Proposal for a Council Decision authorizing the United Kingdom to extend application of a measure derogating from Article 28e(1) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes
Date: 1997-07-25
Institutions: European Commission
Subjects: VAT, approximation of laws, goods and services, intra-EU trade, turnover

COMMISSION  OF THE  EUROPEAN  COMMUNITIES 

•it 

* 

Brussels,  25.07.1997 
COM(97)405  final 

Proposal for a 

COUNCIL  DECISION 

authorizing the United  Kingdom to extend  application 
of a measure derogating from Article 28e(l) of the 
Sixth Council Directive (77/388/EEC) of 17 May 1977 
on the harmonization  of the laws of the Member States 
relating to turnover taxes 

(presented  by the  Commission) 

EXPLANATORY MEMORANDUM 

By letter  registered  by the  Commission's  Secretariat-General  on  21 February 1997,  the 
United Kingdom  Government  requested  authorization,  pursuant  to  Article 27  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 -  Common  system  of value-added  tax: 
uniform  basis  of  assessment,1  to  extend  application  of  the  derogation  granted  to  it by 
Council Decision 92/546/EEC of 23 November 1992.2 

The  United Kingdom  was  authorizied  by that  Decision  to  introduce  a  special  measure 
allowing the appropriate authorities to direct that the open-market value be taken as the 
taxable amount for intra-Community acquisitions of goods where the person acquiring the 
goods is not a fully taxable person and there are family, legal or business ties, specified in 
national legislation, between the person acquiring the goods and the supplier. 

In  accordance  with  the  above-mentioned  Article  27,  the  other  Member States  were 
informed of the United Kingdom's request by letter dated 6 May 1997. 

According  to  the  normal  rules  of  the  common  VAT  system,  and  in  particular 
Article 28e(l)  of  the  Sixth Directive,  the  taxable  amount  for  the  intra-Community 
acquisition  of  goods  is  established  on  the basis  of the  same  elements  as those  used  in 
accordance with Article 11(A) to determine the taxable amount for the supply of the same 
goods within the country. 

Article  11(A) establishes the principle that the taxable amount for  supplies of goods and 
services  is  everything  which  constitutes  the  consideration  which  has  been  or  is  to  be 
obtained  by  the  supplier  from  the  purchaser,  the  customer  or  a  third  party  for  such 
supplies. 

However,  by  Council  decision  deemed  to  have  been  adopted  on  11  April 19873  in 
accordance with Article 27(4) of the Sixth Directive, the United Kingdom was authorized 
to derogate from Article 11. 

The United Kingdom is empowered by that decision to direct that the open-market value 
be taken  as the taxable amount  for  supplies of goods  or  services  or  imports where the 
recipient is a totally or partially exempt person and there are family, legal or business ties, 
specified  in  national  legislation,  between  the  person  effecting  the  supply  of  goods  or 
services and the recipient  or between the person importing the goods and the person to 
whom payment for them must be made. 

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

28.12.1996, p. 89). 

2  OJNoL 351, 2.12.1992, p. 34. 

3  OJNoL  132, 21.5.1987, p. 22. 

The transitional  arrangements  for  taxing  intra-Community  trade  introduced,  with  effect 
from  1  January 1993,  the  concept  of  the  intra-Community  acquisition  as  a  taxable 
transaction  under  the  common  VAT  system.  The  United Kingdom  was  accordingly 
authorized  by  Decision 92/546/EEC  to  supplement  the  special  measure  by  derogating 
from  Article 28e(l)  of  the  Sixth  Directive  concerning  the  taxable  amount  for  the 
intra-Community acquisition of goods. 

The  special  measure  in  question  is  an  anti-avoidance  provision  directed  towards 
preventing  a  taxable  person from artificially  depressing  the  price  charged  to  a  person 
connected with him.  For example, the measure is designed to combat tax avoidance in a 
situation  where  an  exempt  or  partially  exempt  company  sets  up  or  uses  a  connected 
wholly taxable company, which buys large quantities of goods, recovers the input tax, and 
then makes a minimal charge for some or all of those goods or part of those goods to the 
totally or partially exempt company. 

Decision 92/546/EEC  was  adopted  on  a temporary  basis.  As  it  is  a  specific  measure 
covering  only  intra-Community  acquisitions -  taxable  transactions  characteristic  of  the 
transitional  arrangements-  the  expiry  date  (31  December  19996)  coincides  with  that 
scheduled  for  the  introduction  of  the  definitive  VAT  system  and,  therefore,  for  the 
abolition of the transitional arrangements. 

As the transitional arrangements are still being applied, the Commission considers that the 
United Kingdom  should  be  authorized  to  extend  application  of the  measure  derogating 
from  Article 28e(l) of the Sixth Directive until 31 December 1999. 

On  10 July 1996 the Commission adopted a work programme for introducing a common 
VAT system,4 which provides for  stage-by-stage  progress towards the new  system.  As 
presentation  of the final package of proposal  is scheduled  for  mid-1999, it  would  seem 
appropriate to limit the period of validity of this decision to  31 December 1999 so as to 
enable an assessment to be made at that  time as to whether the derogation is consistent 
with the approach adopted under the new common VAT system. 

4  COM(96) 328 final, 22.7.1996. 

Proposal for a 

COUNCIL DECISION 

authorizing the United Kingdom to extend application 
of a measure derogating from Article 28e(l) 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 92/546/EEC of 23 November 1992,2 

Having regard to the proposal from the Commission, 

Whereas,  pursuant  to  Article 27(1)  of  the  Sixth  VAT  Directive,  the  Council,  acting 
unanimously  on  a proposal from the  Commission,  may authorize  any Member State  to 
introduce  or  extend  special  measures  for  derogation  from  that  Directive  in  order  to 
simplify the procedure for charging the tax or to prevent certain types of tax evasion and 
avoidance; 

Whereas,  by  letter  officially  received  by  the  Commission's  Secretariat-General  on 
21 February 1997,  the  United Kingdom  Government  requested  authorization  to  extend 
application  of the  derogation  previously  granted  to  it  by Council  Decision 92/546/EEC 
until 31 December 1996; 

Whereas 
United Kingdom's request; 

the  other  Member States  were 

informed  on  6 May 1997  of 

the 

Whereas,  pursuant  to  Decision 92/546/EEC,  the  United Kingdom  is  authorized  to 
introduce  a  special  measure  allowing  the  appropriate  authorities  to  direct  that  the 
open-market value be taken as the taxable amount for intra-Community acquisitions of 

l  OJ  No  L  145,  13.6.1977,  p.l.  Directive  as  last  amended  by  Directive 96/95/EC  (OJNoL  338, 

28.12.19%, p. 89). 

2  OJNoL  351, 2.12.1992, p. 34. 

goods where the person  acquiring the goods is not  a fully  taxable  person  and there are 
family, legal or business ties, specified in national legislation, between the person acquiring 
the goods and the supplier; 

Whereas Decision 92/546/EEC empowered  the United Kingdom to  supplement  a special 
measure authorized by Council decision,3 deemed to have been adopted on 11  April 1987, 
permitting  the  United Kingdom  to  direct  that  the  open-market  value  be  taken  as  the 
taxable  amount  for  supplies  of  goods  and  services  or  imports  where  the  recipient  is a 
totally or partially exempt person and there are family,  legal or business ties, specified in 
national legislation, between the person supplying the goods or services and the recipient 
or between the person importing the goods and the person to whom payment for them has 
to be made; 

Whereas the purpose of the measure in question is to prevent persons with family, legal or 
business  ties,  specified  in  national  legislation,  from  artificially  reducing  the  prices  of 
taxable transactions; 

Whereas according to the case law of the Court of Justice of the European Communities4, 
national derogation measures which are intended to prevent fraud or tax avoidance are to 
be interpreted  strictly  and  can be used  to  derogate from the  rules  for  determining  the 
taxable amount only within the limits strictly necessary to achieve this objective; 

Whereas, the special measure is to  apply only in cases where the administration  is able, 
based on the facts, to conclude that the determination of the taxable amount provided for 
in article 28e(l)  is influenced  by family,  business  or  legal ties between  the person who 
acquires  the  goods  and  the  supplier;  whereas  the  administration  may  not  act  on  mere 
presumptions,  and  the  parties  concerned  must  be  allowed  to  adduce  evidence  to  the 
contrary  where  they  dispute  the  level  of  the  open  market  value  established  by  the 
administration; 

Whereas  the  measure  is  limited  in  scope  in  so  far  as  k  will  apply  only  to  taxable 
transactions where the recipient is a totally or partially exempt person; 

Whereas, given the limited scope of the derogation, the special measure is proportionate 
to the aim pursued; 

Whereas the Commission adopted on  10 July 1996 a work programme,5 accompanied by 
a  schedule  of  proposals,  providing  for  gradual,  stage-by-stage  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 
being granted until 31 December 1999 so as to enable an assessment to be made at that 
time as to whether the derogation is consistent with the overall approach  adopted under 
the new common VAT system; 

Whereas  this  derogation  will  have  no  impact  on  the  European  Communities'  own 
resources arising from VAT, 

OJ No L  132, 21.5.1987, p. 22. 

4 

See judgements of 10 April  1984, the Commission / Belgium (324/82, Reports  1984, p. 1861, item 29) 
and of 29 May  1997, Werner  Skripalle (63/96, Reports  1997, p.0000). 

5  COM(96) 328 final, 22.7.1996 

HAS ADOPTED THIS DECISION: 

Article 1 

By way of derogation from Article 28e(l)  of Directive 77/388/EEC,  the United Kingdom 
is  hereby  authorized,  until  31 December  1999,  to  apply  a  special  measure  allowing  the 
appropriate  authorities  to  direct  that  the  open-market  value  be  taken  as  the  taxable 
amount for intra-Community  acquisitions of goods when the following  two  conditions  are 
met: 

- 

the  person  who  acquires  the  goods  is  not  a  fully  taxable  person  and  there  are 
family,  legal  or  business  ties  specified  in  national  legislation,  between  the  person 
acquiring the goods and the supplier; 

a number  of facts  make it possible to  conclude that  these family,  business  or legal 
ties have influenced  the determination of the taxable amount provided for in article 
28e(l) referred  to above; 

This Decision is addressed to the United Kingdom. 

Article 2 

Done at Brussels, 

For the Council 

The President 

S 

ISSN 0254-1475 

COM(97) 405 final 

DOCUMENTS 

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09  06 

Catalogue  number  :  CB-CO-97-405-EN-C 

ISBN  92-78-23535-0 

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