Communication from the Commission to the Council and the European Parliament - A strategy to improve the operation of the VAT system within the context of the internal market
Date: 2000-06-07
Institutions: European Commission
Subjects: VAT, action programme, single market, tax harmonisation

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 07.06.2000
COM(2000)348 final

COMMUNICATION FROM THE COMMISSION
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT

A STRATEGY TO IMPROVE THE OPERATION OF THE VAT SYSTEM WITHIN
THE CONTEXT OF THE INTERNAL MARKET

TABLE OF CONTENTS

1.

2.

BACKGROUND ......................................................................................................... 3

NEW STRATEGY FOR 2000: reappraisal of the programme proposed in 1996 .......... 4

2.1. Defining a viable strategy to improve the present system ....................................... 4

2.2.

Proposals already before the Council must be adopted ........................................... 5

2.3. Other measures ...................................................................................................... 6

3.

THE ACTION PROGRAMME ................................................................................... 7

3.1.

Phase One: 2000/2001 - Adoption by the Council of the proposals already tabled .. 7

3.2.

Phase Two: 2000/2001 - Presentation of new proposals by the Commission........... 7

3.3.

Phase Three: 2001 - Evaluation and definition of future priorities .......................... 8

1.

PRIORITIES FOR 2000 .............................................................................................. 9

1.1. Treatment of postal services................................................................................... 9

1.2. Treatment of e-commerce and radio and TV broadcasting...................................... 9

1.3. Rules on invoicing ............................................................................................... 10

1.4. Revision of the rules on administrative cooperation and mutual assistance ........... 10

1.5.

Setting the minimum level for the standard VAT rate........................................... 10

1.6. Report on the application of the reduced rate........................................................ 10

2.

OTHER POTENTIAL FUTURE PRIORITIES ......................................................... 11

2.1. Treatment of subsidies, public authorities and services in the public interest ........ 11

2.2. Treatment of financial and insurance services ...................................................... 11

2.3. Court judgements................................................................................................. 11

2.4. Rules on supplies of goods................................................................................... 11

2.5. Closer administrative cooperation ........................................................................ 12

2.6. Coordination of customs and taxation .................................................................. 12

2.7. Review of the place of taxation of services in general (Article 9) ......................... 13

2.8. Rationalisation of derogations under Article 27.................................................... 13

2.9. Rationalisation of options, rights and derogations................................................. 13

2.10. Rationalisation of VAT rates................................................................................ 13

2.11. The scheme applying to small businesses ............................................................. 14

2

1.

1.

BACKGROUND

When the First and Second VAT Directives were adopted in April 1967 the
Community undertook a legal and political commitment (as part of its objective to
create the most efficient possible common market) to establish a common VAT
system under which the taxation of imports and the non-taxation of exports in
intra-Community trade would be abolished. This commitment underpinned the
objective to design a VAT system which was tailored to the internal market and
operated within the European Union in the same way as it would within a single
country.

2.

The two basic principles of VAT had to be observed in designing such a system:

the mechanism of fractionated payments, which ensures that the tax system is to
some extent self-policing;

a clear division of responsibilities between sellers (correct invoicing of the tax due)
and buyers (detailed proof of the tax deducted);

The Commission put forward proposals for such a system in 1987 under the work
programme to establish the internal market by January 1993. The key elements of
these proposals, which were designed to achieve a genuine internal market by means
of taxation in the country of origin, were:

a harmonised tax structure with two rates of VAT;

harmonisation, within a defined band, of the rates applied by Member States;

a clearing mechanism for the redistribution of VAT receipts.

By 1989, it had become clear that it would be impossible to adopt the Commission’s
proposals by 1 January 1993 and the ECOFIN Council therefore decided to adopt a
transitional system which would enable controls at
the Community’s internal
borders to be abolished whilst allowing tax to continue to be collected in the Member
State of destination under certain well defined circumstances (transactions between
taxable persons and large-scale “distance selling” to private individuals).

At the same time however, the Council reaffirmed both legally and politically the
commitment it had made in April 1967 to introduce a “definitive system” of taxation
where goods and services would be taxed in “the Member State of origin” by the
new target date of 31 December 1996.

It therefore fell to the Commission, once again, to put forward new proposals. Before
doing so, the Commission carried out a thorough evaluation of the operation of the
transitional arrangements1 and polled the Member States on their views, concluding
that a different approach to that proposed in 1987 would have to be taken to achieve

Report by the Commission to the Council and the European Parliament on the operation of the
transitional arrangements for charging VAT in intra-Community trade (COM(94) 515 final of
23 November 1994, unpublished)

3

3.

4.

5.

6.

1

7.

8.

9.

10.

2.

2.1.

11.

a VAT system tailored to the internal market. The programme put forward in
19962 differed in two main respects from the 1987 proposals.

Firstly, the substance of the 1987 proposals was based on the principle that taxation
should take at the place of supply (place where the goods are located when they are
sold, place of supply of immovable property, etc.) and the clearing mechanism would
operate on the basis of declarations by taxable persons. The 1996 programme put
forward the idea that taxation should be based on a trader’s “tax domicile” so that
there would be one single place of registration with a redistribution mechanism
based on official statistics (a “new macroeconomic approach”) to ensure that VAT
receipts accrue to the Member State where consumption takes place.

i.e. an
Secondly, the 1987 proposals were based on the “big bang” approach,
immediate switchover to the definitive system, whereas the 1996 programme
envisaged a gradual changeover to the definitive system. The first stage in this
gradual approach was to modernise and more uniformly apply the existing system
introducing changes which would shape it into a definitive system.

This gradual approach has proved as difficult to implement as the 1987 “big
bang” approach. If a Community trader’s entire economic activity is taxed in one
single Member State, taxation systems have to be closely harmonised to ensure the
uniform application traders desire. There also has to be some harmonisation of
rates to ensure that the tax has a neutral impact on business competition. However, it
very soon became clear, as it did in 1987, that this degree of harmonisation could not
be achieved because of differing domestic arrangements in the Member States.
Consequently very little progress has been made in the Council on the Commission’s
proposed 1996 programme.

On the other hand, it is accepted that the current transitional arrangements have a
number of shortcomings, because they are complicated, susceptible to fraud (the
problem of so called “carousel fraud” is becoming of increasing concern) and are out
of date. There is a patent need to modernise, simplify, strengthen and more uniformly
apply the VAT system in order to bring it up to date and to ensure it encourages
legitimate commercial transactions within the internal market without providing
greater scope for fraud.

NEW STRATEGY FOR 2000: REAPPRAISAL OF THE PROGRAMME PROPOSED IN
1996

Defining a viable strategy to improve the present system

It should be pointed out from the outset that the internal market could and would
function better with a VAT system based on taxation in the Member State of origin
as this would be easier to administer (and consequently less costly for business) and
less susceptible to fraud (providing a better a guarantee of stable tax revenue).
However, it must also be recognised that in the current climate (where the conditions
are not propitious for rapid progress towards closer harmonisation of VAT rates and
to introduce a really reliable system of
legislation and it would be difficult

2

A common system of VAT - a programme for the single market (COM(96) 328 final of 22 July 1996,
unpublished)

4

12.

13.

2.2.

14.

reallocating revenue) it is unlikely that significant progress will be made in the
immediate future.

It is not in any way the Commission’s intention to question the idea of a definitive
system of taxation in the Member State of origin of transactions giving rise to
consumption in the Community as a long-term Community goal. However, in the
interest of improving the functioning of the internal market in the short term, the
Commission considers it necessary to reappraise the programme it proposed in 1996
and to define a viable strategy based on four main objectives: simplification and
modernisation of current rules, more uniform application of current rules and
closer administrative cooperation.

The objective of such an exercise is to create fresh impetus within the Council to
achieve the much needed improvements to the present system as quickly as possible.
This will of course only be possible if all Member States are prepared to consider
changes to their national VAT systems (and, if necessary, to agree to a reduction in
the large number of special schemes or options, derogations, etc. which exist at
present) which can help bring about an overall improvement in the way the common
VAT system operates. If the present transitional arrangements are retained Member
States will also have to accept the need for greater emphasis on tighter controls and
closer administrative cooperation in order to deal with the problem of fraud
highlighted in the Commission’s report on administrative cooperation and VAT
control.3 The fact
that under the transitional VAT system goods can circulate
between Member States without VAT being paid4
inevitably creates risks,
particularly of “carousel
fraud” and stringent counter-measures are required.
“Modernisation and simplification” and “administrative cooperation and fraud
prevention” form a single package and must go hand in hand.

Proposals already before the Council must be adopted

This does not mean that the Council does not have to adopt the proposals already
tabled by the Commission under the 1996 programme and the SLIM exercise
(Simpler Legislation for the Internal Market). On the contrary, these proposals were
specifically designed to simplify, modernise, enhance and ensure more uniform
application of the current VAT system in areas where improvements are essential.

3

4

Report from the Commission to the Council and the European Parliament - Third Article 14 report on
the application of Council Regulation (EEC) No 218/92 of 27 January 1992 on administrative
cooperation in the field of indirect taxation (VAT) and Fourth report under Article 12 of Regulation
(EEC, Euratom) No 1553/89 on VAT collection and control procedures (COM(2000) 28 final of
28 January 2000) http://europa.eu.int/comm/taxation_customs/publications/official_doc/com/com.htm
Intra-Community trade is valued at EUR 930 billion annually. VAT accounts for 15 to 25% depending
on the Member State, i.e. EUR 162.75 billion. According to the Commission’s estimates fraud accounts
for 5% of this amount, in other words a loss of EUR 8 billion in tax revenue.

5

15.

16.

2.3.

17.

5

6

7

8

The proposals concerning the right to deduction and abolition of the procedure
provided for under the Eighth Directive (COM(98) 377)5 and determination of the
person liable for payment of VAT (COM(98) 660)6 are crucial to the simplification
of existing procedures. They cover areas where refunds of VAT are difficult to
obtain from other Member States and deal with the cost and complexity of using tax
representatives who are considered to be the main source of problems for traders
operating in other Member States, particularly for small businesses which are
directly affected by the cumbersome procedures involved. These proposals will be
reviewed in the course of their examination by the Council to ensure that they are
compatible with the proposed changes to the current rules.

Two other proposals which the Commission still considers to be essential are the
reform of the VAT Committee (COM(97) 325)7 and the improvement of mutual
assistance for the recovery of claims (COM(98) 364)8. The VAT Committee plays an
important role in ensuring existing rules are more uniformly applied, but
its
effectiveness depends on finding a way of involving it in the procedure by which the
Commission adopts binding implementing decisions. The proposal on the recovery
of claims is crucial to closer administrative cooperation and should be adopted as
quickly as possible. It will also be a perfect adjunct to the proposal to abolish
compulsory tax representation (COM(98) 660).

Other measures

The proposals already before the Council will be supplemented by other measures
under a new strategy covering a number of areas where Community legislation needs
updating (e.g. postal services, e-commerce, etc).

These areas are described in the annex. The list is in no way exhaustive and in no
way excludes others being included. The Commission will ensure that account is
taken of the EU’s international obligations and their VAT implications.

Proposal for a Council Directive amending Directive 77/388/EEC as regards the rules governing the
right to deduct value added tax and 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 on 17 June (COM(1998) 377 final)
(Official Journal No C 219 of 15 July 1998, p. 16 and 20).
Proposal for a Council Directive amending Directive 77/388/EEC as regards the determination of the
person liable for payment of value added tax presented by the Commission on 27 November 1998
(COM(1998) 660 final) (Official Journal No C 409 of 30 December 1998, p. 10).
Proposal for a Council Directive amending Directive 77/388/EEC on the common system of value
added tax (the Value Added Committee) presented by the Commission on 26 June 1997 (COM(97) 325
final) (Official Journal No C 278 of 13 September 1997, p. 6).
Proposal for a European Parliament and Council Directive amending Council Directive 76/308/EEC on
mutual assistance for the recovery of claims resulting from operations forming part of the system of
financing the European Agricultural Guidance and Guarantee Fund, and of agricultural levies and
customs duties and in respect of value added tax and certain excise duties presented by the Commission
on 26 June 1998 (COM(98) 364 final) (OJ No C 269 of 28 August 1998, p. 16) and (COM (1999) 183
final) (Official Journal No C 179 of 24 June 1999, p. 6).

6

3.

18.

19.

3.1.

20.

3.2.

21.

THE ACTION PROGRAMME

A meeting of the Tax Policy Group was held on 2 March 2000 to sound out Member
States’ views on a new approach to VAT and to establish where improvements could
be made. Member States’ representatives endorsed this pragmatic approach which
demonstrated a determination to quickly tackle the problems encountered by traders
and provide them, as far as possible, with a solution which will enable them to
benefit more effectively from the single market.

The Commission has drawn up an action programme to implement this new VAT
strategy based on four objectives: simplification and modernisation of current rules,
more uniform application of current rules and a new approach to administrative
cooperation.

Phase One: 2000/2001 - Adoption by the Council of the proposals already tabled

The following proposals are to adopted as soon as possible:

Changes to the status of the VAT Committee (COM (1997) 325);

Improving mutual assistance on recovery (COM (1998) 364);

Proposal on the right to deduction and the Eighth Directive (COM (1998) 377);

Proposal on the person liable for VAT (COM (1998) 660).

Phase Two: 2000/2001 - Presentation of new proposals by the Commission

The Commission will table proposals for Directives in the following areas in the
course of the year:

taxation of postal services (June/July 2000);

e-commerce (June/July 2000);

invoicing including electronic invoicing (autumn 2000);

revision of rules on administrative cooperation and mutual assistance (December
2000);

a minimum standard rate of VAT (July 2000).

The Commission will also present a report on the application of the reduced rate
(December 2000).

7

3.3.

22.

Phase Three: 2001 - Evaluation and definition of future priorities

Future priorities will largely depend on the progress made by the Council in adopting
the proposals already tabled (the four proposals already presented and another five to
be tabled in the course of 2000). The Commission will present a progress report in
early 2001 and, once it has been discussed by the Council, will use it to draw up a
work programme setting future priorities, initially for 2001/2002. These priorities
will be defined in the light of the findings of a review of the issues discussed in the
annex and any subsequent new requirements. Each of the subsequent phases will
largely depend on the proposals already presented being adopted by the Council. The
aim is to avoid a whole package of proposals waiting for the Council’s approval.

8

ANNEX
AREAS WHERE THE COMMON VAT SYSTEM IS TO BE SIMPLIFIED, MODERNISED
AND ENHANCED

1.

PRIORITIES FOR 2000

1.1.

Treatment of postal services

Public postal authorities are increasingly operating in competitive markets and
competition would inevitably be distorted if only the public sector were exempted
from VAT. This situation is hardly justifiable, and regular complaints have been
received from operators. Some Member States have already opted to tax their postal
services which are now privatised and this has led to problems with other countries
whose public postal services are still exempt.

This shows that the principle of neutrality, which is at the heart of the common VAT
system, is no longer being observed in this sector. Amending the Sixth Directive to
make postal services liable to VAT would therefore help to modernise the taxation
system.

The Commission will present a proposal for a Directive on postal services by the
end of June.

1.2.

Treatment of e-commerce and radio and TV broadcasting

The general principles of taxation of electronic deliveries were first set out in a
communication from the Commission in June 1998.9 The most significant of these
were that, for VAT purposes, electronic transactions should be taxed as services and
taxation should take place in the jurisdiction where consumption takes place. The
conclusions of the July 1998 ECOFIN Council endorsed this approach; this was also
reflected internationally by the OECD conference in Ottawa in October of the same
year. Consequently, the present legal basis makes it difficult to correctly apply these
principles to transactions involving the supply of products in digital form over
electronic networks (which includes broadcasting services).

The Commission therefore intends to amend the provisions of the Sixth VAT
Directive on the place of supply of services so that electronically delivered services
supplied for consumption within the EU are subject to EU VAT and those supplied
for consumption outside the EU are exempt from VAT. This proposal will also
contain a number of facilitation and simplification measures aimed at ensuring that
the administration and collection of VAT takes full advantage of the potential
benefits afforded by electronic technology. Particular objectives will include easing
the tax compliance burden for non-EU operators and removing the barriers in the
existing tax system to the growth of e-commerce.

9

COM(1998) 374 final. Communication from the Commission to the Council, the European Parliament
and the Economic
taxation.
http://europa.eu.int/comm/taxation-customs/publications/official-doc/com/com.htm

and Social Committee

and indirect

- Electronic

commerce

9

1.3.

Rules on invoicing

A study on electronic invoicing was carried out in the wake of the SLIM exercise. Its
main aims were to analyse current practices in the Member States (indications on
invoices and cases in which electronic invoicing and self-invoicing are authorised)
and to recommend the most suitable approach to harmonising practices and
introducing appropriate Community rules. The findings are being discussed with
national administrations and business. Action in this area would both simplify and
modernise current VAT rules bringing them into line with the way in which new
technology is already being used by business. A formal proposal might be ready by
the autumn as these discussions are proving extremely fruitful.

1.4.

Revision of the rules on administrative cooperation and mutual assistance

The report presented by the Commission under Article 14 of Regulation No 218/92
and Article 12 of Regulation No 1553/89 and discussions by the Council’s ad hoc
group on tax fraud indicate that if the present system is retained there must be a
commitment
and administrative
cooperation. The Commission has concluded that existing Community legal
instruments for administrative cooperation and mutual assistance would have to be
enhanced to achieve this goal. Initially it intends to propose, by way of priority, that
Regulation No 218/92 and Directive 77/799/EEC be revised.

to effectively enhance

control procedures

1.5.

Setting the minimum level for the standard VAT rate

Article 12(3) of the Sixth VAT Directive10 sets the minimum level of the standard
rate applying in the Member States at 15% until 31 December of this year. It does not
set a maximum rate although the Commission has twice proposed the introduction of
a band so that standard rates can be more closely harmonised between Member
States. The Commission therefore propose that this provision be extended for five
years.

1.6.

Report on the application of the reduced rate

Pursuant to Article 12(4) the Commission will present a report reviewing the scope
of reduced VAT rates. As it has done in previous reports it will
the
harmonisation of rates and assess the impact of their structure on the functioning of
the single market. It will define the future approach to be taken to harmonise the
scope of reduced rates. This analysis will lay down future guidelines but no formal
legislative proposals are planned in the immediate future. These will not be made
until an evaluation has been carried out of the current pilot project for labour-
intensive services to which Member States may apply a reduced rate until
31 December 2002 in order to promote employment and reduce the black economy.

look at

10

As last amended by Council Directive 1999/49/EC of 25 May 1999 amending, with regard to the level
of the standard rate, Directive 77/388/EEC on the common system of value added tax (Official Journal
No 139 of 2 June 1999, p. 27 and 28).

10

2.

OTHER POTENTIAL FUTURE PRIORITIES

NB: The issues discussed below are areas which the Commission and the Tax Policy Group
consider warrant a thorough review. After the progress report on the Council’s discussions of
the proposals already tabled has been presented, the Commission will, if necessary, make
appropriate proposals under the new action programme which will then be defined. The order
in which they are discussed in no way reflects any order of priority.

2.1.

Treatment of subsidies, public authorities and services in the public interest

Increasing privatisation of activities which were traditionally the exclusive reserve of
the public sector has led to greater distortions of competition between exempt, non-
taxable and taxable services. The VAT system for such services needs to be
modernised taking account of all interests involved, in particular those of users of
these services. The VAT treatment of subsidies also needs to be reviewed in order to
ensure simpler and more harmonised treatment within the EU. Exemptions without
the right to deduction for social, educational, cultural and other activities also need to
be reviewed to see whether they meet current needs.

2.2.

Treatment of financial and insurance services

The financial services sector has increased both in size and complexity and its
structures and operating methods have changed creating growing problems for
current VAT rules. A large-scale study initiated by the Commission has looked at
and developed a method of VAT for financial services in the widest sense of the
word. However, even if this proves neither desirable nor feasible, other measures are
required to bring the VAT system into line with developments in this sector, which
include greater opportunities for cross-border shopping.

2.3.

Court judgements

A number of Court judgements concerning the application of VAT to transactions by
holding companies, sales promotion of products in the form of discount vouchers and
activities by public bodies have highlighted the fact that some provisions of the Sixth
Directive are ambiguous, incomplete or out of date. The Commission may consider
making a proposal
to change these provisions, and adopting
appropriate implementing decisions once the Council has adopted the proposal to
amend the VAT Committee’s rules of procedure (COM(97) 325).

to the Council

2.4.

Rules on supplies of goods

Under the present system the place of supply of goods is based on the place where
the goods are deemed to be located when they are supplied. This principle will not
change but a number of rules which no longer meet the needs of intra-Community
trade will have to be reviewed. These include:

Supplies where the supplier is responsible for assembly and installation on the
customer’s premises: traders have been caused needless problems because there are
both rules governing intra-Community supply/acquisition and rules on taxation at the
place of destination of supplies of goods involving assembly and installation by the
supplier on the customer’s premises. The current rules need to be standardised.

11

Sales of goods through distribution networks: increasing liberalisation of the water,
gas and electricity distribution sectors may mean that the current rules need to be
reviewed to see whether they are compatible with the need for correct and simple
taxation of such supplies; these are increasingly being thrown open to competition
between national producers to the benefit of consumers who are able to use the most
competitive operators. Steps must be taken here to ensure fair competition.

Distance selling: all the information made available to the Commission on Member
States’ monitoring and enforcement of this special scheme under the transitional
arrangements indicates that
the system is incapable of ensuring taxation at
destination if traders fail to spontaneously fulfil declaration and payment obligations
in the Member State where the VAT is due. Under these circumstances, steps could
be taken to change taxation thresholds to ensure that the system applies only where
there is a genuinely significant activity in the Member State of destination. This
could be accompanied by the introduction of automatic exchanges of information
between the Member States involved whenever the special arrangements apply.
Some Member States have already recognised the need for much more routine
exchanges of information and have concluded appropriate bilateral agreements. This
best administrative practice could be extended to the whole Community.

2.5.

Closer administrative cooperation

The increasingly serious problem of fraud, especially cross-border fraud, is being
addressed both by the Commission (though the Standing Committee on
Administrative Cooperation (SCAC)) and by the Council (though the ad hoc working
group on tax fraud). One of the main reasons for the increase in fraud under the
current VAT system is the fact that goods circulate without VAT being paid. The
reports compiled by the Commission under Article 14 of Regulation No 218/92 and
Article 12 of Regulation No 1553/89 make it clear that Member States’ control and
administrative cooperation arrangements cannot deal with this problem. If the
to a real
existing arrangements are retained,
improvement
in these areas. The Commission has concluded that existing
Community legal instruments for administrative cooperation and mutual assistance
need to be enhanced. It will continue its review of appropriate solutions in addition to
the changes planned this year.

there must be a commitment

2.6.

Coordination of customs and taxation

taxation on
The joint meeting of Directors-General for customs and indirect
16 December 1998 decided that there should be further joint discussions to improve
coordination between customs and tax policies.

An ad hoc joint customs-taxation group was set up to look at coordination between
customs and indirect taxation policy and legislation in order to identify deficiencies
which could create problems for traders and risks of fraud and to suggest ways of
overcoming them.

The ad hoc group will present its final report to the Directors-General for customs
and taxation towards the end of June. The report will be used to assess the need for
and nature of a Community initiative. Appropriate proposals will be made in the light
of its conclusions.

12

2.7.

Review of the place of taxation of services in general (Article 9)

A proposal for a Directive amending the rules on e-commerce and radio and
television broadcasting will presented in the course of the year. This will be the last
individual change to Article 9 before a more general and thorough review of the rules
governing the place of supply of services under this Article. This exercise will not,
however, be undertaken in the immediate future; it may wait until changes have been
made in the two specific areas where more rapid action is required.

There seems to be a general consensus that the scope of taxation at the place that the
customer is located (reverse charge mechanism) should be extended or made the
general principle for taxation of services. The Commission, however, considers that
caution should be exercised before embarking upon this course which would call in
to question one of the basic principles of VAT, that of fractionated payment. In its
view, it would be preferable for the proposal in COM (98) 377 on the right to
deduction and replacement of the refund procedure introduced by the Eighth
Directive by a genuine right to cross-border deduction to be adopted as soon as
possible and the contribution it will make to resolving current problems (in particular
deficiencies concerning the leasing of means of transport), to be discussed.

2.8.

Rationalisation of derogations under Article 27

The need for simplification of tax collection and prevention of fraud or tax evasion
prompted the Member States to request and obtain from the Council authorisation to
introduce special derogations to the Sixth VAT Directive. However the number and
diversity of these derogations has led to a somewhat chaotic situation and it would be
useful, if not essential, to rationalise to some degree. This might involve extending
some derogations which have proved to be particularly effective to all Member
States.

2.9.

Rationalisation of options, rights and derogations

Traders often point to problems caused by differences in treatment between Member
States.

It is true that the Sixth VAT Directive has always maintained a whole range of
options, rights and derogations which, very often, have been the price to pay for
unanimous adoption of VAT Directives. Even temporary derogations which were
originally introduced for an extremely short period have proved impossible to abolish
because the Council could not unanimously agree to do so. Some of them, however,
may be real obstacles to the proper functioning of the single market and their
abolition would ensure more uniform application of VAT. Others create problems
with non-EU countries. A review of the Thirteenth Directive might therefore be
considered to help non-EU operators who pay VAT in the Community even though
they do not exercise an economic activity there.

2.10.

Rationalisation of VAT rates

A review and rationalisation of the rules and derogations applying to the definition of
reduced VAT rates should be considered in the medium term. Once the pilot project
introduced by Directive 1999/85/EC (labour-intensive services), has been completed
it may prove necessary to overhaul current rules. This would provide an opportunity

13

to abolish specific and temporary derogations. Particular attention will be paid to the
rates applying to virtual products compared with traditional products and the use of
reduced VAT rates in Community policies (e.g. to help protect the environment,
promote employment, etc.).

2.11.

The scheme applying to small businesses

There have also been repeated calls for a thorough overhaul of the special schemes
applying to small businesses and, in particular that of exemptions which differ
widely from one Member State to another. A Fiscalis seminar will be held shortly to
define the objectives of and means of controlling these schemes (in Faro, Portugal,
on 9 and 10 October 2000). The seminar will also provide a clearer overview of the
current situation in the Member States and identify ways of improving VAT
treatment of small businesses in the European Union. Appropriate proposals may be
made in the light of its findings.

14