Report from the Commission to the Council and to the European Parliament in accordance with Article 12(4) of the Sixth Council Directive of 17 May 1977 on the harmonization of the laws of the Member States relating to turn-over taxes - Common system of value-added tax: uniform basis of assessment
Date: 1997-11-13
Institutions: European Commission
Subjects: EU Member State, VAT, approximation of laws, basis of tax assessment, tax harmonisation

COMMISSION  OF THE  EUROPEAN  COMMUNITIES 

Brussels,  13.11.1997 
COM(97) 559  final 

REPORT FROM THE COMMISSION 
TO THE COUNCIL AND TO THE EUROPEAN 
PARLIAMENT 

in accordance with Article 12(4) of 
the Sixth Council Directive of 17 May 1977 
on the harmonisation of the laws of the Member States 
relating to turn-over taxes - Common system of 
value added tax: uniform basis of assessment 

Table of contents 

1 

INTRODUCTION 

2  HARMONISATION OF VAT RATES: THE STATE OF PLAY  1996 

3  VAT RATES AND THE FUNCTIONING OF THE SINGLE MARKET 

1  (X 

2 

4 

3.1  The influence of VAT rates on cross-border purchasing and supply patterns: general 

trends 

4 

3.2  The influence of VAT rates on cross-border purchasing and supply patterns: analysis 

of specific cases 

4  REVIEW OF THE SCOPE OF THE REDUCED VAT RATE 

4.1  Criteria for reviewing the scope of the reduced VAT rate 

4.2  Reviewing the various categories of Annex H 

4.3  Reviewing requests to introduce specific new categories to Annex H 

4.4  Reviewing the special case of Article  12 (3) (b) 

5  HARMONISING THE SCOPE OF THE REDUCED VAT RATE: THE WAY 

FORWARD 

5.1  Analysis of the current situation in Member States 

5.2  Assessment in the light of the new common system of VAT 

6  CONCLUSIONS 

Annex 1: 

Annex 2: 

Evolution of VAT rates applied in Member 
States 1994 to  1996 (except transitional 
rates according to Article 28 (2)) 

Application  of  reduced  VAT  rates  by 
Member States to the categories of goods 
and services contained in Annex H of the 
Sixth VAT Directive [situation 1 April 1997] 

31 

32 

8 

10 

10 

11 

15 

21 

23 

23 

26 

29 

1 

INTRODUCTION 

This  document  constitutes  the  report  the  Commission  is  required  to  submit  to  the  Council 
according to Article 12 (4) of the sixth VAT Directive in order to review the scope of the reduced 
VAT rates. This review, as in all matters of VAT rate harmonisation,  is based  on the criterion set 
out  in Article 99 of the EC-Treaty  which  specifies  that  harmonisation  is necessary to  ensure the 
establishment  and the functioning  of the  Single Market.  Thus, the report  has as its objectives the 
following: 

•  To review the state of play in the area of VAT rate harmonisation  and to report  major  actions 

and events since the last report COM(94) 584 [chapter 2]. 

•  To assess the influence of the VAT rate structure on the functioning  of the Single Market. The 
report  seeks,  therefore,  to  establish  whether  VAT-induced  distortions  of  competition  or 
deflections of trade between Member States have arisen. In particular to examine whether or not 
VAT  rate  differentials  hamper  cross-frontier  purchases  or  influence  retailer's  supply  patterns 
[chapter 3]. 

•  To examine the scope of the reduced  rate and the coverage  of supplies of goods and  services 
laid down in Annex H to the sixth VAT directive. According to Article  12 (4) of the Directive 
the  Council  is to  review  Annex  H  every  two  years  to  see  whether  changes  to  its  scope  are 
desirable.  Hence,  all  complaints  and  representations  made to  the  Commission  relating  to  the 
scope of the reduced VAT rate are considered  in this context.  Particular attention is also given 
to Article 12 (3) (b) on the taxation of certain energy supplies [chapter 4]. 

•  To  reflect  on  the  way  forward  in  harmonising  the  scope  of  the  reduced  VAT  rates.  Future 
harmonisation cannot be based only on the discussions and requests of the day. It  is therefore 
necessary  to  undertake  a  broader  analysis  of  the  current  situation  in  Member  States.  Such 
analysis allows for an assessment  of the state of play in the light of the proposed  new common 
system of VAT [chapter 5]. 

•  To summarise the main findings of the report  and to draw conclusions with a view to possible 

legislative action by the Commission regarding Article 12 (4) [chapter 6]. 

It is important to note that this report does not cover the harmonisation of excise duties. Moreover, 
the  report  does  not  deal  in  detail  with  all  rate-related  issues  that  are  intrinsically  linked  to  the 
realisation of the programme for a common system of VAT for the Single Market  [COM(96) 328 
final] which  explicitly  calls  for  a  higher  degree  of  convergence  of  VAT  rates.  It  does  not,  in 
particular, anticipate the Commission's legislative proposals to this end. 

1  a. 

Finally it  should  be noted  that  this  report  does  not  review  the  transitional  VAT  rate provisions. 
According to  Article 28 (2) (g) of the Directive the Commission  was required  to  re-examine the 
provisions of Article 28 (2) (a) to 28 (2) (f) before 31 December  1994. In this context reference is 
made to  the  report  COM(94)  584.  It  is self-evident,  however,  that  by limiting this  report  to  the 
requirements of the 6th Directive the Commission does not automatically approve continuation of 
these  arrangements;  the  Commission  will  address  these  provisions  in  its  proposals  on  the 
programme for a common system of VAT for the Single Market. 

2 

HARMONISATION OF VAT RATES: THE STATE OF PLAY 1996 

Under  the  current  Community  VAT  legislation  Member  States  may  apply  either  one  or  two 
reduced VAT rates which may not be less than 5% and that theyshall only apply to supplies of the 
categories  of goods  and  services  specified  in  Annex  H (Article  12 (3)  (a))1.  Moreover  Member 
States may apply a reduced  rate to  supplies of natural gas and electricity provided that no risk of 
distortion  of  competition  exists  (Article  12 (3)  (b)).  These  provisions  are  subject  to  a  detailed 
examination in chapter 4. 

The  rules  concerning  the  rates  applied  to  works  of  art,  antiques  and  collector's  items  are 
determined in a separate Directive2 amending the sixth VAT Directive. The taxation of agricultural 
outputs  other  than  those  falling  within  category  1 of  Annex  H  (mainly  cut  flowers,  ornamental 
foliage, bulbs, roots and the like, firewood) was settled in  1996 by the Council in the framework of 
the transitional arrangements of the sixth VAT Directive1. As far as the regime and the rates applied 
to gold are concerned a proposal from the Commission is pending in the Council4. 

Article 28 (2) sets out various VAT rate measures which Member States are permitted to maintain 
in force during the transitional  period  referred  to in Article 28 1. As stated above, the Commission 
will tackle these arrangements  in the context  of the new common  system  of  VAT for  the  Single 
Market. 

Directive  96/95/EC of 20 December  1996 amending . with  regard  to the  level  of the  standard  rate of 
value added tax. Directive 77/388/EEC on the common system of value added tax. OJ No. L 338 of 28 
December  1996, p. 89. 
Directive  94/5/EC  of  14 February  1994  supplementing  the  common  system  of  value  added  tax  and 
amending Directive 77/388/EEC. OJ No. L 60 of 3 March  1994. p.  16. 
Directive  96/42/EC  of  25  June  1996  supplementing  the  common  system  of  value  added  tax  and 
amending Directive 77/388/EEC. OJ No. L  170 of 9 July  1996. p. 34. 
COM(92) 441 final. 

Under the transitional arrangements of 28 (2) (a) to 28 (2) (f),  some Member States are allowed to 
apply  to  a  limited  number  of  goods  and  services  exemptions  with  refund  of  the  tax  paid  at  the 
preceding  stage  (so-called  zero-rates)  or  reduced  rates  lower  than  the  minimum  laid  down  in 
Article  12 (3)  (so-called  super-reduced  rates).  Some  Member  States  were  also  allowed  to  keep a 
reduced  rate  not  lower  than  12% applicable  to  supplies  of  goods  and  services  other  than  those 
specified  in  Annex  H  provided  these  rates  were  in  force  on  1  January  1991  (so-called  parking 
rates).  Those  Member  States  which  applied  a  reduced  rate  to  restaurant  services,  children's 
footwear  and clothing  and housing  on  1 January  1991  were  permitted  to  continue  to  apply these 
rates for the transitional  period  of the present  VAT  arrangements.  Finally  Greece  was  allowed  to 
continue  to  apply  specially  reduced  rates  to  certain  Islands  and  Departments.  Being  part  of  the 
transitional VAT arrangements these provisions are not examined in detail. 

A detailed table describing the development of VAT rates in Member States (except the ones from 
Article 28  (2))  since the end of  1994, the date of the last Commission  report  on the subject,  is set 
out in Annex  1. It will be seen that the levels of rates still vary significantly:  standard rates between 
15% and  25%,  reduced  rates  between  5% and  17%-\  The  simple  average  of  the  standard  rates 
applied  across  the  Community  is  around  19.5% while  the  average  reduced  rate  is  slightly  above 
8%. In comparison to the  1994 figures this is a significant  increase  of average  VAT  rates which is 
mainly due to the enlargement  of the Community to  15 Member  States and the on average higher 
rates of the three new Member States. 

The  weighted  average  rate  for  the  Community  as  a  whole  shows  a  similar  trend;  Commission 
estimates  stemming  from  Member  States'  Own  Resources  Statements  and  statistics  on  VAT 
receipts reveal the following picture: 

Weighted  average  rate 

1994 

1995 EU  12 

1995 EU 15 

All rates 

Standard  rate 

Reduced rate6 

14.03% 

14.25% 

14.61% 

17.07% 

17.28% 

17.62% 

5.71% 

6.17% 

6.57% 

The  rate  of  17% is  applicable  in  Finland  to  a  limited  number  of  foodstuffs.  It  is  applicable  on  a 
transitional  basis  only  (until  1998); anyhow  it  constitutes  a  third  reduced  rate  in  this  country.  The 
Commission  has officially  addressed  the  Finish  authorities  to  reduce  the  number of  reduced  rates to 
two. Apart from that, the highest reduced rate in the Community amounts to 12,5%. 
In  this  context  all  kinds  of  reduced  rates  arc  included:  /.cro-ratcs.  so-called  supcr-rcduccd  rates, 
parking rates, permanent reduced rates. 

The Commission takes it for granted that the existing degree of harmonisation  of VAT rates is 
the  very  minimum  which  has  been  considered  by  Member  States  as  essential  for  the  Single 
Market to function.  It is obvious that widening discrepancies between the VAT rates of various 
Member  States  can,  in  principle,  always  give  rise  to  structural  imbalance  and  distortions  of 
competition in certain sectors of economic activity. The Commission is determined to deal with 
such problems  when tabling new proposals  on  VAT rate harmonisation.  The first  proposal  in 
this area is scheduled for late 1997 or the beginning of 1998. 

In  this  context  it  is  once  again  it  should  be  noted  that  the  following  is  only  to  examine  the 
present functioning  of the Single Market within the structure of reduced VAT rates in force. 

3 

VAT RATES AND THE FUNCTIONING OF THE SINGLE MARKET 

In examining  the  effects  of the present  VAT  rate  disparities  on  the  functioning  of the  Single 
Market,  the  Commission  has  tried  to  assess  (i)  whether  differences  in  VAT  rates  as between 
Member States influence behaviour of private persons and businesses (taxable persons) and (ii) 
whether reported cases of such influence are inherent in the present VAT rate structure. 

3.1 

The  influence  of  VAT  rates  on  cross-border  purchasing  and  supply  patterns: 
general trends 

In the aforementioned  1994 report the influence  of VAT rates both on cross-border  purchasing 
patterns by private customers and on intra-Community trade by taxable persons were  carefully 
investigated. In order to do so a number of studies had been commissioned the results of which 
revealed  that,  generally  speaking  and  subject  to  a  number  of  specific  exceptions,  unexpected 
VAT-induced distortions of competition or deflections of trade had not taken place. The reasons 
for  this  result  are  basically  twofold.  Firstly,  non-tax  factors  very  often  seem  to  outweigh  a 
possible  VAT-induced  incentive  for  cross-border  shopping.  Secondly,  the  transitional  system 
seeks to ensure, by applying the destination principle  in trade between taxable persons and by 
using  a  number  of  special  taxation  regimes  (e.g.  distance  selling  scheme),  that  VAT  rate 
disparities are not really exploitable. 

VAT  is  levied  in  the  Member  State  of  origin  on  supplies  made  by  taxable  persons  in  one 
Member  State  to  particular  types  of  purchasers  in  other  Member  States  i.e  flat  rate  farmers, 
exempted  small  businesses,  taxable  persons  carrying  out  transactions  which  are  exempt 
according to Article 13 of the sixth VAT Directive, non-taxabie persons purchasing goods under 
an annual threshold of  10,000 ECU. The same is true for supplies of goods to travellers carried 
away by themselves7, supplies under the distance selling arrangement below a ceiling fixed  by 
the Member State of supply and supplies of certain services. The supply of exciseable goods is 
evidently  largely  influenced  by the way  the  excise  duties  are  levied  and  by the  level  of rates 
applied. 

To the  best  of  its  knowledge  the  Commission  is  not  aware  of  any  significant  or  widespread 
distortions of competition or deflections  of trade caused by these arrangements. One major case 
which  has  again  come  to  the  Commission's  attention  has  already  been  assessed  in  the  1994 
report:  This  involves  German  farmers,  subject  to  flat  rate  VAT  schemes,  who  purchase 
fertilisers  and pesticides etc., which in Germany are subject  to the standard  rate, directly from 
neighbouring Member States where such products are taxed at reduced rates. Similarly, French 
customers tend to buy their domestic fuel  such as coal in Belgium where the applicable rate is 
significantly  lower.  Other  cases of VAT induced  deflections  involving  sales of beverages  like 
soft drinks and mineral water from France to Belgium or from France to Britain do not generally 
have  a  major  impact.  The  sum  of  such  minor  cases  may,  however,  be  worth  considering. 
Moreover there is always the possibility of a significant  regional impact which may need to be 
assessed. In any case it is important  to note that where different  (reduced) rates are applied in 
different  Member States or where there is a reduced VAT rate in some Member States but not in 
others, this  will  have  a negative  effect  on the  sales  of those businesses  which  do  not  benefit 
from  a reduced  rate or which  are competing with  similar  businesses  in another Member  State 
where a lower rate is applied. 

The  supply  of  telecommunication  services  across  borders  is  an  example  of  an  area  where 
providers have the opportunity to choose in which countries to be established (i.e. for the place 
of  taxation)  to  benefit  from  low  rates  and/or  advantageous  arrangements  with  respect  to  the 
deduction  of  input  tax.  This  incentive  will  be  reinforced  under  the  new  taxation  schemes 
recently  introduced  by  Member  States  consequent  upon  the  legislative  initiatives  by  the 
Commission in this area8. 

7 
8 

Except new means of transport. 
COM(97) 4 final; see also Council decisions 97/200-214/EC, OJ No L 86 of 28 March  1997, p. 5. 

It goes without saying that VAT rate differentials  are more important  in certain industries than 
in  others.  In  the  horticultural  and  floricultural  sectors,  for  instance,  big  rate  differences  have 
clearly given rise to fraudulent  activities. Moreover the Commission is aware of cases in which 
the application of the flat-rate-scheme  to intra-Community trade in this sector creates distortion 
between competing traders. 

It will be seen from the table set out in Annex  1  that VAT rates in Member states did not change 
enormously  from  1994 to  1996 which  is why it appears to be likely that the  1996 situation in 
this  respect  will  be  comparable  to  1994. It  has  to  be  stressed,  however,  that  the  conclusions 
drawn in  1994 depended  on the special conditions of the transitional  system referred  to above. 
Thus, it is self-evident  that the changeover to the new common  system of VAT for  the Single 
Market will create a completely new situation which will have to be taken into account  in the 
making of proposals  for that system. Moreover,  non-tax  factors  which influence  the behaviour 
of businesses and private persons are continuously changing. 

In order to assess the effect  of the latter aspect, the Commission subsidised a study by an outside 
consultant on this question9. The study focused on border regions which have been identified  as 
"sensitive"  in  previous  studies,  namely  border  regions  between  Germany  and  Denmark,  the 
Netherlands,  Belgium,  Luxembourg,  France  and  Austria.  The  focus  of  the  study  was  on  the 
determinants  of  consumer  decisions,  general  trends  in  cross-border-shopping  as  well  as 
incentives for  and strategies of the retail  sector. The investigation  was carried out by means of 
an exhaustive written survey and expert interviews. The scope of the study included VAT and 
excise duties; distance sales (mail order) were also separately analysed. 

Basically, the  study  confirms  the results  of previous  studies which  were  included  in the  1994 
report.  However,  some  particular  results  warrant  special  mention  .The  main  findings  of  the 
study can be summarised as follows: 

•  Retailers  in  regions  of  relatively  intense  cross-border  shopping  actually  tailor  their 
advertising, and the  varieties  goods  stocked,  and  also adapt their  systems to accept  foreign 
currencies  etc.  to  accommodate  shoppers  from  the  neighbouring  states.  There  are  clear 
examples  where  such  active  cross-border  operations  have  lead  to  the  mobilisation  of  EU 
customers. 

•  Price differentials  attributable to different  tax rates is not the only factor affecting  the volume 
of  cross  border  shopping  between  neighbouring  Member  States  Product  variety,  attractive 
shopping  atmosphere,  favourable  customer  services  complement  the  price  advantage. 
Language barriers are much less important than might have been expected. 

"Retail strategies to benefit from indirect tax differences" (JUrgen Ratzinger, Ifo Institute for Economic 
Research) - March 1996 

•  For the future an ongoing integration process is expected, leading to growing competition, to 

the further approximation of price levels and a possible changes in purchasing patterns. 

•  Cross  border  distance  sales  contribute  significantly  to  the  turnover  of  German  retailers. 
Around 5% of consumption demand is supplied by mail order sellers and approximately 3% 
of the mail turnover of German companies is carried out with EU-consumers in neighbouring 
countries. 

•  At  the  various  borders,  in  general,  the  volume  of  cross-border  shopping  has  not  change 
significantly  since  1993. Two particular  cases are noteworthy,  however:  (i) In the  German 
border  region  near  Luxembourg  customers  from  beyond  the  border  play  an  extremely 
important role which has even grown during the past years, (ii) The German-Austrian border 
region  turned  out  to  have  been  traditionally  highly  integrated,  prior  to  accession..  In  fact, 
Bavaria  and  North-Italy  absorb  a  significant  share  of  the  Austrian  purchasing  power  (e.g. 
around  5% of the Lânder Kârnten, Tirol,  Salzburg  and  Oberôsterreich, without  accounting 
for tobacco, petrol and vehicles. This represents an increase of cross-border  shopping from 
1994 to 1995 of around 23%). 

These  conclusions  -  which  are  not  particularly  surprising  -  reveal  two  basic  general  trends 
regarding the  influence  of VAT rates on cross-border  purchasing  and  supply  patterns. Firstly, 
notwithstanding  the  existing  rate  differentials,  the  degree  of  integration  of  markets  is  still 
increasing and retailers are continuing to improve their strategies. Although, the Single Market 
does not work perfectly  in economic terms its functioning  is, nevertheless, steadily improving. 
Secondly,  it  is  obvious  that  where  conditions  for  cross-border  shopping  are  favourable  (no 
language barriers, common traditions etc.) VAT-induced  deflections  of trade do take place and 
they  might  be  viewed  as  distortions  of  competition.  Thus  the  study  clearly  confirms  the 
numerous  complaints  of  Austrian  operators  about  VAT  induced  deflections  of  trade  towards 
Germany  (e.g.  for  electric  appliances).  With  the  exception  of  some  limited  areas  it  is 
unfortunately  impossible  to  reliably  estimate  the  magnitude  of  cross-border  shopping  flows 
broken down by product. 

In consequence both the assessment  of  general  trends regarding  cross-border  transactions  and 
the particular results of the study provide insufficient  evidence to justify  major  changes of the 
current VAT rate system. However, this assessment  relates to the present situation only and is 
based on the assumption that the current taxation arrangements are applied and that operators' 
and customers' behaviour does not change significantly. 

At the same time, it is clear that the present taxation  system  as such - being based  on a broad 
application  of  the  destination  principle  and  a  number  of  special  regimes  -  obstructs  full 
exploitation  of  the  Single  Market.  The  current  complicated  and  uneven  rate  structure  is  a 
consequence  of  Member  States  insistence  on  retaining,  for  domestic  political  and  economic 
reasons,  their  existing  diversity  of  rates.  The  predicted  ongoing  integration  of  markets  will 
increase  competition,  lead to further  approximation  of price  levels and, at the end  of the day, 
provide  for  the  adjustment  of  purchasing  patterns.  It  is  probable  that  these  trends  will  be 
considerably  boosted  by  the  advent  of  the  Single  Currency  and  by  the  increasing  use  of 
electronic  commerce.  It  is therefore  likely  that  the  restrictive  effects  of  the  current  VAT rate 
structure will become even more aggravating  in the future.  Even under the current transitional 
arrangements further  VAT rate harmonisation will probably prove to be necessary as industries 
(products and services) become more and more competitive in cross-border trade. 

3.2 

The  influence  of  VAT  rates  on  cross-border  purchasing  and  supply  patterns: 
analysis of specific cases 

The Commission regularly receives reports on and complaints about specific  cases where VAT 
rate discrepancies are said to be the reason for significant  distortions between operators. Clearly 
in this report it is not possible to deal with the details of all the various cases which have been 
referred  to the  Commission(many  of which  are confidential  or are  subject  to  data  protection) 
Where  appropriate,  the  Commission  has  in  specific  cases  contacted  the  responsible  national 
authorities in order to obtain more information and explanation. 

However, two intrinsic problems resulting from the present VAT rate structure can be identified 
as the basic  cause of  certain  distortive  effects  on the  competitive  situation  of taxable  persons 
(which,  in  turn,  prevents  final  consumers  from  benefiting  from  the  Single  Market  to  its  full 
extent): (i) the optional character of Annex H and (ii) the lack of common definitions within the 
categories listed in Annex H. 

For  the  time  being,  the  application  of  either  one  or  two  reduced  rates  to  supplies  of  the 
categories  of goods and  services  specified  in Annex  H  is an option  for  Member  States. They 
may or may not apply a reduced VAT rate to the various items. A table showing to what extent 
Member  States have used their option to apply a reduced rate to the  17 different  categories of 
Annex H is set out in Annex 2 to this report. It is self-evident that the unequal VAT treatment of 
identical goods and services throughout the Community is likely to create a situation in which 
there is distortion of competition. 

It is certainly  true that the  categories  of  services  in  Annex  H by their  very  nature  are  not the 
kinds  of  economic  activities  which  lend  themselves  to  significant  cross-border  applications. 
Also the goods referred to in Annex H are not of the types which private persons would usually 
travel significant  distances to purchase. In the Commission's opinion, however, this assessment 
does not necessarily give the complete picture of the situation in  1996. Before  examining each 
of  the  categories(see  chapter  4)  it  is  worth  giving  some  thought  to  the  following:  VAT  rate 
discrepancies  within  Annex  H  vary  at  least  20%-points  (between  5%  and  25%), taking  into 
account  super-reduced  rates  and  zero-rates  this  divergence  widens  to  25%-points.  Thus  the 
potential  substantial  savings  involved  create  an  incentive  to  purchase  goods  and,  to  a minor 
extent, services abroad  even when considerable  inconveniences  are to be faced.  In the medical 
sector, for instance, there are opportunities for businesses and operators to exploit differences  in 
international prices where such price differences  have been influenced by VAT rates. 

Moreover, Member States tend to select goods and services from within a category of Annex H 
rather than including the whole of the category in their reduced rate. In a number of cases such 
distinctions  are  even  made  when  the  combined  tariff  nomenclature  is  used  to  establish  the 
precise  coverage  of a  given  category.  The Commission  is aware  of  a number  of  cases  where 
Member States make distinctions within a determined category of Annex H which appear to be 
arbitrary. 

One could argue that although such unequal treatment of basically identical goods or services is 
difficult  to  understand  there  is no  resultant  intra-Community  distortion  between  national  and 
foreign suppliers because the treatment applies equally to both of them In practice, however, the 
responsible tax authorities become aware of such distinctions only when additional  declaration 
obligations  are  fulfilled  (e.g.  intra-Community  acquisition).  Thus  it  may  happen  that  national 
producers  always benefit  from  the  reduced  rate, regardless  of the very  character  of the  goods 
produced or services rendered, whereas their foreign counterparts suffer the correct standard rate 
of VAT. 

Also,  the  Commission  often  receives  complaints  about  distortions  of  competition  within  a 
Member State that stem from an uneven transposition of Annex H categories. Such distortions 
are  equal  for  all  Community  operators  and  citizens  which  is  why  they  do  not  fall  into  the 
Commission's  responsibility  under  single  market  competition  rules  but  their  existence  is 
certainly worth reporting. It should be noted that according to basic principles of the sixth VAT 
directive  identical  goods  and  services  cannot  be  taxed  at  different  rates;  if  there  is  a  rate 
difference  it has to be justified  by an objective difference.  The Commission has already insisted 
on this  fundamental  principle  in other  areas  and  in one  case this has  reached  the  stage  of an 
infringement procedure. 

The  lack  of  clear  common  definitions  of  Annex  H's  categories  also  leads  to  an  impressive 
number of "border-line" cases. Many Member States do, for instance, apply a reduced VAT rate 
to tea and coffee  and the standard rate to  soft  drinks. It is legitimate  question to ask however, 
whether ice-tea in cans is to be viewed  as tea or as a soft  drink and this is equally the case for 
number of ready to drink coffee products. When two products which are liable to different  VAT 
rates  are  sold  together  and  cannot  be  separated,  again  the  question  is  which  rate  to  apply. 
Similarly, there are no conclusive criteria for  establishing, for  example, whether the CD or the 
book  is more important  when both are sold together  as one item  constituting  a dictionary. All 
this  reveals  the  basic  problems  of the  current  VAT  rate  structure  which  both  run  contrary  to 
basic principles of VAT and almost certainly create distortions of competition. 

Unfortunately,  the Commission is not in a position to determine the exact quantitative effect  of 
distortions arising from the above basic problems. It is true that at the time of the adoption of the 
Rates Directive 92/77/EEC the Council was aware of the fact that minor distortive effects  might 
result  from  the  way  Annex  H  was  designed.  However,  the  present  situation  does  not  -  as 
outlined  above  -  call  for  urgent  action,  all  the  more  so  as  the  whole  matter  of  rates 
harmonisation will in any case be tackled in the context of the new common system of VAT for 
the Single Market. The growing number of problematic cases, however, leads the Commission 
to think that a close monitoring of the situation is absolutely necessary and that separate  future 
initiatives in this area might prove to be inevitable. Member States are explicitly requested to try 
to overcome the above-mentioned  difficulties. 

4 

REVIEW OF THE SCOPE OF THE REDUCED VAT RATE 

4.1 

Criteria for reviewing the scope of the reduced VAT rate 

The legal basis for this report, Article 12 (4) second paragraph of the sixth VAT Directive, reads 
as follows: 

"On the basis from a report from the Commission,  the Council shall,  starting in 
1994,  review the scope of the reduced rates every two years. The Council,  acting 
unanimously on a proposal from the Commission,  may decide to alter the list of 
goods and services in Annex H. " 

As  seen  above,  in the  context  of  the  transitional  VAT  arrangements  the  present  interrelation 
between the structure of VAT rates and the overall functioning of the Single Market (in terms of 
cross-border  transactions)  does  not  call  for  a  systematic  change  of  VAT  rates.  Specific 
complaints, however, do reveal problems with some aspects of the present situation. 

10 

This chapter is to examine the various categories of Annex H, the requests to enlarge Annex H 
and the special case of certain energy supplies (Article  12 (3) (b)) in detail. In this context, the 
Commission has received numerous representations from various trade and industry  federations 
pleading for the inclusion of their sectors in the scope of the reduced rate on the occasion of the 
next review. 

As stated  above, the  basic  criterion  for  reviewing  the  scope  of the reduced  VAT  rate  and  for 
examining Annex H and Article 12(3)(b) is the one set out in Article 99 of the EC-Treaty which 
refers  to  harmonisation  of  legislation  to  the  extent  that  such  harmonisation  is  necessary  and 
specifies that harmonisation  is necessary to ensure the establishment  and the functioning  of the 
Single Market. Thus the focus of the analysis is on whether any change to the present provisions 
is required to overcome problems of distortions of competition. 

It  follows  that  any  assessment  of  the  merits  of  applying  a  reduced  VAT  rate  to  a  particular 
sector, good or service, can only be made in the light of this overall  guideline of the Treaty in 
the area of indirect taxation. In other words: even if there are no clear distortions of competition 
ascertained  in a specific  case, all pros and cons of reducing VAT have to be  evaluated  in the 
light of their overall effect  on the functioning  of the Single Market. As far as VAT is concerned 
the Council has made it absolutely  clear that the completion  of the  Single Market requires the 
switch  to  a  VAT  system  based  on  the  taxation  in  the  Member  State  of  origin  of  supplies  of 
goods and services (Article 28 1 of the sixth Directive). Hence any reflection on the scope of the 
reduced VAT rate cannot  neglect the possible  impact on the aforementioned  programme  for a 
common system of VAT for the Single Market. 

The background of Annex H and the historical context of the appropriate Council decisions are 
not explained in this report as this was detailed in the last report. 

4.2 

Reviewing the various categories of Annex H 

As outlined  above, the optional character  of Annex H and the relatively wide definition  of its 
categories creates basic technical problems which need to be closely monitored  and  analysed. 
For a number  of categories, however, the Commission  has been addressed  by various  interest 
"groups with a view to including certain goods or services in the scope of a reduced VAT rate. 
The major  cases of this kind are dealt with in this chapter and the general discussion on certain 
categories is described. The following  sectors are the most important ones: agriculture, health, 
passenger transport, culture, social policy. 

11 

Agriculture 

The agricultural  outputs in question are those which are not included  in Annex H, (category  1) 
namely cut flowers,  ornamental  foliage,  bulbs, roots and the like and firewood. In the Council 
discussion on the relevant Commission proposal10 it appeared that Member States have diverse 
opinions  on which  VAT rate  should  in principle  apply to  agricultural  outputs.  Some  Member 
States  want  to  extend  the  scope  of the  reduced  VAT  rate  to  all  agricultural  outputs, whereas 
others would prefer to retain the existing list. 

There is intense cross-border shopping in the category of foodstuffs.  Such shopping has always 
been a feature of intra-Community trade in this sector but according to the evidence from all the 
studies  of  which  the  Commission  is  aware,  it  is  not  primarily  influenced  by  VAT  rate 
differences.  Very  often  purchases  of  foodstuff  are  made  from  neighbouring  Member  States 
although the rates applicable are higher. At present a targeted modification  of Annex H in this 
area is not considered appropriate. 

Health 

The  reduced  VAT  applicable  to  pharmaceutical  products  (category  3)  or  medical  equipment 
(category  4)  illustrates  the  above-mentioned  problem  of  vague  definitions  very  well.  What  is 
"normally used for health care", what is "normally intended to alleviate or treat disability"? In a 
number  of  Member  States  these  questions  currently  cause  disputes  between  the  responsible 
authorities, and the businesses involved as to whether or not their sectors or products are within 
Annex H; This is hardly surprising in view of the unclear wording of the provision; 

Passenger transport 

The  taxation  of  passenger  transport  (category  5)  is  a  very  complicated  and  special  matter. 
Member States currently tax "transport" in very different  ways and they apply VAT rates which 
vary from zero (exemption with refund  of input tax) to 25%. In doing so, most Member States 
make  distinctions  between  various  means  of transport,  between  domestic  transport  and  intra-
Community or international transport etc. The Commission is mindful  that the current situation 
creates  a  number  of  practical  problems  for  the  businesses  involved  and  that  there  are  major 
distortions  of  competition.  The  Commission  is  moreover  aware  of  the  fact  that  the  transport 
sector is a special one which possibly requires a special VAT treatment. 

10 

See footnote 3. 

12 

A study has therefore been commissioned with the following objectives. To assess the effects  of 
using  different  techniques  for  applying  VAT  to  passenger  transport  services.  To  investigate 
whether  competitive  imbalances  exist  between  different  modes  of  transport  on  similar  routes 
(especially:  high-speed  rail  transport  vs.  air  transport).  To  predict  the  influence  on  price 
(absolute and relative) of a modification  to the current territoriality regulation, depending on all 
possible  taxation  methods  (taxation  at  the  place  of  departure,  of  arrival,  of  establishment  or 
where  the  buyer  is  taxed?),  To  investigate  problems  involving  tax  deduction  in  the  place  in 
which the transport service buyer is established. 

Culture 

The  most  widely  discussed  category  of  Annex  H  is  that  containing  books,  newspapers  and 
periodicals  (category  6). However  often  this  discussion  is widened  to  include  the  taxation  of 
cultural  events  in  general  (category  7).  In  this  context,  there  are  essentially  two  lines  of 
reasoning pleading for widening the scope of the reduced VAT rate: 

Firstly, the record and video industry demands that CDs, records, cassettes and videos should be 
eligible  for  a  reduced  VAT  rate.  It  is  claimed  that  CDs  etc.  are  discriminated  against  in 
comparison with other cultural media such as books, newspapers, museums, cinema, theatre etc. 
Moreover, it is maintained that in the medium term, a reduction in VAT would be compensated 
for by an increase in revenue as overall sales of CDs etc. would increase thanks to the reduced 
level of taxation. 

Furthermore,  some  Member  States, especially  France, table  essentially  the  same request,  in a 
broader context. It is argued that the character of compact disks, records, cassettes, videos etc. as 
means of communication  and the spread of cultural  values is comparable to that  of books and 
that historic reasons for  favouring  books to records etc. are no longer valid in the  "information 
society". A reduced VAT rate would boost the demand for records etc. and thus encourage the 
production of art, music etc in Europe. The potential educational benefits are also stressed. 

For the time being, the Commission is not entirely convinced by that reasoning. Most Member 
States consider the majority of sales in this sector to be leisure or entertainment purposes, rather 
than being cultural in nature. In practice such distinctions are difficult  to make. The same could 
be said of books. Historically, however, books were first on the scene, and acquired a privileged 
status which has not been extended to newer media of transmission. Obviously, books are still 
widely seen as the priority means of cultural  communication. Arguments along these lines are 
however somewhat futile  since any criteria forjudging  what is "leisure" or "culture" are largely 
subjective. 

13 

The major  difference  between books and CDs etc. is that books can be read immediately  while 
CDs  etc.  always  require  further  technical  equipment  to  give  access  to  the  information.  If a 
reduced rate is to be considered the question  arises as to whether the equipment  should also be 
included.  Other problems concern support  for  information  like video-cassettes,  fees  to be paid 
for  accession  to  information  on  networks  like  INTERNET  and  so  on.  Any  extension  of  the 
reduced  rate would therefore  require the development  of a new philosophy  for  its justification 
and it is likely that the cultural and educational  consideration alone will not provide a practical 
criterion. 

Secondly, the publishing  industry  and  editor  federations  advocate  an  extension  of the  current 
option, to tax books at a reduced VAT rate, to corresponding modem products like CDs which 
contain  information  that  is  usually  (and  was  formerly)  published  in  books  only.  The 
Commission  considers  such  substitution  to  be  extremely  difficult  if  not  impossible  to  define. 
Even a CD-ROM, the content of which is identical to a book, is a different  product. CDs require 
the use of further  equipment which offers  facilities to access the information  (indexing,  subject 
searching etc.) superior to those available to the user of a normal book. Moreover, no CD-ROM 
is really only limited to the contents of a book of the same title; it is easily possible and certainly 
convenient to add further background information  (photographs, pictures, music etc.). 

Applying essentially the same reasoning, a similar move is being made in France to reduce the 
VAT  rate  on  CD-ROMs,  on-line-services,  software  "multi-media" etc.  from  20,6% to  5,5%. 
Such  questions  will  in  any  case  have  to  be  assessed  in  the  broader  context  of  the  impact  of 
technological change on taxation systems (e.g. electronic commerce etc.). 

Social Policy 

Regarding  the  supply,  construction,  renovation  and  alteration  of  housing  provided  as  part  of 
social policy (category 9) it seems that some Member State tend to include all kinds of services 
in the construction  sector in this item. The Commission is currently examining the appropriate 
legislation.  It  is  important  to  note that  the  lack  of  common  definitions  does  not  allow  for  an 
extensive application of the category; in this particular case it is strictly limited to social housing 
and that lack of common definitions  should not be used to justify  more extensive application of 
this reduced VAT rate. 

Conclusion 

In conclusion,  all requests  for  widening the  scope of the existing Annex  H'  categories raise a 
number  of  specific  technical  problems  which  should  not  be  underestimated.  An  overall 
evaluation in the light of the criteria set out above reveals the serious fundamental  issues raised 
by such requests. To start with, the revenue effect  of widening the  scope of the reduced  VAT 
rates would be in all cases substantial. Probably compensatory  measures would  be needed, the 
introduction of which would be unpopular and, what is more, counter-productive. 

14 

From a theoretical  standpoint,  it has to be underlined  that VAT  is a neutral  multi-stage  broad-
based consumer tax which is as such not best suited as a means of selectively targeting  social, 
cultural, etc., activities for  favourable  treatment In economic terms it is a fact  that other means 
(such as direct subsidies or reductions in direct taxation1 ') are much more effective  and  efficient 
and do not cause so many undesirable side-effects.  This is, of course, also true for  the existing 
reduced VAT rates in Annex H for  goods and services. The question  is, however, whether the 
Commission should propose any alterations to Annex H. The answer is that so far there is little 
evidence of a compelling need to enlarge the scope of the existing categories. 

4.3 

Reviewing requests to introduce specific new categories to Annex H 

Discussions with Member States and industries 

Industries and/or other representative organisations of various kinds, from  a number of Member 
States, campaign  for  enlargement  of the  scope of Annex  H  . The  most  important  issue  in this 
context  is  the  request  to  apply  the  reduced  VAT  rate  to  so-called  labour-intensive  and 
environmentally friendly services. This request  originated from a particular  Dutch  problem  in 
relation  to  the  taxation  of  the  repair  of  footwear  and  clothing.  After  1  January  1993  the 
Netherlands  had  to  tax  these  services  at  the  standard  rate  which  created  an  internal  political 
problem  in  the  Netherlands.  At  the  time,  no  immediate  solution  was  found  and  so  the 
Netherlands  insisted  on  a  declaration  in  the  Council  Minutes  regarding  a  re-examination  of 
Annex H in this respect at a later date. 

There is also pressure for the application of a reduced VAT rate to supplies of environmentally-
friendly  and energy-saving goods and  services. In fact  a number  of Member  States do apply a 
reduced VAT rate to supplies of (presumably polluting) energy whereas energy saving material 
is  taxed  at  the  standard  rate. Not  surprisingly  there  is  a  strong  lobby  for  equalising  the  tax 
treatment  of both.  Similarly,  France  put  forward  the  idea  of  applying  a  reduced  VAT  rate  to 
electric vehicles and vehicles using gas engines. 

In any case, direct subsidies and reductions in direct taxation do generally constitute State aid within the 
meaning of Article  92(1)  EC-Treaty  and  need to be examined  by the  Commission  in accordance  with 
the procedure set out under Article 93 EC Treaty. 

15 

The case  in  favour  of applying  a reduced  VAT rate to  labour-intensive  goods  and  services in 
general (and not just clothing and shoe repairs) has been taken up by a number of associations, 
including UEAPME12 - the organisation representing small and medium-sized enterprises in the 
Community. They argue that the application of a reduced VAT rate would help reduce the level 
of unemployment  in Europe by providing a stimulus to sectors which employ  labour-intensive 
production methods or services. The other argument used by the sector concerned to support a 
low VAT rate is essentially  a black  economy  argument. It is argued that the VAT mechanism 
does not function  particularly well in sectors which have few deductible VAT inputs and where 
most  of  the  customers  are  private  individuals  without  a  right  of  deduction.  Applying  a high 
VAT rate to such sectors tends to encourage recourse to non-declaration with a consequent loss 
of direct tax revenue  (income or corporation tax) and of social  security payments. Exactly the 
same effect  is said to increase do-it-yourself activities by households. 

Other  organisations  develop  a similar  line  of reasoning  which  is limited, however,  to  a given 
sector.  For  example,  a  number  of  organisations  working  for  the  preservation  of  the  cultural, 
architectural  and  natural  heritage  of  Europe  advocate  a reduced  VAT  rate  for  the repairs and 
maintenance of historic houses, gardens, vernacular buildings etc. It is maintained that not only 
the social  and cultural  importance  of buildings and  landscapes justify  such a measure but that 
there is a strong economic rationale for reducing the appropriate VAT rate. Firstly, the reduced 
VAT rate would give a significant  incentive to renovate and to repair historic buildings etc. and 
thus increase the appropriate demand for (mostly relatively low-skilled) services. Secondly, it is 
argued  that  the  nature  of the  countryside  or  the  cultural  landscape  are  decisive  for  attracting 
tourists of all kind. Travel and tourism being the world's largest industry, the indirect impact of 
a  reduced  VAT  rate  on  the  repairs  and  maintenance  of  the  man-made  and  cultural  heritage 
would, therefore, be far-reaching and wide-spread throughout the business community of a local 
economy. Not surprisingly, there are also efforts  being made for attributing a reduced VAT rate 
to the whole tourism business. 

Similar  arguments  stressing  the  positive  effect  both  on  employment  and  environment  are put 
forward  in  other  sectors13  or  for  differently  defined  services14.  Due  to  their  very nature  such 
services are said not to be  subject to cross-border  competition. It is, therefore,  argued that this 
fact  would be sufficient  to justify  their insertion into Annex H - which would  enable Member 
States to apply a reduced VAT rate or not. 

12 

13 

14 

Union  européenne  de  l'artisanat  et  des  petites  et  moyennes  entreprises  -  Europâische  Union  des 
Handwerks  und  der  Klein-  und  Mittelbetriebe  -  European  Association  of  Craft,  Small  and  Medium 
Sized Enterprises 
It is virtually  impossible to establish  an exhaustive  list of the  sectors concerned  which range from the 
biking industry to removal services or textile care and dry-cleaning. 
E.g. so-called  "services de proximité"  in France: labour-intensive services, typically carried out by self-
employed  or family  businesses and usually taking place at the customer's  home (tuition, nursing, home 
industry etc.). 

16 

The idea of using VAT rates as a policy tool  for attaining specific  economic  objectives  such as 
higher employment or improved protection of environment to a certain extent finds favour with 
the European Parliament and the Economic and Social Committee15. 

In some cases, the option to tax certain supplies at the reduced VAT rate is seen as a remedy to a 
specific  problem.  For  instance,  exempted  bodies  like  charities  often  suffer  from  irrevocable 
input VAT which means that taxation at a reduced VAT rate would be much more beneficial  for 
them.  In the  Commission's  opinion  such  cases  have  to  be  separated  from  those  mentioned  so 
far. In fact, the Commission is mindful  of the problems of the current taxation system  including 
those  relating  to  exemptions  and  the  right  of  deduction.  These  are  issues  which  will  be 
addressed  in  the  proposals  for  the  new  common  system  of  VAT.  In  any  event  introducing 
specific new categories to Annex H would run contrary to the basic goal of simplifying  the VAT 
system  and reducing  compliance  costs.  On this behalf reference  is  made  to  the  ongoing  SLIM 
initiative which is also important for VAT. 

The Commission has however  serious doubts on the suitability  of VAT  as a means of targeted 
economic policy: Economic research suggests that VAT has, in the end, only a limited effect  on 
sales prices. The demand for services (including the labour-intensive  ones) depends much more 
on other factors,  such  as consumer habits,  general  economic  trends etc,  Furthermore,  lowering 
the  VAT  rate  would  no  doubt  cause  budgetary  losses.  Therefore  compensatory  measures  like 
increases  in direct taxation are needed and the overall  effect  on the demand  in a specific  sector 
and on the job  market as a whole  are at least  uncertain.  So  far, there  is  no  empirical  evidence 
suggesting otherwise. 

The taxation system would again be made more complex to operate and serious problems would 
arise in defining  the exact  scope  of the reduced rate and in controlling  its application.  There  is 
no  easy  way to  solve  this problem.  Even reliance  on  supposedly  objective  non-tax  criterion  is 
problematic  and  additional  jproblems  arise  moreover  when  such  criteria  are  built  into  the  tax 
system.  Generally  speaking,  such  measures  would  run  contrary  to  the  very  important  basic 
concept of neutrality of VAT and they are incompatible with the idea of a general  consumption 
tax. 

15 

See European Parliament resolution on the Commission work programme for  a new common system of 
VAT  adopted  on  10 June  1997  and the  appropriate  opinion  by the  Economic  and  Social  Committee, 
adopted  by  its Plenary  Session  on 9 July  1997. Both  institutions  endorse the  objectives  and the  broad 
concept of the work programme. 

17 

The black-economy certainly gives rise to great difficulties  within the current taxation systems. 
The Commission  is, however, of the opinion that it would be premature to change Community 
VAT legislation only with a view to dealing with this problem and regardless of the effects  of 
other possible changes. As far as the supplier is concerned, VAT is most probably not the main 
driving force  for tax avoidance. The financial  benefits  of tax planning are very much greater in 
the fields of  direct  taxes  and  social  contributions.  It  is true  however  that  there  is  an  obvious 
incentive for  consumers to buy goods and services VAT free.  In any event the Commission  is 
mindful  of the  problem  and  will  be pleased  to  intensify  its discussion  on  counter-action  with 
Member States. 

Studies on the employment effects  of a reduced VAT rate on selected sectors 

In order to assess the effect  of reduced  VAT rates in comparison to other fiscal measures, the 
Commission  contracted  with  an  outside  consultant  to  study  the  "Potential  impact  on 
employment  creation  of  fiscal  instruments  (namely  of  a  reduced  VAT  rate  for  selected 
sectors)"16.  This  was  also  done  in  order  to  fulfil  a  commitment  taken  in  the  European 
Parliament  in  the  context  of  the  debate  on  the  VAT  rate  applicable  to  floricultural  and 
horticultural outputs in autumn  199517. 

the  study examines three possibilities for boosting employment by means of fiscal measures: a 
reduced  VAT rate  for  selected  (presumably  labour-intensive)  sectors, a reduction  in the  direct 
tax  rate  and  reduction  in  employer's  social  security  contributions.  All  possibilities  were 
designed to be revenue neutral and to this end two compensatory measures were investigated: a 
general  rise  in  the  VAT  rate  and  a  rise  in  fuel  duties.  Thus  six  scenarios  for  five  selected 
Member  States (Belgium, Western  Germany, Italy, Spain, United Kingdom) were produced in 
total.  The  tool  used  for  the  analysis  was  an  econometric  input-output  model  covering  the 
Member  States before  the  1995 enlargement  and  disaggregated  both  by region  and  by  sector. 
The model has been adjusted to the specific objectives of the study. 

The overall results of the study are of course subject to a number of assumptions inherent to the 
model  or  needed  to  permit  the  comparison  of  simulations  (size-wise  and  country-wise).The 
study concludes, however, in a clear statement which reads as follows: 

"The policy of a compensated reduction of VAT on selected services (Simulation 
1) can generally be said  to  have only marginal employment  effects,  while no 
perceptible  effects are  obtained by  the policy  of a  compensated reduction  in 
direct taxation  (Simulation  2). In contrast,  the compensated reduction  in social 
security  contributions (Simulation  3)  does,  on  the  whole, produce  the most 
positive effects on employment. " 

16 

17 

"Potential  impact  on  employment  creation  of  fiscal  instruments  (namely  of  a  reduced  VAT  rate  for 
selected  sectors)"  by  Cambridge  Econometrics  Ltd.  and  the  Institute  of  Employment  Research, 
University of Warwick - September  1996. 
The Directive in question has been adopted by the Council of Ministers in  1996. See footnote 3. 

18 

For the total of the five Member States examined the three basic measures show the  following 
results that differ  only slightly according to the compensation chosen: 

1.  A  50%  reduction  of  VAT  on  selected  sectors  results  in  a  small  overall  increase  of 
employment of 0.1% higher than the base case (no change of taxation policy). The sectoral 
distribution  of  the  small  employment  gains  indicates  that  Other  Market  services, 
Manufacturing  and  Construction  benefit  more while Banking, Finance and Insurance and 
Distribution register losses18. The national distribution is uneven. 

2.  The model  results  for  a  5% reduction  of  direct  taxes  suggest  that  this policy  option  has 

virtually no effect  on employment (only 0.05% above base in the long run). 

3.  A  5% reduction  in  social  security  contributions  would  provide  for  a  modest  increase  of 
employment (long-term effect  of 0.3% higher than the base case). The sectoral distribution 
of the employment gains is skewed towards services and presumably to small and medium 
sized enterprises. It is noteworthy, however, that the employment  gains in some countries 
actually outweigh small decreases in others. 

As  in  all  economic  modelling,  when  assessing  the  study  a  number  of  caveats  should  not  be 
overlooked  and  it  is  obvious  that  economic  research  cannot  be  substituted  for  political 
decisions. The results of the study do not, however, give any evidence whatsoever that reducing 
VAT on labour-intensive  services is a recommendable option of fiscal  policy that justifies  the 
considerable problems and difficulties  linked to this measure. This assessment is reinforced by a 
comparison to the alternative which has already been advocated by the Commission in its White 
Paper on Growth, Competitiveness and Employment (chapter IX): a reduction in social security 
contributions  which  might  in  some  cases  be  compensated  through  increases  in  taxation  and, 
more  particularly,  through  increases  in  environmental  taxes  or  taxes  on  consumption.  The 
Commission  continues  to believe  that  measures  touching  more  directly  the  labour  market  as, 
e.g., reduction of employers'  and/or employees'  social  security  contributions, direct  incentives 
to employers etc. are more  likely to have a positive impact on job  creation  than  indirect  ones 
like VAT reductions. Such measures may also contain State aid elements. 

18 

Other market services comprise the wide range of business that is not linked to distribution, lodging and 
catering,  transport,  communication  or banking, finance and  insurance.  Distribution  and  Other  Market 
Services have low wage rates and unit labour costs which are typical characteristics of low-skill, labour-
intensive sectors. 

19 

The Commission  is aware of the fact that this view is shared neither by all Member  States nor 
by all operators. For instance, UEAPME has commissioned, through its Dutch member MKB, a 
"counter-study", a "second opinion" to the above study by Cambridge Econometrics/University 
of Warwick. This study, which was issued only recently, was carried out by the Dutch institute 
EIM19 under the name "Stimulation of labour-intensive services - The employment effects  of a 
reduction of VAT rates"; on this basis MKB has also produced an information leaflet "White on 
black"20. 

The  methodological  approach  taken  in  this  study  is  different  from  the  one  in  the 
Cambridge/Warwick-study.  It  is  also  based  on  an  econometric  model  but  no  compensatory 
measures  for  budget  neutrality  are  taken  into  account  as  it  is  maintained  that  effective  job 
creation may cost money. For the Netherlands the effects  of the VAT reduction  are calculated 
relative to a base variant (which reproduces the anticipated developments arising from unaltered 
policy)  and  a  break-down  for  sectors  is  provided  for.  For  Germany,  Italy  and  the  United 
Kingdom, which are covered in a much rougher calculation, the expected employment growth is 
bench-marked  with  total  employment  in  industry.  For  the  Netherlands  the  application  of  the 
reduced  VAT rate of 6% (instead  of the currently  applied  standard  rate of  17.5%) to up to 24 
selected sectors is tested, in five scenarios establishing various limits of labour-intensiveness (all 
24 sectors, at least 60, 70, 80 or 90%); for the other countries Dutch elasticities and ratios were 
applied to national data on industry turnover, employment levels, VAT rates, etc. 

The key results of this study are a reduction of the level of unemployment in the Netherlands of 
about 0.5% until 2004 when the reduced VAT rate is applied to all 24 sectors; at the same time 
the public sector deficit would be 0.4% bigger. Similar (but less reliable) effects  are expected in 
Germany and, for the construction industry, in Italy; for the UK the relative employment  effect 
is significantly bigger. 

The  Commission  is  of  the  opinion  that  the  results  of  both  studies  are  difficult  to  compare 
directly.  The  condition  of  revenue-neutrality  obviously  makes  an  enormous  difference.  It  is 
evident  that  tax  reliefs  without  compensation  impact  much  more  on  economies  than 
compensated  ones  but  this  is  not  only  true  for  VAT.  In  this  sense,  the  basic  result  of  the 
Cambridge  study, which says that cuts in non-wage labour costs (namely  social  contributions) 
are by far most efficient  and effective fiscal measure for boosting employment, is by no means 
challenged by the result from the MKB/EIM-study. 

19 
20 

Economisch Instituut voor het Midden- en Kleinbedrijf 
Thus focussing on me underground economy aspect. 

20 

In any event, the Commission is prepared to intensify  the discussion both on the theoretical side of 
the interrelation between taxation and employment  and  on the political  and  practical  rationale for 
addressing VAT reductions in this context. 

4.4 

Reviewing the special case of Article 12 (3) (b) 

Article 12(3)(b) of the sixth VAT directive states that 

"Member  States  may  apply  a  reduced rate  to  supplies of  natural gas  and 
electricity provided that no risk of distortion of competition exists. A Member State 
intending to apply such a rate must,  before doing so, inform the Commission.  Ihe 
Commission  shall give  a  decision on  the  existence  of  a  risk  of  distortion  of 
competition...." 

Under  current  Community  legislation  all  other  supplies  of  energy  except  the  ones  mentioned  in 
Article  12 (3) (b) and except firewood (Article 28 (2) (i)21) are  not  eligible for  a reduced  rate of 
VAT. Article 12 (3) (b) is generally interpreted  restrictively. Some Member States are also entitled 
to continue to apply a lower rate in this area for the transitional period before the entry into force of 
the new common VAT system. 

On this basis, the  opinions  on  the  interrelation  between  VAT  and  energy  obviously  differ  a lot, 
between Member States and within Member States: 

•  In the United  Kingdom  and  some other  Member  States  a lower  VAT  rate  on  energy  saving 
materials  and  similar  is  actively  campaigned  for.  In  its  budget  1997  the  UK  Government 
announced that one of its objectives is to help the less well off to save energy, and that it will 
consult about the best means of achieving this. The Finance Act  1997 requires the Treasury to 
produce  a  report  on  the  consequences  to  the  Exchequer  of  VAT  relief  for  energy  saving 
materials by May  1998". Anyhow, this report  will also thoroughly  assess other fiscal  measures 
than VAT for favouring energy-saving materials 

•  The Netherlands intent to make use of Article  12 (3)(b) by applying the reduced  VAT rate to 
electricity produced by "wind energy, solar energy, energy from small hydraulic plants, biomass 
energy  (green  energy  or  energy  produced  by  non-polluting  methods)".  This  is  expected  to 
encourage private households to consume energy produced this way. 

21 

Introduced  by  the  Directive  on  the  taxation  of  agricultural  .outputs  other  than  those  falling  within 
category  I of Annex H; sec footnote 3. 

21 

•  The United Kingdom has also reduced,  as from 1 September  1997,  the VAT rate applicable to 
domestic fuel and power from 8% to 5%, this being based on Article 28 (2) (b). The rationale of 
this move is to ease the tax burden on a socially sensitive good. 

•  Germany  has  launched  the  idea  of  a  special  VAT  rate  on  the  consumption  of  energy.  The 
underlying  idea  is to  introduce  an environmental  element  into  the  VAT  system  by  applying  a 
special rate the level of which should be above the standard rate to all kinds of energy supplies. 

•  In general the level of the VAT rate applied to energy supplies (gas,  electricity) differs  between 

5% and 25% within the Community. 

It follows from the foregoing  that the taxation  of energy  is a very  complex  area in the  sense that 
environmental  and social  aspects play a conflicting  role in determining the "justified" rate, the one 
pleading  for  a generally  higher,  the  other  for  a generally  lower  rate.  For  the  time  being,  there  is 
obviously little room for distortions of competition as energy markets to a large extent continue to 
be  characterised  by  national  distribution  monopolies.  These  national  monopolies  are,  however, 
subject to rapid change in the real single market. This trend will certainly increase the likelihood  of 
distortion of competition in the near future and this tendency  needs to be taken into account  while 
reflecting on the future VAT regime in this  field. 

In the  Commission's  opinion the  current  arrangements  which  are  explained  above  are  difficult  to 
operate and do not provide for a coherent approach, whether from a social,  environmental  or  fiscal 
point  of  view.  Their  revision  should  therefore  be  addressed  in  the  context  of  the  new  common 
system of VAT while following in the first instance the general lines adhered to for that exercise. 

It  is  noteworthy,  however,  that  excise  duties  are  in  fact  a  much  more  targeted  levy  on  energy 
supplies of all kinds.  Also,  their impact  on  consumer  prices  is much  higher as the  level  of rates is 
relatively  high  (especially  compared  to  VAT  rates)  and  as  input  tax  cannot  be  deducted  by 
companies (which is a characteristic of VAT).  Therefore,  it seems logical  to use this instrument,  if 
necessary, for policy purposes rather than VAT. The Commission proposal for an overall  approach 
to the taxation of energy products is a first step in this direction  [COM(97)  30 final]. This proposal 
sets  new  Community  minimum  rates of taxation  for  all  energy  products,  thus  providing  Member 
States  with  the  possibility  of  differentiating  the  levels  of  taxation  according  the  environmental 
quality of products.  It also lays down  a number of options enabling them to exempt  or to tax  at a 
reduced rate fuels (such as renewables) or uses which are environmentally  friendly. 

22 

5 

HARMONISING  THE  SCOPE  OF  THE  REDUCED  VAT  RATE:  THE  WAY 
FORWARD 

When  Annex H  was  negotiated  by Member  States  and  decided  by  the  Council  of Ministers the 
compromise  chosen  was  not  based  on  a  absolutely  coherent  and  conclusive  approach22.  Thus 
Member  States provided for what they estimated to be the absolute minimum for  the transitional 
regime to  function.  It  is however  self-evident  that  some  of the  problems  mentioned  above stem 
from this incoherence  regarding the  scope of the reduced  VAT  rate.  It  is therefore  clear that  in 
considering the new origin-based common system of VAT it will be necessary to review the level of 
rates and to produce a coherent structure for the future scope of the reduced rates. 

Such coherent rate structures and future harmonisation cannot be based only on the discussions and 
requests  of the day.  This  chapter  endeavours  to  give  some  hints from a broader  standpoint  and 
reflects on possible ways forward in harmonising the scope of the reduced VAT rate. 

The  appropriate  Commission  proposals  are  referred  to  in  the  various  rounds  of  VAT  rate 
harmonisation  scheduled  in the Commission working programme for  the new common  system of 
VAT. When the assessment of rates harmonisation  is eventually on the agenda, in the first place it 
will be up to the Council and to Member States to decide to what extent approximation of rates is 
needed  in  order  to  avoid  major  distortions  of  competition.  When  the  Commission  working 
programme is subsequently  realised,  such  distortions  are likely to  come up but  they  may remain 
limited or possibly Member States may regard them simply as a positive element of tax competition. 
In this sense the Commission's plans are biased  neither one way nor the other.  It  is however too 
early to examine this situation in detail. 

Notwithstanding this approach the Commission believes that its review on the scope of the reduced 
VAT rate should include a preparatory evaluation and stimulate discussions in Member States. 

5.1 

Analysis of the current situation in Member States 

Member States apply Article 12 (3) (b) of the sixth Directive and its Annex H very differently.  The 
data set out in the table of Annex 2 reveal to what extent Member States make use of the option to 
tax the various categories of Annex H at a reduced  rate. The information  in the table is, however, 
too detailed to give an overview of basic decisions or common trends underlying the rates applied 
in the various Member States. 

22 

The historical context  is outlined  in chapter 2 of the previous report of 1994. 

23 

The following table forms a "snapshot" of the situation in 1996 and attempts to give some essential 
information in this context: 

N° 

Category 

Number of Member  States 
applying a reduced  rate 
(Art.  12(3)(b)) 

Number of Member 
States applying a 
special transitional  rate 
(Art. 28 (2))23 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

Foodstuffs 

Water supplies 

Pharmaceutical  products 

Medical equipment 

Transport of passengers 

Books, newspapers, periodicals 

Admissions  to  shows  and  cultural 
events; 

broadcasting services 

Royalties due to and services 
supplied by writers, composers, 
and performing  artists 

Social  housing 

Agricultural  inputs 

Hotel accommodation 

Admission to sporting events 

Use of sporting  facilities 

Social  services 

Services supplied by undertakers 
and cremation  services 

Medical and dental care; thermal 
treatment 

Street cleaning, refuse  collection 
and waste treatment 

11 

9 

6 

7 

11 

8 

10 

7 

5 

9 

9 

6 

4 

5 

4 

7 

3 

5 

-

6 

4 

2 

9 

5 

1 

4 

3 

2 

1 

2 

2 

1 

1 

4 

23 

This is without exemptions according to Art.  13 of the sixth  VAT Directive. 

24 

It will be seen that a majority of Member States (i.e. eight or more out of  15) use only seven out of 
the seventeen  possible  categories  to  apply  a reduced  VAT  rate  Moreover,  further  analysis  of the 
tables in Annex  1 and Annex 2 reveals that on the available evidence 

Few Member states apply a reduced rate to the whole of any category of Annex H; 

three Member States do not apply Annex H at all; 

four Member States have two reduced VAT rates24; 

the levels of the reduced rates vary between  5% and  12.5% (respectively,  on a temporary basis, 
17% in Finland); 

some Member  States  make  wide  use  of  the  "special"  rates  permitted  for  a transitional  period 
until the introduction of the new common system of VAT; 

for eleven out of the seventeen  categories  a factual  link  to  exemptions  exists  (insofar  as within 
these  categories  at  least  some  Member  States  exempt  at  least  some  of  the  appropriate 
transactions); 

generally  speaking,  categories  6,  7  and  8  fall  into  the  scope  of  what  one  might  call  "cultural 
policy"; 

generally  speaking,  categories  3,  4  and  16  fall  into  the  scope  of  what  one  might  call  "health 
policy"; 

generally speaking, categories  1, 2, 5, 9,  12,  13,  14 and  15 fall into the scope of what one might 
call "social policy" (wanting one could put cultural and health aspects also under this label); 

generally speaking,  categories  1 and  10 fall  into the  scope  of what  one  might  call  "agricultural 
policy"; 

generally  speaking,  categories  2,  5,  9,  10  and  17  impact  on  or  fall  within  the  scope  of 
"environmental policy"; 

it is difficult  to classify category  11 with a view to a general policy approach; 

that there is, for the time being, no mention made of other policy fields like economic  policy or 
similar. 

24 

As regards the three rates in Finland sec footnote  5. 

25 

To complete the picture, it may be useful to repeat three key results elaborated so far: 

«  the optional character of Annex H and the lack of common definitions of its categories are, at 

least under specific circumstances, likely to create distortions of competition; 

• 

• 

there  is a growing  feeling  in Member  States that  VAT rates  may,  under  the  condition  that 
distortions of competition are avoided, be used as a means of economic policy; 

in  some  areas  new  technological  developments  appear  to  lead  to  unequal  treatment  of 
comparable goods and/or services in terms of the applicable VAT rate. 

It follows from the foregoing that in general within the Community there is a need for a reduced 
VAT rate and that,  very broadly  speaking,  streamlining  of  its  scope  is necessary,  also  for  the 
sake of simplification  and reduced compliance costs. Such streamlining in needed regarding the 
level  of the  reduced  rate, the  political  criteria  for  its  application,  its  suitability  for  the  Single 
Market and the general topic of modernising the VAT system. The Commission has already set 
up  the  framework  for  this  streamlining  by  adopting  its  working  programme  for  the  new 
common system of VAT which addresses, inter alia, precisely these issues. 

5.2 

Assessment in the light of the new common system of VAT 

In any system of VAT based on taxation in the country of origin and enabling a taxable person 
to effect  supplies to any destination in the Community, the VAT rate will be a significant  price 
factor  in determining the competitive position of operators. For the set-up of the new common 
system of VAT it must therefore be decided what degree of difference  between rates will still be 
acceptable to avoid creating major distortions of competition. 

One  of  the  essential  characteristics  of  VAT  is,  as  stressed  above,  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 jeopardise this neutrality and might also 
influence  business  locations, which would  also be inconsistent  with the very principles  of the 
Single Market. It is also clear that the more VAT rates that are permitted to Member States, the 
more unwarranted complexity is added to the business of control. 

26 

In  this  context,  it  is  worthwhile  recalling  the  Commission's  commitment  in  its  work 
programme:  Generally  speaking  and  allowing  for  the  fact  that  the  ultimate  solution  of  the 
problem  is  probably  not  achievable  in  the  short  term  ,  the  Commission  considers  that  an 
approximation  within  a  rather  narrow  band  (e.g.  two  or  three  percentage  points)  might  be 
sufficient  in the case of the standard rate. Nevertheless, the introduction of a single standard rate 
should not be set aside since this would be the only way of guaranteeing that the tax is entirely 
neutral  and  could  bring  significant  anti-fraud  and  anti-avoidance  benefits.  The question  of the 
level  of  the  standard  rate  must  be  settled  by  means  of  a  political  decision  which  cannot  be 
considered  without  placing  it  in the  much  wider  context  of  overall  tax  revenues  and  without 
taking  account  of  the  European  Union's  general  objectives  and  in  particular  its  global  fiscal 
strategy. From this point of view there is a strong rationale for increasing VAT receipts in order 
to compensate for targeted reductions of non-wage labour costs. 

As to  the  scope  of  the  reduced  rates, which  are the  subject  of  this  report,  the  constraints  are 
exactly the same as for the standard rate. The Commission remains convinced that the simplicity 
of  the  VAT  system,  and  therefore  its  vulnerability  to  fraud  as  well  as  its  effect  on  business, 
depends directly on there being as small  a number  of rates as possible. Therefore,  on  a purely 
technical level, the Commission considers that there should be only one reduced rate and that its 
scope should be defined  restrictively  and according to coherent criteria. It goes without  saying 
that  a reduced  rate  of this nature  would  ideally  have  to  be  compulsory  in  all  Member  States. 
This  rate  could  then  also  be  applied  to  the  bulk  of  items  which  are  currently  exempt  as 
exemptions necessarily hamper the neutrality of VAT. 

As far  as environmental  aspects  of the VAT rate  structure  are concerned,  it  is difficult  to  see 
how regressivity can play a role for justifying  the application  of a reduced VAT rate to certain 
goods or services. However, it is acknowledged that, as VAT influences  the price of goods and 
services, it can contribute to changing consumer behaviour, both in making polluters pay, and in 
encouraging  more  environmentally  friendly  behaviour.  Unlike  "social"  reasons  for  applying 
reduced VAT rates on basic necessities, but which also benefit the rich, fossil fuels, for example 
are just as damaging for the environment whoever uses them. Nevertheless, practical  problems 
of  definition  would  arise.  It  is  not  always  easy  to  categorise  products  and  services  between 
environmental  "goods"  and  "bads",  and  any  more  nuanced  appreciation  of  the  relative 
environmental  advantages  or disadvantages  cannot  easily  be  incorporated  into  a  VAT  system 
which wishes to avoid undue complexity. 

27 

In general,  in the  context  of  further  harmonisation,  various  options  can  be  considered.  Given 
that  widening  the  number  of  reduced  rates  is  not  a  realistic  option  there  are,  in  simple 
arithmetical terms, the following possibilities: 

• 

the present situation of two reduced rates being applied on an optional basis; 

• 

two reduced rates being applied on an compulsory basis; 

• 

the ideal situation of one reduced rate being applied on an compulsory basis; 

•  one reduced rate being applied on an optional basis. 

Making the application of the reduced VAT rate compulsory requires at the same time common 
definitions of the categories of goods and services to which such rate is to be applied. 

Regarding  the  number  of  the  reduced  rates,  the  present  divergence  of  rates  within  the 
Community might plead for  a structure of two rates which would then be applied to separated 
lists  of  goods and  services. As to  the  scope  of  the  reduced  rate(s)  it  seems that  the  currently 
implicit distinction of various categories should be explicitly elaborated and modernised. In all 
these categories the crucial underlying rationale is the regressive character of VAT which in fact 
can only be dealt with by applying a reduced VAT rate in socially "sensitive" sectors. The basic 
problem  is, however,  to  define  the  social justification  and  to  define  the  precise  scope  of  the 
reduced rate. This appears to be relatively simple in the area of health, passenger transport and 
foodstuffs  (and  the  appropriate  agricultural  inputs)  whereas  cultural  activities  are  certainly 
difficult  to distinguish from pure leisure. 

In any event, decisions  on the level of VAT rates are influenced  by the level  of VAT-induced 
distortions that Member States will judge to be acceptable under the new arrangements. 

28 

6 

CONCLUSIONS 

This report  sets  out  to  fulfil  the  reporting  obligation  laid  down  in  Article  12 (4)  of  the  sixth 
VAT  Directive  in  order  to  review  the  scope  of  the  reduced  VAT  rates.  In  fulfilling  this 
obligation the Commission wishes at the same time to provide the Council and the Parliament 
with an adequate assessment of the impact of the present VAT rates structure on the  functioning 
of  the  Single  Market  both  with  a  view  to  the  general  framework  of  the  transitional  VAT 
arrangements  and  regarding  the  forthcoming  changeover  to  the  new  origin-based  common 
system of VAT. 

Based  on  available  information,  the  Commission  believes  that,  as  an  overall  assessment,  the 
present VAT rates structure is not, Community-wide, an obstacle which prevents the transitional 
VAT arrangements from functioning, In general the VAT rate differentials  do not hamper cross-
frontier  purchases but there is evidence that they sometimes impact on consumer decisions in a 
distortive  manner. Retailers increasingly tend to benefit from the existing purchasing potential 
beyond  borders.  Apart  from  specific  regions  and/or  specific  goods  there  have  been  no  really 
significant  broad  Community-wide  distortions  of  competition  or  deflection  of  trade  brought 
about as a result of excessive disparities in VAT rates between Member States. 

The analysis  of the present  VAT rates  structure  and of the  scope  of the reduced  VAT rate in 
particular  reveals,  however,  two  intrinsic  problems  having  certain  distortive  effects  on  the 
competitive  situation  of  taxable  persons  (which,  in  turn,  prevents  final  consumers  from 
benefiting from the Single Market to its full  extent). These are: the optional character of Annex 
H and the lack of common definitions of the categories listed in Annex H. Both aspects can lead 
to  situations  where  the  principle  of  neutrality  of  VAT  is  infringed.  In  this  context  the 
Commission wishes to encourage Member States to consider the possible difficulties  caused by 
these basic problems. 

The review of the various categories of Annex H shows that there are currently disputes over a 
number of categories and the Commission is mindful  that the current wording of Annex H does 
not take account of all new technological developments, which have occurred since its adoption 
in  1992. Annex  H does not  follow  a coherent  and conclusive  approach  which  can  sometimes 
lead to particular difficulties  in certain sectors. Such problems can only be solved  step-by-step 
in  the  various  stages  of  proposals  to  be  made  in  the  context  of  the  introduction  of  the  new 
common system of VAT. 

29 

The Commission and Member States therefore need to develop clearer ideas about what is to be 
achieved by short and long term harmonisation of the scope of the reduced rate of VAT. The 
results of this report strongly suggest the following guidelines: 

•  close approximation of rates is a technical necessity; 

•  the scope for the application of reduced rates should be determined by social considerations 

(in order to offset the sometimes regressive character of VAT); 

•  generally reduced VAT rates are a very imprecise tool for policy making and they should not 

be used as a substitute for direct subsidies; 

•  reduced VAT rates should not touch on the general neutrality of VAT. 

The  Council  and  the  European  Parliament  are  invited  to  express  their  opinion  on  the 
conclusions of this report and the Commission will be pleased to intensify the inter-institutional 
discussion in this respect. 

30 

ANNEX  1: 

EVOLUTION  OF VAT RATES  APPLIED  IN MEMBER  STATES 1994 
TO  1996  (EXCEPT  TRANSITIONAL  RATES  ACCORDING  TO 
ARTICLE 28 (2)) 

Member  State 

Reduced  rates 

Standard  rates 

1994 

1995 

1996 

1994 

1995 

1996 

Belgium 

Denmark 

Germany 

Greece 

Spain 

France 

Ireland 

Italy 

Luxembourg 

Netherlands 

Austria27 

Portugal 

Finland29 

Sweden30 

6 

./. 

7 

8 

6 

5.5 

12.5 

9 

6 

6 

10 

5 

6 

./.. 

7 

8 

7 

5.5 

12.5 

1026 

6 

6 

6 

./. 

7 

8 

7 

5.5 

12.5 

10 

6 

6 

10/12 

5 

10/12 

5/1228 

5/12 

6 / 1 2 / 17 

6 / 1 2 / 17 

12/21 

12/21 

6/12 

20.5 

20.5 

25 

15 

18 

15 

25 

15 

18 

16 

21 

25 

15 

18 

16 

18.6 

20.625 

20,6 

21 

19 

15 

21 

19 

15 

21 

19 

15 

17.5 

17.5 

17.5 

20 

16 

22 

25 

20 

16 

22 

25 

20 

17 

22 

25 

United Kingdom 

8 

8 

8 

17 5 

17.5 

17.5 

25 
26 
27 
28 
29 

30 

Changeover from  18,6% to 20,6% on  1  August  1995. 
Changeover from  9% to 10% on 24 February  1995. 
Member State since  1  January 1995. 
The  12% rate has been introduced with entry into force on 12 July  1996. 
Member  State  since  1 January  1995. A comprehensive  VAT  system  was introduced  in Finland  on  1 
June  1994 only. Finland  (like no other Member  State) is not allowed to apply three reduced  VAT  rate 
and has already been addressed by the Commission on this behalf (sec footnote 5). 
Member State since  1  January 1995. 

31 

ANNEX 2: 

APPLICATION OF REDUCED VAT RATES BY MEMBER STATES TO THE CATEGORIES OF GOODS AND SERVICES 
CONTAINED IN ANNEX H OF THE SIXTH VAT DIRECTIVE [SITUATION 1 APRIL 1997] 

Note: Reduced rates in the sense of Article 12 (3) (a) are printed in bold 

ex = exemption without right to deduct input tax;  0 = exemption with right to deduct input tax 

N° 

Category 

1 

Foodstuffs 

2 

Water supplies 

3 

Pharmaceutical  products 

4 

Medical equipment 

5 

Transport of passengers 

B 

6 

12 

21 

6 

6 

21 

ex 

6 

21 

6 

ex 

DK 

25 

EL 

8 

D 

7 

15 

E 

4 

7 

F 

IRL 

5,5 

20,6 

21 

0 

12,5 

25 

7 

8 

7 

5,5 

ex 

25 

15 

8 

18 

4 

5,5 

0 

16 

20,6 

25 

7 

8 

7 

5,5 

0 

I 

4 

10 

16 

10 

4 

10 

19 

4 

L 

3 

NL 

6 

A 

10 

FIN 

S 

UK 

17 

12 

25 

0 

P 

5 

12 

17 

*> 
j 

6 

10 

5 

22 

25 

17,5 

3 

6 

20 

15 

17,5 

12 

5 

17 

3 

17,5 

20 

5 

22 

ex 

0 

17,5 

0 

0 

0 

0 

25 

25 

ex 

12 

0 

ex 

8 

7 

15 

7 

16 

5,5 

ex 

10 

16 

3 

ex 

6 

ex 

10 

5 

6 

32 

N° 

Category 

6 

Books, newspapers, periodicals 

7 

Admissions 
events; 

to  shows  and  cultural 

broadcasting services 

8 

Royalties due to and services supplied 
by writers, composers, and  performing 
artists 

9 

Social housing 

10 

Agricultural inputs 

11 

Hotel  accommodation 

12 

Admission to sporting events 

B 

6 

ex 

ex 

6 

21 

ex 

6 

21 

6 

12 

6 

12 

21 

6 

6 

ex 

DK 

25 

0 

25 

D 

7 

EL 

4 

E 

4 

F 

2,1 

5,5 

7 

16 

ex 

2,1 

5,5 

20,6 

7 

15 

ex 

4 

8 

18 

ex 

8 

IRL 

12,5 

21 

0 

12,5 

21 

ex 

ex 

7 

7 

5,5 

21 

25 

15 

8 

4 

5,5 

12,5 

7 

7 

25 

20,6 

8 

7 

5,5 

12,5 

I 

4 

19 

4 

10 

19 

10 

19 

4 

10 

4 

10 

L 

3 

NL 

6 

A 

10 

P 

5 

3 

6 

15 

17,5 

10 

ex 

ex 

5 

17 

ex 

UK 

0 

17,5 

FIN 

12 

0 

6 

22 

S 

6 

25 

ex 

25 

ex 

é 

3 

17,5 

10 

20 

17 

ex 

17.5 

3 

17,5 

20 

5 

22 

15 

3 

6 

10 

20 

5 

22 

17 

25 

ex 

25 

17,5 

0 

17,5 

5,5 

12,5 

10 

3 

6 

10 

5 

6 

12 

17,5 

20,6 

ex 

10 

3 

ex 

6 

20 

5 

6 

17,5 

ex 

6 

25 

15 

8 

ex 

15 

8 

7 

16 

7 

16 

33 

N° 

13 

Category 

Use of sporting facilities 

B 

6 

DK 

ex 

D 

ex 

EL 

8 

F 

IRL 

I 

20,6 

12,5 

19 

L 

3 

E 

16 

ex 

NL 

17,5 

6 

ex 

25 

7 

8 

7 

20,6 

ex 

19 

3 

17,5 

14 

Social services 

15 

Services supplied by undertakers and 
cremation services 

16 

Medical and dental care; thermal 
treatment 

17 

Street cleaning, refuse collection and 
waste treatment 

6 

21 

ex 

6 

6 

21 

ex 

21 

A 

20 

ex 

10 

0 

P 

5 

FIN 

12 

ex 

17 

ex 

S 

ex 

6 

ex 

25 

25 

ex 

ex 

UK 

17,5 

ex 

ex 

ex 

ex 

15 

ex 

3 

19 

19 

ex 

20 

ex 

ex 

3 

ex 

17,5 

ex 

10 

ex 

5 

ex 

ex 

4 

3 

17,5 

10 

ex 

22 

25 

17,5 

ex 

0 

ex 

15 

8 

ex 

8 

7 

ex 

7 

16 

7 

20,6 

5,5 

20,6 

25 

ex 

8 

7 

20,6 

21 

ex 

21 

ex 

21 

ex 

34 

ISSN 0254-1475 

COM(97) 559  final 

DOCUMENTS 

EN 

09  06  01 

Catalogue number  :  CB-C0-97-575-EN-C 

ISBN  92-78-26351-6 

Office  for Official  Publications of the European Communities 

L-2985 Luxembourg