Proposal for a Council Directive amending, with regard to the level of the standard rate, Directive 77/388/EEC on the common system of value added tax
Date: 1998-11-30
Institutions: European Commission
Subjects: VAT, basis of tax assessment, distributive trades, provision of services, tax exemption

COMMISSION OF THE EUROPEAN  COMMUNITIES 

Brussels, 30.11.1998 
COM(1998) 693  final 

98/0331 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

Amending, with regard to the level of the standard rate, Directive 77/388/EEC 
on the common system of value added tax 

(presented by the Commission) 

•»3rç 

EXPLANATORY  MEMORANDUM 

1.  The purpose of this proposal  is to enable the Council to take a decision  concerning 
the level of the minimum  standard rate, as required by Community legislation  in the 
field of value added  tax (VAT).1  This decision  is necessary  in order to consolidate 
the  functioning  of  the  internal  market  from  a  tax  standpoint,  both  under  the 
transitional  arrangements  currently  in  force  and  with  a  view  to  the  definitive 
arrangements for the common system of VAT. 

2. 

In the context of its work programme for the introduction of a new common system 
of  VAT  for  the  single  market2  and  in  its  report  on  rates,3  the  Commission 
emphasised  the  importance  of  approximating  VAT  rates  within  a  harmonised 
structure  - which  was  necessary  in  any  event  - in order  to  enable  a common  VAT 
system  to be  introduced.  The degree  of harmonisation  required  must  be  assessed, 
both at present and in the future,  in the light of what is deemed necessary to prevent 
distortions  of  competition  which  would  be  detrimental  to  the  Community  as  a 
whole.  One  of  the  main  characteristics  of  VAT  is  that  it  should  be  neutral  with 
regard  to  the  conditions  of  competition.  Preserving  the  possibility  of  applying 
excessively  divergent  rates  in  different  Member States  might  jeopardise  this 
neutrality  and  influence  the  location  of  businesses;  it  would,  therefore,  be 
inconsistent with the very principles of the single market. 

3.  Consequently,  this  proposal  is  aimed  at  paving  the  way  for  the  harmonisation  of 
rates that  is necessary  in  the context  of the existing  VAT  system  and,  at the  same 
time, preparing  the next  steps towards a gradual  approximation  of rates  in order to 
permit the introduction of the common VAT system.  It covers only the level of the 
standard rate. 

4.  At present,  the transitional  arrangements  contained  in Community  VAT  legislation 
provide  for  harmonisation  of the number  and  level  of VAT rates.  That  constitutes 
the  degree  of  harmonisation  which  the  Member States  had  already  recognised  as 
being  essential  to  the  functioning  of  the  transitional  arrangements.  Under  these 
transitional  arrangements,  Member States  must  set  the  standard  rate  of  VAT  at  a 
minimum of 15%. 

5.  Article 12(3)(a) of the Sixth VAT Directive lays down that, on a proposal from the 
Commission  and  after  consulting  the  European  Parliament  and  the  Economic  and 
Social Committee, the Council will decide unanimously on the level of the standard 
rate to be applied after 31 December 1998. 

Sixth Council Directive 77/388/EEC of  17 May 1977, as last amended by Council Directive 98/80/EC 
of 12 October 1998. 
COM(96) 328 final, 22.7.1996. 
Report  from  the  Commission  to  the  Council  and  the  European  Parliament  in  accordance  with 
Article  12(4) of the Sixth Council Directive, COM(97) 559 final,  13.11.1997. 

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6.  This proposal  follows  the same line of reasoning as the  1995 Commission  proposal 
on  the same subject.4  The situation  has  not  fundamentally  changed  since  then.  In 
1990, the Council  had  accepted  the Commission's  objective  of preventing  a  further 
widening  of  the  gap  between  the  standard  rates  applied  by  the  Member States. 
However, it confined  itself to laying down a legally binding minimum rate of  15%, 
although  it  did  annex  to  this  decision  a  declaration  containing  a  political 
commitment  to avoid, during the period  of application  of the Directive, an increase 
in  the  span  of  10 percentage points  between  the  lowest  and  highest  standard  rates 
applied in the Community. 

7. 

8. 

In practice, the level of the standard  rate varies between  15% and  25%.  A rate of 
15%  is  applied  in  one  Member State  (L),  while  a  rate  of  25% is  applied  in  two 
Member States (DK and S). 

In its report to the Council  and Parliament  on the scope of reduced VAT rates,3 the 
Commission  concluded  that,  overall,  the  present  structure  of  VAT  rates  does  not 
constitute  an  obstacle,  within  the  Community  area,  to  the  functioning  of  the 
transitional  VAT  arrangements.  There  is, however,  evidence  that  they  sometimes 
have an impact on consumer choices, thereby causing distortions.  Countries such as 
Austria  and  Belgium  are  particularly  exposed  to  this  phenomenon  on  account  of 
their  geographical  location.  Retailers  endeavour  more  and  more  to  exploit  the 
purchasing  potential  beyond  their  borders.  However,  except  where  some  specific 
geographical  areas or goods are concerned, there has been no  significant  distortion 
of competition on a macro-economic  level within the Community  or any  deflection 
of  trade  caused  by  excessive  disparities  in  VAT  rates  between  Member States. 
These findings show that  increasing disparities  in Member States' normal rates can 
always, in principle, give rise to structural imbalances and distortions of competition 
in certain branches  of economic  activity.  Moreover,  the introduction  of the  single 
in  different 
currency  could  accentuate  existing  problems. 
Member States will be more transparent  and it will be  easier to  gauge the  level  of 
the VAT rates applied.  The resulting situation will also make it more necessary than 
ever to harmonise rates in the single market. 

Prices  charged 

9.  A proposal on the level of both the standard rate and reduced rates will, therefore, be 
required.  However,  for  technical  reasons,  such  a  proposal  cannot  be  presented 
before  1999. 

COM(95) 731 final, 20.12.1995. 

10.  In  the  light  of  both  the  findings  of  the  above-mentioned  Commission  report  and 
experience in the Community to date, it is important to ensure that, in the meantime, 
the  degree  of  harmonisation  already  achieved  is  at  least  maintained,  thereby 
ensuring  that  the transitional  arrangements  continue  to  function  as  satisfactorily  as 
possible. 

11.  Where the standard  rate is concerned,  although  the disparities  in the rates currently 
in  force  allow  the  single  market  to  function  more  or  less  satisfactorily  under  the 
present  tax  system,  laying  down  rules  on these  existing  rates  will  provide  an  even 
stronger  guarantee  in  this  respect  by  preventing  major  distortions.  The  logical 
conclusion to be drawn from these findings is that the risk of widening disparities in 
the  levels  of  the  standard  rate  applied  by  the  Member States  must  be  avoided  by 
establishing  a  band  which  lays  down  a  minimum  and  maximum  level  for  the 
standard rate. 

12.  The Commission  has, therefore,  concluded  that it is appropriate  to propose another 
rate  band,  which  is  the  only  instrument  reflecting  the  political  agreement  of  the 
Council  in  1996.  Accordingly, the lower limit of the standard  rate band is fixed at 
15% and the upper limit at 25%. 

Comments on the Articles 

Article 1 

In the first paragraph,  it  is proposed  that  the  present  level  of  the  standard  rate  of  value 
added  tax  in  the  Member States  be  fixed  at  between  15%  and  25%  as  from 
1 January  1999.  This paragraph  proposes that the existing range of  standard  VAT rates 
in the Member States should not be extended  further. 

The second paragraph  suggests that the minimum  and maximum  levels proposed  for the 
standard  rate should not the regarded  as definitive.  They will be reviewed, on the basis 
of a proposal from the Commission, by 31 December 1999. 

The  third  paragraph,  on 
Directive 77/388/EEC. 

Articles 2 to 4 

the  reduced  rate(s),  does  not  alter  the  wording  of 

These Articles lay down implementing measures for the Directive. 

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Proposal for a 
COUNCIL DIRECTIVE 
Amending, with regard to the level of the standard rate, Directive 77/388/EEC 
on the common system of value added tax 

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  Article  12(3)(a)  of  Council  Directive 77/388/EEC4  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,  as  last  amended  by 
Directive 98/80/EC5 lays down that the Council shall decide on the level of the standard 
rate to be applied  after  31 December  1998; whereas the standard rate of value added tax 
is fixed by each Member State as a percentage of the taxable amount and is the same for 
the  supply  of  goods  and  for  the  supply  of  services; whereas  from  1  January  1993 until 
31 December  1998, this percentage may not be less than  15%; 

Whereas experience under the existing taxation system has shown that the standard rates 
of  value  added  tax  currently  in  force  in  the  various  Member States,  combined  with  the 
safeguards built into that system, have ensured that the transitional system of value added 
tax  has,  on  the  whole,  functioned  satisfactorily;  whereas  widening  disparities  in  the 
standard rates of value added tax in the various Member States could, on the other hand, 
create  a structural  imbalance  in  various business  sectors; whereas  the  existing  range of 
standard  rates  of  value  added  tax  applied  in  the  various  Member States  leaves 
Member States  considerable  leeway  in  fixing  the  level  of  the  standard  rate;  whereas, 
consequently, a more extensive adjustment  to standard rates of value added tax would not 
be appropriate at present; 

4O JL  145,13.6.1977, p. 1 
5 OJL 281,  17.10.1998, p. 31 

Whereas, however, the Commission report on rates highlighted the fact that distortions of 
competition  exist  and  are  likely  to  be  accentuated  by  the  introduction  of  the  single 
currency; whereas the period  of application of the standard rate should be limited to one 
year  in  order  to  enable  the  Council  at  a  later  stage  to  decide  on  the  levels  of both  the 
standard rate and reduced rates, 

HAS ADOPTED THIS DIRECTIVE: 

Article 1 

Article  12(3)(a) of Directive 77/388/EEC is replaced by the following: 

"a)  The  standard  rate  of  value  added  tax  shall  be  fixed  by  each  Member State  as  a 
percentage of the taxable amount  and  shall be the same for  the supply  of goods and  for 
the  supply  of  services.  From  1 January  1999  until  31  December  1999, this  percentage 
may be no lower than  15% and no higher than 25%. 

On  the  basis  of  a  proposal  by  the  Commission  and  after  consultation  of  the 
European Parliament,  the Council  shall decide  unanimously  on the level of the standard 
rate to be applied after 31 December 1999. 

Member States may also apply either one or two reduced rates. These rates shall be fixed 
as  a percentage  of the taxable  amount  which  may not  be  less  than  5% and  shall  apply 
only to supplies of the categories of goods and services specified in Annex H." 

Article 2 

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

When  Member States  adopt  these  provisions,  these  shall  contain  a  reference  to  this 
Directive  or  shall  be  accompanied  by  such  reference  at  the  time  of  their  official 
publication. The procedure for such reference shall be adopted by Member States. 

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

2. 
domestic law which they adopt in the field covered by this Directive. 

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Article 3 

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

Article 4 

This Directive is addressed to the Member States. 

Done at Brussels, 

For the Council 
The President 

ISSN 0254-1475 

COM(98) 693 final 

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