WRITTEN QUESTION P-2853/01

by Florence Kuntz (EDD) to the Commission

(8 October 2001)

Subject: Imposition of VAT on service charges

On 1 October 2001 new rules entered into force in France making the imposition of VAT compulsory on service charges claimed on behalf of staff in catering and hairdressing establishments.

Until this year, however, France had been exempted from this requirement as a result of Council Decision 89/487/EEC(1) of 28 July 1989 authorising the French Republic to apply a measure derogating from the second subparagraph of Article 17(6) of the Sixth Directive 77/388/EEC(2) on the harmonisation of the laws of the Member States relating to turnover taxes.

It was only following a decision of the Court of Justice, delivered on 29 March 2001, that it became possible to bring this derogation to an end. Why did it take the Commission and the Court more than ten years to denounce a situation which was a problem for no one except themselves? In particular, why was it necessary to introduce the VAT requirement in respect of service charges just as the euro was being introduced? The new currency will itself give rise to inflationary pressures linked to its conversion rate (6,55957 francs to the euro) and the problems which rounding off prices will pose. Will the Commission explain why it has accepted this absurd timing and thereby taken the risk of heightening recessionary trends by discouraging private consumption, which is an engine of growth?

(1) OJ L 239, 16.8.1989, p. 21.

(2) OJ L 145, 13.6.1977, p. 1.

Answer given by Mr Bolkestein on behalf of the Commission

(6 November 2001)

The derogation referred to in the Honourable Member's question which was granted to France by Council decision of 28 July 1989 is in no way intended to enable France to exclude service charges from the VAT assessment basis. This measure, which derogates from Article 17(6) of the Six Directive 77/388/EEC on the harmonisation of legislation on the laws of the Member States relating to turnover taxes, authorised France to exclude tax on certain representational expenditure from the right to deduct VAT. This derogation was deemed to be invalid by the Court of Justice in its ruling of 19 September 2000(1).

As guardian of the EC Treaty the Commission must ensure that Community legislation is properly implemented by the Member States even in the transition period preceding the introduction of the euro.

In this case the Commission took the view that point 1 of Article 2 and Article 11(A)(1)(a) of the Directive of 17 May 1977 meant service charges could not be excluded from the VAT assessment basis.

Furthermore, the non-inclusion of service charges in the VAT assessment basis had a negative impact on the French contribution to VAT own resources for the Community budget as each Member State's contribution is calculated using that assessment basis.

These are the reasons which led the Commission to institute infringement proceedings under Article 226 (former Article 169) of the EC Treaty against France for having allowed service charges to be excluded from their VAT assessment basis.

The Commission's legal analysis was confirmed by the Court of Justice in a ruling of 29 March 2001(2).

Member States are required to notify the Commission within three months of measures taken to comply with rulings by the Court of Justice. If they do not, a procedure may be introduced under Article 228 (former Article 171) of the EC Treaty. Since the Commission has no influence on the length of infringement proceedings, the fact that the introduction of the euro has coincided with the alignment of French legislation on Community law is purely fortuitous.

(1) Joined cases C-177/99 and C-181/99 Ampafrance SA and Sanofi Synthelabo SA.

(2) Case C-404/99 Commission v France.