Report from the Commission to the Council presented in accordance with Article 2 of Council Decision 92/545/EEC of 23 November 1992 (application of a measure derogating from Article 21 of the Sixth Directive 77/388/EEC on the harmonization of the laws of the Member States relating to turnover taxes)
Date: 1997-06-10
Institutions: European Commission
Subjects: Netherlands, VAT, clothing industry, tax evasion, tax harmonisation

COMMISSION  OF THE  EUROPEAN  COMMUNITIES 

it 

it 

Brussels,  10.06.1997 
COM(97) 286  final 

REPORT FROM THE COMMISSION  TO THE COUNCIL 

presented  in accordance with Article 2 of 
Council Decision 92/545/EEC of 23 November  1992 
(application of a measure derogating from  Article 21 of 
the Sixth Directive 77/388/EEC on the harmonization 
of the laws of the Member States relating 
to turnover taxes) 

Proposal for a 

COUNCIL  DECISION 

authorizing the Kingdom of the Netherlands to extend the 
application of a measure derogating from  Article 21 
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) 

REPORT FROM THE COMMISSION  TO THF rOHNriT 

presented in accordance with Article 2 of 
Council Decision 92/545/EEC of 23 November 1992 
(application of a measure derogating from Article 21 
of the Sixth Directive 77/388/EEC on the harmonization 
of the laws of the Member States 
relating to turnover taxes) 

z 

I.  INTRODUCTION 

By Decision  92/545/EEC  of 23 November  1992,'  the Council  authorized  the Netherlands, 
on the basis of Article 27 of the Sixth Directive, to take special  measures derogating  from 
Article 21 of that Directive.  The authorization was valid until 31 December  1996. 

The derogation  enabled the Netherlands to apply in the ready-to-wear  clothing industry a 
scheme  for  shifting  the  obligation  to  pay  over  VAT  to  the  tax  authorities  from  the 
subcontractor to the clothing firm (the contractor). 

Article 2  of  the  Decision  provides  that  the  Commission  is  to  present  to  the  Council  a 
report  on  the  application  of  the  derogation,  accompanied,  where  appropriate,  by  a 
proposal for a decision extending it. 

The purpose  of this report  is to  give an account  of the application  of this derogation  and 
to  examine the request  for  an extension  submitted  by the Netherlands by letter  registered 
by the Secretariat-General  on  15 November  1996. 

n.  APPLICATION OF THE DEROGATION 

1. 

Reasons for and nature of the scheme 

When  it  submitted  its  request  for  a  derogation  in  1992,  the  Dutch  Government  pointed 
out  that  it  is  common  in  the  ready-to-wear  clothing  industry  for  retail  chains  to  obtain 
supplies  of  clothes  from  ready-to-wear  clothing  firms,  which  take  responsibility  for 
manufacture. 
These  firms  often  in  turn  put  the  work  out  to  small  workshops 
(subcontractors). 

Tax evasion occurred  in the relationship between the ready-to-wear  clothing firms and the 
subcontractors:  the  subcontractor  invoiced  VAT  to  the  ready-to-wear  clothing  firm  but 
omitted to pay it over to the tax authorities, while the clothing firm deducted the tax. 

It was difficult  to combat this type of evasion by applying the normal rules of the common 
system  of  VAT  since  the  ready-to-wear  clothing  workshops  are  very  often  small firms 
which  barely have their  own means of production  and  are established  in rented  industrial 
premises or in dwellings.  These workshops do not  comply  with the  applicable  legislation 
on  social  insurance,  taxation  and  working  conditions;  many  of  them  frequently  change 
hands.  In these  circumstances,  the tax  authorities  had  little chance  of recovering  the tax 
when they discovered instances of evasion. 

The  Dutch  Government  therefore  requested  and  obtained  authorization  to  introduce  a 
special measure which involves collecting from the contractor the VAT normally due from 
the subcontractor under Article 21 of the Sixth Directive. 

OJ No L 351, 2.12.1992, p. 33. 

3 

The  measure  forms  part  of  an  overall  strategy  which  the  Dutch  tax  authorities  have 
developed  in  order  to  combat  evasion  more  effectively  in  sensitive  sectors  such  as  the 
ready-to-wear  clothing industry. 

2. 

Views of the Dutch administration on the application of the scheme 

The Dutch  authorities  state that  the  scheme  for  shifting  the  obligation  to  pay  over  VAT 
has proved  very  effective  in the fight against  VAT  evasion  in the ready-to-wear  clothing 
industry. 

A survey carried out in the Dutch tax administration has shown that,  since the scheme was 
introduced, there is no longer any evidence of large-scale evasion in the industry. 

Two tax offices  which are responsible for  some 45% of all businesses in the  ready-to-wear 
clothing  industry  have found  that  VAT  evasion  has disappeared  in the  industry  since  the 
special measure was introduced.  Although the resources assigned  to tax monitoring have 
not  been  increased,  evasion,  which  amounted  to  some  HFL 3.4 million  over  the  period 
1989-93, has no longer been  detected  since  1994.  This finding is confirmed  by other tax 
offices. 

III.  OPINION OF THE COMMISSION 

Article 27  of the  Sixth Directive  permits  special  measures  derogating  from  the  Directive 
to be introduced  either to simplify  the procedure for  charging the tax or to prevent  certain 
types of tax evasion or avoidance. 

The Commission takes the view that the effectiveness  of the scheme in combating evasion 
is beyond  doubt  and that  the  special  measure therefore  satisfies  the  conditions  laid  down 
in Article 27. 

The  scope  of  the  measure  is  furthermore  limited  to  those  transactions  where  there  is  a 
genuine risk of evasion. 

The  Commission  therefore  considers  that  there  is good  reason  for  extending  the  special 
measure under Article 27 of the Sixth Directive. 

As regards  the  period  of  validity  of  the  authorization,  the  Commission  would  point  out 
that  on  10 July  1996  it  adopted  a  work  programme2  for  the  introduction  of  a  common 
VAT system which provides for step-by-step progress towards the new system. 

As  the  final  package  of  proposals  is  scheduled  for  presentation  in  mid-1999,  the 
that  no  derogation  should  be  extended  beyond 
takes 
Commission 
31 December  1999. 

the  view 

It  would  seem  appropriate to  determine  at that time whether  the  derogation  is  consistent 
with the approach adopted under the new common system of VAT. 

COM(96) 328 final, 22.07.1996. 

Proposal for a 

COUNCIL DECISION 

authorizing the Kingdom of the Netherlands to extend 
the application of a measure derogating from Article 21 
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) 

b 

EXPLANATORY  MEMORANDUM 

By letter  registered  by the  Commission's  Secretariat-General  on  15 November  1996,  the 
Dutch Government  submitted  a request  for  an extension  of the  derogation  it was granted 
by Council Decision 92/545/EEC of 23 November  1992.1 

Article 2 of the Decision states that, in the light of a Commission  report  on the application 
of  the  derogation  by  the  Netherlands,  the  Council  may,  on  the  basis  of  a  Commission 
proposal, authorize the extension of that Decision. 

The  Commission's  report  on  the  application  of  the  Decision  concludes  that  it  is 
appropriate for the application of its provisions to be extended until 31 December  1999. 

On  10 July  1996  the  Commission  adopted  a  work  programme  for  the  introduction  of  a 
common VAT system2 which provides for  step-by-step  progress towards the new system. 
As  the  final  package  of  proposals  is  scheduled  for  presentation  in  mid-1999,  it  would 
seem appropriate not to  extend  the period  of validity beyond  31 December  1999  so as to 
enable  an  assessment  then  to  be  made  of  the  derogation's  consistency  with  the  overall 
approach adopted under the new common system of VAT. 

In  accordance  with  Article 27(3)  of  the  Sixth VAT Directive,  the  other  Member  States 
have been informed  of the Dutch request by letter dated 21 April  1997. 

1  OJ No L 351, 2.12.1992, p. 33. 

2  COM(96) 328 final, 22.07.1996. 

Proposal  for  « 

COUNCIL DECISION 

authorizing the Kingdom of the Netherlands to extend the application  of a measure 
derogating from Article 21 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 UNION, 

Having regard to the Treaty establishing the European  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,1  and  in  particular  Article 27 
thereof, 

Having regard to the previous Council Decision 92/545/EEC of 23 November  1992,2 

Having  regard  to  the  Commission  report  on  the  application  of  the  above-mentioned 
Decision, 

Having regard to the Commission proposal arising from that  report, 

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  derogating  from  that  Directive  in  order  to  simplify 
the procedure for charging tax or to prevent certain types of tax evasion or avoidance; 

Whereas,  by  letter  registered  by  the  Secretariat-General  of  the  Commission  on 
15 November  1996,  the  Dutch  Government  requested  authorization  to  extend  the 
application  of  the  derogation  previously  granted 
it  for  a  limited  period  by 
Council Decision 92/545/EEC; 

to 

Whereas  the  other  Member States  were  informed  on  21 April  1997  of  the  Dutch 
Government's request; 

1  OJ  No  L  145,  13.6.1977,  p.  1;  Directive  last  amended  by  Directive 96/95/EC  (OJNoL338, 

28.12.1996, p. 89). 

OJ No L 351, 2.12.1992, p. 33. 

Whereas the derogation  involves collecting from  the ready-to-wear  clothing firm the VAT 
normally due from  the subcontractor under Article 2l(l)(a) of the Sixth Directive; 

Whereas  the Commission  report  on  the application  of  (he detonation  has  shown  (hat  the 
special measure satisfies the conditions for the application of Article 27 of the Directive; 

Whereas the Commission adopted  on  10 July  1996 a work  programme3 and a timetable of 
proposals  providing  for  gradual,  step-by-step  progress  towards  a  common  VAT  system 
for the single market; 

Whereas, as the final package of proposals is scheduled  for mid-1999, the authorization  is 
to  be granted  until  31 December  1999 so  as to  enable an  assessment  then to  be made  of 
the  derogation's  consistency  with  the  overall  approach  of  the  new  common  system  of 
VAT; 

Whereas  this  derogation  will  not  have  a  negative  effect  on  the  European  Communities' 
own resources accruing from VAT, 

HAS ADOPTED THIS DECISION: 

Article 1 

By way of derogation from Article 21(l)(a) of Directive 77/388/EEC, the Kingdom  of the 
Netherlands  is  hereby  authorized  to  apply  until  31 December  1999  in  the  ready-to-wear 
clothing  industry  a  scheme  for  shifting  the  obligation  to  pay  over  VAT  to  the  tax 
authorities from  the subcontractor to the clothing firm (the contractor). 

This Decision is addressed to the Kingdom of the Netherlands. 

Article 2 

Done at Brussels, 

For the Council 

The President 

3  COM(96) 328 final, 22.07.1996. 

8 

ISSN 0254-1475 

COM(97) 286 final 

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09  01  06 

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ISBN 92-78-21176-1 

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