Proposal for a Council Regulation (EC) on verification measures, measures relating to the refund system and administrative cooperation measures necessary for the application of Directive 98/xxx/EC
Date: 1998-06-17
Institutions: European Commission
Subjects: VAT, administrative cooperation, single market, tax relief, tax system

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 17.06.1998 
COM(1998) 377  final 

98/0209 (CNS) 
98/0210 (CSS) 

Proposal for a 

COUNCIL DIRECTIVE 

Amending Directive 77/388/EEC 

as regards the rules governing the right to deduct 
Value Added Tax 

Proposal for a 

COUNCIL REGULATION (EC) 

on verification measures, 
measures relating to the refund system 
and administrative cooperation measures 
necessary for the application of Directive 98/xxx/EC 

(presented by the Commission) 

EXPLANATORY  MEMORANDUM 

As  a  result  of  the  changes  made  to  the  common  VAT  system  by  the  transitional 
arrangements,  it  was  possible  to  eliminate,  on  ! January 1993,  the  checks  and 
administrative  procedures  prior  to  or  on  crossing  an  internal  border  of  the  European 
Union,  while  safeguarding  to  the  maximum  the  Member States'  discretion  for 
determining  the  national  VAT  system,  in  particular  by  retaining  a  large  number  of 
options and powers in the Directive. 

The abolition of physical barriers nevertheless placed greater emphasis on the intangible 
obstacles to transnational activities faced by business. 

The wide  variety  of  rules  for  determining  the place  where  a  transaction  is  taxed  and, 
consequently, the place where the tax is deducted or refunded,  and the lack of uniformity 
in  the  way  the  present  system  of  VAT  is  applied,  means  that  the  Single  Market  is 
segmented into fifteen tax areas, creating legal uncertainty for traders.  Thus, traders have 
to know the  law  and the way it  is  applied  in each Member State where they carry out 
taxable  transactions  and  in  the  Member States  where  they  incur  VAT-bearing 
expenditure. 

In  addition,  traders  exploit  these  differences  by  using  clever  tax  accounting,  and  this 
distorts any fairness of competition that might otherwise exist in the Single Market. 

In July  1996 the Commission presented a work programme accompanied by a timetable 
of proposals  for  the introduction  of  a genuine  common  system  of  VAT which will be 
suited to the demands of the Single Market.  Under this programme, Community action 
will be based on three pillars: more uniform  application of the tax, modernisation of the 
tax and a change in the taxation system (place of taxation). 

However, independently of the move to a system of taxation at the place of origin, it is 
now an urgent necessity to modernise the general provisions of the present system and to 
achieve more uniform  application.  This phase has become the  absolute priority  of the 
work programme. 

In  a  working  paper  dated  14 May 1997,  the  Commission  also  indicated  that  VAT 
obligations should be one of the sectors to be covered in the second phase of the SLIM 
initiative (Simpler Legislation  for the Internal Market).  The Commission  felt that there 
was a need  for  immediate  examination  of  simplification  measures which would reduce 
the burdens  on business  in the  short  term,  and  at  the  same  time  pave  the way  for  the 
introduction of the new system of VAT. 

The working  party  set up to  examine  the  subject  identified  the  VAT  refund  procedure 
laid down by the Eighth VAT Directive as one of the subjects which is in urgent need of 
simplification. 

, 

Following  the  work  of  this  group,  the  Commission  report  on  the  SLIM  initiative, 
approved by the Internal Market Council on 27 November Î997, recommends a study of 
how to achieve a radical reform of the existing refund procedures in the Eighth Directive. 

The first section of the present proposal is the outcome of this study.  The objective of the 
proposed measures is to simplify  the procedures enabling taxable persons established in 
the Community to recover the tax in a Member State where they are not established. 

The second  section of the present proposal concerns  expenditure  not  eligible  for  a  full 
deduction of VAT.  This section  forms part of the exercise of modernising  the present 
system  and  ensuring  its  more  uniform  application.  The  objective  of  the  proposed 
measures  is  to  approximate  the  national  rules  that  are  currently  very  divergent  in  this 
area. 

The two sections of the proposal, at first sight  independent  of  one  another,  are in  fact 
inseparable if the neutrality of the tax is to be ensured. 

First of all, if the rules concerning the refund/deduction of the tax paid in a Member State 
where  the  taxable person  is  not  established  were  amended  without  approximating  the 
right to  deduct,  this  would  provide  a  solution  to  existing  situations  of  distortion  of 
competition, but would create new distortions, in particular for suppliers of services, who 
are  in  direct  competition  on  the  market  of  a  given  Member State,  and  who  would  be 
subject to different  deduction rules. 

Example: the services of three accountants, established in three different  Member States 
(A, B and C), supplied to a taxable person established  in Member State D, must  all be 
taxed  in  Member State  D.  However,  under  the  proposed  system,  the  VAT  paid  in 
Member State  D  on  expenditure  on  accommodation,  food,  petrol,  etc.  incurred  when 
visiting  their  clients  is  deductible  in  their  Member State  of  establishment  within  the 
limits  applied  by  that  Member State  (provided  that  the  accountants  have  no  VAT 
identification  in  Member State  D  for  other  activities).  Since  the  non-deductible  VAT 
forms part of the cost of a service, an excessively wide divergence in the deduction rules 
leads to distortions of competition. 

Secondly, since VAT is not fully  deductible under the proposed  expenditure rules, they 
still leave the Member States a margin of discretion.  The change in the refund  procedure 
prevents traders from exploiting any differences  that might still result from this margin of 
discretion, so as not to create situations of unfair competition. 

The two sections of the proposal are described in detail below. 

1.  DEDUCTION OF THE VAT PAID IN A MEMBER  STATE WHERE  THE TAXABLE PERSON 

IS NOT ESTABLISHED 

Introduction 

The Sixth VAT Directive establishes the principle that every taxable person is entitled to 
the  deduction  or  refund  of  VAT,  whatever  the  Member State  where  he  has  incurred 
VAT-bearing  expenditure.  However,  as Community  law  stands  at present,  the taxable 
person  can  exercise  this  entitlement  to  deduction  or  refund  only  in  the  Member State 
where the transaction was taxed. 

The Eighth VAT Directive harmonised, throughout the Community, the arrangements for 
the  refund  of  VAT  to  taxable  persons  established  in  a  Member State  other  than  that 
making the refund.  The main objective of that Directive is to place taxable persons who 
are not established in the Member State where they pay VAT on a similar footing  to the 
taxable  persons  of  that  Member State  who  exercise  their  right  to  deduct  by  directly 
setting off the tax on their periodic returns.  I 

e difficulties connected with the applicafion &ï the Eighth Directive 

In practice, the operation  of  the  Eighth  Directive  refund  procedure  poses  considerable 
problems for both traders and the national administrations of the Member States, 

First, the procedure has given rise to complaints, from traders, and in particular that: 

-  administrative  formalities  are  burdensome  (requests  must  be  made  in  an  official 
language of the country of refund,  documents must be presented by fixed time limits, 
etc.)-  In practice, traders are frequently obliged to use local advisers to complete these 
formalities; 

-  more  and  more Member States  are  failing  to  respect  the time  limit  for  refunds  laid 
down  by  the Directive.  Thus  traders  are compelled  to  pay  the tax  in  advance and 
shoulder the cost over long periods: this can represent a considerable financial burden. 
Uncertainty as to when the refund will be made and, consequently, as to the size of the 
financial burden to be borne creates uncertainty for traders as to the costs to pass on to 
their customers; 

-  national  administrations  apply  the  provisions  of  the  Eighth  Directive  extremely 
literally,  so  that  requests  are frequently rejected  because  of  failure  to  respect  the 
formalities  and traders are given the impression that national administrations wish to 
discourage the use of the refund procedure. 

The burden and the cost of the administrative formalities and the refund period mean that 
taxable persons who are entitled to a refund  of VAT are discouraged from exercising that 
right. 

As  a result,  the difficulties  which  taxable persons  face  in  practice  undermine the very 
principle of the deductibility of the tax and therefore the neutrality of the tax irrespective 
of the Member State of supply. 

Secondly, the refund  procedure causes considerable problems for the competent national 
administrations, since it has proved more difficult  than expected to operate.  Each refund 
request requires a physical intervention (in particular, every invoice and import document 
presented must be stamped and returned within one month) by the administration of the 
Member State  of refund.  The Member States  must  consequently  allocate  a  significant 
number of officers  to the completion of tasks considered to be unproductive; the purpose 
of which  is to  refund  a tax  collected  on  the  national  territory  to  taxable persons from 
other countries. 

Even more important is the lack of effective  verification  as to whether an application  for 
refund  and the amount  to be refunded  are justified,  since  the  administration  possesses 
very little information with which to assess the right to refund. 

The information available allows it to verify only: 

- 

the  applicant's  status  as  a  taxable  person  (on  the  basis  of  certification  by  the 
Member State in which he is established); 

- 

the conformity of the invoice or the import document; 

- 

the correct  application  of  the  limits  to  the right to  deduct  which  are  in  force  in the 
Member State of refund (where the tax was paid). 

However,  the Member State of refund  has no  information  as to  how  the  expenditure  is 
actually divided between activities which are taxed, exempt or outside the scope of VAT 
and as to how the right to deduct is exercised (according to the proportion deductible or 
the actual attribution).  Thus, the Member State is unable to take  account  of the taxable 
person's overall tax situation arid is obliged to take decisions on the basis of  incomplete 
information. 

i 

The Member States are well  aware of this situation: in  1993 the complexity  and cost  of 
the procedure led 11 of the then 12 Member States to ask for a derogation on the basis of 
Article 27  which  would  enable  them  to  introduce  special  measures  for  taxing  certain 
work on movable tangible property and transport services  located  in the territory  of the 
country but directly linked to the intra-Community transport of goods, so that traders did 
not have to have to use the Eighth Directive as a matter of course. 

These  derogations,  authorised by  Council  Decisions,  were justified,by  the  fact  that the 
increasing  use  of 
the  development  of 
intra-Community trade in certain services. 

the  refund  procedures  could 

impede 

The Council  also  amended  the fifteen Commission  proposals  for  a Decision  on  special 
measures  for  the  taxation  of  telecommunications  services,  with  a  view  to  simplifying 
collection of the tax, so that operators did not have to use the Eighth Directive procedure. 

In  view  of  the  foregoing,  it  was  not  unexpected  for  the  SLIM  initiative  to  make  a 
recommendation on the Eighth Directive refund procedure, which was supported by both 
representatives of the national administrations and business. 

The Commission's reaction to the SLIM  recommendation 

It is first of all important to stress that the above difficulties  will be definitively  solved by 
the introduction of the new common system of VAT, as set  out in the work programme 
adopted by the Commission in July 1996. 

Under this new system, based on the principle of a single place of taxation and deduction, 
every  taxable  person  will  be  able  to  deduct  the  input  VAT  in  one  place,  even  if  the 
transaction  was  taxed  in  another  Member State.  Consequently,  the  Eighth  Directive 
procedure will become redundant. 

The Commission has, however, decided to react promptly to the SLIM recommendation, 
while bearing in mind that any legislative initiative in this area can only have a temporary 
nature, pending the entry into force of the new common system of VAT. 

The objective of the present proposal is therefore to improve the operation of the existing 
system  of  VAT  in  the  short  term,  by  simplifying  a  procedure  which  in  the  view  of 
business  impedes  the  operation  of  the  Internal  Market,  while  not  undermining  the 
continuation of the work envisaged by the work programme for the new common system. 

Consequently, certain parts of the proposal will be revised as and when proposals for the 
introduction of the future system are presented. 

The Commission is proposing additional verification measures, the justification  and need 
for  which  will  be  regularly  reviewed,  with  the  sole  object  of  immediately  permitting 
adequate monitoring of the deduction in the absence of satisfactory  cooperation between 
Member States in the area of verification. 

Another consequence is that, were the Council not to adopt the present proposal within a 
reasonable period, the Commission would be obliged to withdraw it so that the Council 
did not have to go on discussing a proposal which could not  achieve its objective  - the 
rapid  simplification  of  existing  procedures -  and  which,  if  adopted  belatedly,  could 
therefore jeopardise the transition to the new common system. 

The principles of the proposed system 

A right to deduct 

The  Commission  takes  the  view  that  the  only  change  which  can  in  fact  significantly 
simplify  the common system of VAT in general, and the refund  procedure in particular, 
is to authorise the taxable person to deduct the VAT paid in a Member State where he is 
not  established,  by  setting  it  off  in his periodic  return  against  the  amount  of VAT  for 
which he is liable in a Member State where he carries out taxable transactions, for which 
the VAT-bearing goods and services are used. 

The purpose of the present proposal is to introduce this right to deduct into Article 17 of 
the Sixth Directive, with the result that the special refund  procedure for taxable persons 
established  in  the  Union  (i.e.  the  procedure  laid  down  by  the  Eighth  Directive)  will 
disappear. 

In  substance,  the  proposed  measures,  which  take  the  legal  form  of  an  amendment  to 
paragraph 3 and the inclusion of paragraph 3a in Article 17, achieve the following result, 
as regards taxable persons established in the European Community: 

•  the taxable person is identified in a single Member State: 

the  VAT  is  deducted  in  that  Member State,  irrespective  of  the  Member State 
where he incurred the VAT-bearing expenditure; 

•  the taxable person is identified in several Member States: 

(a) 

he  is  identified  in  the  Member State  where  he  has  incurred  the 
VAT-bearing expenditure: 

the VAT is deducted  in that Member State (no change as compared with 
the present situation). 

(b) 

he  is  not  identified  in  the  Member State  where  he  has  incurred  the 
VAT-bearing expenditure: 

the  VAT  is  deducted  in  the  Member State  where  he  supplies  goods  or 
services for which the expenditure is used. 

It follows  logically  from  this amendment of Article 17 that the amount of VAT eligible 
for  deduction  will  now  be  determined  according  fo  the  rules  of  the  Member State  of 

establishment, and no longer according to the rules of the Member State which collected 
the tax, as is the case at present. 

In  terms  of  formalities,  this  proposal  requires  taxable  persons  to  present  a  specific 
document, to be attached to their periodic return, on which they enter the VAT amounts 
paid in other Member States  for which  they  are exercising  their right to  deduct.  These 
amounts  are  to  be  broken  down  by  Member State.  A  copy  of  the  invoices  or  import 
documents is to be attached to this specific document in order to provide proof. 

A bilateral refund and compensation system for  debts 

This document contains the information required to operate a refund system between the 
Member States, so that the Member State in which the deduction is made (Member State 
of  deduction)  can  obtain  a  refund  thereof  from  the  Member State  where  it  was  paid 
(Member State of purchase).  The attached proposal for a Regulation deals with this debt 
refund and compensation system, and with the verification  measures to be established by 
the Member States. 

The proposal  for a Regulation provides  for the introduction of a debt compensation and 
refund  system which operates bilaterally between the Member States.  For this purpose, 
each Member State will, every six months, inform each of the other Member States of the 
amount of VAT deducted during the past half year which the Member State of purchase 
is required to refund. 

The  amount  to  be  notified  represents  the  amount  of  VAT  actually  deducted,  i.e.  after 
application  of  the  proportion  when  the  taxable  person  is  engaged  both  in  activities  in 
respect  of  which  VAT  is  deductible  and  activities  in  respect  of  which  VAT  is  not 
deductible,  and  after  the  limits  on  the  right  to  deduct  which  are  in  force  in  the 
Member State of deduction have been applied. 

In this way, any Member State can establish the balance payable to or receivable from the 
other Member States.  These balances are actually paid at a later date, because they may 
still be adjusted as a result of the verifications  laid down by  the Regulation.  However, 
there is provision  for the Member States, by bilateral  agreements,  to  derogate from the 
deadline  laid  down  by  the  Regulation  by  setting  other  deadlines  or,  in  certain 
circumstances, by allowing the balance to be carried over until the following period. 

Verification measures 

Under  the  present  VAT  system,  each  Member State  is  responsible  for  applying, 
monitoring  and collecting  the tax, which goes  directly  into  its national  budget.  One  of 
the basic principles of this system is that the VAT is deducted in the Member State where 
the tax was due and/or paid.  A single Member State is therefore responsible for verifying 
payment and deducting the tax. 

The purpose of the present proposal is to introduce a derogation from the above principle 
for the cases today covered by the Eighth Directive. 

As  a  result,  for  the  transactions  concerned,  the  Member State  of  purchase  will  be 
responsible  for  verifying  that  the  VAT  has  been  paid,  whereas  the  Member State  of 
deduction will be responsible for monitoring the deduction of that tax. 

Like  any  other. verification,  this  should  be  based  on  the  knowledge  which  the  tax 
administrations  have  of  their  taxable  persons, on how  their* reliability  is  assessed,  the 
fraEd-ri.sk  that these taxable persons represent and on thorough and efficient  cooperation 
with the'administrations of  the  other  Member States,  Effective  control  in  the Interna! 
Market requires the establishment of common criteria for assessing the fraud risk that a 
taxable person represents, rather than the routine forwarding of copies of invoices which 
constitutes an additional burden for both taxable persons and administrations.  The cases 
which, on the basis of these common criteria, are identified  as requiring more thorough 
monitoring, would be of interest to all the administrations concerned.  This would enable 
them, as a result of their mutual interest in effective  cooperation, to exploit to the full the 
information and experience they possess. 

Directive  77/799/EEC  on  mutual  assistance  enables  the  Member States  concerned  to 
exchange  any information  they consider  necessary  in  order to  exercise their  respective 
powers  of  inspection.  Past  experience  demonstrates, however,  that  the Member States 
are not yet making full use of the opportunities provided by this Community instrument. 

In view of this experience, and of the special nature of the proposed system, which seeks 
to  improve  the  operation  of  the  present  VAT  system,  the  Commission  is  obliged  to 
provide for additional verification measures to accompany its introduction. 

These  additional  measures  reduce  the  simplifying  effects  of  changing  the  deduction 
system and are only acceptable in the short term.  The length of time for which they are 
applied must be strictly limited to the time required to improve cooperation between the 
Member States. 

The  Commission  will  regularly  examine  the  use  of  these  measures  and  their  practical 
results  for  the  Member States.  For  this  purpose,  the  Member States  are  required  to 
provide the Commission with the necessary information.  The Commission will present 
to  the  Council,  by  the  end  of  the  second  year  in  which  these  measures  are  applied, a 
report  on  whether  they  are  justified  and  necessary  as  part  of  its  monitoring  of  the 
cooperation  between  the Member States  on  verification,  where  necessary  accompanied 
by proposals repealing the said measures. 

As regards the verification measures laid down by the present proposal, it is important to 
bear in mind  the nature of most  of the expenditure  for which refund  requests  are now 
made under the Eighth Directive procedure. 

Because  of  the  rules  for  the  location  of  transactions,  most  of  these  requests  relate to 
general costs, such as hotel and restaurant costs, costs connected with taking part in fairs 
and the vehicle and motor fuel costs of international road transport operators. 

It is therefore unlikely that the proposed  system, under which these amounts will be set 
off against the tax owed by the taxable person, will substantially increase the situations in 
which operators are entitled to high tax credits, which usually require more monitoring 
by the administration. 

Consequently,  it  is  necessary  to  ensure  that  the  verification  measures  proposed 
specifically  for operating the deduction system are not disproportionate to the risks of tax 
losses for the Member States. 

The measures provided for by the Regulation result in several-stage  verification  and for 
each of the stages establish the financial responsibilities of the Member States concerned. 

This phased verification has a great advantage over the present system,  since it does not 
require the administration to take an "immediate  and virtually final" decision,  as  is the 
case today. 

First,  the  administration  of  the  Member State  of  deduction  carries  out  an  initial 
verification  when it receives the periodic return, the specific  document  and its annexes. 
Unlike  the  administration  of  the Member State  of  refund  under the present  system, the 
competent  administration  will  already  possess  more  precise  data  concerning  the  tax 
situation of the taxable person. 

Clearly,  the  amount corresponding  to the adjustments  that  are necessary  following  this 
initial  verification  is  not  included  in  the  amount  of  VAT  which  the  Member State  of 
deduction requires the Member State of purchase to refund. 

Next,  the  Member State  of  deduction  provides  the  Member State  of  purchase  with 
information,  normally  in  electronic  form,  concerning  certain  transactions  for  which  a 
deduction under Article 17(3a) is made. 

When the Member State of purchase detects irregularities relating to the transactions  for 
which  the  deduction  has  been  made,  it  must  inform  the  Member State  of  deduction 
thereof within three months of receiving the information.  In addition, the Member State 
of purchase is not required to refund the amount of VAT in question to the Member State 
of deduction. 

It  is  up  to  the  Member State  of  deduction  to  take  the  recovery  measures  it  considers 
appropriate, particularly in the light of the tax situation of the taxable person in question 
(filing of periodic returns, payment of the tax due, other existing tax debts). 

In  addition,  irrespective  of  the  place  where  the  VAT  was  paid,  the  Member State  of 
deduction  examines  whether  the  deduction  made  is justified,  as  part  of  the  scheduled 
inspection of all the taxable person's activities. 

Lastly,  under the verification  procedure  laid  down  by  this  proposal  there  is  nothing  to 
prevent  the  administrations  from  requesting  information  by  utilising  the  mutual 
assistance Directive procedure. 

in  normal 

Also, the Commission is well aware of the fact that the non-harmonisation of information 
that has to appear on invoices is liable to pose problems.  However, this problem already 
exists 
intra-Community  trade  (supplies/intra-Community  acquisitions, 
intra-Community transport, etc.) the only difference  being, in the present case, that VAT 
is  actually  invoiced  in the Member State of purchase.  The  SLIM  report  also  contains  a 
recommendation  to  study  this  problem.  The  Commission  will  not  fail  to  act  on  this 
recommendation. 

Pending  the  outcome  of  such  work,  the  operation  of  the  proposed  system  requires  a 
minimum  of  flexibility  from  the  Member States.  They  have  to  ensure  that  a  taxable 
person in possession  of an invoice,  which mentions  at least  the  information  required by 
the Sixth Directive, is not prevented from exercising his right to deduct. 

Nevertheless,  an  administration  has  the  right  to  request  from  the  taxable  person  a 
translation of the invoice entries in cases where it is unable to assess the business  nature 
of the expenditure. 

Conclusion 

Introducing the requirement  to present  a specific  document  is justified  because it enables 
all the present obligations laid down by the Eighth Directive to be abolished. 

It can be concluded  that  the present  proposal  considerably  simplifies  recovery  of the tax 
paid in a Member State where a taxable person is not established  and, as a result, puts an 
It  also  simplifies  administrative 
end  to  a  real  obstacle  to  transnational  activities. 
management  for  the  Member States  by  providing  better  opportunities  for  verification  at 
Community  level. 

In legal terms, this change in the system requires: 

-  an amendment  to Article  17 of the Sixth Directive, to include the right to  deduct 
the VAT paid in a Member State where the taxable person is not established,  and 
to  Article 22  of  the  Directive,  as  regards  the  requirement  to  file  a  specific 
document  and its annexes; 

- 

the  bringing  into  force  of  a  Regulation  which  manages  relations  between  the 
Member States  as  regards  the bilateral  compensation  and  refund  system  and  the 
verification  measures; 

- 

the repeal of the Eighth Directive. 

2. 

EXPENDITURE  WHICH  IS NOT ELIGIBLE  FOR FULL  DEDUCTION 

Introduction 

As regards the rules for the deduction of VAT, Article  17(6) states that: 

"Before a period  of four  years  at  the latest  has  elapsed from  the date  of entry  into force 
of  this  Directive,  the  Council,  acting  unanimously  on  a proposal  from  the  Commission, 
shall  decide  what  expenditure  shall  not  be  eligible for  a  deduction  of  value  added  tax. 
Value  added  tax  shall  in  no  circumstances  be  deductible  on  expenditure  that  is  not 
strictly business  expenditure,  such as that on luxuries,  amusements  or  entertainment. 

Until  the  above  rules  come  into force,  Member States  may  retain  all  the  exclusions 
provided for  under their national  laws when this Directive  comes  into force. " 

The  provision  refers  to  expenditure  which,  even  when  incurred  as  part  of  the  normal 
running  of  a  business,  is  often  also  intended  to  meet  private  needs,  because  it  has  the 
characteristics  of private  consumption.  In these  cases,  it  is not  always  easy  to  apportion 
such expenditure between business element  and private element, with the result  that there 
can be a risk of abuse or tax evasion, giving rise to distortions of competition. 

The Member States have solved the problem  in different  ways: 

10 

Most countries (B, DK, EL, E, F, IRL, I, AU, P, FI, S, UK) exclude or limit the right to 
deduct  so  as to  eliminate  or  substantially  simplify  cases where  a distinction  has to be 
made between expenditure relating to the private needs of the taxable person and others, 
and expenditure connected with the economic activities of the taxable person: according 
to the Member States concerned, this has advantages for-the administration and prevents 
or limits tax fraud. 

The  other  countries  (D,  L,  NL)  grant  the  right  to  full  deduction,  in  accordance  with 
Article 17(2), for the expenditure in question or for the most important categories of such 
expenditure, the only exclusion being that which has no business characteristic. 

A  proposal  for  a  Directive  on  this  subject  was  presented  to  the  Council  on 
25 January 1983.1  However,  even though an amending proposal2 was presented to take 
account  of  Parliament's  amendments,  it  was not  possible  to  reach  £ consensus  on this 
proposal.  Since the Council was unable to take a unanimous  decision on this proposal, 
the Commission finally decided  to withdraw  it on 21 November  1996.3  Withdrawal is 
also  the  logical  consequence  of  the  Commission's  adoption  in  July  1996  of  the work 
programme for the introduction of a common system of VAT, suited to the demands of 
the Single Market. 

The difficulties  in the présent situation 

The present situation does not meet the essential requirements of uniformity  of the basis 
of assessment and tax neutrality. 

The taxable persons of a Member State which authorises the full  deduction of the tax for 
all  expenditure,  except  that  which  has  no  business  characteristics,  enjoy  an  advantage 
compared  with  the  taxable  persons  of  a  Member State  where  some  categories  of 
expenditure are excluded from the right to deduct.  This difference  in treatment can lead 
to distortions of competition  in international  trade in goods  and services  in so far  as its 
effects are indirectly passed on to the price of goods and services. 

Although the existence of this diverse treatment is not a new problem, the establishment 
of the Internal Market on  1 January 1993 highlighted these differences  far more sharply 
by bringing national laws and the way they are applied by the Member States into more 
direct competition. 

The Commission therefore  feels it necessary to act on the mandate laid down in Article 
17(6) of the Sixth Directive, and to resume the approximation  of the different  national 
rules which exist at present, while leaving Member States some margin of discretion to 
take account of the specific situation in their country. 

1  OJ C 37,10.2.1983, p.8. 

2  OJC 56, 29.2.1984, p.7. 

3  OJC 2, 4.1.1997, p.2. 

11 

The principles of the proposed system 

It should not be forgotten that the right to deduct is a basic feature of the value added tax 
system.  Consequently, any exclusion from this right is an exception to the rule, which is 
unacceptable unless it is specifically justified. 

Clearly,  therefore,  the proposal  must  be  confined  to  categories  of  expenditure  which, 
even when incurred as part of the normal running  of  a business, usually  contain  some 
element of private and final consumption  at the same time. In general, moreover, there 
can be no  real  verification  of  how  such  expenditure  is  apportioned  between  business 
element and private element, so that risks of abuse or tax fraud are created. 

Such  expenditure  is  that  particularly  relating  to  passenger  cars,  expenditure  on 
accommodation,  food  and  drink,  and  expenditure  on  luxuries,  amusements  or 
entertainment. 

Expenditure relating  to passenger cars must be considered  to refer  to capital goods, the 
non-business  use  of  which  cannot  be  ruled  out,  and  which  above  all  cannot  be  easily 
verified. 

Although  expenditure  on  accommodation,  food  and  drink  can  be  incurred  in  certain 
places and according to certain rules because of the business activity exercised, there is 
no  doubt  that  it  also  has  private  characteristics,  since  it  is  expenditure  which  satisfies 
primary needs. 

Lastly, it should be remembered that the basic principle that the tax charged on goods and 
services  used  for  the  purposes  of  taxed  transactions  is  deductible  means  that  the 
deduction does not apply to expenditure which is not of a strictly business nature, such as 
expenditure  on  luxuries,  amusements  or  entertainment,  in  accordance  with  the  present 
version of Article 17(6). 

Various  systems  have  been  established  to  take  account  of  the  specific  nature  of  such 
expenditure as part of the activity of taxable persons. 

Expenditure on passenger cars 

As  a  rule,  the  normal  deduction  rules  apply  to  the  VAT  on  expenditure  relating  to 
passenger cars. 

However, if difficulties  in verifying  the non-business use of these goods are so great that 
they prevent  a Member State from applying  the normal  deduction  rules  in  practice, an 
optional  system  for  limiting  the  deduction  has  been  established,  enabling  the 
Member States  which  so  wish  to measure  the  non-business  use  of  passenger  cars  in a 
simplified  fashion. 

A  Member State  that  makes  use  of  this  option  may  set  a  maximum  percentage  for 
deduction which may not be lower than 50% of the input tax, this amount corresponding 
to the maximum business use which, it is assumed, has been made of the passenger cars. 

By utilising this option, the administration  has no need  to monitor  the way in which a 
substantial  majority  of  taxable persons  apportion  the private  and  business  use  of  their 
passenger cars in their accounts. 

12 

However, where the percentage of business use is not as high as the percentage of the 
ceiling  for deductible VAT set by the Member State of the deduction, the deduction is 
made according to the normal rules. 

Application of a maximum deductible percentage enables a simplified  distinction to be 
drawn between the input tax: 

- 

- 

linked to the non-business use of cars, i.e. private use but also use for transactions 
outside the scope of VÀT; 

linked to the business use of cars, i.e. for transactions within the scop© of VAT, 
both transactions in respect of which VAT is deductible and exempt transactions 
in respect of which VAT is not deductible. 

Consequently, when the taxable person carries out both transactions in respect of which 
VAT  is  deductible  and  transactions  in  respect  of  which  VAT  is  not  deductible,  the 
proportion  of  input  VAT  linked  to  the  business  use  of  passenger  cars  still  has  to  be 
broken down to determine the VAT attributable to the former and the latter transactions. 

Lastly, when the business use of the goods considered is negligible, the time spent by the 
administrations  on  verification  will  not  be justified  by  the  result.  This  is  why  the 
proposal provides  for total exclusion from the right to deduct  if the business use is less 
than 10%. 

Special consideration is given to taxable persons whose activity consists in the operation 
of  passenger  cars  or  who  rely  on  such  goods  to  engage  in their  activity  (e.g.  taxable 
persons whose economic  activity consists of the sale or hire of passenger  cars, or who 
operate taxis, driving schools, etc.).  In this case, the normal deduction rules are applied, 
but only if any non-business use is negligible, i.e. less than 10%. 

Other expenditure 

As regards  expenditure  on accommodation,  food  and drink,  their  characteristic  of  final 
consumption may justify  exclusion from the right to deduct.  However, such expenditure 
may be caused by the needs of the activity,  e.g. because  it  is  incurred  during business 
travel. This is why a flat-rate limit on the deduction was considered fair, with the flat-rate 
percentage for deduction being set at 50% of the value added tax charged on expenditure 
on accommodation, food and drink. 

However, deduction continues to be entirely ruled out for expenditure that is not directly 
and  strictly  linked  with  the  needs  of  the  taxed  transactions,  i.e.  for  expenditure  on 
luxuries, amusements or entertainment. 

3. 

PRESENTATION OF EACH OF THE PROVISIONS OF ARTICLE 1 OF THE DIRECTIVE 

Ad point 1 

Article 17(6) is repealed. 

13 

5. 

FISHING ZONES 

The vessels referred to in Article  1 of the Protocol shall be authorised to engage in 
fishing  activities in the waters beyond twelve nautical miles from the base lines. 

6. 

ENTERING AND LEAVING THE ZONE 

Vessels  shall  notify  the  Gabonese  Ministry  responsible  for  fisheries  of  their 
intention to enter or leave Gabon's fishing zone at least 24 hours in advance. When 
notifying  their departure,  all  vessels  shall  also  notify  the estimated  catches  taken 
during the time they have spent in Gabon's fishing zone.  This information  should 
preferably be communicated by fax or, for vessels not equipped with a fax, by radio. 

A  vessel  found  to  be  fishing  without  having  informed  the  Gabonese  Ministry 
responsible for fisheries shall be regarded as a vessel without a licence. 

Vessels shall be informed of the relevant fax number and radio frequency when the 
fishing  licence is issued. 

The  Gabonese  Ministry  responsible  for fisheries and the  shipowners  shall  keep a 
copy  of  fax  communications  or  a  recording  of  radio  communications  until  both 
parties have agreed to the final statement of fees due referred to in point 2. 

7. 

ZONES CLOSED TO SHIPPING 

The zones adjacent to oil extraction activities shall be closed to all shipping. 

The  Gabonese  Ministry  responsible  for fisheries shall  notify  the  coordinates  of 
these zones to shipowners when the fishing licence is issued. 

The zones closed to shipping shall also be notified  for information purposes to the 
Delegation  of  the  European  Commission  in  the  Gabonese  Republic,  as  shall  all 
changes  to  these  zones,  which  must  be  announced  at  least  two  months  before 
enforcement. 

8. 

USE OF SERVICES 

Community vessels shall, wherever possible, transship and procure the supplies and 
services they require in Gabonese ports. 

p:\accords\gabon\98-03\en-98.doc 

-14-

Article  17b lays down provisions regarding exclusions from the right of deduction. 

Article  ITb(lXa)  provides  that  the  VAT  charged  on  expenditure  relating  to  passenger 
In  this  case  the 
cars  is  not  deductible  when  their  business  use  is  less  than  10%. 
difficulties  in checking the breakdown between business  and non-business  use would be 
too  great  to justify  the  results. This  provision  is  compulsory  for  all  the  Member States, 
therefore  irrespective  of whether or not a Member State has decided to use the option in 
the first  subparagraph. 

Since  this  exclusion  concerns  transactions  in  respect  of  which  VAT  is  generally 
deductible, the taxable person may  adjust  the deduction when,  in the subsequent  year or 
years» the business  use of the passenger  car  exceeds  10%, since the condition  on  which 
the exclusion is based no longer exists. 

This is an exclusion laid down with a view to simplifying  the administrative  management 
of  the  VAT  system.  Consequently,  when  the  business  use  of  a car  becomes  too  great, 
there is clearly no justification  for retaining the effects  of this exclusion. 

Article  17b(l)(b)  excludes  any right  to  deduct  for  expenditure  on  luxuries,  amusements 
or entertainment. 

It  would  not  seem  appropriate  to  attempt  a  precise  definition  of  what  is  meant  by 
"expenditure on luxuries, amusement or entertainment" under the terms on this Directive. 

It  would  instead  be  preferable  to  ensure  a  consistent  interpretation  on  the  basis  of 
implementing measures.  The Commission would refer,  in this respect, to its proposal to 
amend  the  rules  of  procedure  of  the  VAT  Committee  so  as  to  transform  it  into  a 
regulatory committee. 

Only a few general  indications of what might be covered by these terms should be given 
at the present stage. 

"Expenditure  on  luxuries"  might  include  expenditure  which,  by  its  nature  and  amount, 
can  no  longer  be  considered  normal  operating  expenditure,  e.g.  the  purchase  by  an 
accountant of an ECU 50 000 oriental carpet to decorate his  office. 

"Expenditure  on  amusement  and  entertainment"  would  cover  expenditure  designed  to 
give  (potential)  clients  a  positive  image  of  the  taxable  person  and  his  business  and 
expenditure  defrayed  solely  to  encourage  clients  to  do  business  and  employees  to 
perform  their duties, e.g.  the purchase of  100 tickets  to  a  football  match  for  distribution 
free of charge. 

Article  17c,  introducing  transitional  provisions,  establishes  that  the  new  system  for 
limiting  (he deduction  relating  to passenger  cars  and  to  expenditure  on  accommodation, 
food  and  drink,  and  the  exclusion  from  the  right  to  deduct  for  expenditure  on  luxuries, 
amusements  or  entertainment,  does  not  apply  to  situations  arising  when  the  previous 
legislation  was  in  force  (i.e.-  the  exclusion  from  deduction),  but  only  to  transactions 
effected  after the new system was introduced. 

The  right  to deduct  for  capital  goods  arises when  the  taxable person  acquires  them,  but, 
under  Article  20  of  the  Sixth  Directive,  it  is  adjusted  every  year  during  the  adjustment 
period.  Thus, if the law were changed  to introduce  a right to deduct,  even partial, in the 
case  of capital  goods  the deduction  would  have  to  be  adjusted  on the  basis  of  the  years 
15 

remaining  until  the  end  of  the  adjustment  period:  this  could  have  very  significant 
budgetary effects  for the Member States which did not grant a right to deduct. 

Ad point  3 

The purpose  of extending  the  application  of Article  20(3)  is to  deal with the  eventuality 
of double taxation where a passenger  car which has been  eligible  for  a limited  deduction 
in accordance with Article  17a is resold. 

However,  in order  to  avert  the  risks  of tax  avoidance,  the  amount  of the  adjustment  can 
not  exceed the amount  of tax  obtained by  applying the rate of tax  in  force  for  passenger 
cars to the taxable amount of the resale. 

Without  this measure, tax could be avoided where  a business  car was resold  to a private 
individual  at an  artificially  low price, after  only  a few  months'  use. This measure  limits 
the adjustment  amount to the amount of tax due at the time of the resale, or, insofar  as the 
resale is exempt (e.g. intra-Community supply), to the amount of tax which would be due 
if the resale was not exempt. 

Ad point 4 

Point 4 provides for modifications  to Article 28f. 

Ad point 4 a) 

The  purpose  of  this  amendment  is  to  exclude  from  Article  17(3),  as  amended  by 
Article 28f,  the  principle  of  the  right  to  a  refund  of  the  VAT  paid  in  a  Member State 
where the taxable person is not  established,  in  so  far  as the taxable person  is  established 
in the Community. 

Ad point 4 b) 

New  paragraphs  3a,  3b  and  3c  are  inserted  into  Article  17, as  amended  by  Article  28f: 
this  entitles  taxable  persons  established  in  the  Community  to  deduct  the  VAT paid  in  a 
Member State where they are not  established. 

The first subparagraph of paragraph 3a provides for the principle of deduction. 

The  second  subparagraph  of paragraph  3a specifies  the Member State where  the  taxable 
person  can  deduct  the  VAT,  when  he  is  identified  for  VAT  purposes  in  several 
Member States.  Clearly, this provision  is only  important  if it  is in  fact  the  same  person 
(the same legal entity) that is identified  for value added tax in several Member States. 

Example:  a  taxable  person  has  the  seat  of his  activity  in  Member State  A.  He  also  has 
fixed  establishments  from  which  taxable  transactions  are  effected  in  Member States  B 
and C.  The VAT paid in Member State D, charged on the hotel costs of staff  of the fixed 
establishment  in Member State B, is deductible in Member State B according  to the rules 
in force in that Member State. 

The  first  subparagraph  of  paragraph  3b  contains  the  definition  of  a  non-established 
taxable  person.  This  definition  is the one  laid down by  Article  1 of the  Eighth  Directive 
supplemented  by the rule that Directive 92/111/EEC added to Article  17(4). 

16 

The second  subparagraph  of paragraph  3b contains  a provision  concerning  the  exchange 
rate  to  be  used  to  calculate  the  deductible  VAT.  Clearly,  this  provision  applies  only 
where  either  the  amount  of  VAT  paid  is  indicated  in  the  currency  of  a  country  which 
does  not  use  the  Euro  as  national  currency  (VAT  invoiced  in  dollars),  or  the 
Member State  where  the  deduction  is  made  has  not  introduced  the  Euro  as  its  national 
currency. 

Since  the  use  of  Community  provisions  on  customs  value  is  a principle  familiar  to  the 
common  system  of  VAT,  the  most  appropriate  solution  seems  to  be  to  use  these 
provisions for the application of paragraph 3a. 

Lastly,  the  third  subparagraph  of  paragraph  3b  contains  a  provision  which  is  meant  to 
ensure  that  the  non-harmonisation  at  Community  level  of  the  information  to  be 
mentioned  on  invoices  shall  not  prevent  a  taxable  person  from  exercising  the  right  to 
deduct. 

A taxable person who holds an invoice drawn up according to the rules  applicable  in the 
Member State of purchase cannot be prevented from exercising his right to deduct on the 
grounds  that  this  invoice  does  not  contain  all  the  entries  required  by  the  law  of  the 
Member State of deduction. 

Pending  the examination  of this matter  in line with  the  SLIM recommendation  made on 
this  subject,  the  Member States  must  take  the  necessary  measures  to  ensure  that  the 
administration  of  the  Member State  of  deduction  agrees  that  a  taxable  person  should 
exercise  his  right  to  deduct  when  he  is  in  possession  of  an  invoice  which  mentions  at 
least the information  referred to in Article 22(3)(b). 

Paragraph  3c lays down  that  the  Council  will  adopt  measures  on the  refund  system  and 
the  administrative-cooperation  measures  necessary 
the  deduction 
arrangements of paragraphs 3 a and 3b function  properly. 

to  ensure 

that 

These measures are dealt with in the proposal for a Regulation presented at the same time 
as this proposal for a Directive. 

Ad point 4 c) 

Article  17(4)  of  the  Sixth  Directive,  as  amended  by  Article  28f  thereof,  is  amended  to 
contain  only  references  to  the  refund  procedure  laid  down  by  the  Thirteenth  Directive, 
since any reference to the Eighth Directive procedure has become redundant. 

Ad point 5 

The introduction  of a right to deduct the VAT paid  in a Member State where the taxable 
person is not established requires the introduction of a new obligation in Article 22 of the 
Sixth Directive, as amended by Article 28h thereof. 

In  order  to  operate  the  refund  system  between  the  Member States,  and  for  verification 
reasons, point (d) is added to Article 22(4).  It requires the taxable person who exercises a 
right to deduct  the VAT paid  in  a Member State where  he  is  not  established  to  attach  a 
specific  document to his periodic return. 

17 

In  this  document,  the  taxable  person  indicates,  for  each  Member State,  the  deductible 
amount of tax.  A copy of the invoices or the import documents must be attached to this 
specific document to provide evidence of these amounts. 

The  use  of  a  specific  document  for  these  transactions  means  that  an  unnecessary 
extension  of  the  periodical  return forms  can be  avoided  in  all  cases  where  the  taxable 
person has not, during the tax period,  incurred expenditure  in the Member States where 
he is not established. 

For verification  reasons,  the  document  must  also  contain  a statement  in writing by the 
taxable  person  certifying  that  he  is  not  identified  for  VAT  purposes  in  each  of  the 
Member States where he has paid the VAT for which he is exercising his right to deduct 
by means of the document in question. 

4. 

INDIVIDUAL PRESENTATION OF THE REGULATION'S  PROVISIONS 

Ad Article 1 

This Article defines the Regulation's scope. 

Ad Article 2 

Paragraph 1  defines some of the terms used in the Regulation. 

Paragraph 2 requires Member States to determine the authority or authorities responsible 
for applying this Regulation and to provide the other Member States and the Commission 
with a list thereof. 

Ad Article 3 

Article  3  sets  out  the  verification  measures  to  be  taken  on  submission  of  the  periodic 
return in which the deduction is made. 

Any  irregularity  detected when  this  verification  is  carried  out must be  corrected by the 
Member State of deduction. 

In addition to this correction, where the verification reveals that taxable transactions have 
occurred on the territory of  another Member State, the Member State of  deduction must 
also  inform  the  Member State  concerned  thereof. 
In  such  a  case,  the  conditions 
governing  deduction  under  Article  17(3a)  of  the  Sixth  Directive  are  not  met  and  the 
taxable person in question is no longer considered to be a taxable person not established 
in the Member State of purchase. 

Carrying out this verification  as soon as the return is submitted allows tax administrations 
to react promptly to any irregularities detected  and immediately  to exclude  the VAT on 
these transactions from the system of refund between Member States. 

18 

Ad Article 4 

The first paragraph  lays  down  the  principle  that  the  Member State  of  deduction  is  to 
obtain, from the Member State of purchase,  a refund of  the  amount  of  VAT  deductible 
pursuant to Article 17(3a). 

Any  adjustments carried out as a result of  irregularities detected  during the  verification 
referred to in Article 3 are obviously excluded from the refund amounts. 

The second paragraph lays down that, every six months, each Member State must inform 
all the other Member States of the amount, in Euro, of tax to which it is entitled by way 
of a refund under the first paragraph. 

The information  is to be expressed  in Euro so that the refund  amount to which  a  given 
Member State is entitled can be offset  against  the amount it is  required to refund to the 
other Member State. 

The  third  paragraph  lays  down  that,  as  regards  those  Member States  which  have  not 
introduced the Euro as their national currency, the amount of VAT, in national currency, 
which a Member State may obtain as a refund must be converted into Euro in accordance 
with the Community  provisions  in  force  for  calculating  customs  value  since  the  use  of 
these provisions is a principle familiar to the common system of VAT. 

Ad Article 5 

The information  referred  to  in Article 4  allows  the  calculation,  bilaterally,  of  a balance 
between the Member States. 

However, this balance is provisional since it can still be corrected as a result of applying 
the procedure laid down in Articles 6, 7 and 8. 

Ad Article 6 

The first paragraph  lays  down  the  principle  that  the  Member State  of  deduction  must 
inform the Member State of purchase of certain transactions in respect  of which the right 
to deduct, pursuant to Article  17(3a), is  exercised, namely  those  transactions  which  are 
likely to present a risk of tax evasion. 

In order to enable the Member State of purchase to act quickly, the information  must be 
sent  by  the  15th day  of  the  month  following  the  month  in  which  the  periodic  return, 
together  with  the  specific  document  and  copies  of  invoices  or  import  documents,  is 
submitted. 

To ensure that verification  is effective,  it is made clear that traders should not  know  the 
criteria used to determine the transactions which should be notified,  and that these criteria 
may  be  amended  by  means  of  a quick  and  flexible  procedure  when  the  Member States" 
practical experience reveals that this is necessary. 

For these reasons, the second paragraph of Article 6 lays down  that responsibility  in this 
area  lies  with  the  Standing  Committee  on  Administrative  Cooperation  in  the  field  of 
Indirect Taxation which, in this instance, acts as a "regulatory  committee". 

19 

The third paragraph entitles Member States to lay down additional criteria on the basis of 
bilateral agreements. 

The  fourth  paragraph  requires  Member States  to  supply  the  Commission  with  any 
information  concerning the use of exchanged information  which the Commission might 
deem necessary for drawing up the report referred to in Article 12. 

Ad Article 7 

< 

When  the  information  received  pursuant  to  Article  6  allows  the  Member State  of 
purchase to establish an irregularity in the transaction which has given rise to a deduction 
pursuant  to  Article 17(3a),  that  Member State  must  inform  the  Member State  of 
deduction thereof within three months of receiving the relevant information. 

This provision is more particularly concerned with instances in which the Member State 
of purchase discovers that the transaction in question is fictitious (e.g. fictitious taxable 
person, taxable person who exists, but where the transaction does not correspond to his 
economic  activity),  or  that  the  taxable  person  in  question  is  carrying  out  taxable 
transactions on its territory.  In the latter case, deduction pursuant to Article  17(3a) must 
be refused, even if the expenditure in question was incurred as part of the taxable person's 
economic  activity.  Refusing  deduction  is  an  effective  means  for  the  Member State of 
purchase of compelling the taxable person in question to complete the formalities relating 
to identification, submitting returns and paying the tax. 

By contrast, the mere finding that the tax due on a given transaction has not been paid to 
the Treasury is not enough to cast doubt on the regularity of the transaction giving rise to 
deduction of the tax in another Member State. 

Ad Article 8 

Where  the  Member State  of  purchase  informs  the  Member State  of  deduction  of  any 
irregularities  within  the  stipulated  three  months,  the  amount  in  question  will  not  be 
refunded by the Member State of purchase to the Member State of deduction. 

This  means  in  practice  that  the  financial  burden  of  non-recovery  of  the  amount  in 
question falls on the Member State of deduction. 

However, once the three-month period has elapsed, the Member State of purchase is no 
longer authorised to reduce the amount of tax, for which the Member State of deduction 
is requesting a refund, by setting off the tax connected with irregular transactions. 

Ad Article 9 

The  first  paragraph  lays  down  the  dates  on  which  the  final  balance  between 
Member States is determined. 

If the provisional  balance has  not  yet  been fixed when the  Member State  of purchase, 
within the required  deadline, informs  the Member State of deduction  of an irregularity, 
the amount of tax in question will not be included in the provisional balance. 

20 

However,  if  the provisional  balance  has  already  been  fixed  when  the  Member State  of 
purchase,  within  the  required  deadline,  informs  the  Member State  of  deduction  of  an 
irregularity, the provisional balance must be adjusted accordingly. 

This  is  why  provision  is  made  for  the  balance  to  be  determined  on  30 April  and 
31 October, so  leaving  four months between the end of the period during which returns 
are submitted and calculation of the final balance. 

The second paragraph lays down the date on which the balance must be paid, i.e.  15 days 
after the final balance has been calculated. 

The  third  paragraph  stipulates  that  payment  be  made  in  Euro,  since  the  balance  has 
already been calculated in that currency. 

The  fourth paragraph allows  Member States  to  agree  on other deadlines.  For example, 
two Member States  for which the refund  amounts  are small  might  wish  to  simplify  the 
administrative procedure by, for example, carrying the balance forward until such time as 
it reaches a certain threshold. 

Ad Article 10 

This  Article  introduces  new  powers  for  the  Standing  Committee  on  Administrative 
Cooperation  in  the  field  of  Indirect  Taxation  set  up  by  Article  10  of  Council 
Regulation (EEC) No 218/92 of 27 January 1992. 

All the measures necessary for the implementation of the Regulation will be discussed by 
this Committee, which will serve as a regulatory committee for this purpose.  It is already 
stipulated in Article  10(3) and (4) of Regulation No 218/92/EEC that the Committee may 
act  as  a regulatory  committee  on  certain  matters  relating  to  the  implementation  of  the 
Regulation. 

Ad Article 11 

This  Article  lays  down  that,  if  Member States  enter  into  bilateral  agreements  under 
Articles 6 and 9 of the Regulation, they must inform the Commission thereof. 

Ad Article 12 

This  Article  lays  down  that,  before  the  end  of  the  second  year  of  application  of  the 
additional verification  measures, the Commission will present a report to the Council on 
whether they are justified  or necessary  and on the development  of cooperation  between 
Member States  in the area of  verification,  where  appropriate  accompanied  by proposals 
repealing the additional measures. 

Ad Article 13 

This Article specifies  1  January 1999 as the date on which the Regulation will  enter into 
force. 

21 

Proposal for a 
COUNCIL DIRECTIVE 
amending Directive 77/388/EEC 
as regards the rules governing the right to deduct 
Value Added Tax 

/ 

\ 
3870103 vÇ*sj 

r 

THE COUNCIL OF THE EUROPEAN COMMUNITIES, 

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

Having regard to the proposal from the Commission,1 

Having regard to the opinion of the European Parliament,2 

Having regard to the opinion of the Economic and Social Committee,3 

Whereas the arrangements  for  the refund  of tax to non-established  taxable persons laid 
down by the Eighth Council VAT Directive (79/1072/EEC) of 6 December 19794, as last 
amended by the Act concerning the conditions of accession of the Kingdom of Norway, 
the Republic  of Austria,  the  Republic  of Finland  and  the Kingdom  of  Sweden  and the 
adjustments  to  the  Treaties  on which  the European  Union  is  founded,  in practice pose 
considerable  problems  for  both  business  and 
the  national  administrations  of 
Member States; 

Whereas  the  Commission's  report  on  the  second  phase  of  the  SLIM  initiative 
recommends examination of methods of radically reforming  the arrangements for  refund 
now laid down by the Eighth Directive; 

Whereas  the  only  change  which  can  effectively  make  a  major  simplification  to  the 
common  system  of  VAT  in  general,  and  to  the  refund  procedure  in  particular,  is  to 
authorise the taxable person to deduct the VAT paid in a Member State where he is not 
established, by directly setting it off against the amount of VAT for which he is liable in 
a Member State where he carries out transactions eligible for a deduction; 

Whereas in order to provide for every taxable person  established  in the Community the 
right  to  deduct  the  VAT  paid  in  a  Member State  where  he  is  not  established,  it  is 
necessary in particular to amend Article 17 of the Sixth Council Directive (77/388/EEC) 

1  OJC 

2  OJC 

3  OJC 

4  OJL 331, 27.12.1979, p.ll. 

22 

of  17 May  1977  on  the  harmonisation  of  the  laws  of  the  Member States  relating  to 
turnover taxes - Common system of value added tax: uniform basis of assessment;5 

Whereas  such  amendment  requires  the  introduction  of  a  system  of  refund  between  the 
Member States,  so  that  the  Member State  where  the  taxable  person  is  established  can 
recover  the  amount  of  VAT  deducted  from  the  Member State  where  this  VAT  has been 
paid; 

Whereas,  for  the  requirements  of the refund  and  verification  system,  it  is  appropriate  to 
require  taxable  persons  to  present  a  specific  document  to  be  attached  to  their  periodic 
returns, on  which  they  enter,  for  each  Member State, the  amounts  of  VAT paid  in  other 
Member States  for which they  are exercising  their right  to deduct  and to require them to 
attach a copy of the invoices or import documents to this specific  return; 

Whereas,  on  the  other  hand,  all  the  administrative  formalities  laid  down  by  the  Eighth 
Directive  become  redundant  and  therefore  this  new  requirement  does  not  undermine  the 
objective  of simplifying  the entire procedure  nor the opportunity  to repeal  the current 8th 
Directive; 

Whereas  the  steps  to  be  taken  by  traders  to  recover  the  VAT  in  a  Member State  where 
they are not established  are considerably  simplified; 

Whereas  in  addition  administrative  management  is  simplified  while  providing  the  best 
opportunities  for  verification; 

Whereas  these  changes  are  nevertheless  only  temporary,  since  they  will  become 
redundant  when  the  new  common  system  of  VAT,  based  on  the  principle  of  a  single 
place of taxation and deduction, is introduced; 

Whereas,  with  a  view  to  respecting  the  neutrality  of  the  tax,  it  is  appropriate  for  the 
procedure  for  recovering  the tax paid  in another  Member State  where  the taxable  person 
is not  established  to be  simplified  at  the  same  time  as  the  rules  for  limiting  the  right  to 
deduct are approximated; 

Whereas  the  recommendation  made  in  the  Commission's  report  on  the  SLIM  initiative 
also makes the link between these two  subjects; 

Whereas certain  items of expenditure, even when  incurred  in connection  with the normal 
operation  of a business, are often  also liable to meet private needs and therefore  have  the 
characteristics of final consumption; 

Whereas the apportionment  of such expenditure between business  and private use cannot 
always be accurately verified,  so presenting the risk of abuse or  fraud; 

Whereas,  in  the  present  situation,  the  existing  exclusions  from,  and  limitations  to  the 
right  to  deduct  in  the  Member States  are  very  dissimilar,  and  this  may  be  a  source  of 
distortions of competition; 

5  OJ L  145, 13.6.1977 p.l,  as last amended by Directive 96/95/EC (OJ L 338, 28.12.1996, p.89). 

23 

Whereas this diversity  is not a new problem, but whereas the operation of the Single 
Market since  1993 has made it more obvious  that diversity  can lead to distortions of 
competition in international trade insofar as its effects are passed on to the price of goods 
and services; 

Whereas  the problem  of  the  dual  business  and  private  nature  of  expenditure  and  the 
resulting difficulties  of verification  exist in particular for expenditure on passenger cars, 
accommodation, food or drink, and that on luxuries, amusements or entertainment; 

Whereas,  in  taking  into  account  the different  possibilities  of  intended  use for  business 
needs and the verification  difficulties,  a variety of arrangements must be established  for 
the  above  categories  of  expenditure, but  the normal  deduction  rules  must  apply  for  all 
expenditure for which this Directive does not provide specific rules; 

Whereas, as regards expenditure relating to passenger cars, it is appropriate to provide for 
an  optional  arrangement,  so that  Member States which  so  wish  can  determine  that the 
part  of the non-business  use  of passenger  cars  in  a simplified  manner,  while  leaving a 
certain margin of discretion under this optional arrangement; 

Whereas, as regards expenditure  on accommodation,  food  and drink,  a flat-rate  limit to 
the right to deduction  has been  considered  the most  appropriate  to take account  of the 
dual business and private nature which such expenditure has; 

Whereas,  expenditure  on  luxuries,  amusements  and  entertainment  should  be  excluded 
from  the  right  of  deduction,  given  that  this  expenditure  is  not  strictly  business 
expenditure; 

Whereas the purpose of approximating national laws on the expenditure referred to in this 
Directive is to confirm  the general rules governing the right to deduct resulting from the 
Sixth Directive (77/388/EEC), by limiting all exceptions to those rules solely to the cases 
explicitly considered; 

HAS ADOPTED THIS DIRECTIVE: 

24 

I 
i 

[ 

Article 1 

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

(1)  Article 17(6) is repealed. 

(2)  The following Articles 17a, 17b and 17c are inserted: 

"Article 17a 

Limitations of the right of deduction 

1. 

As regards expenditure relating to passenger cars which cars which are not 
used  solely  for  business  purposes,  Member States  may  provide  that the 
deduction  of  the  value  added  tax  charged  on  such  expenditure  shall  be 
calculated within the limit of a ceiling to be set by the Member States at 

,  not less than 50% of the said tax. 

The  provisions  contained  in  the  above  subparagraph  shall  not  apply  to 
passenger cars which constitute the taxable person*s stock in trade nor to 
those which are strictly necessary for the exercise of the business activity, 
nor  to  the  goods  and  services  connected  with  these  cars,  where  their 
non-business use is less than 10%. 

"Passenger car*' means any road vehicle (including any trailer) other than 
one  which,  by  its  design  and  equipment,  is  intended  solely  for  the 
transport of goods or is intended for industrial or agricultural use or has a 
seating capacity of more than nine persons including the driver. 

"Expenditure  relating  to  passenger  cars"  means  expenditure  on  the 
purchase,  including  under  contracts  to  make  up  work  and  the  like, 
manufacture,  importation,  leasing  or  hire,  use,  modification,  repair  or 
maintenance,  and  expenditure  on  supplies  for  or  services  performed  in 
relation to such vehicles. 

Value  added  tax  charged  on  expenditure  on  accommodation,  food  or 
drink, other than that incurred by a taxable person in relation to the supply 
for consideration by that taxable person of accommodation, food or drink 
shall be deductible at the rate of 50%. 

The  provisions  of  paragraphs  1 and  2  shall  apply  without  prejudice  to 
Article 17(5). 

Article 17b 

Exclusions from the right of deduction 

The following expenditure is excluded from the right of deduction: 

expenditure  relating  to  passenger  cars  as  defined  in  Article  17a(l)  in 
respect of which the business use is less than 10%. 

25 

2. 

3. 

1. 

a) 

(b) 

expenditure on luxuries, amusements or entertainment. 

Article 17c 

Transitional provision 

The provisions referred to in Articles  17a and 17b apply only to the value 
added tax which became chargeable  after  the said provisions  entered  into 
force in that Member State. 

(3)  The following third and fourth subparagraph are added to Article 20(3): 

"The adjustment  referred to in the first subparagraph shall also be applied in the case 
of  the  resale  of  a  passenger  car  in  respect  of  which  the  purchase,  manufacture  or 
importation  had  been  subject  to  Value  Added  Tax  which  the  taxable  person  was 
authorised to deduct in accordance with the first subparagraph of Article  17a(l). 

The  adjustment  referred  to  in  the  previous  subparagraph  may  in  no  circumstances 
exceed  the  amount  of  the  tax  obtained  by  applying  the  rate  of  tax  in  force  for 
passenger cars to the taxable amount of the resale." 

(4)  Article 28fis  modified  as follows: 

a)  The opening sentence of Article  17(3) is replaced by the  following: 

"Subject  to  paragraph 3a,  Member States  shall  also  grant  every  taxable  person  the 
right to the deduction  or refund  of the value added  tax  referred  to in paragraph 2 in 
so far as the goods and services are used for the purposes  of:" 

b)  Paragraphs 3a, 3b and 3c are inserted in Article  17: 

"3a 
In so far  as the goods and services  are used  to make taxed transactions  or 
transactions referred  to in paragraph 3, Member States shall also grant every taxable 
person the right to deduct: 

(a) 

(b) 

value  added  tax  due or paid  in a Member State where that taxable person 
is not established in respect of goods or services supplied or to be supplied 
to him by another taxable person; 

value  added  tax  due  or  paid  in  respect  of  goods  imported  goods  into  a 
Member State where that taxable person is not  established; 

When  the taxable  person  is  identified  for  VAT purposes  in  several  Member States, 
the  right  to  the  deduction  shall  be  granted  in  the  Member State  where  the  taxable 
transactions  or  the  transactions  referred  to  in  paragraph 3  for  which  the  goods  or 
services are used  are carried out.  In so far  as the goods  and  services  are used in the 
general  framework  of the taxable person's  economic  activities  and  it is not  possible 
to  attribute  them  to  taxable  transactions  or  transactions  referred  to  in  paragraph 3, 
the  right  to  deduct  shall  be  granted  in  the  Member State  where  the  taxable  person 
has established the seat of his economic activity. 

26 

For the purposes of applying the previous provision,  $a taxable person not 
3b 
established in the territory of country' shall mean a taxable person who has had in 
that country neither the seat of his economic activity nor a fixed establishment from 
which the goods or services are supplied nor, if no such seat or fixed establishment 
exists, his domicile or normal place of residence, and who has supplied no goods or 
services deemed to have been supplied in that country, with the exception of: 

a)  transport  services  and  services  ancillary  thereto  exempted  pursuant  to 
Article 14(l)(i), Article 15 or Article 16(1) B, C and D; 

b) supplies of goods and services to a person who has been designated as the person 
liable to pay the tax in accordance with Article 21(l)(a); 

c)  supplies of services  in cases where the tax  is due solely  by  the person to  whom 
the services are supplied in accordance with Article 21(l)(b). 

When  the  VAT  which  the  taxable  person  is  authorised  to  deduct  pursuant  to 
paragraph 3a is  expressed in a currency other than that of the Member State where 
the right to  deduct  arises,  and  provided  that  one  of  the  two  States  issuing  these 
currencies  does  not  use  the  Euro  as  national  currency,  the  exchange  rate  shall  be 
determined,  at  the  time  when  the  chargeable  event  takes  place,  according  to  the 
Community provisions in force for calculating the customs value. 

For the purposes of applying paragraph 3a and the first and second subparagraphs of 
this  paragraph,  Member States  shall  ensure  that  a taxable  person  is  not  prevented 
from  exercising his right to deduct when he holds an invoice which contains at least 
all the information listed in Article 22(3)(b)." 

3c: 
The  Council,  acting  in  accordance  with  the  procedure  provided  for  in 
Article  99  of  the  Treaty,  shall  adopt  measures  on  the  refund  system  and  the 
administrative-cooperation  measures  necessary  to  ensure  that  the  deduction 
arrangements of paragraphs 3a and 3b function properly." 

(c)  Article 17(4) is replaced by the following: 

"4.  The refund  of  value  added tax  referred  to  in paragraph 3  shall  be  effected  to 
taxable persons  who  are not  established  within  the  territory  of  the  Community,  in 
accordance  with 
in 
Directive 86/560/EEC. 

implementing 

detailed 

down 

rules 

laid 

the 

The  taxable persons  referred  to  in Article 1 of  Directive 86/560/EEC  shall  also  be 
considered  for the purposes  of  applying  the  said  Directive  as  taxable  persons  who 
are not established in the Community when, inside the territory of the country, they 
have  only  carried  out  supplies  of  goods  or  services  to  a  person  who  has  been 
designated as the person liable to pay the tax in accordance with Article 21(l)(a). 

Directive 86/560/EEC  shall  not  apply  to  supplies  of  goods  which  are,  or  may  be, 
exempted  under  Article 28c(A)  when  the  goods  supplied  are  dispatched  or 
transported by the acquirer or for his account." 

(5)  Article 28h is modified as follows: 

27 

The following point (d) is added to Article 22(4): 

"(d)  In so  far as  the  taxable  person  exercises  a right to  deduct  which  arose under 
Article  17(3a),  the  taxable  person  shall  supplement  the  declaration  by  a  specific 
document which must show the amount of deductions to be made, broken down by 
Member State. 

The taxable person  shall  attach a copy of the invoices  or import  documents  to the 
specific document in order to provide proof of these amounts. 

The  taxable  person  shall  certify  in the  specific  document  provided  for  in  the first 
subparagraph  that  he  has  no  value  added  tax  identification  number  in  the 
Member State where the VAT deductible under Article 17(3a) is due or paid." 

Directive 79/1072/EEC is repealed with effect from 1  January 1999. 

Article 2 

Article 3 

1. 
Member States  shall  bring  into  force  the  necessary  laws,  regulations  and 
administrative provisions in order to comply with this Directive on 1 January  1999. They 
shall forthwith inform the Commission thereof. 

When  Member  States  adopt  these  measures,  they  shall  contain  a  reference  to  this 
Directive  or  shall  be  accompanied  by  such  reference  on  the  occasion  of  their  official 
publication. The methods of making such reference shall be laid down by Member States. 

Member States shall communicate to the Commission the texts of the provisions 

2. 
of national law which they adopt in the field governed by this Directive. 

Article 4 

This  Directive  shall  enter  into  force  on  the  20th  day  following  its  publication  in  the 
Official Journal of the European Communities. 

Article 5 

This Directive is addressed to the Member States. 

Done at Brussels, 

1998 

For the Council 
The President 

28 

Proposal  for a 
COUNCIL REGULATION (EC) 
on verification  measures, measures relating 
to the refund  system and administrative cooperation measures 
necessary for the application of Directive 98/xxx/EC 

(presented by the Commission) 

THE COUNCIL OF THE EUROPEAN UNION, 

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

Having regard to the proposal from the Commission,1 

Having regard to the opinion of the European Parliament,2 

Having regard to the opinion of the Economic and Social Committee,3 

Whereas  amending  the  Sixth  Directive  in  such  a  way  as  to  enable  a  taxable  person  to 
deduct the VAT due or paid in a Member State in which he is not established requires the 
introduction  of  a bilateral  refund  and  compensation  system  in  respect  of  debts  between 
Member States in order to allow the Member State in which, pursuant to Article  17(3a) of 
the Sixth Directive, deduction  is carried out to request a refund  of the amount  in question 
from the Member State in which VAT was due or paid; 

Whereas the practical  operation  of such a debt refund  and compensation  system  requires 
the application  of common rules, in particular with regard to exchange rates, the date on 
which the balance between two Member States is to be determined  and the date on which 
the balance has to be paid to each other; 

Whereas  Member States  may  enter  into  bilateral  agreements  laying  down  special 
provisions  between  contracting  Member  States  which  derogate  from  these  rules  as 
regards  the  deadline  for  payment  of  the  balance  and  the  volume  of  documents  to  be 
transmitted for verification  purposes; 

Whereas  cooperation  between  Member States  in the  area  of  control  has  not  yet  reached 
the  quality  or  extent  needed  to  permit  an  effective  verification  of  the  deduction  made 
pursuant to Article  17(3a) of the Sixth VAT Directive (77/388/EEC); whereas temporary 
provision for additional verification  procedures is therefore  necessary; 

1  OJC 

2  OJC 

3  OJC 

29 

Whereas these additional procedures reduce the simplification  effect  resulting from the 
amendment, by Council Directive 98/xxx/EC of xx/xx/1998, of the rales governing the 
right  to  deduct  the  VAT  paid  in  a  Member State  where  the  taxable  person  is  not 
established; a regular review of the procedures must take place to assess their need and 
justification; 

Whereas the Commission will present to the Council before the end of the second year in 
which these procedures are applied a report on the need and justification  for them and on 
the development of cooperation between Member States in the area of verification, where 
appropriate accompanied by proposals rescinding the additional procedures; whereas, to 
this end, Member States will supply the Commission with the necessary information; 

Whereas  the  Commission,  assisted  by  the  Standing  Committee  on  Administrative 
Cooperation in the field of Indirect Taxation, set up by Article  10 of Council Regulation 
(EEC) No 218/92  of  27 January 1992,  should  be  given  the  power  to  adopt  measures 
implementing this Regulation; 

HAS ADOPTED THIS REGULATION: 

30 

Article 1 

Purpose 

This Regulation establishes the verification procedures, the rules and procedures relating 
to  the  refund  system  and  the  administrative  cooperation  procedures  necessary  for  the 
application of Directive 98/xxx/EC. 

Article 2 

Definitions 

1. 

For the purposes of this Directive: 

"Member State of deduction" means the Member State in which a taxable person 
exercises his right to deduct pursuant to Article 17(3a) of the Sixth Directive; 

"Member State of purchase" means the Member State in which the VAT eligible 
for deduction pursuant to Article 17(3a) of the Sixth Directive was due or paid. 

Each Member State shall notify  the other Member States and the Commission of 

2. 
the authorities appointed for the purposes of applying this Regulation. 

Article 3 

Verification by the Member State of deduction 

1. 
The  Member State  of  deduction  shall,  at  the  time  when  the  periodic  return, 
together  with  the  specific  document  and  copies  of  invoices  or  import  documents,  is 
submitted, carry out an initial verification  to ensure that the limits on the right to deduct 
In 
and,  where  appropriate,  the  deductible  proportion  have  been  correctly  applied. 
addition,  it  shall  check  whether  the  nature  and  type  of  expenditure  gives  rise  to  the 
presumption that the taxable person is carrying out taxable transactions on the territory of 
the Member State of purchase for which he is liable to pay tax. 

2.  Where irregularities are detected, the Member State of deduction  shall  forthwith 
carry out the necessary adjustments. 

3.  Where the Member  State of deduction  considers  that  expenditure  shown by the 
taxable person indicates that taxable transactions are being carried out on the territory of 
the Member State of purchase, the Member State of deduction shall immediately  inform 
that Member State thereof. 

31 

Article 4 

Compensation between Member States 

1. 
The Member State of deduction has the right to obtain from the Member State of 
purchase a refund  of the amount of VAT deducted, with due account being taken of the 
adjustments resulting from the verification referred to in Article 3. 

2. 
Each Member State shall inform  the other Member States of the total amount, in 
Euro, of the VAT to be refunded  pursuant to paragraph  1.  This shall be done not later 
than 31 July of each year in respect of VAT deducted in returns submitted during the  first 
half of the year in question, and not later than 31 January of each year in respect of VAT 
deducted in returns submitted during the second half of the previous year. 

The exchange rate shall be determined on 31 January and on 31 July of each year, 
3. 
as  appropriate,  in  accordance  with  the  Community  provisions  in  force  for  calculating 
customs value. 

Article 5 

Provisional balance 

On the basis of the information transmitted pursuant to Article 4(2), Member States shall, 
on  31  January  and  31  July,  bilaterally  decide  the provisional  balance  between  refund 
amounts payable and refund amounts receivable. 

Article 6 

Exchange of information 

1. 
The Member State of deduction shall inform the Member State of purchase of the 
taxable  transactions  that  may  present  a  risk  of  evasion  in  respect  of  which  VAT  is 
deducted  pursuant  to  Article  17(3a) of the  Sixth  Directive.  Such information  shall be 
sent  not  later  than  the fifteenth day  of  the  month  following  the  month  in  which  the 
periodic  return,  together  with  the  specific  document  and  copies  of  invoices  or import 
documents, is submitted. 

The  criteria  for  selecting  the transactions  that  have  to  be notified  shall  be laid 

2. 
down in accordance with the procedure provided for in Article 10. 

3. 

However, Member States may agree bilaterally on additional criteria. 

Member States shall supply the Commission with any information concerning the 
4. 
use made of information  exchanged which the Commission deems necessary for drawing 
up the report provided for in Article 12 below. 

32 

Article 7 

Verification by the Member State of purchase 

Within  three  months  of  receiving  the  information  referred  to  in  Article  6,  the 
Member State of purchase shall inform the Member State of deduction of the cases where 
it has detected irregularities as a result of which it has established either that the taxable 
transaction  was fictitious or that  the  transaction  was  carried  out  as  part  of  the  taxable 
person's taxable activities on its territory. 

In such situations, the taxable person may not exercise the right to deduct laid down by 
Article 17(3a) of the Sixth Directive. 

Article 8 

Time limit for  modifying the provisional balance 

1. 
Provided that the three-month  deadline  referred  to  in Article  7 is  met,  the  VAT 
amount  relating  to  transactions  in  respect  of  which  the  Member State  of  purchase  has 
detected  irregularities  shall  be  excluded  from  the  amount  which  the  Member State  of 
deduction can obtain as a refund pursuant to Article 4. 

Once  the  three-month  deadline  referred  to  in  Article  7  has  passed,  the 
2. 
Member State of deduction may no longer request a change in the amount to be refunded. 

Article 9 

Payment of the balance between Member States 

1. 
The final balance  shall  be  determined  on  30 April  and  31 October.  Where  the 
provisional  balance  has  already  been  determined,  it  shall  be  adjusted  by  setting  off 
against  it the  VAT  relating  to  any  irregularities  detected  on  the basis  of  the procedure 
provided for in Articles 6 and 7. 

2. 
The final balance that a Member State must refund to another Member State shall 
be paid not later than 15 May in respect of final balances determined on 30 April and not 
later than 15 November in respect of final balances determined on 31 October. 

3. 

Payment of the balance shall be made in Euro. 

4. 
However, Member States may, by bilateral agreement, derogate from this Article. 
They may, inter alia,  agree on a different  deadline  for payment  of the balance or allow 
payment of the balance to be carried forward in certain circumstances. 

33 

Article 10 

Implementing measures 

1. 
The  measures  necessary  for  the  implementation  of  this  Regulation  shall  be 
adopted  by  the  Commission  in  accordance  with  the  procedure  provided  for  in  Article 
10(3) and (4) of Council Regulation (EEC) No 218/92 of 27 January 1992. 

2. 
To  this  end,  the  Commission  shall  be  assisted  by  the  Standing  Committee  on 
Administrative Cooperation in the field of Indirect Taxation set up under Article 10(1) of 
that Regulation. 

Article 11 

Communication of bilateral measures 

Member States shall inform  the Commission of any bilateral agreements entered into in 
the fields of Articles 6 and 9. 

Article 12 

Report 

The  Commission  shall  present  to  the  Council,  before  the  end  of  the  second  year  of 
application of the verification measures referred to in Article 6 and 7, a report on the need 
and justification  for them and on the development of cooperation between Member States 
in  the  area  of  verification,  where  appropriate  accompanied  by  proposals  repealing  the 
said measures. 

Article 13 

Final provisions 

This  Regulation  shall  enter  into  force  on  the  twentieth  day  following  that  of  its 
publication in the Official  Journal of the European Communities. 

It shall apply from 1  January 1999. 

This  Regulation  shall  be  binding  in  its  entirety  and  directly  applicable  in  all 
Member States. 

Done at Brussels, [date] 

For the Council 
The President 

34 

ISSN 0254-1475 

COM(98) 377 final 

DOCUMENTS 

EN 

09  01  06 

Catalogue  number  :  CB-CO-98-387-EN-C 

ISBN  92-78-37193-9 

Office  for Official  Publications of the European  Communities 

L-2985  Luxembourg 

as"