Opinion of the Economic and Social Committee on the 'Proposal for a Council Directive amending Directive 77/388/EEC as regards the possibility of applying on an experimental basis a reduced VAT rate on labour-intensive services'
Date: 1999-05-26
Institutions: European Economic and Social Committee
Subjects: VAT, VAT rate, fight against unemployment, labour force, moonlighting

C 209/20

EN

Official Journal of the European Communities

22.7.1999

Opinion of the Economic and Social Committee on the ‘Proposal for a Council Directive
amending Directive 77/388/EEC as regards the possibility of applying on an experimental basis a
reduced VAT rate on labour-intensive services’ (1)

(1999/C 209/06)

On 31 March 1999 the Council decided to consult the Economic and Social Committee, under Article 99
of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was
responsible for preparing the Committee’s work on the subject, adopted its opinion on 5 May 1999. The
rapporteur was Mr Lustenhouwer.

At its 364th plenary session (meeting of 26 May) the Economic and Social Committee adopted the
following opinion by 108 votes to two, with four abstentions.

1. General comments

1.4. Moreover, the Commission states that the proposal is
underpinned by the fact that a reduced VAT rate will result
in lower consumer prices and thus stimulate demand for
labour-intensive services.

1.1.
The Committee welcomes the proposal and is pleased
that the Commission has heeded so swiftly the European
Council’s call (11 and 12 December 1998) for such a proposal.

1.2.
The proposal satisfies the similar request made by the
Committee in its opinion on the European employment
summit (2). As the Committee indicated at that time, the
employment climate is the reason some Member States want
to be allowed to set a reduced VAT rate as a means of
creating jobs. Moreover, the Commission has indicated that
the proposal also reflects the desire to achieve greater balance
between taxation on the labour factor and taxation on other
(production) factors.

2. Specific comments

2.1.
The Commission has opted for a system whereby the
Member States can request Council authorisation to apply —
under certain strict conditions — a reduced VAT rate on
labour-intensive services which are not currently listed in
Annex H of Regulation 77/388/EEC. The Council can only
give such authorisation unanimously, and for a fixed period,
i.e. from 1 January 2000 until 31 December 2002 at the latest.

According to the Commission, an important conse-
1.3.
quence of the introduction of a reduced VAT rate in these
labour-intensive sectors will be that it will help to combat the
black economy, since it will considerably narrow the price
differential between undeclared and declared labour. The ESC,
which recently called for renewed efforts at Community and
national level to combat the black economy (3), feels therefore
that the Commission proposal is worthy of support from this
perspective too. Although the impact on job creation will
probably be limited, moving labour out of the ‘black’ economy
into the ‘white’ economy is in itself sufficient reason to endorse
the proposal.

(1) OJ C 102, 13.4.1999, p. 10.
(2) OJ C 355, 21.11.1997.
(3) Commission communication on undeclared work — OJ C 101,

12.4.1999.

Indeed,

The Committee endorses this approach.

2.2.
it
enables the Member States to use this option where the
employment climate and the specific situation in the relevant
sectors offer the prospect of implementing such an instrument
effectively. However, any possible benefits must be carefully
assessed in each individual case against additional adminis-
tration and monitoring costs, and any distortions of compe-
tition. It should also be remembered that the resulting tax
shortfall will have to be made up either by raising taxes
elsewhere or by means of appropriate expenditure cuts. The
Committee therefore feels it is important that, prior to drawing
up the list of services to which a reduced VAT rate can be
applied, the Member States should consult employer and
employee representatives in the sectors concerned, and listen
to their version of the possible effects of such a measure. The
Committee feels that the optional nature of the approach —
subject to the strict conditions set out below — as opposed to
a blanket implementation of the system, makes a more flexible,
targeted implementation possible. Moreover, the safeguard
provided by the unanimous decision-making process would
prevent it from being applied in an undesirable way.

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Official Journal of the European Communities

C 209/21

2.2.1.
The Commission imposes strict conditions on the
types of services to which a reduced VAT rate can be applied.
The Committee believes that these restrictions are wholly
warranted. Indeed, job creation will be particularly successful
if the services concerned are of a labour-intensive nature, and
the VAT rate has a direct impact on the final price the
consumer has to pay. By limiting these services to local
services, distortions of competition can be largely prevented
(although substitution effects can never be ruled out com-
pletely, and there may be some limited cross-border impact in
border regions), and the operation of the single market will
not be hampered. With reference to distortions of competition,
the Committee calls on the Member States to ensure that the
tax discrepancies which currently exist in some Member States
between private sector firms and non-profit sector activities
do not grow even further with the introduction of a reduced
VAT rate.

2.2.2.
The Committee realises that it will always be possible
to argue about what constitutes a labour-intensive service, and
how the expression should be interpreted. There are no
hard-and-fast criteria, although it clearly refers to services
where wage costs account for the lion’s share of the final price
paid by the consumer. Accordingly, the Committee feels that
services of a social nature or which fulfil an important role in
the community should not be excluded from the services to
which a reduced VAT rate can be applied. Services such as care
for the elderly, handicapped persons and children, and those
of an environmentally-friendly nature, for example, should not
be excluded from the scope of this instrument. In this regard,
the unanimity requirement in the Council decision-making
process could also ensure there is a realistic, socially-useful
interpretation of the term.

2.3.
The Committee endorses the fact that Article 1(b) of
the proposal makes certain requirements of the Member States
who wish to introduce such a measure. When applying,
Member States must be able to say what impact they expect
the measures to have on job creation, and what back-up
measures they might
introduce to prevent distortions of
competition, for example.

2.4.
Article 1(c) introduces a corrective mechanism about
which the Committee has some reservations. Under this
mechanism, the Council, acting by qualified majority and on a
proposal from the Commission, would be able to withdraw
the derogation from the standard VAT rate if distortions of
competition should arise. Whether this corrective mechanism
is really necessary is a moot point. The ‘experimental’ appli-
cation of the reduced VAT rate will only, in the first instance,
be possible for three years, which is a very limited period, thus
making significant distortions of competition unlikely. All

things being equal, the Committee concludes that the Com-
mission was right to include this corrective mechanism. Some
monitoring to prevent or counter serious distortions of
competition is called for here, as it is not possible to foresee
all the effects. Bearing in mind the need for legal certainty for
the firms and associations which will be able to apply the
reduced VAT rate from 1 January 2000,
the Committee
wonders whether it should not be possible to correct the list
to include other reduced VAT rated activities or to delete
certain activities within a fixed deadline, i.e. 1 January 2001.
Any distortions of competition, whether domestic or in border
areas, should in any case have materialised after a year.

2.5.
Article 1(d) requires the Member States to approve the
application of a reduced VAT rate, and to prepare a detailed
assessment report by October 2002 at the latest. Since June
2002 would appear to be a more appropriate deadline, in view
of the time needed to draft a definitive regulation for this area,
the Committee feels that
the proposal should take into
account the impact on Member State budgets. By bringing the
budgetary impact into the equation, it will be possible to get
an idea of the effectiveness of the measure in terms of the cost
per job created. Moreover, the Committee wishes to see the
Member States’ assessment reports, and to be consulted before
the Commission and the Council reach their conclusions in
the future.

3. Conclusions

In conclusion, the Committee generally endorses the Com-
mission proposal, which takes on board the Committee’s
conviction that use of the VAT rate should also be an option
in the fight against unemployment. It also meets the calls from
numerous craft industry and SME organisations for a weapon
to combat the black economy. It is of course possible to level
several criticisms at this proposal. As mentioned earlier, the
interpretation of ‘labour-intensive’ is open to criticism and it
is not always fully clear which services are of a mainly local
nature; there could be apprehension about the impact in
border regions, and scepticism about the job-creation impact
of the measure, etc. All these criticisms were expressed in the
debate which preceded the presentation of the proposal.
Nevertheless,
the Committee concurs with the European
Council’s view that the need to stimulate employment is so
great that no stone should be left unturned. Consequently, the
proposed measure deserves the benefit of the doubt and will
have to prove itself as an experiment.

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Official Journal of the European Communities

22.7.1999

The Committee therefore calls on the Council to adopt the
proposal as soon as possible, so that it can enter into force on

1 January 2000 [cf. Article 2(1)] as planned.

Brussels, 26 May 1999.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

Opinion of the Economic and Social Committee on:

— the ‘Proposal for a Council Directive amending Directive 91/440/EEC on the development of

the Community’s railways’,

— the ‘Proposal for a Council Directive amending Directive 95/18/EC on the licensing of railway

undertakings’, and

— the ‘Proposal for a Council Directive relating to the allocation of railway infrastructure
capacity and the levying of charges for the use of railway infrastructure and safety
certification’ (1)

(1999/C 209/07)

On 19 October 1998 the Council decided to consult the Economic and Social Committee, under
Article 71 of the Treaty establishing the European Community, on the above-mentioned proposals.

The Section for Transport, Energy, Infrastructure and the Information Society, which was responsible for
preparing the Committee’s work on the subject, adopted its opinion on 19 May 1999. The rapporteur
was Mr Decaillon.

At its 364th plenary session (meeting of 26 May 1999) the Committee adopted the following opinion by
80 votes to 15, with 14 abstentions.

1. Preliminary remarks

These proposals constitute a package of legislative

1.1.
measures and ideas on the use of rail infrastructure.

1.2.

They should be viewed:

— in the wider context, given the special role played by
transport in the matter, of the EU’s approach to growth,
competitiveness and employment, sustainable develop-
ment and the enlargement process.

The proposals represent a step forward and will speed

1.3.
up the restructuring of Europe’s railways.

— in the context of all the different texts and proposals on

rail transport;

The purpose of the proposals is to develop the single

1.4.
market further and provide for greater competition.

— in the context of all the different texts and proposals on

transport policy in general;

2. Summary of the Commission proposals

— in the context of all the different texts and proposals on

services of general interest;

2.1. Amendment of Directive 91/440/EEC

(1) OJ C 321, 20.10.1998, p. 6, 8, 10.

2.1.1.
The proposal requires that the accounts for the
management of infrastructure be kept completely separate