with the 
need for simplification of procedures and the reduction of tax compliance costs which are 
indispensable for the strengthening of the internal market. 
The Commission would note, therefore, that the introduction of the definitive VAT regime 
would be facilitated were Member States themselves to consider changing these provisions 
initially by reducing the number of rates they apply generally and where possible replacing 
the rates by one of the rate options open to Member States under Article 12 (3). This 
question will be taken up in the Commission communication on the introduction of the 
definitive VAT regime 
19 
8. Conclusions 
This report sets out to fulfil the reporting obligations placed on the Commission by the 
Council when adopting legislation on VAT rate approximation in 1992. In fulfilling these 
obligations, the Commission wishes at the same time to provide the Council with an 
adequate assessment of the functioning of the VAT rates regime in the framework of the 
transitional VAT regime during the first two years of a Community without internal 
frontiers. The Commission thus hopes that the report will enable the Council to take a view 
as to whether the VAT rate arrangements are operating as originally intended in the absence 
of border controls or whether any amendments are necessary. 
Based on such information as is available, the Commission believes that the position is 
generally satisfactory with regard to the functioning of the new system of VAT rate 
approximation. No significant changes in cross-border purchasing patterns have been found. 
Similarly there have been no significant distortions of competition or deflection of trade 
brought about as a result of excessive disparities in VAT rates as between neighbouring 
Member States. The Commission concludes that in these circumstances there is no 
justification at present for introducing major changes to the essential level or structure of 
the new rates system or to the scope of the reduced rate. In addition, the Commission 
concludes that the provisional VAT rate provisions currently in force do not need to be 
amended for the time being given that these measures are due to be phased out by the end 
of the transitional period. If Member States were themselves to take action to reduce the 
number of rates generally applied this would facilitate discussions on the introduction of the 
definitive VAT regime. The debate on this and other VAT-related issues will be taken up 
in the context of the Commission communication on the introduction of the definitive 
regime. 
20 
TABLE NO. 1 
EVOLUTION OF VAT RATES APPLIED IN MEMBER STATES BETWEEN 1987 AND 1994 
MEMBER 
STATES 
GERMANY 
BELGIUM 
DENMARK 
SPAIN 
GREECE 
FRANCE 
IRELAND 
ITALY 
LUXEMBOURG 
NETHERLANDS 
PORTUGAL 
UNITED 
KINGDOM REDUCED RATES 
1987 
7 
1/6 
-
6 
3/6 
2,1/4/5,5/ 
7/13 
1,7/10 
2/9 
3/6 
6 
8 1992 
7 
1/6 
-
6 
4/8 
2,1/5,5 
2,3/10 
4/9 
3/6 
6 
8/5 1993 
7 
1/6 
-
3/6 
4/8 
2,1/5,5 
2,5 
4/9 
3/6 
6 
5 1994 
7 
1/6 
-
3/6 
4/8 
2,1/5,5 
2,5 
4/9 
3/6 
6 
5 STANDARD/INTERMEDIATE RATES 
1987 
14 
19/17 
22 
12 
18 
18,6/28 
25 
19 
12 
20 
16 
15 1992 
14 
19,5 
25 
13 
18 
18,6 
21/10/ 
12,5 
19/12 
15 
18,5/17,5 
17/16 
17,5 1993 
15 
19,5 
25 
15 
18 
18,6 
21/12,5 
19/12 
15 
17,5 
16 
17,5 1994 
15 
20,5/12 
25 
15 
18 
18,6 
21/12,5 
19/13 
15/12 
17,5 
16 
17,5 INCREASED RATES 
1987 
-
25/25+8 
-
33 
36 
33 1/3 
38 
-
-
30 1992 
-
-
-
28 
36/-
22 
38 
-
-
30 1993 
-
-
-
-
-
-
-
-
30* 1994 
-
-
-
-
-
-
-
-
30* 
Note: Portugal: Application of the 30% rate is contrary to Community law since 1. January 1993. Portugal has announced that this rate will be abolished in its budget law for 1995. 
21 
TABLE N° 2 
APPLICATION OF REDUCED VAT RATES BY MEMBER STATES TO THE CATEGORIES OF GOODS AND SERVICES 
CONTAINED IN ANNEX H OF THE SIXTH VAT DIRECTIVE (AS AMENDED) 
CAT. 
1 
Foodstuffs 
2 
Water supplies 
3 
Pharmaceutical 
products 
4 
Medical 
equipment 
5 
Transport of 
passengers 
6 
Books, 
newspapers and 
periodicals 
7 
Admissions to 
shows, etc. 
Broadcasting 
services 
8 
Services of 
writers, 
composers, etc. 
9 
Social housing BE 
RR 
RR 
RR 
SR 
RR 
RR 
RR 
ZR 
EXEMPT 
RR 
PR 
SR 
PR 
RR DK 
SR 
SR 
SR 
SR 
EXEMPT 
SR 
EXEMPT 
SR 
SR 
SR DE 
RR 
RR 
SR 
RR 
RR 
SR 
RR 
EXEMPT 
RR 
SR 
RR 
SR GR 
RR 
RR 
RR 
SR 
RR 
RR 
RR 
EXEMPT 
RR 
SR 
RR 
RR SP 
SR 
SRR 
RR 
SRR 
SR 
RR 
RR 
SR 
SRR 
EXEMPT 
RR 
SR 
RR 
SRR FR 
RR 
RR 
RR 
SR 
RR 
RR 
SRR 
RR 
SRR 
RR 
SR 
RR 
RR 
SR IR 
ZR 
RR 
SR 
EX.. 
ZR 
ZR 
EXEMPT 
ZR 
RR 
SR 
EXEMPT 
RR 
SR 
SR 
RR IT 
SRR 
RR 
PR 
RR 
RR 
SR 
RR 
RR 
PR 
SRR 
SRR 
RR 
SR 
RR 
SR 
SRR 
RR LUX 
SRR 
EXEMPT 
SRR 
SR 
SRR 
EXEMPT 
SRR 
SRR 
SRR 
SR 
SRR 
SRR NL 
RR 
RR 
RR 
SR 
RR 
EXEMPT 
RR 
RR 
EXEMPT 
RR 
SR 
SR 
RR PO 
RR 
SR 
RR 
RR 
SR 
RR 
RR 
RR 
EXEMPT 
RR 
SR 
SR 
RR UK 
ZR 
ZR 
SR 
ZR 
SR 
ZR 
ZR 
ZR 
SR 
SR 
SR 
2? 
10 
Agricultural 
inputs 
11 
Hotel 
accommodation 
12 
Admission to 
sporting events 
13 
Use of sporting 
facilities 
14 
Social services 
15 
Cremation 
services 
16 
Medical and 
dental care 
17 
Collection of 
domestic waste 
and street 
cleaning RR 
RR 
RR 
RR 
RR 
RR 
RR 
SR 
RR 
SR SR 
SR 
SR 
EXEMPT 
SR 
SR 
SR 
SR RR 
SR 
SR 
ZR 
RR 
SR 
RR 
EXEMPT RR 
RR 
RR 
RR 
RR 
RR 
RR 
RR RR 
RR 
SR 
RR 
SR 
EXEMPT 
SR 
RR 
RR 
RR 
RR RR 
RR 
SR 
SR 
SR 
SR 
RR 
SR 
SRR 
RR RR 
RR 
EXEMPT 
RR 
EXEMPT 
SR 
EXEMPT 
SR 
EXEMPT 
SR SRR 
RR 
RR 
PR 
RR 
SR 
SR 
SR 
SRR 
SRR SRR 
SRR 
SRR 
SRR 
SRR 
SRR 
SRR 
SRR RR 
RR 
SR 
SR 
SR 
SR 
SR 
SR RR 
RR 
RR 
RR 
SR 
SR 
SR 
SR SR 
SR 
ZR 
ZR 
ZR 
ZR 
ZR 
ZR 
SR 
SR: standard rate 
RR: reduced rate 
SRR: super-reduced rate 
PR: parking rate 
ZR: zero rate 
??. 
TABLE N°3 
SUMMARY LIST OF SUPER REDUCED RATES OF VAT APPLICABLE IN MEMBER STATES 
(note: this list is not exhaustive) 
Goods and services 
(short description) 
Foodstuffs 
Beverages: 
-Mineral water/lemonade 
Children's clothing and 
footwear 
Pharmaceutical products 
Books 
Newspapers 
Periodicals 
TV licence 
Hotels 
Restaurants 
Admissions to cinema, 
theatre, cultural events. 
Admissions to sporting 
events. 
Cut flowers and plants. 
Treatment of waste and 
waste water. 
Collection of domestic waste. 
Transport of persons BE 
0 
0 DA 
0 DE GR 
4 
4 
4 
4 ES 
3 
3 
3 FR 
2,1 
2,1 
2,1 
2,1 
2,1 IE 
0 
0 
0 
0 IT 
4 
4 
4 
4 
4 
4 
4 LUX 
3 
3 
3 
3 
3 
3 
3 
3 
3 
3 
3 
3 
3 
3 
3 PB PO GB 
0 
0 
0 
0 
0 
0 
0 
0 
0 
24 
Building sector: 
-Supply of new buildings 
- Renovation works and 
repairs 
-Construction works of new 
buildings 
Works of art, antiques 
Medical equipment 
Water supplies etc. 
Agricultural inputs 
Social services/charities etc. 3 
3 
3 
0 
0 4 
4 
4 
4 
4 3 
3 
3 
3 
3 
3 0* 
0* 
0* 
0 
(if imported) 
0 
0 
0 
UK: The zero rate applies to supplies of domestic buildings and approved repairs to listed buildings 
25 
Proposal for a 
COUNCIL DIRECTIVE 
amending Directive 77/388/EEC 
on the common system of Value Added Tax 
(taxation of agricultural outputs) 
26 
EXPLANATORY MEMORANDUM 
The purpose of this proposal is to enable the Council to take a decision on the taxation of 
agricultural outputs after 1 January 1995 as it is required to do under Community VAT 
legislation. The decision is necessary to consolidate fiscal equality in the Internal Market by 
eliminating distortions of competition which have arisen as a result of structural imbalances 
in the level of VAT rates currently applied by Member States to supplies of agricultural 
outputs. It is therefore in the interest of Member States that the source of fiscal distortion 
arising in current VAT legislation should be eliminated. 
At present Community VAT legislation(1) lays down a series of rules which Member States 
must respect in setting the structure, levels and coverage of rates of value added tax that they 
apply. These rules on the approximation of VAT rates were necessary to enable the 
Community to abolish internal border controls on 1 January 1993 as part of the programme 
of eliminating fiscal frontiers. However, with regard to agricultural outputs other than 
foodstuffs the Council considered it appropriate to defer a decision on the appropriate VAT 
rate treatment until 31 December 1994 (Article 12(3)(d) of the Sixth Directive). The Council 
also decided that in the meantime a standstill arrangement would apply under which those 
Member States which were already applying a reduced VAT rate to supplies of agricultural 
outputs at the time the Directive was adopted would be permitted to continue to apply them 
for a further two years; those Member States which applied the standard rate at that time 
would continue to apply this rate. 
The expression "agricultural outputs other than foodstuffs" covers products such as flowers, 
plants and similar products of the floriculture and horticulture sectors as well as items such 
as, raw wool and wood of various kinds. The current situation in Member States with regard 
to the taxation of these products at reduced rates is set out in the following table: 
agricultural outputs Member States applying a reduced rate 
flowers, plants etc. DE, IT, LU, NL, PO 
wool BE, LU, NL 
wood for industrial uses DE 
wood for use as firewood BE, DE, EL, IE, IT, LU, NL 
As can be seen, the products in question, with the possible exception of firewood, are taxed 
at reduced VAT rates by a minority of Member States only. In order to enable the Council 
to take the necessary decision on the taxation of agricultural outputs after December 1994 the 
Commission has examined the situation to see whether the current structural imbalance in 
VAT rates applied by different Member States in the sector has had any discernible effect on 
cross-border purchasing patterns since the abolition of frontier controls in January 1993. Such 
evidence as is available has revealed that this has not in fact been the case and that there has 
not been any significant changes in cross-border purchases by private individuals since 
(i) The Sixth Council VAT Directive 77/388/EEC as amended by Directive 92/77'/EEC. 
27 
January 1993. This is not surprising given that the type of products under consideration are 
by their nature not ones which private persons would normally travel long distances to buy 
even if there were significant price differences from one Member State to another. 
However, the Commission is aware of reported cases of fraud in regard to flowers and plants 
in which traders situated in Member States in which these products are taxed at the standard 
rate, have apparently purchased such products in Member States in which they are taxed at 
the reduced rate and have not subsequently declared these purchases to their fiscal authorities. 
These cases of fraud are essentially a matter for investigation by the competent authorities of 
the Member States concerned. However, it is clear that the problem has arisen as a result of 
unscrupulous traders deciding to take advantage of the difference in VAT rates between 
Member States. The differences have arisen because of the fact that some Member States at 
present have the option of retaining a reduced rate. As the text of Article 12(3)(d) of the 
Sixth Directive stands at present, no remedy is provided in Community law to overcome the 
present structural imbalances in VAT rates applied in the floricultural and horticultural 
sectors. This is because Member States currently applying the standard rate do not have the 
option of applying the reduced rate. 
There are, therefore, two solutions to this problem which the Commission might propose. On 
the one hand, the Commission can propose that the standard VAT rate should apply to all 
supplies of flowers and plants from 1 January next. This would have the effect of creating 
a level playing field in this sector free from fiscally induced distortions of competition as a 
result of differences in VAT rates. 
Alternatively, the Commission might propose that Member States should have the option of 
applying a reduced rate to such supplies. Such an option might be advisable in view of the 
negative effects that an increase in the VAT rate would have on production and sales of 
flowers and plants in Member States currently applying a reduced rate. Flowers and plants 
are products which by their nature and the nature of the market are vulnerable to abrupt 
increases in the retail price level. Member States could avoid this outcome by availing of the 
option to apply a reduced VAT rate to supplies of these products. 
In view of the foregoing the Commission is of the opinion that on balance, the most 
appropriate means of overcoming the current structural imbalance in rates would be to extend 
the option of applying a reduced rate to flowers, plants and the like as well as to firewood 
but on a transitional basis only. The Commission does not wish to extend the scope of the 
reduced rate on a permanent basis at present. Changes of this type can be more appropriately 
considered against the background of future Council conclusions on the shape of the 1997 
definitive VAT regime. In addition the Commission does not favour extending the scope of 
the reduced rate to other agricultural outputs such as wool and wood for industrial use on the 
grounds that such products are by their nature inputs into manufacturing processes which for 
the most part are carried out by taxable persons with a right to deduct input VAT. 
28 
Commentary on the Articles 
Article 1 
It is proposed to end the present standstill arrangement with regard to the taxation of 
agricultural outputs other than products falling within category 1 of Annex H, by deleting 
Article 12(3)(d) of the Sixth VAT Directive and inserting a new subparagraph (g) in 
Article 28(2) which will permit Member States to apply a reduced rate to supplies of live 
trees and other plants (including bulbs, roots and the like, cut flowers and ornamental foliage) 
and wood for use as firewood for the duration on the transitional period referred to in 
Article 28(1). 
29 
Proposal for a 
COUNCIL DIRECTIVE 
amending Directive 77/388/EEC 
on the common system of Value Added Tax 
(taxation of agricultural outputs) 
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 Article 12(3)(d) of Directive 77/388/EEC(1), as last amended by Directive 94/5/EC(2), 
lays down that the rules concerning the taxation of agricultural outputs other than those falling 
within category 1 of Annex H are to be decided unanimously by the Council before 
31 December 1994 on the basis of a Commission proposal; whereas until that date, those 
Member States which had already been applying a reduced rate might continue to do so while 
those applying a standard rate could not apply a reduced rate; whereas that allowed a two-
year postponement in the application of the standard rate; 
Whereas experience has shown that the structural imbalance in the VAT rates applicable by 
Member States to agricultural outputs of the floricultural and horticultural sectors has led to 
reported cases of fraudulent activities; whereas that structural imbalance is a direct result of 
the application of Article 12(3)(d) and should be redressed accordingly; 
Whereas the most appropriate solution would be to extend to all Member States, on a 
transitional basis, the option of applying a reduced rate to supplies of agricultural outputs of 
the floricultural and horticultural sectors and of wood used as firewood, 
HAS ADOPTED THIS DIRECTIVE: 
Article 1 
Directive 77/388/EEC is hereby amended as follows: 
1. Article 12(3)(d) is deleted. 
a) 
(2) OJ NoL 145, 13.6.1977, p. 1 
OJNoL 60, 3.3.1994, p. 16. 
30 
2. The following indent is inserted in Article 28(2): 
(g) Member States may apply a reduced rate to supplies of live trees and other 
plants (including bulbs, roots and the like, cut flowers and ornamental foliage) 
and wood for use as firewood. 
The present indent (g) becomes indent (h). 
Article 2 
1. Member States shall bring into force the laws, regulations and administrative 
provisions necessary to comply with this Directive by 1 January 1995 at the latest. 
They shall forthwith inform the Commission thereof. 
When Member States adopt these provisions, these shall contain a reference to this 
Directive or shall be accompanied by such reference at the time of their official 
publication. The procedure for such reference shall be adopted by Member States. 
2. Member States shall communicate to the Commission the text of the provisions of 
domestic law which they adopt in the field covered by this Directive. 
Article 3 
This Directive shall enter into force on the day of its publication in the Official Journal of the 
European Communities. 
Article 4 
This Directive is addressed to the Member States. 
Done at Brussels, For the Council 
The President 
31 
Financial statement 
The proposed Directive, when adopted, will have no consequences for the collection of 
Community own resources. 
32 
Impact on SMEs 
Proposal for a Council Directive amending Directive 77/388/EEC on the common system of 
value added tax. 
taxation of agricultural outputs. 
1. Administrative constraints for business resulting from the application of the legislation. 
None 
2. Easing of burdens on business. 
None 
3. Disadvantages for business. 
None 
Note re points 1, 2 and 3. The proposal has been tabled in order to enable the Council of 
Ministers to fulfil its legal obligation to take a decision on the appropriate rate of 
VAT to apply to agricultural outputs from 1 January 1995. The decision in question 
will simply determine the level of its VAT rate to be applied to supplies of such 
products from that date. It will have no other impact on business. 
4. Effects on employment. 
Positive. 
However, according to a study commissioned by the Dutch flower and plant industry(1), 
a return to the standard VAT rate would have a negative impact on employment in the 
Netherlands and Germany (estimated to be around 10% of the workforce in this sector). 
5. Have the social partners been consulted? 
No 
6. Are there any less constraining alternatives? 
No 
(i) VAT rates for ornamental plants in the EU as from January 1, 1995 (Moret, Ernst 
& Young). 
33 

ISSN 0254-1475 
COM(94) 584 final 
DOCUMENTS 
EN 03 09 
Catalogue number : CB-CO-94-694-EN-C 
ISBN 92-77-84287-3 
Office for Official Publications of the European Communities 
1^2985 Luxembourg 
34