Proposal for a Council Directive amending Directive 77/388/EEC on the common system of Value Added Tax (level of the standard rate)
Date: 1995-12-20
Institutions: European Commission
Subjects: VAT, VAT rate, delivery, provision of services, tax harmonisation

COMMISSION  OF THE  EUROPEAN  COMMUNITIES 

Brussels,  20.12.1995 
COM(95)731  final 

95/  0362(CNS) 

Proposal for a 
COUNCIL DIRECTIVE 
amending Directive 77/388/EEC 
on the common system of Value Added Tax 
(level of the standard rate) 

(presented by the Commission) 

EXPLANATORY  MEMORANDUM 

The purpose of this proposal  is to enable the Council to take a decision on the level of the 
minimum  rate  of  the  standard  rate  as  it  is  required  under  Community  VAT  legislation1. 
The decision  is necessary  to consolidate the functioning  of the single market  from  a  fiscal 
standpoint  both  under  the  transitional  arrangements  currently  in force  and  in the  light  of 
the preparation of the definitive arrangements for the common system of value added tax. 

At  present  the  transitional  arrangements  of  Community  VAT  legislation  provide  for  a 
harmonisation  regarding  the number  and the level  of VAT  rates. This is no more than  the 
very  minimum  degree  of approximation  which  has been  considered  by Member  States as 
essential  for  the  single  market  to  function.  In  the  framework  of  these  transitional 
arrangements Member  States had to fix a standard  VAT rate of at least  15 %.  In practice, 
standard  rates  vary  from  15 %  to  25  %.  The  rates  of  15 %  and  of  25  %  are  applied  in 
respectively  two  Member  States.  Article  12(3)(a) of the  Sixth  VAT  Directive  lays down 
that  on  the  basis  of  the  report  on  the  operation  of  the  transitional  arrangements  and 
proposals on the definitive  arrangements to be submitted  by the Commission,  the Council 
shall decide unanimously before  31 December  1995 on the level of the minimum rate to be 
applied after  31 December  1996 with regard to the standard rate. 

In  its  report  to  the  Council  on  the  functioning  of  the  VAT  rate  system  following  the 
abolition  of  fiscal  frontiers  on  1  January  19932,  the  Commission  concluded  that  with 
regard  to  the  application  of  various  types  of  reduced  VAT  rates  (super-reduced  rates, 
zero-rates,  "parking"  rates etc.) no major  distortions  of competition  had  been  ascertained 
under  the  transitional  arrangements  for  taxation  of  intra-Community  trade  that  could  be 
attributed  to the  application  of various types of reduced  VAT rates  (super-reduced  rates, 
zero-rates,  "parking"  rates  etc.).  At  the  same  time,  however,  practical  experience  has 
shown that  widening  discrepancies  between  the  standard  rates  of various Merroer  States 
can, in principle, always give rise to structural  imbalance and  distortions  of competition in 
certain  sectors  of  economic  activity.  Furthermore,  various  Member  States  have  recently 
undertaken to increase their standard  VAT rate. 

In view of the findings  of the Commission  report  and  of practical  experience  so far  in the 
Community,  it  is important  to  ensure  that  at  least  the  level  of harmonisation  achieved  to 
date is maintained  thereby ensuring that the transitional  arrangements continue to  function 
properly.  As  far  as  the  standard  rate  is  concerned,  the  logical  conclusion  from  this  is, 
therefore,  that further  divergence in the existing levels of standard  rates in Member  States 
must be avoided by creating a rate band comprising minimum and  maximum levels for  the 
standard  rate.  Since the standard  rates which  are at  present  in force  apparently  guarantee 
the overall functioning  of the single market  under the existing taxation  system,  there is no 
urgent  need  to  set  these  rates  as  levels  other  than  the  levels  of the  lowest  standard  rate 
and  the  highest  standard  rate  which  are currently  in force  community-wide,  that  is  15 % 
and 25 %. 

It goes without saying that any change in the transitional  arrangements must also serve for 
the  preparation  of the subsequent  definitive  system  of taxation  of trade  between  Member 
States. Moreover,  it  is evident  that  this  definitive  system  will  in any  case  require  a  fairly 
rigorous  approximation  of  VAT  rates.  Such  an  approximation  of  VAT  rates  follows 
conclusively from  the country  of origin principle and is, therefore,  an intrinsic requirement 

1 
2 

The Sixth Council  VAT Directive 77/388/EEC as last amended by Directive 95/7/EC. 
Report from  the Commission  to the Council  in accordance with Articles  12(4) and 28(2Xg) of the 
Sixth Council  VAT Directive; COM(94) 584. 

I. 

of  any taxation  system  as envisaged  for  the  definitive  regime  in  Article  28  1  of the  Sixth 
VAT Directive,  whatever  the details of this regime  may be. Thus, the  system  of taxation 
shall not conduct taxable persons to choose the location of any commercial  activity in  first 
place with regard to the applicable VAT rate. 

It  follows  from  the  foregoing  that  it  would  not  be  appropriate  to  allow  for  a  further 
widening  of  the  range  of  standard  VAT  rates  in  Member  States;  major  discrepancies  in 
VAT  rates  could  be  an  obstacle  to  further  harmonisation  and,  consequently,  to  the 
introduction  of  the  definitive  regime.  However,  given  that  a  fundamental  change  of  the 
number and of the level of VAT rates applicable today will only be feasible  and  politically 
acceptable in the context  of the introduction  of the definitive  system,  it  is not  advisable at 
this stage to  anticipate  these decision  by changing the rates currently  applied.  A standard 
VAT  rate  band  between  15 %  and  25  %  will,  thus,  ensure  that  the  introduction  of  the 
definitive regime is not made more  difficult. 

Furthermore,  given  the  transitional  character  of the  present  taxation  system  it  is  evident 
that for the time being there is no sense in taking a final decision at present  on the level of 
the  standard  VAT  rate.  The  Commission  therefore  proposes  the  creation  of  a  standard 
VAT  rate  band  on  a  transitional  basis  only.  The  levels  of  the  minimum  rate  and  of  the 
maximum  rate  are  subject  to  revision  after  a  two  years-period  and  will  anyway  be 
examined  in  the  context  of  the  introduction  of  the  definitive  system.  Thus,  it  will  be 
possible  to  monitor  the  further  development  of  the  single  market  under  this  VAT  rate 
band  and  to  adjust  it when  appropriate.  Given this possibility  of revision of the  proposed 
rates and given that  under the proposed  levels for the minimum rate and for  the maximum 
rate no Member  State will  have to  adjust  its currently  applied  standard  rate,  the  proposal 
interferes  as little as possible in the fiscal  sovereignty of Member States and ensures, at the 
same time, that the introduction of the definitive VAT regime is not jeopardised. 

Commentary on the Articles 

Article 1 

Paragraph  1 proposes  that  the  present  range  of  standard  rates  of value  added  tax  in the 
various  Member  States  is  not  widened  (with  the  effect  that  the  existing  divergence 
between standard rates will not be enlarged). 

Paragraph  2  suggests  that  the  proposed  minimum  level  and  the  maximum  level  of  the 
standard  rate are not intended to be definitive  but that they are - on Commission  initiative 
- subject to revision after  a two years-period. 

Paragraph  3 regarding the  reduced  rate(s)  does not  change the  wording  of the  Directive 
77/388/EEC. 

Proposal for a 
COUNCIL  DIRECTIVE 
amending Directive 77/388/EEC 
on the common system of Value Added Tax 
(level of the standard rate) 

THE COUNCIL OF THE EUROPEAN UNION 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article 99 thereof, 

Having regard to the proposal from the Commission, 

Having regard to the opinion of the European Parliament, 

Having regard to the opinion of the Economic and Social Committee, 

Whereas  Article  12(3)(a)  of  the  Directive  77/388/EEC3,  as  last  amended  by  Directive 
95/7/EC4,  lays  down  that  on  the  basis  of  the  report  on  the  operation  of  the  transitional 
arrangements  and  proposals  on  the  definitive  arrangements  to  be  submitted  by  the 
Commission  pursuant  to  Article  281, the  Council  shall  decide  unanimously  before  31 
December  1995  on the  level  of the  minimum  rate to  be  applied  after  31 December  1996 
with  regard  to  the  standard  rate;  whereas  the  standard  rate  of  value  added  tax  shall  be 
fixed by each Member  State as a percentage  of the taxable amount  and  shall be  same  for 
the  supply  of  goods  and  the  supply  of  services;  whereas  from  1 January  1993  until  31 
December  1996, this percentage may not be less than  15%; 

Whereas  experience  has shown  that  under the current  taxation  system,  the  standard  rates 
of value added tax presently in force in the various Member States in combination with the 
safeguards  built  in  in that  tax  system,  have  ensured  that  the  transitional  system  of  value 
added  tax  has  functioned  satisfactorily;  whereas  widening  discrepancies  between  the 
standard  rates of value added  tax in the various Member  States would  create  a structural 
imbalance  in  various  business  sectors;  whereas  the  existing  range  of  standard  rates  of 
value  added  tax  applied  in the various Member  States  leaves  a wide margin  for  Member 
States to fix the level of the standard rate; whereas, consequently,  a further  adjustment  to 
the  range  of  the  possible  standard  rates  of  value  added  tax  at  a  later  stage  could  be 
economically desirable; 

3 
4 

OJNoL  145, 13.6.1977, p. 1. 
OJ No L  102, 5.5.1995, p. 18. 

(A 

Whereas the transitional arrangements of the common system of value added tax shall not 
jeopardise the subsequent  definitive  arrangements; whereas any change to the transitional 
arrangements has, therefore, to serve for the preparation of the definitive  system; whereas 
the introduction  of the definitive  system which is to be based on the principle of taxation 
in the country  of origin  will  in any event  require approximation  of the  standard  rates  of 
value added tax in the various Member States, 

HAS ADOPTED THIS DIRECTIVE: 

Article  1 

Directive 77/388/EEC is hereby amended as follows: 

Article 12(3)(a) is replaced by the following: 

"The standard rate of value added tax shall be fixed by each Member State as a percentage 
of the taxable amount and shall be the same for the supply of goods and for the supply of 
services. From  1 January  1997 until 31  December  1998, this percentage  may not be less 
than  15 % and not be higher than 25 %. 

On the  basis  of  a proposal  by the  Commission  and  after  consultation  of  the European 
Parliament the Council  shall decide unanimously  on the level  of the  standard rates to be 
applied after 31 December 1998. 

Member States may also apply either one or two reduced rates. These rates shall be  fixed 
as a percentage of the taxable amount which may not be less than 5 % and shall apply only 
to supplies of the categories of goods and services specified in Annex H." 

Article 2 

1. 

Member  States  shall  bring  into  force  the  laws,  regulations  and  administrative 
provisions  necessary  to  comply  with  this  Directive  by  1 January  1997  at  the 
latest. They shall forthwith inform the Commission thereof. 

When Member  States  adopt  these  provisions,  these  shall  contain  a reference  to 
this  Directive  or  shall  be  accompanied  by  such  reference  at  the  time  of  their 
officiai  publication.  The  procedure  for  such  reference  shall  be  adopted  by 
Member States. 

2. 

Member States  shaH communicate to the Commission the text  of the  provisions 
of domestic law wfeicfe they adopt in the field covered by this Directive. 

Article 3 

This Directive shall enter into force on the day of its publication in the Official  Journal of 
the European Communities. 

This Directive is addressed to the Member States. 

Article 4 

Done at Brussels, 

For the Council 
The President 

G 

Financial  statement 

The  proposed  Directive,  when  adopted,  will  have  no  consequences  for  the  collection  of 
Community own resources. 

ISSN 0254-1475 

COM(95) 731 final 

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