A COMMON SYSTEM OF VAT - A programme for the Single Market
Date: 1996-07-22
Institutions: European Commission
Subjects: VAT, competition, fiscal policy, single market, tax harmonisation

COMMISSION  OF THE EUROPEAN  COMMUNITIES 

Brussels,  2 2 . 0 7 . 1 9 96 
COM(96)  328  final 

A COMMON SYSTEM OF VAT 

A programme for the Single Market 

(presented  by the  Commission) 

TABLE OF CONTENTS 

INTRODUCTION 

I.  HISTORICAL BACKGROUND 

H.  A  SYSTEM  OF  V AT  WHICH  IS  SUITED  TO  THE  DEMANDS  OF  THE  SINGLE 

MARKET 

1.  THE LIMITATIONS  OF THE PRESENT SYSTEM 

1.1.  A complex and subjective system 

1.2 

A  system  which  is  poorly  suited  to  the  new  economic 

challenges 

1.3.  Divergences in application between Member States 

1.4.  The criticisms voiced by businesses 

1.5.  Conclusion 

2.  THE SYSTEM UNDER CONSIDERATION 

2.1.  The essential characteristics 

2.1.1.  Elimination  of  any  distinction  between  domestic  and 

intra-Community transactions 

2.1.2.  Taxation  of  all  transactions  carried  out  within  the 

Community 

2.2:  Key features 

2.2.1.  Single  place  of  taxation  for  operators  -  a  major 

simplification 

2.2.2.  End of the direct allocation of VAT  revenues by the tax 

system  16 

2.3.  Consequences 

2.3.1  Harmonisation measures 

2.3.2  Uniform application 

2.3.3  Modernisation of the existing system 

2.3.4.  Administration, control and collection in the new system 

m.  CONCLUSION: THE COMMISSION PROPOSES A WORK PROGRAMME 

ANNEX  A:  THE  COMMISSION'S WORK PROGRAMME 

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INTRODUCTION 

Since  1993, when  the  present,  so-called  transitional  VAT-system  was  put  into  place, 
substantial developments have taken place at Community level. 

While it was  a  major  step  forward  to  substantially  abolish the  internal  frontiers  of the 
European Union,  this  only partly  reflects  the process  of  economic  integration  that  has 
taken  place.  The  level  achieved  is  much  more  visible  when  it  is  recalled  that  the 
European Union is today in the process of introducing a single currency. It is not  about 
having a common symbol on coins and bank notes but about showing that the European 
Union has developed into a single economy. 

Ministers of Finance have agreed,  against this background,  to  discuss the more general 
lines  of  a fiscal policy  able  to  respond  to  two  of today's  major  challenges:  promoting 
economic growth and reducing unemployment. 

At the heart  of all such considerations  is the single market. Its aim was, and  still  is, to 
convert  15  separate  national  markets  to  a  single  European  market,  to  open  up  new 
opportunities  for  our  industry  by  giving  immediate  access  to  over  350  million 
consumers, and so to strengthen our economies' competitiveness in the world. The rapid 
progress towards an increasingly global economy demonstrates how important  it was to 
prepare for this steadily increasing internationalisation. 

A further  strengthening of our single market policy is necessary if full advantage is to be 
taken  of  its  initial  conception.  This  is  particularly  true  for  a  tax  like  VAT,  for  the 
following reasons: 

o  VAT is a tax on goods and services the free circulation of which is a basic element in 

the construction of the single market. 

o  VAT  is -  in its  conception  and basic legislation  -  a  Community  tax  and  one  of its 

characteristics and objectives is to introduce a common system of VAT. 

The limitations  of the  present  VAT system the so called  "transitional  regime"  and  the 
reasons  why  it  is  so  called  and  has  to  be  replaced  are  explained  in  detail  in  this 
document.  It  should, however,  be stressed here that the present  system clearly  imposes 
unnecessary  costs  on  our  enterprises  and,  consequently,  on  consumer  prices.  This  is 
because  ,  on  average  and  based  on  preliminary  estimates,  the  cost  for  companies  of 
administering transactions carried  out in other Member States is 5 or 6 times more than 
the costs would be for similar transactions in their home countries 

Elimination  of  those  costs  would  undoubtedly  contribute  to  improving  our  economy's 
competitiveness  in  the  world.  It  would  at  the  same  time  allow  our  own  SMEs,  for 
whom such a cost is likely to be an insurmountable barrier, to finally penetrate the single 
market.  When  discussing  the  Commission's  White  Paper  on  Growth,  Competitiveness 
and  Employment,  all  Member  States  agreed  with  the  analysis  that  growth  and 
employment are best promoted by SMEs.  A  change of the VAT  system reducing  costs 
and providing radical simplification  can substantially contribute to reaching that goal. 

In  the  process  of  achieving  economic  and  monetary  union  with  a  single  currency, 
taxation policy must further take account  of constraints put on Member  States  e.g.  with 
regard to the objective of reducing and/or stabilising budgetary deficits.  Taxation policy 
should indeed contribute to reaching that objective by, at least, stabilising tax receipts. 

Once  again,  the  best  way  to  achieve  this  goal  is  to  promote  growth  and  employment 
thus increasing overall tax receipts  and reducing expenditure.  Another  aspect  could  be 
to  make tax collection  more effective  by  simplifying  the tax  and thus  making  it  easy  to 
apply  and  by  reducing  the  tax  system's  susceptibility  to  fraud.  Today,  under  the 
transitional  system,  goods  worth  more than ECU 700 billion  circulate  VAT-free  in  the 
European Union  and some  of that  amount  may well  be  diverted  to  the  black  economy. 
A  change towards  a situation  in which  goods  would  circulate  tax  paid,  making  the  tax 
system  simpler  and  thus  better  protected  against  evasion  would  therefore  be  a  major 
contribution which VAT fiscal policy can make to fulfilling  the Maastricht criteria. 

In  forming  the  work  programme  which  is  set  out  here  together  with  its  associated 
calendar,  the  Commission  has  given  particular  attention to  maintaining  coherence  with 
economic and monetary union. The Commission will continue to pay particular attention 
to  this  in  implementing  this  programme  while  stressing  that  progress  towards  a  single 
currency is independent of the setting up of the common VAT system which is presented 
here. 

I.  HISTORICAL BACKGROUND 

Since work first started  on the introduction  of a system of VAT in the Community,  the 
question  of  abolishing  tax  frontiers  (ending  of  tax  remission,  taxation  of  intra-
Community transactions) has been discussed, the ultimate objective being the creation of 
a  common  system  of  VAT  under  which  sales  within  the  Community  would  be  taxed 
from the  point  of  origin.  The  view  has  also  been  taken  that  taxation  of  goods  and 
services  in  the  Member  State  of  origin  would  meet  the  needs  of  a  common  market 
provided  an  answer  could  be  found  to  two  fundamental  political  questions:  the 
harmonisation  of  rates  and  the  allocation  of  revenues  to  the  Member  State  of 
consumption. 

The general approach and the proposals made in 1987 only confirmed  these choices 
as far as intra-Community trade was concerned by suggesting the following  answers  to 
these political questions: 

•  an  "adequate"  approximation  of  rates  within  a harmonised  structure  of  two 

rates; 

•  a compensation  mechanism for revenues displaced by the system of taxation. 

The  Ecofin  Council,  recognising  in  1989  that  it  would  be  impossible  before 
1 January  1993 to  achieve the harmonizations necessary to  move onto  a unified  system 
of taxation  in the Member  State  of  origin,  decided  to  introduce  a  transitional  system 
aimed  at  circumventing  these  difficulties  which would  preserve  the  principle  of  taxing 
transactions  from  the  point  of  origin  while  still  allowing  tax  to  be  collected  in  the 
Member State of destination in a number of situations (taxation of transactions between 
liable persons and various special arrangements). 

Thus, the taxation of transactions and the actual collection of tax continued to be carried 
out  in  the  Member  State  of  destination,  which  was  considered  to  be  the  country  in 
which, in all probability,  the goods or services sold would  be consumed  and to  which 
the  revenues  generated  by  taxation  should  therefore  accrue.  Given  this  situation  of 
taxation  at  destination,  it  was  possible  to  make  do  with  minimum  rules  on  the 
approximation of tax rates and legislation, and the autonomy of the Member  States was 
largely  preserved.  The  situation  has  changed  little  since  the  introduction  of  the 
Commission's  initial  proposals  on  the  single  market  in  1987.  No  progress  has  been 
made on approximating the Member States' laws, and the level of harmonisation of VAT 
rates has remained modest. 

This  summary  of the  historical  background  helps us  to  understand  why  many  people 
still  expect  the  Commission  merely  to  come  forward  with  proposals  which  are 
based on the same approach  as in 1987, i.e.: 

taxation  at the place of origin, i.e. the place at which the goods and services 
are situated at the time when they are sold by the enterprise; 

approximation  of  VAT  rates  and  legislation  to  the  extent  which  is  strictly 
necessary to limit the risks of competition being distorted; 

a  compensation  mechanism which the Member  States  are likely to  accept  to 
ensure  that  revenues  continue  to  accrue  to  the  Member  State  in  which 
consumption takes place. 

Without repeating the detailed observations presented in the Report on the operation of 
the transitional  arrangements (COM (94) 515, 23 November  1994), it must be stressed 
just  how  much our  experience with the transitional  system has  fundamentally  changed 
the assessment which may be made of the "solutions" previously  envisaged  and has led 
the Commission to attempt to redefine the characteristics which a common system of 
VAT for the single market should display. 

It might be argued  that the objective  of eliminating checks at the Community's internal 
borders, which is a precondition for completion of the single market,  has been achieved 
by means of the transitional  system. However it is increasingly becoming  clear that the 
actual  process  of  harmonising  the  Member  States'  laws  on  turnover  taxes  and  the 
prospect  of  introducing  a  common  system  of VAT  and  its  transition  to  the  definitive 
system  go  well  beyond  that  achievement  and  cannot  be  dissociated  from  two  other 
fundamental  objectives  of the European Union: 

that  of  ensuring  the  neutrality  of  taxation  in  respect  of  trade  within  and 
between  Member  States  alongside  the  general  development  of  European 
integration; 

that  of  establishing  "an  internal  market  characterised  by  the  abolition,  as 
between Member  States, of obstacles to the free movement  of goods, persons, 
services and capital" (Article 3(c) of the Treaty). 

In preparing its proposals to the Council on the transition to  a new common  system of 
VAT for the single market, the Commission has been guided by these objectives  and by 
the  essential  criteria  which  the  Council  itself  defined  for  the  transition  to  a  definitive 
system. These are a clear  affirmation  of its wish that the definitive  system should  offer 
significant  advantages as compared to the existing transitional system and meet the 
following essential criteria, which are considered to be of equal importance: 

an  easing  of  the  administrative  obligations  incumbent  on  enterprises  and 
administrations and a significant  simplification of taxation; 

no reduction of Member States' tax revenues; 

no increase in the risk of tax evasion; 

maintenance of tax neutrality in terms of competitiveness. 

It  very  quickly  became  clear  that  the  implementation  of  all  of  these  criteria  and 
objectives  could  not be  achieved  simply by amending  the  tax  rules  introduced  for  the 
transitional period but that, instead, detailed work would have to be carried  out on the 
very principles of the operation of the entire common system of VAT. 

This work has proved to be so extensive that the Commission was not able to present its 
proposals before  31 December  1994, as was initially  envisaged.  This is because it has 
been necessary to explore as many solutions as possible in order to identify the one best 
able to lead to  a system of VAT which is genuinely suited to the demands of the single 
market  and  which  enables  the  competitiveness  of  the  European  economy  to  be 
strengthened. 

In  these  circumstances,  the  Commission  considers  that  it  would  be  premature  at  this 
stage  to  present  proposals  for  legislation  governing  the  transition  to  a  new  common 
system  of VAT.  Consequently,  this document  contains  a WORK PROGRAMME which 
the  Commission  intends to  follow  in the  coming years  for  the  purposes  of  presenting 
suitable proposals for shifting  over to a new common system of VAT which is suited to 
the single market. 

H.  A SYSTEM OF VAT WHICH IS SUITED TO THE DEMANDS OF THE 

SINGLE  MARKET 

1. 

THE LIMITATIONS OF THE PRESENT SYSTEM 

1.1.  A complex and subjective system 

The  present  VAT  system  is  designed  in  such  a way  that  VAT  revenues  are  collected 
directly  by the  state  on whose  territory  the  consumption  of  the  goods  and  services  is 
deemed  to  take  place.  To  achieve  this  objective,  complex  rules  have  had  to  be 
introduced  for  defining  the  location  of  a transaction.  Thus,  there  are  no  less  than  25 
different  rules for  determining the place  at which  a transaction  should  be taxed,  which 
means,  inter alia,  that  operators  are required  to  divide their  turnover  up  between  the 
various  Member  States  which  are  competent  to  tax  them,  and  this  serves  to 
compartmentalise the single market. 

Consequently,  VAT  has  lost  the  objectivity  it  should  have  since  the  applicable  tax 
system  depends  on  a range of diverse factors  which have to  be taken into  account by 
the seller of goods or services: 

the place at which the seller and buyer are established, 

the tax status of the person to whom goods or services are supplied, 

the VAT identification number of the person supplied, 

the location of the goods at the time of supply, 

the person who organises transport and the place of departure or arrival, 

the nature of the services supplied, 

the turnover achieved by the seller in the Member  State in which the goods are 
supplied. 

On  top  of  these  difficulties  in  ensuring  correct  taxation,  firms  also  face  problems  in 
obtaining the deduction or refund  of VAT paid in Member  States in which they are not 
established. 

1.2 

A system which is poorly suited  to the new economic challenges 

Since the  present  system  is  still  based,  where  possible,  on  physical  monitoring  of  the 
movement  of goods,  it is no longer  suited to  modern business practices.  This heritage 
from  the  past  prevents  taxation  from  being  based  on  commercial  transactions  as 
accounted  for  within firms and  is  a  very  major  obstacle  to  the  development  which  a 
genuine  single  market  should  enable  each  and  every  one  of  them  to  achieve,  and  in 
particular  for  small and  medium-sized  enterprises,  which  should  be able to  benefit  fully 
from  the  new  opportunities  offered  by the European  market.  The  maintenance  of the 

status  quo  is also  a  source  of legal uncertainty  for  operators  and  administrations  alike 
since they are both  faced  with the  difficulty  of  satisfying  themselves  of  points  of  fact, 
such as whether goods have indeed been transported to another Member  State, without 
any real means of proving them absolutely conclusively. 

Moreover, the present system is poorly suited to the development of the most buoyant 
segment of the European  and world  economy,  Le. those  international  services which 
evade  or  increasingly  might  evade  VAT  on  consumption  within  the  Community. 
Current  legislation  is  incapable  of  ensuring  correct  taxation  in  areas  such  as 
telecommunications,  in  which  very  rapid  technological  developments  have  occurred. 
Likewise,  activities which were  previously the  exclusive  domain  of  public  services  are 
increasingly being taken on by private firms: the derogations  introduced  for  the  private 
sector have thus become obsolete and give rise to  distortions  of competition  which  are 
increasingly damaging to both the public and private sectors. 

1.3.  Divergences in application between Member States 

By  dint  of the  manner  in  which  the  common  system  was  set  up  (directives  leave  the 
Member  States  with  a  lot  of  powers  and  options),  divergences  in  its  application  have 
existed from the outset.  However,  the impact of these divergences has been  reinforced 
by the fact that operators are now affected  to a greater degree by legislation - and above 
all the manner in which it is applied - of Member States other than the one in which they 
are established or pursue their usual activities. 

Increasingly  denounced  as  being  the  most  damaging  barrier  of  all  within  the  single 
market,  the  divergences  in  the  application  of  the  common  system  of  VAT  between 
Member  States  have  a  variety  of  origins:  special  arrangements,  options  and  powers 
granted by the directive (66), temporary or transitional derogations which have not been 
repealed,  other  derogations  authorised  by  the  Council  (some  130),  shortcomings  in 
transposition or differences  in the interpretation of common provisions. 

The  result  is  an  extremely  complex  situation  in  which  there  is  no  legal  certainty 
whatsoever  for  most  operators,  and  this  in  itself  constitutes  yet  another  obstacle  to 
transnational  economic  activities  and consequently gives rise to many  obligations  for 
firms,  which today have to be familiar  with the details and practical implementation  of 
the legislation of fifteen  Member States in order to be able to operate in the Community. 

In  addition,  operators  exploit  these  divergences  using  clever  tax  accounting,  and  this 
distorts any fairness  of competition which might otherwise exist in the single market  (as 
illustrated by the problems encountered in the car leasing sector). 

10 

1.4. 

The criticisms voiced  by  businesses 

At  a  conference  organised  by  the  Commission  in  June  1994  on  the  future  definitive 
system, the wish was clearly expressed for there to be a comprehensive  debate on  ways 
to bring about a general and effective  improvement of the existing system. 

The  Commission  departments  have  also  received  a  not  insignificant  number  of 
contributions  from  professional  circles  in  which  the  latter  express  their  lack  of 
satisfaction with the current VAT system and their hopes with regard to the new system. 

Almost 80% of operators are in favour of replacing the exiting transitional  system with a 
definitive  system. 

These  same operators  are broadly in favour (85%)  of harmonisation  of Member  States' 
legislation,  particularly  in  the  following  areas:  charging  procedures  and  declaration 
obligations  (74%),  right to  deduct  (52%),  VAT  rates  and  exemptions  (43%).  A  large 
majority  of  them  also  regret  the  divergences  in  application  which  they  observe  at 
present. 

These pressing demands reveal the dissatisfaction caused by the current system, which is 
often seen by operators as an obstacle to  any extension of their economic  activity to the 
Community territory as a whole. 

1.5. 

Conclusion 

The combined  effect  of all the difficulties  associated with the present  system is far from 
negligible,  and  given  that  it  extends  to  businesses,  consumers  and  tax  administrations 
alike,  it  is  proving  to  be  a  significant  burden  to  the  competitiveness  of  the  European 
economy. 

11 

Consequences for operators 

the  need  to  become familiar  with  the  specific  legislation  applied  in  the 
different Member States, which may be an insurmountable obstacle to SMEs; 

discrimination between purely  domestic and intra-Community  transactions; 
this  goes  completely  against  other  EU  policies  for  which  Community  law 
guarantees the  same access for  all European firms; on the  contrary,  the VAT 
system  introduces  significant  barriers  including,  for  example,  for  public 
procurement; 

legal  uncertainty  due  to  the  various  factors  which  sellers  must  take  into 
account  in  determining  whether  and  where  their  sales  are  to  be  taxed;  this 
continually  exposes them to the financial risk that  the tax  administration  might 
come  up  with  a  different  interpretation,  which  effectively  means  that  it  is 
operators  which  have  to  bear  the  cost  of  maintaining  autonomy  between  the 
Member States. 

major costs, which have a particularly penalising and deterrent effect  for SMEs, 
and prevent the benefits  of the single market from being fully  reaped  (especially 
in terms of economies of scale): 

transactions  carried  out  in  a  Member  State  other  than  the  one  in  which  a 
business is established remain more expensive than purely domestic transactions, 
in particular because they are required to use tax representatives  (according to 
some estimates, the average costs can be five or six times greater than those of a 
domestic transaction); 

the application of the transitional system generates costs which some businesses 
put at 20% of their total tax costs. 

Consequences for consumers 

a  major  restriction  on  their freedom  to  obtain  supplies  on  the  market 
conditions of other Member  States:  their  purchases  in other  Member  States 
are subject to tax in either the country of origin or of destination depending on 
factors  such  as the  seller's  turnover  in their  country,  the  nature  of  the  goods 
purchased  (new  means  of  transport,  for  example),  or  whether  or  not  they 
organise transport to their country themselves; 

they do not benefit from  all the advantages which the single market should 
offer: the complexity of the conditions governing whether their purchases may 
be  made  inclusive  of  tax  in  another  Member  State  (travel  to  the  country 
themselves, organise the transport  or undertake to pay VAT at the  destination) 
is a deterrent to  consumers, who will therefore  tend to buy at home; this helps 
maintain a segmented  market  and compartmentalises  competition,  the  result  of 
which  is that  major  differences  continue  to  exist  in  prices  charged  from  one 
Member State to another. 

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Consequences for administrations 

• 

• 

- 

- 

• 

loss  of  sovereignty  over  monitoring:  the  apparent  defence  of  national 
sovereignty  in  a  system  of taxation  which  ensures  a direct  allocation  of VAT 
revenues between Member  States gradually  leads to  a real  loss  of  sovereignty 
over  tax  matters; this  is because  the fragmentation of the  activities  of  taxable 
persons  between  the  various  Member  States  prevents  administrations  from 
being able to monitor the overall activity of a firm and to satisfy themselves that 
any deductions made are justified; 

the opportunity to commit tax evasion or avoidance: 

the circulation between Member States of goods which are totally exempt  from 
tax  may  encourage  the  development  of  "black  markets":  the  amount  of  tax 
involved,  based  on  the  volume  of  trade  between  Member  States,  is  some 
ECU  100 billion per annum; 

the  complexity  of  the  situation  encourages  operators,  disheartened  by  the 
cumbersome  nature  of  their  obligations  and  the  scale  of  their  costs,  not  to 
declare  their  activities  or  to  declare  them  in  the  country  in  which  their  costs 
would  be lowest;  it also creates  a feeling  of lack  of effective  control,  which is 
particularly damaging to the proper application of the tax. 

impact  on  VAT  revenues:  wrong  application  of  the  tax  rules  or  their 
circumvention  by  means  of  clever  tax  accounting  may  lead  to  a  reduction  of 
revenues  or  even  a  displacement  of  activity  to  third  countries  where  no 
Community VAT is payable. 

These  difficulties  are  too  fundamental  to  be  solved  on  the  basis  of  the  existing 
framework.  Simplification measures have reached their limits and attention must now be 
directed  at the actual  source of these problems, which lies in some of the basic choices 
made in the past on the basis of the existence of nation states surrounded by a  frontier. 

In  order  not  to  invite  the  same  criticisms  as the  present  system  and  to  meet  fully  the 
objectives  of  the  single  market,  the  new  system  of  VAT  will  have  to  satisfy  the 
following  criteria: 

• 

• 

• 

• 

it must abandon the segmentation of the single market into  15 tax areas; 

it  must  be  simple  and  modern  so  as  to  rise  to  the  challenges  of  the  21st 
century; 

it  must  guarantee  equal  treatment  of  all  transactions  carried  out  in  the 
Community; 

it  must  ensure  effective  taxation  and  guarantee proper  monitoring,  thereby 
maintaining the level of VAT revenues. 

13 

2. 

THE SYSTEM UNDER CONSIDERATION 

Such  a  common  system  of  VAT  can  be  defined  solely  by  reference  to  the  general 
objectives  of  the  Treaty,  and  in  particular  the  pursuit  of  economic  integration  and 
convergence as symbolised by the concept of the single market. 

In  this  context,  the  common  system  of  VAT  must  be  given  the  characteristics  of a 
genuine  Community tax area in which domestic  and intra-Community  transactions are 
afforded  equal  treatment,  this  being  the  unavoidable  consequence  of  the  ultimate 
objective which has been pursued ever since the First VAT Directive was adopted, i.e. 
the eventual  creation  of a "common market within which there  is  healthy  competition 
and whose characteristics are similar to those of a domestic market". 

2.1.  The essential  characteristics 

2.1.1.  Elimination  of  any  distinction  between  domestic  and  intra-Community 

transactions 

The  single  market  should  function  on the  same  conditions  and  in  the  same  way  as a 
domestic  market,  and  this  also  applies  in the field of  VAT.  It  absolutely  must  offer 
operators  the  opportunity  to  carry  on business  in  all the Member  States,  and  the new 
common  system  of  VAT  must  therefore  ensure  that  no  activity  is  more  difficult  to 
exercise in one Member  State than in another and that any purchase can be made on the 
same  terms  throughout  the  Community.  At  the  same  time,  a  transaction  involving 
several  Member  States  should  not  be  allowed  to  result  in  more  obligations  than  one 
carried  out  within  a  single  Member  State.  Any  other  approach  implies  costs  which 
would penalise European businesses. 

Eliminating  the  distinction  between  domestic  and  intra-Community  transactions  must 
enable operators  to reduce to  only two the number  of tax  systems  currently  applicable: 
transactions  involving  a  third  country  and  transactions  carried  out  within  the 
Community.  Thus,  it  will  be  possible  to  achieve  a  major  simplification  to  the 
benefit  of  operators,  consumers  and  administrations  alike,  and  one  which  is  fully 
consistent  with  the  Council's  conclusions  concerning  the  essential  conditions  for  the 
transition to a definitive system. 

2.1.2.  Taxation of all transactions carried out within the Community 

It  being  established  that  all  transactions  carried  out  within  the  Community  should  be 
afforded  equal  treatment,  it  is  necessary,  to  guarantee  both  the  simplicity  and  the 
effectiveness  of  the  system,  that  the  principle  be  generally  applied  of  taxing  all 
transactions carried out within the Community, and this in preference  to a generalisation 
of the exemptions currently applicable to intra-Community transactions.  This approach 
is a suitable means of restoring the objectivity  of the tax, which has gradually been lost, 
and implies that two essential characteristics of VAT be strengthened: 

14 

the mechanism  of fractioned  payments,  which  ensures  that  the tax  system is 
self-checking; 

the  clear  sharing  out  of  responsibilities  between  the  supplier  (correct 
invoicing of the tax due) and the buyer (correct proof of the taxes he deducts). 

These characteristics  guarantee that  VAT is able to  provide the  advantages  it  offers  in 
terms  of  effectiveness  and  monitoring  over  other  consumption  taxes  (retail  taxes,  for 
example).  This goes  a long way to  explaining why it  has been introduced  in the  large 
majority  of  OECD  countries  and  why  it  was  chosen  by  the  European  Community. 
Consequently,  the  remission/taxation  mechanisms  for  trade  between  Community 
Member States must be abolished. 

In this way, the principle of taxing transactions carried  out within the Community from 
their  point  of  origin  is  complied  with:  all  that  remains  is  to  draw  the  necessary 
conclusions  for  the  mechanisms  to  be  established  for  its  implementation,  in  particular 
regarding  the determination of the place of taxation. 

2.2.  Key  features 

2.2.1.  Single place of taxation for operators - a major  simplification 

Experience  with the transitional  system has shown that  as long  as the tax  rules  require 
operators to  distinguish their  sales according to the place  at which they  are  deemed  to 
take place in the  Community,  no  genuine  simplification  can be  achieved  and  the  single 
market will continue to be segmented and compromised.  It is unthinkable that a French 
firm  should be required to declare its sales in all the various towns of France in. which it 
has customers, but this is what is at present required at. Community level if the same  firm 
decides to  sell goods in Cologne  or carry out work  on property  in Rome.  At national 
level,  the  Member  States  apply  the  very  sound  rule  that  a  taxable  person  is 
registered  only once, and there are convincing reasons for so doing: 

it  is  easier  for  operators,  who  are  able to  meet  their  obligations  (declaration 
and payment of tax) and exercise their rights (right to deduction) at one place; 

it is easier  for  consumers, who are able to  obtain  supplies without  constraints 
from the trader of their choice; 

it  is  easier  and  more  efficient  for  tax  administrations,  who  are  able  to 
monitor  all the  activities  of a taxable person  and  the  deductions  carried  out in 
relation to those activities. 

15 

The Commission  is  convinced  that  this  approach  must  also  be  adopted  at  Community 
level and that,  consequently,  all the transactions of a given operator will  have to be 
taxed at one place for the entire Community, whereby a distinction will no longer be 
made according to the Member State in which they are carried  out.  This approach also 
implies that the right to deduct must be exercised strictly and exclusively at that place. 

Requiring  taxation  and  deduction  to  be  administered  by  a  single  tax  administration 
would  strengthen the monitoring of the tax, although there will still be a need  for  close 
collaboration between the  15 administrations. 

2.2.2.  End of the direct allocation of VAT revenues by the tax system 

Any  system  which  opens  up  the  possibility  of  deducting  in  one  Member  State  VAT 
which  has  been  collected  in  another  involves  a  displacement  of  the  VAT  revenues 
directly collected by each Member State. 

As early as in  1987, the Commission considered  a compensation  mechanism  as a means 
of reallocating  any revenues which might be displaced  following  a reform  of the system 
of taxation. 

In  1994, when defining the essential conditions for the transition to the definitive  system, 
the  Council  insisted  that  the  changeover  should  not  lead  to  a  'reduction  of  Member 
States' tax revenues. 

The system advocated  by the Commission creates a Community  tax  area  and  abandons 
the  direct  allocation  of  VAT  revenues  by  the  actual  tax  system,  replacing  it  with  a 
reallocation mechanism. 

In this respect, the Commission would stress that the reallocation  of revenues  between 
Member  States  cannot  be  based  on  data  provided  in  the  tax  returns  of  taxable 
persons.  Indeed,  such an approach  would be incompatible with the choice of  a single 
place  of  taxation  because  this  would  reintroduce  the  monitoring  of  the  physical 
movement  of  goods.  Also,  this  would  necessitate  making  a  distinction  between 
domestic and intra-Community  supplies and by this clash with the fundamental  principle 
that domestic and intra-Community transactions should be treated in the same way.  The 
simplification  involved  in eliminating this distinction would  be  cancelled  out  if  for  the 
purposes  of  compensation,  operators  had  to  continue  identifying  intra-Community 
transactions  in  their  tax  returns.  Any  correction  of  the  allocation  of  revenues  must 
therefore be based on data not taken from the tax returns filed by operators. 

Given that  the  Council  stressed  in its  above-mentioned  conclusions  that  VAT  has the 
character  of  a  general  tax  on  consumption,  the  Commission  considers  that  the  best 
means  of  determining  the  revenues  of  each  Member  State  in  terms  of  taxed 
consumption  which  occurs on its territory  is to quantify  consumption  by  means of 
statistics. 

16 

Indeed,  on the basis of the  consumption  side of National  Accounts,  appropriate  input-
output  tables  and  other  information  (statistical  surveys,  annual  reports,  etc.),  it  is 
possible to establish the yearly consumption of the various economic sectors, such as the 
private  sector  and  the  State  sector,  both  classified  by  function  and  broken  down  into 
more  detailed  figures.  Such  information  is  also  available  for  other  sectors  and  sub-
sectors,  such  as  non-profit-making  private  bodies,  the  credit  sector,  insurance 
companies, the health sector, etc. 

Those parts which - though being final consumption - are not subject to taxation need to 
be eliminated from these consumption  figures.  Those figures which have been inserted 
into the GNP  calculation for  the black economy must consequently  be deducted  again. 
After  doing  so,  the  statistical  consumption  figures  correspond,  in  principle,  to  the 
appropriate  tax  base  (taxable  amount  of the  underlying  transactions)  that  -  under  the 
destination  principle  as  applied  for  the  revenue  allocation  -  would  give  rise  to  VAT 
receipts  in the  Member  State  establishing  this  calculation.  It  is, therefore,  possible to 
group  the  classifications  of  sectors  and  sub-sectors  used  in  the  National  Accounts 
according  to  their  VAT  treatment  (out  of  scope,  exempted  with  or  without  right  of 
deduction, taxed at the standard rate, taxed at a reduced rate) and thus - by applying the 
appropriate weighted  VAT  rate - calculate the theoretical  VAT  receipts  of the  country 
concerned. 

The  share  of  each  Member  State  in  the  total  of  all  Member  States'  theoretical  VAT 
revenues  will  be  the  key  to  redistributing  the  total  VAT  revenue  of  the  Community 
among the Member States. 

In  practice,  this  system  of  macro-economic  reallocation  of  Member  States'  VAT 
revenues could be easy to implement using the accounting methods applied to the VAT 
own resource. 

In its eagerness to preserve the Member States' budgetary situation, the Commission will 
be particularly attentive to the setting up of suitable mechanisms intended to ensure that 
Member  States  have  access  to  the  revenues  generated  by  VAT  whenever  they  are 
entitled to them without  having to wait  for  the final outcome  of the  calculations  to  be 
carried out on a statistical basis. 

Such  a  system  would  lead  to  a much  more  accurate  and  complete  allocation  of  VAT 
revenues based  on  all final consumption  taking  place on  the  territory  of  each Member 
State than occurs with the present system. 

Application  of the  principle  of taxation  in the  country  of  origin,  even  if  it  is  not  very 
widespread today in view of the particular  systems in force,  has already led to  a certain 
displacement  of  revenues  between  Member  States  without  any  compensation  having 
been  deemed  necessary.  Strengthening  the  principle  that  the  revenues  generated  by 
VAT  should  accrue  to  the  Member  State  of  consumption  would  be  one  means  of 
stabilising the overall tax revenues of Member States. 

17 

2.3.  Consequences 

Once it is the case that all the economic activities of a given trader are taxable in a single 
Member State,  very  extensive  harmonisation  of  tax  mechanisms  is  inevitable  to 
ensure  uniform  application  demanded  by  operators;  besides,  if  the  tax  is  to  remain 
neutral  vis-à-vis  the  conditions  of  competition  between  businesses  a  certain  degree  of 
harmonisation  of  VAT  rates  is  equally  necessary. 
In  any  case,  irrespective  of  the 
specific  arrangements  proposed,  the  system  needs  to  be  completely  modernised  in 
order to take up the challenges of the twenty-first century. 

2.3.1  Harmonisation  measures 

Harmonisation of rates 

The  degree  of  harmonisation  of  VAT  rates  which  needs  to  be  achieved  must  be 
considered  in  the  light  of  what  is judged  necessary  to  avoid  damaging  distortions  of 
competition for the Community as a whole. 

Indeed,  one  of  the  essential  characteristics  of  VAT  is  its  neutrality  vis-à-vis  the 
conditions  of  competition:  consequently,  maintaining  the  possibility  of  applying  too 
many different  rates from one Member State to another would endanger this  neutrality 
with the risk that  business  locations would be influenced,  which would  be  inconsistent 
with the very principles of the single market. 

Otherwise, the Member States cannot be expected to accept from the outset a system of 
taxation which  might  seriously  damage their  own operators  if there  is not  a  sufficient 
degree of harmonisation of VAT rates. 

Consequently, the Commission intends to address the matter of rates as follows. 

As far as the standard rate is concerned, the introduction of a single rate would provide 
a  perfect  solution  avoiding  any  tax-related  distortion  of  competition  and,  above  all, 
ensuring  that  the  tax  is  applied  simply  and  uniformly  throughout  the  Union 
nevertheless, an approximation within a band could prove  sufficient. 

The decision  setting the rate should be a political  one and should take account  of the 
general  need  for  sufficient  revenue,  the  need  to  share  the  burden  among  the  main 
types  of  statutory  contributions  and  charges  (direct  taxation,  indirect  taxation,  social 
contributions) and the thrust of medium-term tax policy. 

1* 

Consequently, the question of rates must form part of the wider debate launched  at the 
informal  Council meeting in Verona  on the  general  tax  policy  of Member  States  and 
the Community as a whole.  In this context,  the debate is not limited to  identifying  the 
rate of tax necessary  to  guarantee  a level  of revenues  comparable  to  the  present  one, 
but  it  might  also  include  other  political  considerations. 
In  particular,  it  might  be 
envisaged  to  provide,  by way  of the  VAT,  the  budgetary  resources  needed  to  reduce 
other contributions and charges. 

As regards the reduced rate(s), harmonisation  of their  number  and  scope  is  necessary 
from a  purely  technical  standpoint.  The  Commission  remains  convinced  that  only  a 
small number of rates is compatible with the objective of simplifying the tax. 

Other harmonisation measures 

Harmonisation  of  many  other  aspects  of  the  common  system  of  VAT  is  absolutely 
necessary.  Mention should be made here of topics such as the extent of and  conditions 
for  exercising  the  right  to  deduct,  exemptions,  the  tax treatment  of  small  firms  or 
other  special  schemes.  Although  it  has  not  been  possible  to  achieve  significant 
progress  so far,  there is no escaping the fact  that  these  aspects  must  be harmonised  in 
order to ensure healthy competition and sufficiently  uniform application of the tax across 
the Union, factors  which are closely linked to the simplicity and  effectiveness  of the tax 
system.  The  entire  range  of  options,  authorisations  and  derogations  allowed  by  the 
existing system also need to be reviewed. 

The  Commission  is,  however,  already  convinced  that  the  proposals  currently  on  the 
Council  table  cannot  be  used  as  a  basis  for  the  in-depth  discussions  that  need  to  be 
launched  on these topics with a view to the changeover to the new  common  system of 
VAT.  They will therefore be withdrawn to make way for proposals expressly concerned 
with introducing the new VAT arrangements. 

2.3.2  Uniform  application 

The harmonisation  of rates and other  aspects of the  common  system of VAT will be a 
It  is  nevertheless  indispensable  to  ensure  that  a  more  unified 
definite  step  forward. 
approach is taken to  interpreting  the legislation.  To that  end, the  Commission  intends 
shortly to  propose that  the VAT  Committee  be turned  into  a regulatory  committee, 
with the Commission being given powers to  take measures  implementing  acts  adopted 
by the Council. 

Thought  will also have to be given to the strategy to be taken,  in terms  of the type of 
legal  instrument  (a  directive  or  a  regulation?)  and  the  decision-making  process 
(unanimity  or  qualified  majority?),  for  arriving  at  a  system  of  VAT  that  is  genuinely 
common and uniformly applied. 

19 

2.3.3  Modernisation  of the existing system 

The need  is making  itself felt  today  for  a  re-examination  of the  approach  taken  in the 
1970s in  a  number  of fields, e.g.  areas  excluded  from  the  scope  of  the  tax  (activities 
carried  on  by  public  authorities,  holding  companies,  etc.),  or  transactions  exempted 
because they relate to  certain  activities carried  on in the general  interest  (public postal 
services, activities of public broadcasting organisations, etc.) or because of the technical 
difficulties  involved  in  applying  the  tax  (telecommunications,  real  estate, financial and 
insurance services, etc.). 

Attempts will also have to  be made to achieve a better  match between  the Union's tax 
territory and its customs territory. 

In any event, the modernisation exercise will have to be carried  out in such a way as to 
establish  as  wide  as  possible  a  scope  for  the  tax  and  will  require  a  debate  on  the 
possibility  of widening  the scope still further  by limiting exemptions  and  all other 
derogations  to  the  tax  system  currently  in  force  so  as  to  ensure  that  the  taxation 
arrangements  are as neutral,  as simple and  as effective  as possible,  taking  into  account 
their  likely  effects  on income  distribution.  Moreover,  it  cannot  be  ruled  out  from  the 
outset  that  this  debate  might  make  it  possible  to  reduce  rates  overall  while 
guaranteeing  an  unchanged  level  of  revenues  or  to  eventually  compensate  for  any 
reduction of non wage labour cost. 

Such a reappraisal will be no easy task and will be feasible  only in close liaison with the 
economic operators concerned; however, it would be inconceivable to ignore, in a single 
market, the impact on neutrality and competitiveness of the choices made with regard to 
the scope of VAT. 

2.3.4.  Administration,  control and collection in the new system 

The considerable  simplification  of the  system  proposed  offers  the  additional  benefit  of 
simplifying  administration of the tax in three important ways. 

Firstly,  the  abolition  of the  distinction between  domestic  and  intra-Community 
transactions  and  of  exceptions  to  the  general  rule  will  reduce  the  existing 
opportunities for evasion. 

Secondly,  a single VAT  supervisory  relationship  will provide  a more  complete 
understanding of each business to the benefit of effective  control. 

Thirdly,  the  abolition  of the  VAT-free  circulation  of good  in  intra-Community 
trade  will  eliminate  the  key  condition  for  the  main  intra-Community  VAT 
frauds,  as set out under point 1.5 earlier. 

All these imply that the burden on administrations will be reduced,  permitting  resources 
to be concentrated where they are most needed. 

20 

This simplification  benefit  is however a net gain both for  administrations  and taxpayers. 
If the simpUfication  of the tax reduces the burden on administrations, the overall burden 
of obligations on the taxpayer also requires reconsideration. The existing obligations on 
the  taxpayer  were  put  in  place  to  ensure  control  and  collection  in  the  present,  more 
complex,  system.  A  simpler  system  requires  the  detailed  re-examination  of  the 
justification  of each of the existing obligations on business. 

In  reconsidering  each  of these  obligations, the  question  of what  each taxpayer  has the 
right to  expect  of  the  tax  administration  (the  obligations  of  the  administration  to  the 
taxpayer)  must  also  be  considered.  The  compliant  taxpayer  should  have,  at  least,  the 
right to expect clarity of his obligations, fair and correct administration of the tax and an 
avoidance  of  unnecessary  disruption  of  his  economic  life.  Fulfilling  these  basic 
obligations is inherently in the interests of the tax administration. 

Fulfilling 
them  encourages  voluntary  compliance  which  frees  resources  to  be 
concentrated  on non-compliant  traders. Some expression of these rights of the taxpayer 
(or  obligations  on  the  administration)  should  be  enshrined  in  Community  law.  If  the 
relationship between taxpayer and administration is seen properly as a whole, obligations 
on the administration towards the taxpayer must be considered  simultaneously  with the 
obligations on the taxpayer. 

This  re-examination  of  the  justification  for  these  obligations  from  the  standpoint  of 
burdens  on  business  will  be  intimately  linked  to  the  establishment  of  the  sufficient 
minimum of obligations on taxpayers set out below. 

The  new  system  also  has  two  major  implications  for  the  administration  of  the  tax: 
collective responsibility  and a greater emphasis on  cooperation. 

Collective  responsibility 

Under  the  existing  system,  each  Member  State  is  responsible  for  the  administration, 
control and collection of the tax which contributes  directly to  its own national Budget. 
Consequently  each Member  State grants itself the powers and resources which it thinks 
necessary  to  achieve  this  goal.  Certainly  no  Member  State  can  achieve  this  goal 
satisfactorily  without  the  cooperation  of  other  Member  States,  as  provided  for  in 
Community  legislation.  But  the  primary  responsibility  for  successful  administration  of 
the tax in all its aspects rests with each Member State alone. 

In  the  proposed  system  this  individual  responsibility  will  be  replaced  by  a  collective 
responsibility.  All the Member  States will be responsible  collectively  for  the  global tax 
receipts  which  are  due  to  each  of  them  according  to  their  consumption.  The 
effectiveness  with which  each Member  State administers,  controls  and  collects  the  tax 
will directly affect  the national Budget of each other Member State. 

21 

That said, the change from individual responsibility to collective responsibility  must also 
be  reinforced  by  its  corollary,  mutual  confidence  between  Member  States.  If  each 
Member  State  will  be  directly  affected  by  the  effectiveness  with  which  each  other 
Member  State administers, controls and collects the tax,  then  each Member  State must 
be  confident  that  each  other  Member  State  will  carry  out  these  collective  tasks 
effectively. 

The  Member  States  need  to  be  made  confident  in  each  other  in  three  ways: 
powers, tasks and performance. 

o  Each Member State must be reassured that each other Member  State has a  sufficient 
minimum  level  of  national  control  and  collection  powers.  These  will  include  a 
sufficient  minimum of common obligations on the taxpayer,  in particular  accounting 
and  record  keeping  obligations  that  are to  the  greatest  possible  extent  founded  on 
normal commercial practice.  What constitutes a sufficient  minimum will need  to be 
determined. 

However in determining this minimum, it is also important  both to  protect  revenue  and 
to  ensure  that  legitimate  businesses  are  not  undermined  by  unfair  competition  from 
unscrupulous  operators  who  do  not  respect  the  law.  It  is  particularly  important  to 
ensure 
from  differences  between 
Member States to make illegal gains at the expense of legitimate businesses. 

that  criminal  organisations  cannot  benefit 

Determining  this minimum must therefore  take  place in the  light  of  the  need  to  ensure 
that appropriate means exist to detect and punish tax evasion and fraud.  Such  measures 
should  apply evenly across the Community to  ensure that  fraudsters  do  not  profit  from 
important  differences  in  enforcement  rules  and  penalties  for  fraudulent  behaviour. 
Taking  these  considerations  into  account  will,  as  stated  earlier,  be  intimately  linked  to 
the re-examination of the obligations on the taxpayer described  previously. 

o  Each  Member  State  also  needs  to  be  reassured  that  a  sufficient  minimum  of 
common  control  and  collection  tasks  will  be  carried  out.  What  constitutes  a 
sufficient  minimum  of  common  control  and  collection  tasks  will  also  need  to  be 
determined. 

o  Finally each Member State needs to be reassured  that the  quality  of  performance 

of these tasks will meet acceptable standards. 

Ensuring this  quality  of performance  implies transparency  on  the  performance  of  each 
Member State. The way to achieve this transparency  is to  replicate  at  Community  level 
the  management  systems  and tools  (performance  indicators  and  statistics)  available  to 
the  Member States  for  monitoring  the  performance  of  their  own  regional  and  local 
administrations.  Responsibility  for  this  close  monitoring  should  rest  primarily  with  the 
Commission,  assisted  by  an  advisory  committee  composed  of  representatives  of  the 
Member States. 

The actual performance  of each Member State against the standards would  then need to 
be evaluated.  If the evaluation  showed that  the acceptable  standards  had  not  been met, 
and that consequently the VAT revenues of all the Member States had  been put  at risk, 
these  losses  would  have  to  be  compensated  through  the  system  for  macroeconomic 
reallocation of VAT revenue. 

22 

Greater  emphasis  on  cooperation 

Administrative  cooperation  will  become  more  central  in  the  operation  of  the  new 
system.  Although  for  tax  purposes  all transactions  will take  place in the Member  State 
of  registration,  physical  aspects  of  the  transaction  may take  place  in  another  Member 
State.  To  ensure  that  the  Member  State  of  registration  can  control  all  aspects  of  the 
transaction, these physical aspects will need to be verified.  This requires full  cooperation 
between  the  Member  State  of  registration  and  the  Member  State  where  the  physical 
aspects  of  the  transaction  take  place.  In  short,  a  level  of  cooperation  between  the 
Member  States at  least  equivalent  to that  currently  achieved  within  each  Member  State 
will be required. 

The  new  collective  responsibility  will  of  course  give  a  great  incentive  to  this 
cooperation.  Indeed  it  will  be  in  the  same  ultimate financial interest  of  each  Member 
State  to  provide  cooperation  as  it  will  be  to  concentrate  on  domestic  administration. 
Further,  the  monitoring  and  evaluation  of each  Member  State's  performance  must  also 
include  their  performance  in  cooperation.  Nevertheless  three  further  initiatives  are 
needed. 

Firstly,  the  existing  legal  framework  for  mutual  assistance  and  administrative 
cooperation requires extensive reform.  In particular the obligations to cooperate need to 
be strengthened  and  the  arrangements for  monitoring performance  in cooperation  made 
explicit.  There  will  also  be  a  need  to  strengthen  cooperation  on  enforcement  and 
investigative  procedures  and  to  ensure  that  both  administrative  penalties  and  penalties 
under the criminal  law of the Member States  are adequately  structured  to  take  account 
of  the  new  regime.  There  will  be  a  particular  need  to  ensure  a  high  level  of judicial 
cooperation. 

Secondly,  effective  control  and  collection  under  the  new  system  will  require  agreed 
common  control  methodologies.  These  will  be  necessary  to  ensure  that  control  and 
collection  can  be  as  effective  in  a  Member State  where  only  the  physical  aspects  of a 
transaction  take  place  as  within  the  Member State  of  registration.  Experiments  in 
developing  these control  methodologies  have already  taken  place under  the  transitional 
system. 

Also, new tools and  methodologies for cooperation  will be needed.  In developing these 
tools,  the  infrastructure  and  experience  of  the  transitional  regime,  notably  the  VAT 
Information  Exchange System (VIES) will be important. 

Finally  a new  spirit  of  cooperation  between  individuals  in  national  tax  administrations, 
based  on a much deeper  mutual understanding  and confidence,  needs to  be  established. 
A  programme  to  achieve  this,  building  on  past  experience,  needs  to  be  put  in  place 
before the entry into force of the new system. 

23 

BOL  CONCLUSION:  THE  COMMISSION 

PROPOSES  A  WORK 

PROGRAMME 

The  transitional  system  gives  Member  States  the  illusion  of  having  retained  full 
sovereignty  in determining their revenues and the overall operation of the VAT  system: 
in  reality,  the  system's  complexity  and  subjectivity,  the  fact  that  it  is  ill-suited  to  new 
economic  challenges  and the divergences which exist with regard to its application  have 
a  detrimental  effect  on  the  competitiveness  of  businesses  without  guaranteeing  the 
Member  States  the  certainty  of  being  able  to  receive  the  revenues  to  which  they 
are entitled. 

The system  proposed  by the Commission  involves a complete overhaul  of  the  common 
system  of  VAT,  with  major  consequences  for  the  Community  as  a  whole  and  for  each 
Member  State  individually.  This  requires  the Member  States  to  embark  on  a  legislative 
harmonisation  process  which  is  more  extensive  than  has  ever  before  been  contemplated 
in  the  field  of  indirect  taxation,  and  in  particular  that  of  VAT,  in  order  to  restore  the 
economic efficiency  of VAT  as a system of taxation. 

That  said,  the  question  that  has  to  be  faced  is  the  following:  is  it  genuinely  possible  to 
achieve the objectives  set for  the new common  system  of VAT by any other means  while 
avoiding the consequences  described  in the  foregoing? 

The  Commission  has  come  to  the  clear  conclusion  that  this  is not  possible  and  that  this 
course  should  therefore  be  pursued.  This  is  because,  if  any  of  the  key  features  of  the 
planned  system  or the  indispensable  harmonisation  measures  resulting  from  it were to  be 
given  up,  the  new  common  VAT  system  could  not  in  any  way  guarantee  the  tax's 
neutrality,  avoid  the  risks  of  evasion  and  loss  of  revenue  and,  at  the  same  time,  achieve 
extensive  simplification.  The  consequences  of this would  be  particularly  disastrous:  not 
only  would  the  new  system  be  doomed  to  preserving  many  of  the  shortcomings  of  the 
present  system  (e.g.  divergences  in  application)  but  it  would  also  generate  particularly 
damaging  distortions  of  competition  which  would  seriously  undermine  one  of  the 
essential  characteristics  of  VAT,  i.e.  its  neutrality.  This  might  give  rise  to  economic 
activities  being  shifted  to  Member  States  with  the  most  favourable  tax  arrangements, 
thus  separating  still  further  the  Member  State  of  taxation  from  the  Member  State  of 
consumption,  with  all  the  repercussions  that  would  inevitably  have  for  the  revenues  to 
be  reallocated  between  Member  States.  The  operation  of  a  system  of  taxation  at  the 
place of origin would  consequently become practically  impossible. 

In  conclusion,  it  is  only  on  the  basis  of  the  proposed  VAT  system  that  it  will  be 
possible  to  achieve  the  completion,  implementation  and  unobstructed  operation  of 
the 
the  single  market  and  thus  to  continue  the  process  of  strengthening 
competitiveness  of European  businesses  at world  level. 

25 

Much  remains  to  be  done,  however,  in  order  to  take  all  the  measures  necessary  for 
changing over to the new common system of VAT proposed  by the Commission  with a 
view  to  meeting  the  needs  of  a  genuine  single  market.  In  this  context  and  given  the 
scale of the tasks still to be completed, it would be unreasonable to endeavour, at the 
same  time  and  in  a  single  package  of  proposals,  both  to  settle  the  immediate 
problems that  are calling for  an early solution geared to the present  situation  (e.g. the 
tax  treatment  of  telecommunications  services)  and  to  adopt  the  other  measures 
necessary for introducing a genuinely common system of VAT based  on the origin 
principle. 

The Commission has therefore  decided to draw up a work programme together with a 
timetable  for  putting  forward  proposals  based  on  a  step-by-step  approach  for 
progressing towards a common system of VAT for the single market. 

The work programme is set out in Annex A. 

26 

ANNEX A: THE COMMISSION'S WORK PROGRAMME 

27 

1. 

INTRODUCTION 

Introduction  of  the  proposed  new  common  system  of  VAT  will  have  major 
repercussions  in terms  of the harmonisation  of all aspects  of the Member States'  VAT 
legislation.  The fact  is that the  situation  has not  changed  much  since the  Commission 
tabled its initial proposals for the single market back in 1987. 

The  first  part  of  this  paper  clearly  demonstrated  that  the  present  situation  has 
unfavourable consequences at various levels: 

• 

• 

• 

for the Community as a whole, since its general policy objectives  are being held 
back; 

for  the Member States, which are finding  it increasingly  difficult  to  control  the 
proper application of the tax; 

for businesses, which are still paying the price, not  of "non-Europe", but of the 
absence of a genuinely common system of VAT. 

Given the scale of what still remains to be done, the Commission has decided to draw up 
the  following  work  programme  based  on  a  step-by-step  approach  for  progressing 
towards the new common system of VAT. 

29 

2. 

PROPOSALS  FOR  THE  CHANGEOVER  TO  THE  NEW  COMMON 
SYSTEM OF VAT: PROVISIONAL TIMETABLE 

2.1  PHASE ONE 

Preparatory work 

LATE 1996: 

Proposal already on the Council table 

On 20 December  1995 the Commission put forward  a proposal on the: 

standard rate of VAT. 

The proposal  provides for  a minimum rate of  15%  and  a maximum  rate of 
25%.  It is the very first step towards the approximation of rates. 

It should be adopted before 31 December 1996. 

Proposal  to be presented 

The Commission is to put forward  a proposal on: 

changing the status of the VAT Committee. 

All  the  limitations  of  this  advisory  committee  have  become  apparent:  the 
guidelines which it adopts - even unanimously - have no binding legal  force 
and traders are not systematically informed  of the topics it discusses and the 
guidelines  it  adopts. 
It  should  therefore  be  turned  into  a  regulatory 
committee  whose  task  would  be,  by  delivering  opinions  by  a  qualified 
majority,  to  assist  the  Commission  in  exercising  its  powers  to  implement 
Community  legislation on VAT in accordance with  the procedure  provided 
for  in  Article 2(III)(a)  of  Council  Decision 87/373/EEC  on  committee 
procedures. 

improving the arrangements on mutual assistance on recovery 

This is part  of the renewal of the existing legal framework  for  cooperation. 
In the recovery  area, a renewal of this framework  is needed  more urgently 
as  the  present  arrangements  are  not  sufficiently  effective  for  even  the 
transitional  system.  Reform  of the arrangements  will  also  take  account  of 
the requirements of the new system of VAT. 

30 

Programme to establish a new spirit of administrative cooperation 

The need to establish a new spirit of cooperation between Member  States at 
an  individual  level  requires  a  new  departure  in  scale  and  ambition.  The 
Commission will propose a programme which will provide  a framework  for 
the development of the tools and activities necessary to make cooperation a 
reality.  This  spirit  of  cooperation  cannot  be  introduced  overnight  and 
therefore needs to be fostered  in preparation for the introduction  of the new 
system. 

2.2  PHASE TWO 

Communication of the basic options and the work programme 

MID-1996: 

Presentation of this paper 

The Commission will present to the Council and Parliament: 

• 

• 

the  broad  lines  of  the  new  common  system  of  VAT  which  it  is 
contemplating; 

the work programme it intends to follow  with  a  view  to achieving 
the objectives set 

2.3  PHASE  THREE 

General principles of VAT 
First package of formal proposals 

MID-1997: 

The  Commission  will present  its  proposals  concerning  the  broad  general 
principles governing the operation of VAT and its essential features. 

These proposals, which will have to take account  of the  need  to  modernise 
the existing provisions, will relate to: 

31 

determination of the physical scope of the tax,  including  the precise 
definition  of taxable transactions (uniform  definition  of the  supply of 
goods, the concept of the supply of services, the fact that the supplies 
are  made  for  consideration,  etc.);  the  precise  determination  of  the 
territorial scope of the tax will be looked into in phase three; 

definition  of  the  concept of  the  taxable person  for  VAT  purposes 
(which  involves  reviewing  the  VAT  status  of  public  bodies,  the 
consequences of treatment as a non-taxable person, etc.); 

determination of the taxable amount for taxable transactions; 

exemptions:  maintenance  or  abolition  and, 
in  any  event, 
harmonisation  of  exemptions,  consequences  for  the right to  deduct, 
etc.; 

the right to  deduct:  conditions giving rise to  and governing exercise 
the  right  to  deduct,  procedures,  harmonisation  of  the 
of 
non-deductibility  of  certain 
items  of  expenditure,  deductible 
proportion  (general  proportion,  actual  application),  i.e.  the  ratio  of 
deductible  transactions  to  non-deductible  transactions  (because 
exempt or outside the scope of the tax). 

LATE 1997: 

The Commission will propose: 

a second round in the approximation of 'Member States' VAT rates. 

K^îtttt ^v^m^pîim^jâ^^jii^ 

ïltfc bases <m which YA^fc'to 

Me«$:ur^.^tHc|i ar^ittdisp^tiM 

of 

2.4  PHASE FOUR 

Scope and place of taxation 
Second package of formal proposals 

The  cornerstone  of  the  proposals  for  the  new  common  system  of  VAT  is  the 
radical change,  as compared with the present situation,  in the role played by the 
place  of taxation:  it  will  no  longer  have to  be used  to  determine  the territorial 
scope of the tax or to determine which Member State is allocated the tax revenue. 

32 

MID-1998: 

The Commission will present proposals relating to: 

•  definition  of the territorial  scope  of VAT; 

•  the place  of  taxation  for  transactions  falling  within  the  scope  of  the 

tax; 

•  Community-wide  organisation  of  the  control  of  taxable  persons 
carrying  out  taxable  transactions  in  the  Community  (obligations, 
methods of control, etc.). 

wmm 

ui &rigfôV?<^Mrô,ta? #*e admfe*îstra$pa$>  , 

2.5  PHASE  FIVE 

Re-allocation  of  revenue  between  Member  States  and  overall  finalisation  of 
the  system 
Third  package  of formal  proposals 

Since  revenue  will  no  longer  be  allocated  between  the  Member  States  by  the  tax 
system,  special  machinery  and the necessary  statistical  measures will have to  be  set 
in place for  ensuring  that  Member  States receive  a level  of revenue  commensurate 
with consumption  within their  territory. 

Consideration  will  also  have  to  be  given  at  this  final  stage  to  the  question  of 
whether  the  special  schemes  (for  small  firms,  farmers,  second-hand  goods,  travel 
agencies,  etc.)  should  be  maintained  and whether  any  specific  measures  should  be 
introduced  or  maintained 
in  the  Member  States. 
Transitional  measures  will  have to  be  planned  for  changing  over  from  the  present 
system  to  the  new  system  of taxation  in the  country  of origin,  and  the  final  round 
in the harmonisation  of VAT  rates begun in  1995 will have to be  implemented. 

in  a  harmonised  fashion 

LATE  1998: 

The Commission  will present  its proposals relating to: 

the machinery for  allocating  the tax  revenue; 

special  schemes  (abolition,  harmonisation); 

transitional  measures. 

33 

MID-1999: 

The Commission will present its proposals relating to: 

the final round in the harmonisation of rates. 

I & ' & j M M ^^ 

€*i$ilKis$çd£* Will mt  fttpttM: 

sy*twre$MM»l|m 

€0#Mate»<m will I»-. aay 

34 

ISSN 0254-1475 

COM(96) 328 final 

DOCUMENTS 

EN 

09  10 

Catalogue number  :  CB-CO-96-353-EN-C 

ISBN 92-78-06896-9 

Office  for Official  Publications of the European Communities 

L-2985 Luxembourg