Proposal for a COUNCIL DECISION authorizing the Netherlands to apply a measure derogating from Article 21 (1) (a) of the Sixth Directive (77/388/EEC) on the harmonization of the laws of the Member States relating to turnover taxes
Date: 1992-05-07
Institutions: European Commission
Subjects: Netherlands, VAT, basis of tax assessment, clothing industry, subcontracting

COMMISSION  OP THE EUROPEAN  COMMUNITIES 

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C0M(92) 184 final 

Brussels, 7 May  1992 

Proposal  for a 

COUNCIL DECISION 

authorizing  the Netherlands to apply a measure derogating  from 

Article 2 K D ( a) of  the Sixth Directive  (77/388/EEC) on the 

harmonization of the  laws of the Member  States relating to 

turnover  taxes 

(presented  by the Commission) 

EXPLANATORY  MEMORANDUM 

1.  By  letter officially  received on 11 February  1992 the 

Netherlands Government  submitted  to the Commission  a request  for a 
derogation pursuant  to Article 27 of the sixth VAT Directive,1  to 

enable  it to$ntroduce a scheme to combat  evasion of VAT  In the ready-

to-wear  clothing  Industry.  The scheme would be part of a package of 

measures concerning  taxes and social  security contributions, designed 

to combat  VAT  fraud  in that  Industry.  The  intention  Is to extend to 

the ready-to-wear  clothing  industry  the tax-shiftIng scheme whereby 

liability  for  the payment  of VAT  is shifted  from subcontractors to 

contractors; the Council  approved  the  Introduction of such a scheme In 

the building, structural  steelwork and shipbuilding  industries by 
decision of 20 June  1982.2 

2. 

In support  of  its request, the Netherlands Government  points out  that 

large stores often purchase clothes from ready-to-wear  clothing  firms, 

which  themselves manufacture  the clothes.  However, these firms 

frequently put  the work out, as contractors, to small  ready-to-wear 

workshops  (the subcontractors). 

The fraud  takes place  in the relationship between  the workshop  and the 

firm.  The former  charges the  latter VAT, but  does not pay  it over to 

the tax authorities, while the  latter deducts  it. 

1 
2 

0J No L 145, 13.6.1977. 
OJ No C 197, 31.7.1982. 

The Netherlands Government  argues that  this type of evasion, which  Is 

now very  frequent  In the ready-to-wear  clothing  industry,  is difficult 

to combat under  the current  system of collecting VAT.  Ready-to-wear 

workshops are generally  small  firms which  Just own their machinery and 

are established  in rented business premises or  In residential 

property.  The statutory provisions concerning  social  security 

contributions, taxation and working conditions are often disregarded. 

Many of  these workshops change hands frequently. Under  the 

circumstances,  if fraud  Is discovered, the tax authorities have  little 

chance of  recovering the tax.  The Netherlands Government  takes the 

view that  this fraud can be conclusively  defeated only by applying the 

tax-shifting scheme to this  Industry as well. 

3.  Under  the tax-shifting scheme, the VAT normally payable by the 

subcontractor  by virtue of Article 21(1)(a) of  the Sixth VAT Directive 

Is collected  from the contractor. 

In the building, structural  steelwork and shipbuilding  industries, the 

authorized  tax-shifting scheme  Is applied only when the subcontracted 

work  is carried out  away  from  the subcontractor's place of business. 

However, when operating  the scheme  in the ready-to-wear  clothing 

industry, the Netherlands Government wishes to  Include contract work 

carried out on the subcontractor's business premises. The 

Justification given  Is that  In the ready-to-wear  clothing  Industry the 

tax authorities have  less chance of recovering VAT than  in the other 

sectors, for  the reasons given  In point  2 above. 

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The  Netherlands  authorities  consider  that  the  scheme  does  not  result 

In a  reduction  in the  amount  of  VAT  payable  at  the  final  consumption 

stage  or  In  the  basis  of  assessment  for  VAT  own  resources. 

The  authorization  will  remain  In force  until  31  December  1996;  before 

that  date,  the  Commission  Is to  report  to  the  CounciI  on  the 

application  of  the  authorization. 

In accordance  with  Article  27(3) of  the  Sixth  VAT  Directive,  the  other 

Member  States  were  Informed  by  letter  dated  10 March  1992 of  the 

Netherlands'  request. 

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Proposal  for a 

COUNCIL  DECISION 

authorizing  the Netherlands to apply a measure derogating from 

Article 21(1)(a) of  the Sixth Directive  (77/388/EEC) on the 

harmonization of  the  laws of the Member  States relating to 

turnover  taxes 

THE COUNCIL OF THE EUROPEAN COMMUNITIES, 

Having  regard  to the Treaty establishing  the European Economic Community, 

Having  regard  to the Sixth Council  Directive  (77/388/EEC) on  the 

harmonization of  the  laws of  the Member  States relating  to turnover  taxes -

Common system of value added  tax: uniform basis of assessment,1  and  in 

particular  Article 27 thereof, 

Having  regard  to the proposal  from  the Commission, 

Whereas, under  Article 27(1) of  the Sixth Directive, the Council, acting 

unanimously  on a proposal  from  the Commission, may authorize any 

Member  State  to  introduce special  measures for derogation  from  that 

Directive  in order  to simplify  the procedure  for charging  the tax or  to 

prevent  certain  types of  tax evasion or avoidance; 

Whereas the Netherlands, by  letter  received by the Commission on 

11 February  1992, requested  authorization to  Introduce  In the  ready-to-wear 

clothJng  industry a special  measure  for derogation  from Article 2 K D ( a) of 

the Sixth Directive; 

OJ No L 145, 13.6.1977, p. 1. 

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Whereas  the  purpose  of  the measure  Is to  combat  fraud  occurring  in  the 

relationship  between  ready-to-wear  clothing  firms  worklr.y  for  large  stores 

on  the  one  hand,  and  small  workshops  (subcontractors)  to which  those  firms 

have  put  the  work  out  on  the  other;  whereas  this  type  of  fraud,  which 

consists  In  the  subcontractor  Invoicing  VAT  to  the  contractor  but  not 

paying  it over  to  the  tax  authorities,  while  the  contractor  deducts  the 

tax,  is difficult  to  combat  under  the  present  system  of  collecting  VAT; 

Whereas  the  scheme  planned  by  the  Netherlands  Involves,  In  the 

ready-to-wear  clothing  industry,  collecting  from  the  contractor  the  VAT 

normally  due  from  the  subcontractor  under  Article  21  of  the  Sixth  VAT 

Direct ive; 

Whereas  the  derogation  will  not  have  a negative  effect  on  the 

European  Community's  own  resources  accruing  from  value  added  tax; 

Whereas  the  scheme  will  be  temporary,  which  will  permit  an  assessment  of 

the  effects  of  the  derogation  after  a  period  of  application; 

Whereas  the  Commission  will  present  a  report  to  the  Council  before 

31  December  1996  on  the  application  of  this  authorization,  accompanied, 

where  appropriate,  by  a  proposal  for  a  Decision  to  extend  the  said 

author izat ion; 

Whereas  the  other  Member  States  were  informed  of  the  Netherlands'  request 

on  10 March  1992; 

HAS  ADOPTED  THIS  DECISION: 

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Article 1 

By  way  of  derogation  from  Article  21(1)(a) of  the  Sixth  Directive, 

the  Netherlands  is  hereby  authorized  to  apply  until  31  December  1996  in  the 

ready-to-wear  clothing  industry  a  scheme  for  shifting  the  obligation  to  pay 

over  VAT  to  the  tax  authorities  from  the  subcontractor  to  the  clothing  firm 

(the  contractor). 

Article  2 

In  the  light  of  a  report  from  the  Commission  on  the  application  of  the 

authorization  referred  to  In Article  1,  accompanied,  where  appropriate,  by 

a  proposal  for  a  Decision  extending  the  said  authorization,  the  Council, 

acting  on  the  basis  of  that  proposal,  shall  decide,  before 

31  December  1996, whether  the  said  authorization  is  to be  extended. 

Article  3 

This  decision  is addressed  to  the  Netherlands. 

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