WRITTEN QUESTION P-2463/97 by Ernesto Caccavale (UPE) to the Commission (8 July 1997)

Subject: VAT levy on European Funds for SMUs

The global grant - an instrument aimed at providing funding for local development projects - is granted by the Commission to intermediary bodies responsible for identifying, selecting and assisting the final beneficiaries, such as small and medium-sized undertakings.

Following complaints to the Ombudsman and protests submitted by individuals to the offices of the Commission and the European Parliament, it appears that taxation on global grant funds varies from country to country and, in particular, that the Italian Government imposes VAT on such funds. This in effect deprives SMUs of a large proportion of the funds granted by the Commission, which are of course subject to tax exemption.

Will the Commission provide detailed information on the provisions contained in contracts signed with intermediary bodies in respect of global grants in the various Member States?

Will it state what tax provisions are applied by each Member State in which the Commission has granted the global grant?

Can it state whether Italy has in fact obtained unjustified funds to the detriment of SMUs by taxing amounts paid under the global grant?

Lastly, will it provide a detailed list of intermediaries which to date have signed contracts with the Commission for global grants?

Answer given by Mr Monti on behalf of the Commission (23 September 1997)

The provisions contained in contracts signed with intermediary bodies in respect of global grants funded by the Community Structural Funds are standard and are, therefore, generally identical. They may not diverge from the binding rules applicable at Community and national level.

Moreover, the rules on indirect taxation laid down by Community Directives ensure that Community grants receive equal treatment in the different Member States.

Article 2 of the Sixth VAT Directive ((Directive 77/388/EEC, OJ L 145, 13.6.1977, as last amended by Directive 96/42/EC, OJ L 170, 9.7.1996. )) provides for VAT to be charged on supplies of goods and services. Consequently, it does not cover the payment of a global grant by the Commission to an intermediary body or the receipt of the money by the body in question. Such a transaction, therefore, falls outside the scope of VAT. Similarly, the payment of a grant by the intermediary body to a beneficiary must also be considered to fall outside the scope of VAT. If, on the other hand, an intermediary body supplies grant-management services against payment to the Structural Funds or firms benefiting from the grant, this constitutes a transaction that is subject to VAT in accordance with the general rules.

Purchases of goods and services by the intermediary body and beneficiary firms in connection with the assisted activity are subject to VAT. The general rules on VAT also apply to the right to deduct and recover the input tax levied on their purchases. In this context, it should be noted that Italy does not make use of the option of limiting the right to deduct input tax, as provided for in Article 19 of Directive 77/388/EEC, in respect of all purchases by beneficiary firms that are funded by grants.

The general rule on the eligibility of VAT under the Structural Funds is clearly specified in the Commission Decision of 23 April 1997 ((OJ L 146, 5.6.1997. )) (datasheet No 15): 'VAT and the other categories of levies, taxes or charges [...] arising from Community financing constitute eligible costs if these taxes and charges are actually and definitively borne (and regardless of the fact that they contribute to the budget of the Member State).' On the other hand, 'VAT which is recoverable, refunded or offset by whatever means cannot be considered eligible, and therefore cannot be part-financed by the Structural Funds.' The rule applies in the same way in all Member States, including Italy.

Information on the implementation of global grants is contained in the annual reports on the activity of the Structural Funds. In addition, every decision to award a global grant is the subject of a press release containing information on the intermediary body designated.