Proposal for a Council Decision authorising Austria to apply a measure derogating from Article 21 of Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes.
Date: 2002-08-19
Institutions: European Commission
Subjects: Austria, VAT, basis of tax assessment, building industry, derogation from EU law, provision of services, subcontracting, tax exemption

C 331 E/166

EN

Official Journal of the European Communities

31.12.2002

Proposal for a Council Decision authorising Austria to apply a measure derogating from Article 21
of Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to
turnover taxes

(2002/C 331 E/29)

COM(2002) 470 final

(Submitted by the Commission on 18 August 2002)

EXPLANATORY MEMORANDUM

INTRODUCTION

In a request addressed to the Commission, registered by the Commission's Secretariat-General on 7 May
2002, the Government of Austria sought authorisation under Article 27 of Council Directive 77/388/EEC
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 (1) (hereinafter referred to as ‘the Sixth
Directive’) to apply a measure derogating from Article 21(1)(a) of the Directive, as amended by Directive
2000/65/EC of 17 October 2000. The purpose of the derogation is to make the person to whom the
services are provided liable for the tax due where these services consist in construction work carried out by
subcontractors.

PURPOSE OF THE DEROGATIONS SOUGHT

The Austrian authorities stress that they have recorded considerable revenue losses in the construction
sector. These losses occur in the business transactions between the general contractor and the subcon-
tractor. The subcontractor charges VAT to the general contractor but fails to pay the tax to the Treasury.
At the same time, the general contractor may exercise its right to deduct VAT, since it holds a valid invoice
corresponding to services actually provided.

According to the Austrian authorities, this type of tax evasion is difficult to curb by applying the normal
rules of the common VAT system because in many cases it is virtually impossible to recover the VAT from
the subcontractor. Experience has shown that
to trace the subcontractors
concerned, especially in the construction sector, for the following reasons: either the subcontracting
company is set up, mostly as a limited company, by a person having no stake in the company, or the
subcontracting company acquires a pre-registered company. As soon as the company is set up, a very high
level of turnover is achieved; the VAT entered on the invoice is not paid; after a short period bankruptcy
proceedings are initiated against the company; the addresses of the company directors are unknown, or the
directors have officially moved abroad; it is not known who is really controlling the whole operation.

is extremely difficult

it

DESCRIPTION OF THE REQUESTED DEROGATIONS

The derogation requested would mean that Austria would be able to designate as the person liable to pay
tax the person to whom the services are provided, by derogation from Article 21(1)(a) of the Sixth
Directive, instead of the person supplying the services, in the following cases:

— where construction work and labour are provided by a subcontractor to a general contractor;

— where construction work and labour are provided by a subcontractor to a company which carries out

its own construction work;

— where construction work and labour are provided by a subcontractor to another subcontractor.

(1) OJ L 145, 13.6.1977, p. 1. Directive last amended by Directive 2002/38/EC (OJ L 128, 15.5.2002, p. 41).

31.12.2002

EN

Official Journal of the European Communities

C 331 E/167

Under this arrangement, subcontractors would no longer charge VAT for the services they supply. This
would therefore solve the problem of non-payment of the tax owed by a subcontractor, who is in practice
often not traceable.

However, the normal taxation rules would apply to all other operations in the construction industry,
especially those carried out by general contractors for clients.

OPINION OF THE COMMISSION

Article 27 of the Sixth Directive allows for derogations in order to simplify the procedure for charging tax
or to prevent certain types of tax evasion or avoidance.

Although the measure does simplify the work of the tax authorities, which very frequently have major
problems collecting tax from subcontractors in the construction sector, the Commission is of the opinion
that the measure envisaged by Austria is to be considered first and foremost as a measure aiming at
preventing certain types of tax evasion or avoidance.

The planned measure also seems proportionate to the objective pursued, since it would not apply to all
taxable operations in a given sector (here the construction sector) but would merely target specific
operations which pose real and considerable problems of
tax evasion or avoidance. The measure
therefore deviates from the general principles laid down in Article 21 of the Sixth Directive only to the
extent strictly necessary to attain that objective.

Note that the proposed derogation would have no effect on the amount of tax due. The amount of tax due
under the derogation would therefore be exactly the same as if the normal rules of Article 21 of the Sixth
Directive were applied.

This is why the Commission is proposing that the Council authorise Austria to apply the requested
derogations from Article 21(1)(a).

The Commission does, however, believe that this derogation should apply only up to 31 December 2007.
This will offer an opportunity to assess whether the derogation should be maintained in the light of
Austria's experience over that five-year period.

THE COUNCIL OF THE EUROPEAN UNION,

Whereas:

Having regard to the Treaty establishing the European
Community,

Having regard to the Sixth Council Directive (77/388/EEC) of
17 May 1977 on the harmonisation of the laws of the Member
States
taxes — common system of
value-added tax: uniform basis of assessment (1) and in
particular Article 27(1) thereof,

relating to turnover

(1) In a request addressed to the Commission, registered by the
Commission's Secretariat-General on 7 May 2002, Austria
sought authorisation to apply a measure derogating from
Article 21(1)(a) of Directive 77/388/EEC.

(2) The other Member States were informed of Austria's

request by letter of 21 June 2002.

Having regard to the proposal from the Commission,

(1) OJ L 145, 13.6.1977, p. 1. Directive last amended by Directive

2002/38/EC (OJ L 128, 15.5.2002, p. 41).

(3) Article 21(1) of Directive 77/388/EEC, as amended by
Article 28g thereof, stipulates that, under the internal
system,
the taxable person supplying taxable goods or
services is normally liable to pay value added tax.

C 331 E/168

EN

Official Journal of the European Communities

31.12.2002

(4) The purpose of

the requested derogation is to enable
Austria to designate the person to whom the services are
provided as the person liable to pay tax, in the following
cases: where construction work and labour are provided by
a subcontractor to either a general contractor, a company
which carries out its own construction work, or another
subcontractor.

(5) The requested measure is

to be considered first and
foremost as a measure to prevent certain types of
tax
evasion or avoidance in the construction sector, such as
subcontractors who fail to pay the invoiced VAT to the
Treasury and then disappear. The measure also has the
effect of simplifying the work of
the tax authorities,
which very frequently have major problems collecting the
VAT due by subcontractors in that sector; the measure has
no effect on the amount of tax due.

(6) The measure is proportionate to the objectives pursued,
since it would not apply to all taxable operations in the
sector
specific
operations which pose real and considerable problems of
tax evasion or avoidance.

concerned but would merely

target

HAS ADOPTED THIS DECISION:

Article 1

By way of derogation from Article 21(1)(a) of Directive
77/388/EEC, as amended by Article 28g thereof, Austria is
hereby authorised to designate the recipients of the supplies
of services referred to in Article 2 of this Decision as the
persons liable to pay value added tax.

Article 2

The recipient of the supply of services may be designated as
the person liable to pay VAT in the following instances:

1. where construction work and labour are provided by a

subcontractor to a general contractor;

2. where construction work and labour are provided by a
its own

subcontractor to a company which carries out
construction work;

3. where construction work and labour are provided by a

subcontractor to another subcontractor.

(7) The authorisation should be granted until 31 December
2007, which will enable the derogation to be reviewed in
the light of experience.

Article 3

This Decision shall expire on 31 December 2007.

(8) This derogation does not adversely affect the Communities'

Article 4

own resources from VAT,

This Decision is addressed to Austria.