Proposal for a COUNCIL DECISION authorizing the French Republic to extend the application of a measure derogating from Article 2 of the sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes
Date: 1992-12-22
Institutions: European Commission
Subjects: France, VAT, basis of tax assessment, industrial waste, tax exemption, waste recycling

COMMISSION  OF THE EUROPEAN  COMMUNITIES 

COM(92) 582 final 

Brussels, 22 December 1992 

COMMISSION REPORT TO THE COUNCIL 
PRESENTED  IN ACCORDANCE WITH ARTICLE 3 OF 
THE COUNCIL DECISION 89/683/EEC 
OF 21 DECEMBER 1989 

(Application of a measure derogating from Article 2 
of the sixth Directive (77/388/EEC) on the 
harmonization of the  laws of the Member States 
relating to turnover taxes - Common system of value added tax) 

Proposal  for a 

COUNCIL DECISION 

authorizing the French Republic to extend the application 
of a measure derogating from Article 2 of the 
sixth Council Directive (77/388/EEC) of 17 May 1977 
on the harmonization of the laws of 
the Member States relating to turnover taxes 

(presented by the Commission) 

>Cc^ 

COMMISSION REPORT TO THE COUNCIL 
PRESENTED  IN ACCORDANCE WITH ARTICLE 3 OF 
THE COUNCIL DECISION 89/683/EEC 
OF 21 DECEMBER 1989 

(Application of a measure derogating from Article 2 
Of the sixth Directive (77/388/EEC) on the 
harmonization of the laws of the Member States 
relating to turnover taxes - Common system of value added tax) 

- 2 -

I. INTRODUCTION 

Bv Council Decision 89/683/EEC of 21 December 1989,  France was authorized, 
on  the  basis  of  Article 27  of  the  sixth  VAT  Directive  and  following  the 
entry  into force of the eighteenth VAT Directive, to introduce  special VAT 
arrangements  derogating  from  the  sixth  Directive  in  respect  of  taxable 
transactions  involving  fresh  industrial  waste  and  récupérable  material. 
Pursuant  to  Article 1  of  that  Decision,  the  authorization  expires  on 
31 December 1992. 

In addition, Article 3 of the Decision stipulates that the Commission is to 
present  to the Council, prior  to  the  date  of  expiry  of  the  derogation, a 
report on its application, accompanied, where appropriate, by a proposal for 
a Council Decision providing for its extension. 

The purpose of the present report  is, therefore, to give an account of the 
application of that derogation  and to examine the request  for an extension 
of that derogation submitted by the French Republic by letter registered by 
the Secretariat-General of the Commission on 22 October 1992. 

II. APPLICATION OF THE DEROGATION 

1.  Background 

By virtue of Article 1(2)(a) of the eighteenth VAT Directive, France was 
obliged  to  abolish  with  effect  from  1 January 1990  the  derogation  it 
applied on a transitional basis to supplies of récupérable material and 
fresh  industrial  waste  pursuant  to  Article 28(3)(b)  of  the  sixth 
Directive, read in conjunction with point 20 of Annex F. 

However, point 4 ("Re  Article 2, point F20") in the minutes adopting the 
eighteenth Directive  contains the following declaration: 

"The Council  and  the Commission  agree that  they  will  consider with an 
open mind a request from France, on the basis of Article 27(1) to (4) of 
Directive 77/388/EEC,  concerning  a  derogation  based  on  the  following 
principle: 

1  OJ No L 398, 30.12.1989. 
2  Council document 6016/89, Annex  II, p. 8. 

- 3 -

Sales,  commission  and  brokerage  operations  relating  to  fresh 
industrial waste and récupérable material  shall be subject to value 
added tax on the authorization of the competent tax authority. 

This  authorization  may  be  subject,  inter  alia,  to  the  following 
conditions:  permanent  installation,  adequate  annual  turnover,  the 
possible provision of a sufficient security*" 

At  the  time,  the  taxation  of  transactions  involving  fresh  industrial 
waste  and récupérable material were  liable to give rise to  substantial 
fraud,  particularly  in  the  "metal  materials"  sector. 
Such  fraud 
consists  in  the  issuing  of  false  invoices  designed  to  transfer  a 
notional entitlement  to tax deduction  ("taxis") or  in the  invoicing of 
taxes never paid to the Treasury.  In both cases, the revenue losses for 
the Treasury  are considerable, with the waste-recovery  sector in France 
having  a total  turnover  of  some  FF 18 billion  in  1989, a  figure which 
this year will rise to FF 25 billion, and this for IS million tonnes of 
recovered product and 5 000 waste-recovery firms. 

2.  Entry into force in France 

The  derogation  was  transposed  into  national  law  by  Article 33  of 
Law No 90-1168  of 
(1991  Finance  Law),  with 
Articles 260, 261, 277, 273, 256, 290 and 1784 of the French General Tax 
Code being amended. 

29 December  1990 

Administrative  Instruction  3-A-1-91  of  27 December 1990,  which  was 
published in Official Tax Gazette No 9 of 14 January 1991 (Series 3 CA), 
contains a commentary on the provisions of national law arising from the 
derogation.  Those provisions entered into force on 1 January 1991. 

3.  pjjPQfflrHPP of tfre special arrangements, introduced, jn France u^der cover 

of the derogation 

The arrangements consist of the following three provisions: 

3.1 Automatic taxation of supplies in respect of fresh industrial waste 
or récupérable material made by firms that satisfy the following two 
conditions simultaneously: 

- existence of a permanent establishment 

and 

- 4 -

- turnover,  exclusive  of  taxes,  in  respect  of  fresh  industrial 
waste or récupérable material of not less than FF 6 million in the 
previous calendar year. 

3.2 A  "limited"  exemption  applicable  in  the  case  in  point  solely  to 
supplies of fresh  industrial waste and récupérable material made by 
firms: 

- which either do not have a permanent establishment 

- or  which,  although  they  have  a  permanent  establishment,  have 
achieved in the previous year a turnover figure, exclusive of tax, 
in respect of such supplies of less than FF 6 million. 

This  exemption  carries  an  option  for  taxation,  subject  to 
authorization,  that  is available only to firms with a total annual 
turnover, inclusive of all taxes, of more than FF 500 000.  In other 
words,  the  exemption  is  compulsory  only  for  firms  with  an  annual 
total turnover, inclusive of all taxes, of less than FF 500 000. 

3.3 Compulsory  suspension  of  payment  of VAT  in respect  of  supplies to 
taxable  persons  of  fresh  industrial  waste  and  récupérable material 
in  the  form  of  non-ferrous  metals  and  their  alloys  where  these 
supplies attract tax automatically or subject to authorisation, i.e. 
where they cannot be exempted. 

Firms  in  the  sector  which  make  supplies  under  a  suspension 
arrangement  are  not  entitled  to  invoice  VAT  but,  instead,  they 
retain  their  entitlement  to  tax  deduction,  such  entitlement  being 
exercised  by  way  of  imputation  where  they  carry  out  taxable 
transactions or by way of refund. 

In addition,  all  imports  of  fresh  industrial waste  and récupérable 
material are exempt  from VAT. 

Commission  operations  in  respect  of  fresh  industrial  waste  or 
récupérable  material  rank  as  supplies  of  goods,  unlike  brokerage 
operations, which, as a result, are not covered by the derogation. 

4.  Position  of  the  French  admj.n4stratj.0n  op  the  application  9*. , tftf 

fljgoqfrUpn, 

The French administration has made the following observations! 

- 5 -

"1. The  waste-recovery  sector  in  France  has  a  turnover  of  some 
FF 25 billion, of which  over  a third  is accounted  for by exports, 
and  this  for  a  total  of  15 million tonnes  of  recovered  product. 
Some 5 000  firms are engaged  in waste-recovery  operations  as their 
main activity. 

Half  of  the  firms  in  this  sector  are  small  firms  with  an  annual 
turnover  of  less  than  FF 500 000.  They  account  for  some  10% of 
total turnover in the sector. 

These  firms differ very widely  in nature  (specialized  small firms, 
charitable  organizations,  migrants,  etc.),  and  the  exemption  in 
respect  of  supplies  of  fresh  industrial  waste  or  récupérable 
material made by them is quite consistent with the dual objective of 
simplification  and  repression  of  fraud,  which  led  to  the 
introduction of the arrangements provided for by the derogation. 

The other  firms, which  are  firms with an annual turnover exceeding 
FF 500 000  and  should,  therefore,  attract  VAT  automatically  or on 
authorization, account for 90% of total turnover in the sector. 

Of the latter firms, some 60% are taxable automatically and account 
for over two thirds of turnover in this category. 

The  remaining  firms  in this  category, which  are  liable to  attract 
VAT subject to authorization, are those that do not have a permanent 
establishment  or  generate  a  turnover  of  between  FF 500 000  and 
FF 6 million. 

Of those  firms without  a permanent  establishment, a relatively  low 
percentage  (some 8%) have a turnover of more than FF 6 million. 

Over  half  of  the  firms  liable  to  attract  VAT  subject  to 
authorization have, at their request, been authorized to charge VAT 
on  their  supplies  of  fresh  industrial  waste  and  récupérable 
material.  Very few requests for authorization are rejected. 

Authorization  may  be  conditional  on  the  provision  by  the  firm 
seeking  authorization  of good  security.  However, in 80% of cases, 
firms  show  themselves  to  be  sufficiently  solvent  and  are  not 
required to provide any security. 

Lastly,  the  VAT-suspension  arrangement  for  fresh  industrial  waste 
and  récupérable  material  in  the  form  of  non-ferrous  metals  is  a 
useful complement to the system since the high value of such metals 
increases the risks of fraud. 

- 6 -

2.  Analysis  of  tax  control  statistics  reveals  that  the  firms  in the 
sector that  attract VAT present  a lower-than-average risk of  fraud 
as compared with other firms in France. 

Moreover,  if  the  average  size  of  adjustments  generally  increases 
with firm size, it does so much less rapidly in the case of firms in 
this sector. 

Lastly,  the  reasons  for  carrying  out  adjustments  have  more  to  do 
with errors in applying the tax rules  (unjustified deductions) than 
with  fraud  proper  (concealment  of,  or  failure  to  report,  taxable 
transactions). 

This situation  stems  from the VAT  arrangements  applicable to firms 
in the sector and to the increased supervision by the administration 
authorized under the arrangements. 

3.  No  particular  difficulties  have  been  encountered  in  administering 
the  arrangements  applicable  to  these  firms  (monitoring  by  the tax 
authorities of authorizations granted and securities provided). 

Furthermore,  the  firms  have  welcomed  the  arrangements  and  are 
appreciative  of  them  since,  among  other  things,  they  safeguard 
against  the  risks  to  which  they  might  be  exposed  as  a  result  of 
fraudulent  practices  on  the  part  of  certain  firms  and  for  the 
consequences  of  which  they  might  be  liable  vis-à-vis  the 
administration." 

III. REQUEST FOR EXTENSION OF THE DEROGATION 

France  is  seeking  an  extension  in  full  of  the  derogation  for  the  entire 
transitional  period  defined  in  Article 281  of  the  sixth  Directive,  as 
amended  by  Directive 91/680/EEC  of  16 December 1991  with  a  view  to  the 
abolition of fiscal frontiers. 

It would also like to see the exemption currently applicable to all imports 
of  fresh  industrial  waste  and  récupérable  material  being  applied  as  from 
1 January 1993 both  to  imports  and to  intra-Community  acquisitions  of such 
products. 

- 7 -

IV. OPINION OF THE COMMISSION DEPARTMENTS 

1.  Application of the derogation by France 

The  transposition  of  Article 1 of  the  Council  Decision  calls  for the 
following observations: 

It is not stipulated in the legal instrument amending Article 261-3-
2  of  the  French  General  Tax  Code  that  the  exemption  which  is 
applicable in any event: 

* to firms whose annual turnover is less than FF 500 000 

* to  firms  not  qualifying  for  the  arrangements  governing  taxation 

subject to authorization 

is limited over time and valid only until 31 December 1992. 

Only Article 260F of the French General Tax Code, which deals with 
the  authorization  for  taxation,  expressly  stipulates  that  such 
taxation subject to authorization is valid until 31 December 1992. 

However, it should  be pointed  out that the administrative  comments 
restore the limitation over time applicable to the limited exemption 
arrangements  provided  for  in  the  Council  Decision  (see  point 1, 
second subparagraph of Instruction 3-A-1-91); 

-  Only firms in the sector with a turnover, inclusive of all taxes, of 
between  FF 500 000  and  FF 6 million  may  be  authorized  to pay VAT, 
that  is  to  say,  to  invoice  it  and,  in  so  doing,  to  transfer  an 
entitlement to tax deduction.  These provisions are consistent with 
Article 1  of  the  Council  Decision;  they  result  from  the  combined 
provisions  of  the  first  indent  of  that  Article.  Accordingly, and 
this was the very purpose of the derogation, small firms necessarily 
remain  exempt  since,  in  the  past,  it  was  basically  small  waste-
recovery  operators  that  perpetrated  fraud  by  using  "taxi" systems. 
It  should  also  be  pointed  out  that  the  authorization  to  tax  is 
generally granted only to firms which beforehand provide a security 
which, jointly and severally with the firm, must undertake to pay to 
the  tax  authorities  the  VAT  invoiced  in  respect  of  transactions 
carried out during the period covered by the authorization. 

- 8 -

Although there  is no express provision to that effect  in Article 1 
of  the  Council  Decision,  the  third  recital  to  that  Decision 
stipulates  that  the  authorization  procedure  "may  involve  the 
provision of a guarantee"; 

-  The  examination  made  by  the  Commission  departments  has  confirmed 
that  supplies  of  fresh  industrial  waste  and  récupérable  material 
which  are exempt  from VAT are not  included  in the numerator of the 
general deductible proportion  in cases where the firm in the sector 
under  consideration  is a taxable  person  entitled  to  deduct  tax in 
part.  However, it would seem that such supplies, where made by the 
manufacturer  himself  and  involving  waste  produced  on  his  own 
premises, may be included  in both the numerator and the denominator 
of  the  deductible  portion,  something  which,  at  first  sight,  is 
contrary  to  the  general  principles  of  VAT. 
The  Commission 
departments would,  therefore, ask  the  French  authorities  to adapt, 
as appropriate the applicable provisions in this context. 

2.  Case for extending the temporary derogation granted to France 

The  Commission  departments  would  note  that  the  transitional  period 
provided  for in Article 281 of the sixth VAT Directive, as amended with 
a view to the abolition of fiscal frontiers, will not necessarily end on 
31 December 1996.  Since the derogation which the French Republic is now 
seeking to extend was  initially  granted  for a period of two years, the 
Commission departments propose that  it be extended  for a further period 
of four years, so that it will expire on a definite date set in advance, 
namely 31 December  1996.  This will make it possible, in particular, to 
ascertain  whether  extension  of  the  exemption  to  the  new  category  of 
intra-Community acquisitions is giving rise to any specific difficulties 
or fraudulent practices. 

Proposal for a 

COUNCIL DECISION 

authorizing the French Republic 

to extend the application of a measure 

derogating from Article 2 of the sixth Council Directive 

(77/388/EEC) of 17 May 1977 

on the harmonization of the laws 

of the Member States relating to 

turnover taxes 

(presented by the Commission) 

EXPLANATORY MEMORANDUM 

1.  By  letter  registered  by  the  Secretariat-General  of  the  Commission  on 
22 October 1992,  the  Government  of  the  French  Republic  requested  an 
extension  of  the  derogation  previously  granted  to  it  for  a  limited 
That 
period  by  Council  Decision 89/683/EEC  of  21 December 1989. 
Decision,  which  was  based  on  Article 27  of  the  sixth  VAT Directive, 
authorizes  France  to  introduce  special  VAT  arrangements  in respect of 
fresh  industrial  waste  and  récupérable  material.  The  authorization 
expires on 31 December 1992. 

2.  Article 3 of the Decision stipulates that, in the light of a report from 
the  Commission  on  the  application  by  France  of  that  Decision,  the 
Council  may,  on  the  basis  of  a  proposal  from  the  Commission,  decide 
before 31 December 1992 that the authorization is to be extended. 

3.  The  report  presented  by  the  Commission  on  the  application  of  that 
Decision  over  the  period  1991-92  finds  that  the  provisions  of  the 
Decision should be extended until 31 December 1996.  The Commission will 
have  to  present  to  the  Council  before  that  date  a  new  report  on  the 
application of the authorization  in question, in particular with a view 
to  ascertaining  whether  extension  of  the  authorization  to  the  new 
taxable  category  of  intra-Community  acquisitions  is giving  rise to any 
specific difficulties or fraudulent practices. 

4.  In accordance with Article 27(3) of the  sixth VAT Directive, the other 
Member States  were  informed  of  the  French  request  by  letter  dated 
20 November 1992. 

1  OJ No L 398, 30.12.1989. 
2  OJ No L 145, 13.6.1977. 

M-

Proposal 

for a 

Council Decision 

authorizing the French Republic to extend the 

application of a measure derogating from Article 2 

of the sixth Council Directive  (77/388/EEC) of 17 May 1977 

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) of 17 May 1977 on 
the  harmonization  of  the  laws  of  the  Member States  relating  to  turnover 
taxes - Common system of value added tax:  uniform basis of assessment,  and 
in particular Article 27 thereof, 

Having regard to Council Decision 89/683/EEC of 21 December 1989, 

Having  regard  to  the  Commission  report  on  the  application  of  the 
aforementioned Decision over the period 1991-92, 

Having regard to the ensuing Commission proposal, 

Whereas, under Article 27(1) of the sixth VAT Directive, the Council, acting 
unanimously  on  a  proposal  from  the  Commission,  may  authorize  any 
Member State  to  introduce  or  extend  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 Commission report on the application of the said derogation over 
the  period  1991-92  has  demonstrated  the  latter's  usefulness  and 
effectiveness in the waste-recovery  sector, which is particularly vulnerable 
to fraud; 

Whereas the said report finds that there is no reason to oppose extension of 
the derogation provided that the derogation is clearly limited over time and 
expires in the short term; 

1  OJ No L 145, 13.6.1977. 
2  OJ  No.L  398,  30.12.1989 

Whereas  the  other  Member States  were  informed  on  20  November 1992  of  the 
request from the French Republic, 

- I *-

HAS ADOPTED THIS DECISION: 

Article 1 

. . f e .. 

• 

By way of derogation from Article 2 of the sixth Directive  (77/388/EEC), the 
French Republic  is hereby authorized, until 31 December 1996 and in respect 
of  fresh  industrial  waste  and  récupérable  material,  to  exempt  from  value 
added tax  (hereinafter referred to as  "VAT"): 

on the one hand, supplies made by: 

undertakings whose annual turnover is less than FF 500 000, 

-•  undertakings which  do not  have a permanent  establishment  or which, 
although  they  have a permanent  establishment, have achieved  in the 
previous year a turnover  figure in respect of such products of less 
than  FF 6 million,  unless  they  are  authorized  to  subject  such 
transactions to VAT, 

-  on the other hand, imports and intra-Community acquisitions. 

Article 2 

By way of derogation from Article 10(2) of the sixth Directive  (77/388/EEC), 
the French Republic is hereby authorized until 31 December 1996 to introduce 
in  respect  of  supplies  to  taxable  persons  of  fresh  industrial  waste  and 
récupérable  material  in  the  form  of  non-ferrous  metals  and  their  alloys, 
where  these  supplies  are  not  exempt  from  VAT  on  the  basis  of  Article 1, 
arrangements suspending payment of the tax relating to these transactions. 

The taxable persons receiving these supplies shall pay the tax on them where 
these  products  are  intended  neither  for  the  export  as  such  nor  for  the 
manufacture or resale as such of products liable to VAT. 

-g  -
Article 3 

In  the  light  of  a  report  from  the  Commission  on  the  application  of  the 
authorization  referred  to  in  Articles 1  and  2,  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 
1 January 1995, whether the said authorization is to be extended. 

This Decision is addressed to the French Republic. 

Article 4 

Done at Brussels, 

For the Council 

The President 

Il 

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