Report from the Commission to the Council on the transitional provisions resulting from Article 28 (3) of the Sixth Directive, 77/388/EEC, and Article 1 (1) of the Eighteenth Directive, 89/465/EEC presented in accordance with Article 3 of the Eighteenth Council Directive of 18 July 1989
Date: 1992-07-02
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: EU Member State, VAT, derogation from EU law, single market, tax exemption, tax harmonisation, tax law

COMMISSION OF  THE  EUROPEAN  COMMUNITIES 

SEC(92)1006 final 

Brussels,  2 July  1992. 

Report  from  the  commission  to  the  council 
on  the  transitional  provisions  resulting  from 

- Article  28(3)  of  the  Sixth  Directive, 

77/388/EEC,  and 

- Article  1(1)  of  the  Eighteenth  Directive, 

89/465/EEC 

presented  in  accordance  with  Article  3 
of  the  Eighteenth  council  Directive  of  18  July  1989 

2 

The  common  system  of  value  added  tax  should  in  principle  include  a  uniform 
basis  of  assessment.  This  objective  was  not  entirely  achieved  by  the  Sixth 
the 
Directive 
Member  States 
the 
Member  States  to  apply,  for  a  transitional  period,  certain  derogations  to 
the  normal  arrangements  of  the  common  system  of  value  added  tax. 

(77/388/EEC) 
relating 

laws  of 
authorizes 

the  harmonization  of 

taxes,  which 

turnover 

on 
to 

the 

These  derogations  were  established  to  give  the  Member  States  and 
economic  sectors  concerned  time  to  make  the  necessary  adjustments. 

the 

(1)  Articles  13  and  15  of  the  Sixth  Directive  of  17  May  1977  list  a  number 
of  transactions  which  are  permanently  exempt  from  value  added  tax. 

Article  28(3)(a)  of  the  Directive  authorizes  the  Member  states,  for  a 
transitional  period,  to  derogate  from  the  general  rule,  so  that  tax  may 
continue  to  be  applied  to  those  exempted  transactions  listed  in  Annex  E 
to  the  Directive. 

Likewise,  Article  28(3)(b)  authorizes  the  Member  States  to  continue  to 
exempt  the  activities  set  out  in  Annex  F  under  conditions  existing  in 
the  Member  State  concerned,  even  though  the  activities  in  question 
should,  under  Articles  5  and  6  of  the  Sixth  Directive,  normally  fall 
within  the  scope  of  VAT. 

(2)  The  Sixth  Directive  also  lays  down  that  the  Council,  acting  on  the 
basis  of  a  report  from  the  commission,  shall  review  the  situation  with 
in  Article  28(3)  and  determine 
regard  to  the  derogations  set  out 
whether  any  or  all  of  these  derogations  should  be  abolished. 

(3)  The  abolition  of  these  derogations  should  be  sought  for  the  following 

reasons: 

(a)  Their  withdrawal  is  necessary  in  order  to  improve  the  functioning 
of 
complete 
harmonization  of  VAT  at  Community  level  and  may  consequently  result 
in  competition  being  distorted  between  the  Member  States. 

to  obstruct 

they  all 

the  VAT 

system: 

tend 

a 

3 

(b)  Moreover,  Article  2  of  council  Regulation  (EEC,  Euratom)  No  1553/89 
of  29  May  1989  on  the  definitive  uniform  arrangements  for 
the 
collection  of  own  resources  accruing  from  value  added  tax  lays  down 
that  the  following,  inter  alia,  shall  be  taken  into  account  for 
determining  the  VAT  resources  base: 

-

-

transactions  which  Member  States  continue 
pursuant  to  Article  28(3)(a)  of  Directive  77/388/EEC; 

to  subject 

to 

tax 

transactions  which  Member  States  continue  to  exempt  pursuant  to 
Article  28(3)(b)  of  Directive  77/388/EEC. 

These  derogations  therefore  have  appreciable  consequences  for  the 
method  of  calculating  own  resources  and  make  their  control  more 
difficult. 

the  Council  meeting  at  which 

(c)  Finally,  note  was  taken  in  the  declaration  included  in  the  minutes 
of 
the  Eighteenth  Directive  was 
adopted  (Fisc  105  - 7716/89)  that  any  necessary  amendments  to  the 
list  of  exempted  transactions  and  taxable  transactions  as  laid  down 
in  Article  28(3)  should  have  the  effect  of  guaranteeing  equality  of 
tax  treatment  between  the  Member  States  in  accordance  with  the 
principles  of  the  EEC  Treaty. 

(4)  With  all  this  in  mind,  and  acting  on  a  proposal  from  the  Commission, 
the  Council  decided  in  its  Directive  of  18  July  1989,  to  abolish  some 
of  the  derogations. 

Thus,  the  number  of  Annex  E  derogations  was  reduced  from  13  to  4  (two 
never  having  been  used);  the  number  of  Annex  F  derogations  was  reduced 
from  27  to  14. 

(5)  The  Council  also  provided,  in  Article  3  of  the  Eighteenth  Directive, 
that  it  would  review  the  situation  with  regard  to  the  other  derogations 
resulting  from 

Article  28(3)  of  the  Sixth  Directive  of  17  May  1977  and 
the  second  subparagraph  of  Article  1(1)  of  the  Eighteenth  Directive 
of  18  July  1989, 

having  regard  to  any  distortions  of  competition  which  had  resulted  from 
to 
their  having  been  applied  or  which  might  arise 
complete  the  internal  market. 

from  measures 

* 

* 

* 

4 

The  purpose  of  this  report  is  to  assess  the  situation  as  regards  the 
derogations  which  have  not  been  abolished  by  the  Eighteenth  Directive, 
taking  account  of  economic  conditions  and  the  completion  of  the  internal 
market. 

It  successively  examines: 

the  derogations  in  respect  of  which  the  Commission  has  undertaken  to 
present  specific  proposals  to  the  Council,  and 

the  consequences  of  the  application  of  the  other  derogations,  or  others 
which  are  likely  to  arise  as  the  internal  market  approaches  completion. 

I.  DEROGATIONS  WHICH  SHOULD  BE  DEALT  WITH  BY  SEPARATE  PROPOSALS 

5 

1.  Specific  proposals  are  necessary  for  some  of  the  derogations  laid 
down  by  Article  28<3>Ca>  and  (b)  <Annexes  E  and  F),  and  these  will 
not 
The 
following  derogation&  are  concerned: 

therefore  be  examined  anv  further 

in  this  report. 

ElS  The  services  of  travel  agents  -

journeys  outside  the  Community 

(cf.  point  F27  and  Article  28(3)(g)) 

In  order  to  take  account  of  the  practical  difficulties  of 
already  raised 
taxing  the  margin  of  travel  agents,  a  matter 
the 
within 
undertaking  given  during 
the 
Eighteenth  Directive,  the  Commission  will  be  putting  a  specific 
proposal  for  a  Directive  to  the  Council. 

accordance  with 
for  adopting 

the  VAT  Committee, 

the  procedure 

and 

in 

FlO  Transactions  of  hospitals  (private  clinics) 

The  proposal  for  a  Nineteenth  Directive 
(COM(84)  648)  would 
extend  exemption  to  hospitals  other  than  those  covered  by 
Article  13A(l) (b)  of  the  Sixth  Directive,  which  are  already 
exempt.  Widening  the  scope  of  the  exemption  referred  to  in 
that  Article  would  therefore  make  the  derogation  set  out  in 
point  10  of  Annex  F  redundant. 

F17  Passenger  transport  and  the  transport  of  goods  related  to 

passenger  transport 

The  implementation  of  Article  28(5)  will  be  the  subject  of  a 
separate  proposal  in  accordance  with  the  Commission's  programme 
for  1992. 

Consequently, 
arrangements 
presented  to  the  Council  as  soon  as  possible. 

to  passenger 

applicable 

proposal 

a  Directive 

for 

a 

on 
transport  will 

the  VAT 
be 

F26  Transactions  concerning  gold  other  than  gold  for  industrial  use 

6 

In  accordance  with  the  undertaking  given  during  discussions  on 
the  Eighteenth  Directive,  the  Commission  will  send  the  Council 
the  VAT 
specific  proposal 
a 
arrangements  applicable 
Technical 
discussions  have  already  commenced  with  a  view  to  drawing  up  a 
working  document. 

a  Directive  concerning 

transactions. 

such 

for 

to 

F27  The  services  of  travel  agents  (journeys  within  the  Community) 

(see  ElS) 

2.  Derogation  under  Article 

the  Sixth  Directive 
28(3> Cg> 
<possibility  of  exemotincr  the  services  of  travel  agents  without 
repayment  of  input  tax> 

of 

This  derogation  will  also  be  examined  in  fresh  proposals  on  the 
transactions  of  travel  agents  (see  ElS). 

II.  ANALYSIS  OF  ~ DEROGATIONS  STILL  IN  EXISTENCE 

A.  General  remarks 

7 

influences 

the  remaining  derogations 
the  Member  States  of 
Application  by 
inevitably 
revenues. 
their  budgetary 
level  of 
Maintaining  them  may  also  distort  competition  between  firms  in  the 
various  Member  States.  Taking  both  these  aspects  into  account,  the 
Commission  intends  to  complete  the  process  of  harmonization  on  the 
basis  of  a  pragmatic  approach. 

the 

1.  Maintaining  derogations  which  enlarge  or  restrict  the  scope  of 
VAT  in  a  Member  State  which  takes  advantage  of  them  affects  the 
level  of  that  State's  VAT  revenues. 
The  derogations  which 
still  exist  have  the  effect 

either  of  maintaining  taxation  on  transactions  which  are  to 
be  exempt  in  the  final  arrangements  (Article  28(3)(a)  and 
AnnexE  of  the  Sixth  Directive), 

or 
of  maintaining 
transactions  (Article 
Directive). 

exemption 

taxable 
28(3) (b)  and  Annex  F  of  the  Sixth 

normally 

of 

loss  of  revenues 

in  the  former  case  and  an 

Abolition  of  the  remaLnLng  derogations  should  therefore  lead  to 
a 
increase  in 
resources  in  the  latter  for  each  Member  State  affected  by  their 
withdrawal. 
In  this  respect,  there  are  more  derogations  left 
in  Annex  F  (14)  than  in  Annex  E  (4).  Putting  aside  any  other 
considerations,  a  Member  state  should  therefore  be  pleased  from 
a  budgetary  point  of  view  to  abolish  the  Annex  F  derogations  it 
applies. 

Maintaining  the  existing  derogations  also  forces  the  Commission 
departments  to  make  corrections  to  the  method  of  calculating 
own  resources  on  the  basis  of  the  information  supplied  by  the 
Member  States. 

1 

2.  Moreover,  the  Council  has  expressly  asked  the  Commission  for  a 
report
enabling  it  to  decide  whether  these  derogations  should 
be  abolished  "having  regard  to  any  distortions  of  competition 
which  have  resulted  from  their  having  been  applied  or  which 
might  arise  from  measures  to  complete  the  internal  market". 

1  Article  3  of  the  Eighteenth  Directive. 

8 

We  should  therefore  examine  both  the  transitional  and  permanent 
arrangements  in  order  to  assess  the  risks  of  competition  being 
distorted. 

The  application  of  each  of  the  derogations  maintained  by  the 
Eighteenth  Directive  is  briefly  analysed  below  by  reference  to 
this  criterion. 

Nevertheless  it  should  first  be  stressed  that  significant 
differences  in  rates  for  the  same  goods  and  services  are 
also  liable  to  distort  competition. 

In  the  case  of  the  supply  of  goods,  the  VAT  rules  currently 
in  force  or  those  which  would  result  from  the  transitional 
arrangements  do  not  give  rise  to  any  apparent  distortion  of 
competition  as  far  as  the  applicable  rate  is  concerned, 
import 
which  is  systematically  that  of 
(current  rules)  or  the  country  of  destination  (transitional 
This  would  not  be  the  case  if,  as  the 
arrangements) • 
Commission  proposed 
the  non-taxable  or 
in  August  1987, 
exempt  person  to  whom  the  goods  are  supplied  had  to  pay  VAT 
at  the  rate  of  the  country  of  origin. 

the  country  of 

As  for  services,  distortions  of  competition  may  arise  if, 
as  stipulated  by  Article  9(1)  of  the  Sixth  Directive,  the 
place  where  a  service  is  supplied  is  deemed  to  be  the  place 
where  the  supplier  has  established  his  business. 

An  alignment  of  rates,  as  proposed  by  the  Commission,  is 
therefore  vital  if  existing  distortions  are  to  be  reduced. 

In  some  cases,  moreover,  distortions  of  competition  due 
exclusively  to  the  maintenance  of  one  derogation  or  another 
are  necessarily  limited.  This  is  because  some  derogations 
are  applied  by  a  very  small  number  of  Member  States  (see 
In  addition,  various  factors  such  as  distance, 
Annex  1). 
convenience, 
a 
purchaser's 
the 
distortion  purely  theoretical. 

etc., 
therefore 

sometimes  make 

influence 

directly 

service, 

choice 

and 

Furthermore,  the  Sixth  Directive  contains  more  derogations 
than  simply  those  laid  down  by  Article  28(3). 

3.  This  being  the  case,  the  derogations  which  remained  following 
transitional 
adoption  of  the  Eighteenth  Directive  retain  a 
character  under  the  Sixth  Directive.  They  should  in  principle 
be  eliminated  in  order  to  complete  the  process  of  harmonization 
between  the  Member  States'  laws  on  turnover  taxes. 

9 

in 
However,  as  it  was  asked 
the 
accordance  with  Article  28(4)  of 
Commission 
those 
derogations  whose  maintenance  would  go  against  the  principle  of 
equality  of  tax  treatment  between  the  Member  States. 

to  propose  abolition  of  only 

the  Sixth  Directive, 

the  Council,  and 

to  do  by 

intends 

4.  Nevertheless,  the  Member  States  could,  as  a  rule  of  thumb,  be 
granted  a 
some  of  the 
right  of  option  in  replacement  for 
derogations  whose  abolition  is  still  recommended  even  though  no 
real  distortion  of  competition  results  from  their  application. 
The  main  advantage  of  such  a  provision  would  be  that  it  would 
allow  all  the  Member  States,  and  in  particular  those  who  do  not 
at  present  "benefit"  from  any  derogations,  to  adapt  their  laws. 

Of  course,  this  possibility  should  not  result  in  the  general 
principles  of  the  Sixth  Directive  being  undermined,  nor  should 
it  give  rise  to  fresh  instances  of  competition  being  distorted 
between  the  Member  States. 

5.  The  abolition  of  a  derogation,  whether  or  not  compensated  for 
by  a 
right  of  option  granted  to  all  Member  States,  should 
become  effective  not  later  than  1  January  1993,  the  date  on 
which  the  transitional  arrangements  enter  into  force  in  the 
context  of  the  abolition  of  tax  frontiers. 

B.  Transactions  referred  to  in  Annex  E 

E2  -

Services  suoolied  by  dental 
supplied  by  dentists  and  dental  technicians 

technicians  and  dental  prostheses 

10 

i.e. 

services 

These  are  the  transactions  referred  to  in  Article  13A(l)(e)  of  the  Sixth 
Directive, 
their 
professional  capacity  and  dental  prostheses  supplied  by  dentists  and  dental 
technicians.  This  provisions  exempts  neither  the  purchase  of  prostheses 
technicians,  but  solely 
within  a  country  nor  their 
transactions  between 
their 
customers. 

supplied  by  dental 

import  by  dental 

the  dentist  and 

technician  or 

technicians 

the  dental 

in 

the 

two  Member  States  which 

(Germany, 
Of 
Belgium),  only  Germany  has  expressed 
the  wish,  during  preparatory 
discussions  for  the  Eighteenth  Directive,  to  maintain  the  derogation  for 
budgetary  reasons. 

transactions 

the  said 

tax 

Its  abolition,  already  envisaged  by  the  Commission  in  1984  in  its  proposal 
for  the  Eighteenth  Directive,  is  justified  by  the  fact  that  the  maintenance 
of  taxation  requires  dentists  to  distinguish  between  taxable  and  non 
taxable  transactions.  Moreover,  such  a  derogation  could  not  possibly  be 
permanent  in  nature. 

11 

E7  -

Activities  of  public  radio  and  television  bodies  other  than  those 
of  a  commercial  nature. 

The  commercial  activities  of  public  radio  and  television  bodies  are  taxable 
pursuant  to  the  third  subparagraph  of  Article  4(5)  and  Annex  D  of  the  Sixth 
VAT  Directive. 

In  contrast,  non-commercial  activities  are  exempt  under  Article  13A(l)(q) 
of  the  same  Directive.  Article  28(3) (a)  nevertheless  authorized  the 
Member  States  to  continue  taxing  the  said  transactions  on  a  transitional 
basis. 

Two  Member  States  apply  derogation  E7  (Denmark  and  Italy).  All  the  other 
Member  States  are  deemed  to  exempt  non-commercial  activities.  Abolition  of 
the  derogation  would  merely  confirm  the  distinction  made  in  the  Sixth 
Directive  between 
commercial  activities. 

commercial  activities  and  exempted,  non 

taxable, 

The  Commission  notes  that  services  supplied  to  television  viewers  by  a 
public  channel  are  basically  no  different  to  those  supplied  by  a  private 
one. 
The  public  channels  are  also  seeking  to  attract  an  ever  wider 
audience  in  order  to  increase  the  volume  of  their  revenues  other  than  from 
licence  fees.  Public  and  private  channels  are  thus  competing  more  directly 
than  hiterto. 
As  new  technologies  (cable,  satellite  television,  etc.)  are  breaking  down 
the  frontiers  between  States,  a  national  public  channel  is  able  to  compete 
with  a  public  or  private  channel  in  another  Member  State. 

Current  developments 
the  European 
characterized  by  the  internationalization  of  production  and  the  market. 

audiovisual 

scene 

on 

are  also 

Exemption  has  the  effect  of  maintaining  distortions  of  competition  to  the 
detriment  of  public  channels,  much  of  whose  revenue  comes  from  licence 
fees.  Unlike  their  competitors  in  the  private  sector,  public  channels 
cannot  fully  deduct  the  tax  charged  on  goods  and  services  acquired  for  the 
purposes  of  their  activity. 

The  only  means  of  ensuring  that  all  broadcasting  bodies  are  treated  equally 
is  to  tax  non-commerical  activity. 

12 

In  addition,  taxation  would  have  a  very  limited  impact  on  the  level  of  such 
fees  since  Member  States  could  apply  a  reduced  rate.  And  since  the  level 
of  the  fee  is  fixed  by  the  public  authorities,  Member  States  may  choose,  if 
they  wish,  not  to  pass  on  the  full  tax  in  the  fee  paid  by  users  of  the 
public  service. 

The  Commission  is  therefore  seeking  both  the  abolition  of  the  derogation 
which  allows  some  Member  States  to  continue  taxing  the  "non-commercial" 
activities  of  public  radio  and  television  bodies  and  the  amendment  of  the 
Sixth  Directive,  so  as  to  make  all  transactions  of  the  said  bodies  taxable 
in  all  Member  States. 

However,  account  should  also  be  taken  of  the  particular  social  and  cultural 
and 
concerns  of 
television.  Member  States  might  wish  to  see  such  concerns  prevail  over 
economic  considerations  linked  to  competition  between  public  and  private 
radio  and  television  broadcasters. 

each  Member  State 

regarding  public 

service 

radio 

It  is  therefore  planned  that  those  Member  States  which  currently  exempt  the 
non-commercial 
television  bodies  may 
continue  to  do  so  after  1  January  1993. 

transactions  of  public  radio  and 

the  VAT  status  of  such  bodies  will  be  reviewed  by  the 
At  all  events, 
Commission,  and 
the  Council  will  have  to  take  a  decision  about  this 
derogation  on  the  basis  of  a  Commission  proposal  which  will  be  l''lt  forward 
by  31  December  1996. 

13 

Ell  -

Supplies  of  buildings  not  newly  constructed,  in  so  far  as  they  are 
made  by  taxable  persons  who  were  entitled  to  deduction  of  input  tax 
on  the  building  concerned. 

This  derogation  allows  the  taxation  of  supplies  of  building  effected  after 
their  initial  occupation  by  taxable  persons  having  exercised  their  right  to 
deduct  input  tax  on  the  buildings  concerned  at  the  time  of  their  initial 
supply. 

Only  three  of  the  Member  States  derogate  from  the  principle  of  exemption 
set  out  in  Article  13B (g)  of  the  Sixth  Directive  (Ireland,  Italy  and 
In  most  of  t!le  other 
France)  and  thus  subject  such  supplies  to  VAT. 
Member  States,  such  supplies  give  rise  to  the  collection  of  registration  or 
transfer  tax,  which  are  not  generally  deductible  by  the  taxable  person  to 
whom  the  building  is  supplied. 

To  the  extent  that  the  goods  in  question  are  immovable,  maintaining  the 
derogation  cannot  have  any  real  consequences  for  competition. 

Such  distortions  could  arise  only  if  the  tax  burden  linked  to  acquisition 
is  very  different  from  one  country  to  another  and,  consequently, 
this 
influences  a  firm's  decision  concerning  its  future  location.  This  being 
said,  that  factor  does  not  seem  to  be  the  only  one  to  determine  its  choice 
given,  for  example,  the  existence  of  aid  which  the  public  authorities  may 
grant  to  firms  to  encourage  them  to  locate  in  one  country  in  preference  to 
another  and  the  influence  of  each  firm's  commercial  policies. 

Nevertheless, 
the 
the 
abolition  of  this  derogation  seems  necessary  in  order  to  make  the  common 
system  of  value  added  tax  as  neutral  as  possible  for  all  involved. 

internal  market  approaches, 

as  completion  of 

In  addition,  since  these  transactions  are  exempted  pursuant  to  Article 
13B(g),  the  Member  States  will  be  able  to  apply  Article  13C(b)  and  grant 
the  right  of  option  to  their  taxable  persons  with  regard  to  the  taxation  of 
these  transactions. 

c.  Transactions  referred  to  in  Annex  F 

Fl  -

Admission  to  sporting  events 

14 

The  first  derogation  of  Annex  F  allows 
to  exempt 
admission  fees  to  sporting  events,  which  would  normally  be  taxable.  Three 
Member  States  currently  exempt 
Ireland  and 
Luxembourg) • 

these  transactions 

the  Member  States 

(France, 

The  Commission  had  envisaged  abolishing  this  derogation  in  its  initial 
proposal  for  the  Eighteenth  Directive.  During  discussions,  it  had  been 
asked  by  Parliament  to  draw  a  distinction  between  amateur  and  professional 
involving 
sport  so  that  only  professional  sporting  events,  i.e.  events 
sportsmen  who  receive  direct  or  indirect  remuneration,  >-Jould  be  taxed. 
Thus,  admission  fees 
involving  only  sportsmen  who 
receive  no  direct  or  indirect  remuneration  for  their  participation  would  be 
the  only  category  which  could  continue  to  be  exempted. 

to  sporting  events 

The  Commission  refused  to  make  this  amendment  because  the  development  and 
current  practice  of  sport  does  not  allow  such  a  distinction  to  be  made. 
Moreover,  accepting  it  would  have 
led  to  a  partial  derogation  being 
maintained  in  favour  of  "amateur"  sport,  which  would  have  been  contrary  to 
the  final  objective  of  abolishing  all  derogations. 

light  of 

the  previous  deliberations  of 

In  the 
the  Working  Party  on 
Financial  Questions,  and  in  view  of  the  fact  that  any  taxes  other  than  VAT 
which  might  be  applied  to  admission  to  sporting  events  accrue  to  the  local 
authorities,  the  Commission  proposes  to  leave  it  to  the  discretion  of  each 
Member  State  to  decide  which 
the  most 
appropriate. 

tax  arrangements  its  considers 

None  the  less,  the  maintenance  of  a  situation  of  treatment  differing  from 
one  country  to  another  should  not  give  rise  to  distortions  of  competition 
in  this  sector  since  the  venue  of  a  sporting  event  is  not  linked  to  the  tax 
arrangements  applied  to  admission  fees  by  a  Member  State. 

Consequently,  the  Commission  intends  to  propose  abolition  of  the  derogation 
whilst  giving  the  Member  states  the  possibility  of  opting  for  an  exemption 
of  admission  fees  to  some  or  all  sporting  events. 

15 

F2  -

Services  supplied  by  authors,  artists,  performers, 
other  members  of  the  liberal  professions 

lawyers  and 

All  the  activities  of  members  of  the  above  professions  are  subject  to  VAT 
in  accordance  with  the  combined  provisions  of  Articles  2  and  4  of  the  Sixth 
Directive.  Derogations  from  the  principle  of  taxation  are  permitted  only 
under  Article  13  or  under  this  transitional  provision.  Six  Member  States 
are  currently  applying  the  F2  derogation  (Belgium,  Denmark,  Spain,  Greece, 
Ireland  and  the  Netherlands). 

Services  supplied  by 
professions 

lawvers  and  other  members  of  the  liberal 

Where  the  services  supplied  by  lawyers  and  other  members  of  the  liberal 
professions,  such  as  notaries,  bailiffs,  journalists,  accountants,  etc., 
are  supplied  to  taxable  persons,  the  fact  of  taxation  enables  customers  to 
deduct  the  VAT  invoiced  to  th~m,  and  likewise  the  supplier  can  recuperate 
any 
the  service  does  not 
Conversely,  exemption  of 
authorize  the  deduction  of  input  taxes,  which  form  part  of  the  cost  price 
of  the  service. 

tax  paid. 

input 

Distortions  of  competition  might  emerge  if  a  Member  State  were  to  continue 
applying  the  derogation. 

This  is  because,  under  Article  9(2) (e)  of  the  Sixth  VAT  Directive,  the 
place  where  certain  transactions  are  deemed  to  occur  is  the  place  where  the 
taxable  customer  has  established  his  business.  Consequently,  the  supply  of 
the  service  will  always  be  taxable  if  the  transaction  is  not  exempted  in 
the  Member  State  in  which  the  taxable  customer  is  established,  whatever  the 
arrangements  applicable  in  the  Member  State  of  the  supplier. 
It  will  never 
be  taxed  in  the  Member  State  of  the  taxable  customer  if  the  derogation  is 
applied  by  that  State. 

these  circumstances, 

In 
distortions  of  competition. 

the  derogation  does  not  create 

any  major 

However,  it  should  be  noted  that  a  supplier  established  in  a  Member  State 
which  applies  the  derogation  cannot  exercise  any  right  of  deduction,  even 
if  the  service  is  taxable  in  the  State  of  the  customer.  The  consequence  of 
this  is  that  the  base  net  of  VAT  of  the  invoiced  service  necessarily 
includes  elements  on  which  non-deductible  VAT  has  been  charged. 

16 

If  the  customer  is  not  taxable,  the  place  at  which  the  service  is  supplied 
is  taken  to  be  the  place  at  which  the  supplier  is  established.  A  service 
supplied  in  a  Member  State  which  applies  the  derogation  is  therefore  never 
the 
to  VAT 
subject 
the  arrangements 
Member  State  of 
the  customer.  Maintaining  this  possibility  of  total 
exemption,  which  leads  to  distortions  of  competition,  cannot  be  allowed. 

irrespective  of 

force 

in 

in 

the  derogation  were  maintained,  of 

Finally,  application  of  the  permanent  arrangements  would  have  the  effect, 
aggravating  distortions  of 
if 
competition  since,  under  those  arrangements,  the  place  at  which  the  service 
is  supplied  would  be  the  place  at  which  the  supplier  is  established  in  the 
Community 
irrespective  of  the  status  of  the  customer,  provided  he  is 
established  in  the  Community. 

The  objective  of  neutrality  with 
achieved  only  if  the  transactions 
arrangements  throughout  the  EEC. 
derogation's  abolition. 

regard  to  VAT  can  therefore  be  totally 
in  question  are  subject  to  uniform  tax 
The  Commission  therefore  proposes  the 

17 

Services  supplied  by  authors,  artists  and  performers 

Point  2  of  Annex  F  also  covers  services  supplied  by  authors,  artists  and 
performers. 

In  its  initial  proposal  for  a  Seventh  Directive, 1  and  subsequently  in  its 
proposal  for  a  Nineteenth  Directive, 2  the  Commission  envisaged  exempting 
artistic  output  and  deliveries  of  works  of  art  by  the  artist  who  created 
them. 

In 
line  with  the  opinions 
Parliament, 3  the  Commission 
Nineteenth  Directive 
the 
Consequently,  the  services  of 
of  works  of  art  by  the  artist 
to  VAT. 

of 

the  Economic  and  Social  Committee  and 
deleted  from  the  text  of  the  proposal  for  a 
output. 4 
provisions 
authors,  artists  and  performers  and  supplies 
who  created  them  remain  in  principle  subject 

exempting 

artistic 

The  Annex  F  derogation  has  the  effect  of  allowing  only  the  supply  of 
services  to  be  exempted. 

Since  hesitations  have  emerged  concerning  the  nature  of  some  transactions 
carried  out  by  artists  (deliveries  or  the  supply  of  services),  and  in 
particular  by  creators  of  works  of  art, 5  abolition  of  the  derogation  would 
have  the  advantage  of  harmonizing  the  tax  arrangements  applicable  to  all 
transactions  carried  out  by  such  persons  in  each  Member  State. 

Nevertheless,  it  emerges  that  exempting  the  said  services  does  not  allow 
taxable  persons  to  exercise  their  right  to  deduct  input  tax.  consequently, 
contrary  to  the  general  principles  of  value  added  tax,  taxable  customers 
pay  residual  tax. 

While  it  does  not  question  the  principle  that  services  supplied  by  authors, 
artists  and  performers  should  be  taxed,  the  commission  would  nevertheless 
point  out  that  some  difficulties  in  applying  that  principle  will  arise 

OJ  No  C  26.  1.2.1978;  OJ  No  c  136,  31.5.1979. 
COM(84)648,  6.12.1984. 

1 
2 
3  Opinions  of  3  July  1985  and  6  April  1987  respectively. 
4 
5  Deliveries  of  creators  of  works  of  art  are  not  dealt  with  by  the 
particular  arrangements  outlined  in  the  proposal  for  a  Seventh 
Directive. 

COM(87)315,  1.7.91. 

the 
owing  to  the  nature  of  the  activities  in  question. 
majority  of  authors  and  artists  who  should  be  taxed  in  the  normal  way  could 
qualify  for  the  SME  arrangements  on  the  basis  of  their  turnover  (see 
COM(86)444). 

Furthermore, 

18 

therefore  considers  it  appropriate 

The  Comission 
the  final 
adoption  of  the  special  arrangements  for  small  and  medium-sized  enterprises 
before  taking  steps  to  abolish  the  derogation;  it  therefore  proposes  that 
it  be  maintained  for  authors,  artists  and  performers. 

to  await 

FS  -

Telecommunications  services  supplied  by  public  postal  services  and 
supplies  of  goods  incidental  thereto 

19 

Now  that  these  transactions  have,  since  1  November  1987,  again  been  made 
in  France,  there  are  five  Member  States  which  continue  to 
liable  to  VAT 
apply 
the 
Netherlands). 

Italy,  Luxembourg 

the  derogation 

(Germany, 

Ireland, 

and 

Of  these  five,  Italy  applies  the  exemption  solely  to  telegraphic  services. 

Germany,  which  considers  that  public  telecommunications  services  should  in 
introduce  tax  on 
future  be  subject  to  VAT,  has  started  gradually  to 
services  and  goods  alike.  Generalized  taxation  should  be  in  force  not 
later  than  31  December  1995. 
Ireland  has  also  decided  to  tax  these 
transactions  with  effect  from  1  January  1991. 

This  situation  is  not  satisfactory  because  exempted  taxable  persons  are 
unable  to  deduct 
factor  which  might  significantly  curb 
investment.  Moreover,  the  taxable  customer  of  exempted  suppliers  cannot 
exercise  any  right  of  deduction  even  though  their  activities  may  be  subject 
to  VAT. 

input 

tax, 

a 

Furthermore,  competition  may  be  distorted  if  the  public  service  is  not 
taxable  even  though  private  firms  competing  with  it  are.  This  is  because 
exemption  in  a  Member  State  of  services  supplied  by  a  public  postal  service 
has  the  consequence  not  only  of  strengthening  the  position  of  the  public 
taxable  competitors  it  may  have  but  also  of 
body  compared  with  any 
distorting  competition  between  the  Member  States. 
If  a  public  body  is 
granted  exemption,  this  can  only  encourage  exempted  taxable  persons  (banks, 
insurance 
of 
telecommunications  services,  to  locate  certain  activities  in  countries  in 
which  the  goods  and  services  acquired  are  not  liable  to  tax. 

etc.),  which 

the  main 

companies, 

consumers 

are 

Finally,  the  need  for  greater  standardization  of  equipment,  deregulation 
and  an  opening-up  of  national  markets  was  stressed  in  the  study  of  the 
benefits  resulting  from  the  existence  of  a  genuine  European  single  market 

telecommunications 

20 
in 
the 
distortions  resulting  from  different  arrangements  applying  in  different 
countries  will  in  future  be  all  the  greater  as  the  telecommunications 
market  is  made  subject  to  less  restrictive  national  rules  than  in  the  past 
and  competition  becomes  keener  in  this  growing  sector  of  the  economy. 

equipment. 1 

Consequently, 

services 

and 

Developments  in  some  countries  and  the  points  raised  above  militate  in 
favour  of  the  derogation's  abolition,  with  the  effect  that  the  supply  of 
all  telecommunications  services  and  goods 
thereto  will  be 
uniformly  taxed  in  each  Member  State,  whatever  the  status  of  the  supplier. 

incidental 

1 

cf.  Research  on  the  cost  of  Non-Europe  - Basic  Findings  - Vol.  1, 
pp.  293  et  seg.  and  pp.  329  et  seg. 

21 

F6  -

Services  supplied  by  undertakers  and  cremation  services,  together 
with  goods  related  thereto 

Abolition  of  this  derogation,  which  is  used  by  six  Member  States  (Denmark, 
Ireland,  Italy,  the  Netherlands,  the  United  Kingdom  and  Portugal),  was  not 
proposed  by  the  Commission  in  the  context  of  the  Eighteenth  Directive  in 
view  of  the  social  and  exceptional  nature  of  the  services  in  question. 

exemption  would  manifestly  not  distort 
Moreover,  maintaining 
competition. 
The  Commission  therefore  proposes  that  the  derogation  be 
abolished  and  that  the  Member  States  be  given  the  possibility  of  opting  for 
exemption. 

the 

22 

F7-

Transactions  carried  out  by  blind  persons  or  workshops  for  the 
blind  provided  these  exemptions  do  not  give  rise  to  significant 
distortion  of  competition 

The  Member  States  may  derogate  from  the  principle  of  taxation  by  exempting 
transactions  carried  out  by  blind  persons  or  workshops  for  the  blind 
provided  such  exemption  does  not  give  rise  to  significant  distortion  of 
competition. 

Three  Member  States  apply 
Nether lands ) • 

the  derogation 

(Germany,  France 

and 

the 

in  theory  give 
The  derogation  may 
between  taxable  and  private  persons 
(supply  of  services  or  goods). 

rise  to  distortions  of  competition 
carrying  out  the  same  transactions 

the  social  treatment  of  the  blind  cannot  validly  be  based  on 
Moreover, 
exemption 
from  VAT,  which  brings  only  an  apparent  and  very  relative 
advantage  since  exemption  does  not  authorize  deduction  of  tax  paid  on  the 
goods  and  services  acquired  for  the  purposes  of  their  activity. 
The 
Commission  has  always  felt  that  the  same  objective  can  be  achieved  through 
specific  grants,  benefits  and  any  other  means  the  Member  State  may  see  fit 
to  use. 

Furthermore,  the  exemption  which  this  section  of  the  population  may  enjoy 
discriminates  against  persons  suffering  from  a  different  handicap  and  the 
similar  structures  which  employ  them. 

That  said,  the  Commission  does  not  dispute  the  social  nature  of  such  a 
measure.  Consequently,  while  proposing  that  the  derogation  be  abolished, 
the  Commission  suggests 
for 
exemption  provided,  of  course,  that  such  exemption  does  not  give  rise  to 
significant  distortion  of  competition. 

that  Member  States  be  permitted 

to  opt 

FB  -

The  supply  of  goods  and  services  to  official  bodies  responsible  for 
the  construction,  setting  out  and  maintenance  of  cemeteries,  graves 
and  monuments  commemorating  war  dead 

This  derogation  used  by  two  Member  States  (Belgium  and  France)  provides  for 
exemption  in  the  case  of  the  supply  of  goods  and  services  to  official 
bodies  responsible  for  the  construction,  setting  out  and  maintenance  of 
cemeteries,  graves  and  monuments  commemorating  war  dead. 

23 

Application  of  this  derogation  does  not  distort  competition  between  the 
Member  States  since 
involving 
immovable  property,  is  limited  in  economic  terms. 

in  question,  which 

the  market 

is  one 

The  Commission  proposes  to  leave  the  Member  States  with  the  possibility  of 
opting  for  exemption,  specifying  however  that  this  necessarily  excludes  any 
right  to  deduct  tax  on  goods  and  services  necessary  for  carrying  out  the 
transactions  covered  by  the  derogation. 

24 

Fl2  -

The  supply  of  water  bv  public  authorities 

Four  Member  States  exempt 
(France,  Greece,  Ireland  and  Luxembourg). 

the  supply  of  water  by  public  authorities 

The  decision  by  certain  Member  States  to  exempt  water  distribution  may 
distort  competition  between  the  Member  States.  This  is  because  the  current 
trend  in  this,  in  all  respects,  important  sector  of  the  economy  is,  in  a 
number  of  Member  States,  one  of  national  public  contracts  being  opened  up 
to  competition  and  of  the  public  services  responsible  for  distribution 
being  privatized. 

In  addition,  water  distribution  demands  a  major  investment  effort  on  the 
part  of  the  public  or  private  bodies  involved.  Public  bodies  are  penalized 
by  their  exemption  since  they  are  unable  to  deduct  VAT  paid  on  goods  and 
services  acquired  for  the  purposes  of  their  activity,  whereas  the  non 
public  ones  can  exercise  that  right.  The  Commission  would  also  point  out 
that  taxing  the  supply  of  water  by  public  authorities  would  have  a  very 
minor 
impact  on  the  price  level  and  would  affect  overall  demand  only 
slightly  or  not  at  all  given  the  rate  which  would  be  applied.  Since  water 
is  an 
the 
Commission's  view,  be  the  reduced  rate  of  between  4%  and  9%. 1 

the  rate  applicable  would, 

item  of  basic  necessity, 

in 

For 
these 
abolished. 

reasons, 

the  Commission  proposes 

that 

this  derogation  be 

1 

See  Commission  proposal,  COM(87)321. 

25 

Fl6  -

The  supply  before  first  occupation  of  buildings  and  the  supply  of 
building  land 

The  supply  of  new  buildings  and  building  land  is  a  very  important  economic 
activity  which  involves  both  households  and  firms. 
Such  transactions  are 
caught  by  the  general  rule  laid  down  in  the  Sixth  Directive,  namely  that 
the  supply  of  goods  or  services  effected  for  consideration  within  the 
territory  of  the  country  by  a  taxable  person  acting  as  such  is  subject  to 
VAT. 

Furthermore,  the  Sixth  Directive  extends  the  scope  of  the  tax  by  permitting 
Member  States  to  treat  as  taxable  persons  individuals  who  carry  out  similar 
transactions  on  an  occasional  basis  (Article  4(3)). 

The  derogation  allows  the  Member  States  to  exempt  the  supply  before  first 
occupation  of  buildings  and  the  supply  of  building  land.  Eight  countries 
exempt  the  transactions  in  question  either  wholly  or  partially  (Belgium, 
Denmark,  France,  Germany,  Luxembourg, 
the  United  Kingdom,  Greece  and 
Portugal).  This  derogation  matches  that  set  out  at  point  11  of  AnnexE, 
which  allows  the  Member  States  to  charge  VAT  on  the  supply  of  previously 
occupied  buildings  which  would  normally  be  exempt. 

The  result  of  this  derogation  is  that  an  exempted  contractor  will  not  be 
able  to  deduct  tax  charged  on  the  goods  and  services  acquired  for  the 
purposes  of  his  exempted  activity,  and  the  taxable  purchaser  of  property 
sold  at  a  price  incorporating  non-deducted  input  taxes  will  be  unable  to 
exercise  any  right  of  deduction  even  though  he  might  have  been  charged 
taxes  other  than  VAT. 

It  should  be  noted  that  reconstituting  the  base  of  such  transactions  for 
own  resources  purposes  raises  many  problems  for  the  authorities  in  the 
Member  States  and  for  the  Commission  departments. 

Nevertheless,  the  Commission  would  argue  that,  in  view  in  particular  of  the 
difficult  economic  situation  currently  obtaining  in  this  sector  in  certain 
Member  States  and  of  social  concern  about  the  cost  of  housing,  it  does  not 
seem  appropriate  to  consider  abolishing  the  derogation  at  this  stage. 

The  Council  will  have  to  take  a  decision  about  the  derogation  on  the  basis 
of  a  fresh  Commission  proposal  to  be  put  forward  by  31  December  1996. 

26 

F23  -

The  supply,  modification, 
hiring  of  aircraft  used  by  State  institutions 

reoair,  maintenance,  chartering  and 

Four  Member  States  make  use  of  the  derogation  (Denmark,  Belgium,  Greece  and 
the 
Italy). 
Member  States. 

Its  application  does  not  distort  competition  between 

taxing  these  transactions,  which  would  have  no 

However, 
impact  on  the 
budget  of  the  Member  State  concerned,  would  allow  the  real  cost  of  the 
It  would  also  have  the  advantage 
expenditure  involved  to  become  apparent. 
of  allowing  businesses  carrying  out  these  transactions  to  deduct  tax 
charged  on  the  goods  and  services  they  have  acquired  for  the  purposes  of 
that  activity. 

Finally,  taxation  would  make  unnecessary  any  calculation  for  the  purposes 
of  determining  compensation 
is  proving  very 
difficult  because  of  the  sensitive  nature  of  information  relating  to  these 
transactions. 

resources),  which 

(own 

For  these  reasons, 
abolished. 

the  Commission  is  proposing  that  the  derogation  be 

27 

F25  -

supply,  modification, 

The 
hiring  of  warships 

repair,  maintenance,  chartering  and 

Five  Member  states  make  use  of  the  derogation  (Denmark,  Belgium,  Greece, 
Italy,  Netherlands). 
Its  application  does  not  distort  competition  between 
the  Member  States. 

taxing  these  transactions,  which  would  have  no 

However, 
impact  on  the 
budget  of  the  Member  State  concerned,  would  allow  the  real  cost  of  the 
It  would  also  have  the  advantage 
expenditure  involved  to  become  apparent. 
tax 
of  allowing  businesses  carrying  out  ~hese  transactions  to  deduct 
charged  on  the  goods  and  services  they  have  acquired  for  the  purposes  of 
that  activity. 

Finally,  taxation  would  make  unnecessary  any  calculation  for  the  purposes 
of  determining  compensation 
is  proving  very 
difficult  because  of  the  sensitive  nature  of  information  relating  to  these 
transactions. 

resources),  which 

(own 

For  these  reasons, 
abolished. 

the  Commission  is  proposing  that  the  derogation  be 

28 

D.  Other  transitional  provisions  resulting  from  Article  28(3) 

Article  28(3)(c)  and  Annex  G  of  the  Sixth  Directive  <paragraph  1> 

The  effect  of  this  provision  is  to 

allow  the  Member  States  which  exempt  transactions  specified  in  Annex  E 
to  maintain  the  right  of  option  for  taxation  if  that  option  has  already 
been  taken  up  by  a  taxable  person; 
for 
allow  the  Member  States  to  grant  taxable  persons  the  right  to  opt 
taxation  of  the  transactions  specified  in  Annex  F  which  they  exempt  on 
a  transitional  basis. 

Maintaining  the  right  of  option  is  thus 
derogations  set  out  in  Annexes  E  and  F. 

linked  to  the  fate  of 

the 

Notwithstanding  its  application  by  the  Member  States  to  the  transactions 
referred  to  at  points  ElS,  F2,  FlO,  F16,  F17,  F26  and  F27,  it  should  be 
possible  to  abolish  this  derogation 
the  Commission  is 
proposing  abolition  of  all  the  other  derogations  (see  Annex  2). 

in  so  far  as 

29 

Article  28(3> (d) 

This  Article  authorizes  the  Member  States  to  continue  to  apply  provisions 
derogating  from  the  principle  of  immediate  deduction  laid  down  in  the  first 
paragraph  of  Article  18(2)  and  in  Article  17(1)  of  the  Sixth  Directive  (the 
right  to  deduct  arising  at  the  time  when 
the  deductible  tax  becomes 
chargeable). 

Only  France  makes  use  of  this  derogation  by  applying  the  so-called  "one 
month  interval"  rule. 

The  Commission  would  point  out  that  the  basic  rule  of  immediate  deduction 
of  input  VAT,  as  it  emerges  from  the  first  paragraph  of  Article  18(2),  is 
intended  to  relieve  the  taxable  person  entirely  of  the  weight  of  tax  due  or 
paid,  particularly  on  goods  or  services  which  are  or  will  be  supplied  to 
him  by  another  taxable  person. 

Application 
distortions 
Member  States. 

of 
of 

the  derogation 
to 
competition 

does 
the 

not  have 
detriment 

the  effect  of  creating 
the  other 
in 
of 

firms 

Sudden  abolition  would  moreover  have  a  very  substantial  immediate  impact  on 
the  budget  of  the  Member  State  concerned. 

Even  so,  application  of  the  derogation  constitutes  a  permanent  burden  on 
firms,  which  are  forced  to  grant  a  non-interest  bearing  cash  advance. 

There  is  consequently  reason  for  France  to  take  early  steps  to  remove  the 
derogation  progressively. 

At  this  stage,  the  Commission  is  not  proposing  abolition,  therefore. 

The  derogation  will  be  re-examined  as  progress  is  made  in  the  Council's 
work  on  the  12th  Directive. 1 

l 

COM(84)  84  final,  16  February  1984. 

Article  28(3> (e) 

1.  This  provisions  allows  the  Member  States  to  derogate 

in  particular 

from: 

30 

the  Member  States  may 

the 
Article  5(4)(c): 
transfer  of  goods  pursuant  to  a  contract  on  which  commission  is 
payable  on  purchase  or  sale  as  constituting  supply  of  goods  (in 
this  situation,  the  commission  agent  buys  and  sells  on  behalf  of 
third  parties  in  his  own  name,  even  if  he  never  actually  owns  the 
goods); 

thus  not  consider 

Article  6(4):  the  Member  States  may  consider  that  a  taxable  person 
acting  in  his  own  name  who  takes  part  in  a  supply  of  services  is 
not  deemed  to  h~ve  received  and  supplied  those  services  himself. 

The  first  two  derogations  thus  allow  an  agent  acting  in  his  own  name  to 
be  treated  simply  as  a  supplier  of  services  and  not  as  a  taxable  person 
.is 
himself  carrying  out  purchase/resale  transactions,  provided  he 
to  a  contract  on  which  commission  is  payable  on 
acting  pursuant 
purchase  or  sale,  or  as  a 
taxable  person  supplying  services  to  the 
customer  on  a  personal  basis. 

the 

agen"': 

the 
Consequently, 
remuneration  received  in  respect  of  his  own  service. 
The  place  at 
which  the  service  is  taxed  is  defined  by  Article  9  of  the  Sixth 
Directive,  and  the  right  to  deduct  can  be  exercised  solely  in  respect 
of  the  elements  which  form  part  of  the  activity  of  agent. 

taxable  on 

supplying 

services 

is 

In  relations  between  the  Member  States,  an  examination  of  the  various 
situations  resulting  from  application  of  the  derogation  reveals  that 
the  effect  of  creating 
its  maintenance  does  not  at  present  have 
distortions  of  competition  as  compared  with  the  arrangements  applicable 
to  commission 
transactions  which  are  considered  to  constitute  the 
supply  of  goods  under  Article  5(4)(c)  or  the  supply  of  services  within 
the  meaning  of  Article  6(4). 

Even  so,  maintaining  this  derogation  in  the  final  arrangements  would  be 
liable  to  distort  competition  each  time  the  purchase  of  a  commission 
agent  established  in  the  country  of  final  consumption  enabled  a  non 
taxable  person  to  buy  in  a  low-rate  Member  State  goods  which,  if  the 
commission  agent  were  considered  to  be  buyer/re-seller,  would  be 

subject  to  the  higher  rate  of  the  country  of  consumption. 

The  Commission  therefore  proposes  its  abolition. 

31 

In  the  case  of  professionals  who  purchase  used  goods,  works  of  art, 
antiques  and  collectors' 
the 
Commission  has  presented  to  the  Council  a  proposal  for  a  Seventh  VAT 
Directive  (see  COM(88)846)  which  defines  the  special  arrangements  which 
might  be  applied  when  goods  have  been  bought  from  non-taxable  persons 
or  taxable  persons  who  did  not  have  any  right  to  deduct  VAT  at  the  time 
of  acquisition. 

the  purpose  of 

resale, 

items 

for 

Since  this  proposal  is  currently  being  examined  by  the  Council  bodies, 
account  should  be  taken  in  this  context  of  the  situation  which  might 
result  from  abolishing  this  derogation  as  regards  commission  agents  who 
purchase  or  sell. 

2.  Other  derogation  resulting  from  Article  28(3)(e) 

Article  28(3)(e)  also  permits  derogation  from  Article  11A(3)(c)  of  the 
Sixth  Directive. 
the  Member  States  have  been  able  to 
include  in  the  taxable  amount  for  VAT  repayments  of  expenses  paid  out 
by  a  taxable  person  in  the  name  and  for  the  account  of  his  purchaser  or 
There  is  no  reason  to  maintain  this  derogation,  and  its 
customer. 
abolition  is  therefore  also  proposed. 

Consequently, 

32 

Article  28C3lCf) 

This  Article  allows  the  Member  State  to  use  the  difference  between  the 
selling  price  and  the  purchase  price  as  the  taxable  amount  for  buildings 
and  building  land  purchased  for  the  purpose  of  resale  by  a  taxable  person 
for  whom  tax  was  not  deductible  at  the  time  of  the  purchase. 

The  derogation  therefore  applies  to  taxable  persons  who  trade  in  buildings 
not  newly  constructed  or  in  building  land  the  purchase  of  which  fell 
outside  the  scope  of  VAT. 

The  goods  in  question  are  in  some  cases  purchased  by  enterprises  as  part  of 
their  activity. 

The  purchase  price  of  such  goods  is  a  component  of  the  coat  price  of  the 
goods  produced  or  of 
the  same  enterprises. 
the  services  supplied  by 
Consequently, 
total  non-taxation  (see  Fl6  derogation)  or  even  reduced 
taxation  distorts  competition  at  the  expense  of  certain  enterprises  within 
the  Community. 

The  Commission  therefore  considers  that  the  current  derogation  should  be 
abolished. 

E.  Derogation  under  the  second  subparagraph  of  Article  1(1)  of  the 

Eighteenth  Directive 

1. 

Indents  (m)  and  (n)  of  Article  13A(1)  of  the  Sixth  Directive  exempt 

33 

certain  services  closely  linked  to  sport  or  physical  education 
supplied  by  non-profit-making  organizations,  and 
certain  cultural  services  and  goods  closely  linked  thereto  supplied 
by  bodies  governed  by  public 
law  or  by  other  cultural  bodies 
recognized  by  the  Member  State  concerned. 

The  Member  States  were  authorized  by  Article  28(3)  (points  4  and  5  of 
Annex  E)  to  tax  such  normally  exempt  transactions  on  a  transitional 
basis. 
law  or  other  cultural  bodies 
recognized  by  the  Member  State  would  thus  be  subject  to  VAT  on  their 
activities  in  the  same  way  as  a  person  governed  by  private  law. 

Bodies  governed  by  public 

The  second  subparagraph  of  Article  1(1)  of  the  Eighteenth  Directive 
authorized  those  Member  States  which,  on  1  January  1989,  applied  the 
derogation  by  taxing  the  said  transactions  to  make  the  exemptions  in 
Article  13A(1)(m)  and  (n)  subject  to  the  conditions  of  the  final  indent 
of  Article  13A(2) (a). 
the  United  Kingdom,  was 
One  Member  State, 
therefore  able  to  continue  taxing  public  bodies  since  exemption  would 
be  likely  to  create  distortions  of  competition  such  as  to  place  at  a 
disadvantage  commercial  enterprises  liable  to  VAT. 

2.  The  effective  extension  of  the  initial  derogation  made  possible  by  the 
second  subparagraph  of  Article  1(1)  of  the  Eighteenth  Directive  should 
be  abolished  for  the  following  reasons. 

taxable  commercial  enterprises  at 

(a)  By  permitting  the  transactions  of  bodies  governed  by  public  law  and 
other  recognized  cultural  bodies  to  be  taxed  on  the  grounds  that 
non-taxation  might  create  distortions  of  competition  such  as  to 
place 
the 
derogation  resulting  from  the  Eighteenth  Directive  goes  against 
indents  (m)  and  (n)  of  Article  13A(1)  of  the  Sixth  Directive,  which 
provides  that  bodies  governed  by  public  law  are  exempt  from  VAT  in 
respect  of  the  activities  they  carry  out  in  their  capacity  as 
public  authorities. 

a  disadvantage, 

34 

However,  the  exemptions  laid  down  in  Article  13A  are  activities 
performed  in  the  public  interest  "which  are  listed .and  described  in 
great  detail"l  with  a  view  to  the  drawing-up  of  a  common  list  of 
exemptions  enabling  the  Communities'  own  resources  to  be  collected 
in  a  uniform  manner  in  all  Member  States. 2  Allowing  a  Member  State 
to  tax  an  activity  exempted  under  Article  13A  on  the  basis  of  the 
final  indent  of  Article  13A(2)(a)  (or  even  Article  4(5)  therefore 
goes  against  the  basic  rules  and  objectives  of  the  Sixth  Directive 
and  would  render  Article  13A  devoid  of  any  meaning. 

(b)  In  addition, 

legal  justification  for  extending  to 
there  is  no 
and  (n)  of  Article  13A(l))  conditions 
public  bodies  (indents  (m) 
to  bodies  not  governed  by  public  law 
which  might  be  applicable 
the 
is  because 
(Article  13A(2) (a)).  This 
Member  States  are  authorized  to  determine  must  be  aimed  solely  at 
ensuring  the  correct  application  of  the  exemptions  laid  down  or  to 
They  cannot  be  used  to  achieve  an  objective 
prevent  evasion. 
contrary  to  that  envisaged  by  the  Sixth  Directive,  i.e.  exemption 
of  public  bodies. 

the  conditions  which 

Moreover,  each  of  the  provisions  of  Article  13  must,  according  to  the 
case  law  of  the  Court  of  Justice,  be  interpreted  restrictively  since 
they  constitute  an  exception  to  the  general  principle  of  taxation  laid 
down  by  the  Sixth  Directive.  Article  13A(2) (a)  cannot  therefore  be 
used  to  tax  the  transactions  referred  to  in  indents 
(m)  and  (n)  of 
Article  13A(l). 

Even  so,  a  different  interpretation  of  the  Sixth  Directive  would  also 
to  be  extended  to  the 
permit  the  conditions  of  Article  13A(2) (a) 
( 1)  of 
( i)  and 
transactions  referred  to  in  indents  (b) , 
Article  13A(l). 
the  Member  state  concerned,  which 
currently  subjects  normally  exempted  bodies  to  VAT,  must  correctly 
apply  the  Sixth  Directive  by  exempting  the  bodies  referred  to  in 
indents  (m)  and  (n)  of  Article  13A(l),  although  it  would  still  be  able 
to  apply  the  conditions  set  out  in  Article  13A(2)(a)  to  the  exemption 
of  principle  granted  to  bodies  other  than  those  governed  by  public  law. 

Consequently, 

(g) , 

(h) , 

1 

2 

court  Judgment  of  11  July  1985  in  case  107/84  commission  v  Federal 
Republic  of  Germany. 
see  the  recitals  to  the  Sixth  Directive. 

3. 

tinaliy, 
the  first  subparagraph  of:  Articie  1 ( 1)  of  the  Eighteenth 
Directive  clearly  abolished  the  derogations  referred  to  in  points  4  and 
the  Member  States  which  nevertheless  obtained  an 
5  of  Annex  E; 
eHtenslon  df  this  de~ogatton  have  thet'efore  been  granted  an  extra 
period  of  time  to  bring  their  laws  irtto  line  with  the  Sixth  Directive. 

For  the  reasons  indicated  above,  the  Commission  will  ask  the  Council  to 
abolish  the  derogation  resulting  fr~ the  Eighteenth  Directive. 

35 

Annex  1.  Application  by  the  r~ember  States  of  the  derogations  set  out  in  Annexes  E 

and  F  to  the  Sixth  Directive 

-

ES 

F 

GR 

IT 

IRL 

L 

NL 

p 

UK  TOTAL 

DK 

X 

B 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

Annex  E 

E  2 

E  7 

E  11 

E  15 

··'· 

Annex  F 

F  1 

F  2 

F  5 

F  6 

F  7 

F  8 

F  10 

F  12 

F  16 

F  17 

F  23 

F  25 

F  26 

F  27 

TOTAL 

D 

X 

X 

X 

X 

X 

X 

6 

X 

X 

X 

X 

X 

X 

8 

7 

1 

8 

5 

7 

~~ 

-

·----~-~i.._____ 

X 

X 

X 

X 

X 

X 

X 

. 

X 

X 

X 

X 

X 

X 

X 

7 

X 

X 

X 

X 

X 

X 

X 

7 

X 

X 

X 

X 

X 

X 

X 

7 

2 

2 

3 

3 

3 

6 

5 

6 

3 

2 

1 

4 

8 

7 

4 

5 

3 

4 

X 

X 

X 

X 

X 

X 

X 

X 

5 

3 

71 

LN 

"' 

37 

Annex  2 

Summary  of  Commission  proposals  (derogations  under 
Article  28(3)  of  the  Sixth  Directive  and  Article  1(1) 
of  the  Eighteenth  Directive) 

Maintenance  Abolition 

Option 

Specific 

proposal 

Annex  E 

E2 

E7 

Ell 

El5 

Annex  F 

Fl 

F2  <Lawyers) 

F2  (artists) 

X 

F5 

F6 

F7 

FS 

FlO 

F12 

F16 

F17 

F23 

F25 

F26 

F27 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

", 

X 

X 

X 

X 

38 

Maintenance  Abolition 

Option 

Specific 
proposal 

X 

Other 
derogations 

28  (3)(c) 

28  (3)(d) 

28  (3)(e) 

28  (3)(f) 

28  (3)(g) 

Derogation 
under  Article 
1<1)  of  the 
Eighteenth 
Directive 

X 

X 

X 

X 

X