Report from the Commission to the Council on the Review of Article 9 of the Sixth VAT Directive - Place of Supply of Services
Date: 2002-10-28
Institutions: European Commission
Subjects: VAT, hire purchase, means of transport, provision of services, tax exemption, tax relief

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 28.10.2002
COM(2002) 587 final

REPORT FROM THE COMMISSION TO THE COUNCIL

on the Review of Article 9 of the Sixth VAT Directive – Place of Supply of Services

   
1.

INTRODUCTION

At  its  meeting  of  4  June  2002,  the  ECOFIN  Council  noted  the  Presidency’s  intention  to
reopen  discussion  on  the  cross-border  deduction  of  VAT  and  harmonisation  of  the  right  to
deduct  VAT  in  the  case  of  passenger  vehicles,  as  well  as  the  Commission’s  intention  to
prioritise work on the revision of Article 9 of the Sixth VAT Directive1, which deals with the
place of supply of services.

The  Council  invited  the  Presidency  and  the  Commission  to  report  on  progress  achieved  in
those areas to enable it to evaluate the situation, particularly in respect of cross-border leasing
of motor vehicles, at the end of 2002.

Accordingly, this report provides an update  of recent developments on the work  carried out
by the Commission in relation to the revision of Article 9.

2.

BACKGROUND

In July 2000, the Commission stated its intention to put forward a number of new proposals
and to review existing proposals in the VAT area. The rules on the place of supply of services
were identified as one of the potential future priorities.

On  7  May  2002,  the  E-Commerce  VAT  Directive2  amending  the  rules  on  the  taxation  of
electronically supplied services and radio and television broadcasting was adopted. In Council
minutes  with  respect  to  the  meeting  that  adopted  that  Directive,  several  delegations  called
upon  the  Commission  to  accelerate  the  review  and  revision  of  Article  9  of  the  Sixth  VAT
Directive.

At the ECOFIN Council meeting on 4 June 2002, Austria raised the issue of VAT on cross-
border  leasing  of  motor  vehicles.  It  wanted  the  Commission  to  present,  at  short  notice,  a
proposal for a Directive with a view to changing the place of supply for leasing and letting of
means of transport. Austria invoked distortions of competition to justify its request.

The Commission saw no reason to present a specific proposal at short notice, since an earlier
proposal,  presented  in  June  1998  dealing  with  cross-border  deduction  of  VAT  would,  once
adopted, go a long way to solving Austria's problem. Essentially, the proposal would see the
rules  for  deducting  input  VAT  apply  based  on  the  Member  State  where  the  customer  is
established  rather  than  where  the  lessor  is  established,  as  is  presently  the  case.  Given  the
differences in the national rules on deduction of VAT on company cars, such a change would
eliminate  any  bias  in  favour  of  lessors  in  a  Member  States  with  more  favourable  rules  of
deduction. This view was strengthened by the  fact that the Danish Presidency  had indicated
its willingness to re-launch discussion on this basis.

However, in view of Austria’s request, the Commission did agree to accelerate its work on the
general  review  of  the  provisions  governing  the  place  of  supply  of  services,  which  would

1 Directive 77/388/EEC OJ L 145 13.06.1977

2 Directive 2002/38/EC OJL 128 15.05.2002

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include  a  reflection  on  the  place  of  supply  rules  governing  letting  and  leasing  of  means  of
transport.

As  indicated  above,  the  ECOFIN  Council  at  its  meeting  of  4  June  2002,  asked  the
Commission to report on progress achieved on the review of Article 9 to enable it to evaluate
the situation, particularly in respect of cross-border leasing of motor vehicles.

3.

STATE OF PLAY ON WORKING PARTY N°1

In launching the review of Article 9, the Commission Services prepared an inventory of the
various problems  which have been  raised  and  outlined  the  framework  for  possible  solution.
These issues were discussed at a meeting of Working Party N°1 on 24 September 2002. The
purpose of the meeting was to confirm with Member States the range of outstanding problems
in  this  area  and  to  consider  the  way  in  which  they  might  be  resolved.  The  issues  were
considered  under  two  broad  headings  –  those  involving  business  to  business  (B2B)
transactions and those involving business to consumer (B2C) transactions. For the most part,
Member States agreed with the identified problems and also raised some additional points for
consideration by the Commission.

In full keeping with the guiding principle that VAT is a consumption tax, whereby the VAT
collected  should  in  principle  finally  accrue  to  the  Member  State  where  actual  consumption
takes  place,  the  Commission  Services  put  forward  various  options  for  consideration  by
Member  States.  These  dealt  with  both  B2B  and  B2C  concerns,  ranging  from  significant
legislative overhaul to more narrowly focused adjustments addressing particular problems.

There was little enthusiasm amongst Member States for an immediate major overhaul of the
present  legislative  scheme,  but  it  was  recognized  that  changes  are  necessary  in  the  B2B
context. These included definitional issues, such as  clarification  of  ‘place  of establishment’,
as well as developing the list of exceptions to the general place of supply rule, thereby better
reflecting supply in the place of consumption for certain B2B supplies. In particular, several
Member  States  reaffirmed  the  need  to  modify  the  place  of  taxation  rules  on  cross-border
leasing of motor vehicles.

With regard to B2C, it was clear that a majority of Member States do not see a need to change
the present regime immediately. Reasons  given included uncertainty  about  the  fiscal impact
and  concerns  and  fears  of  additional  complexities  for  tax  administrations,  businesses  and
consumers.  Given  the  position  expressed  by  the  Council  when  adopting  the  E-Commerce
VAT  Directive,  it  will,  however,  be  necessary  to  revisit  this  matter  when  reviewing  the
operation of that Directive before 2006.

4.

CONCLUSION

Following  this  initial  consultation  of  member  States,  the  Commission  has  concluded  that  it
should focus its work in the near future on modernising the rules for the place of the supply of
B2B services.

(cid:1)  To this end, the Commission Services will continue discussions in the Working Group later
this year focusing on the B2B concerns, which have been identified, including cross-border
leasing of means of transport.

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(cid:1)  Subsequently,  the  Commission  hopes  to  be  in  a  position  to  bring  forth  proposals  for

amending Article 9 of the Sixth VAT Directive in the course of next year.

(cid:1)  The Commission will give further consideration to the rules for taxation of B2C services to
ensure  that  the  taxation  of  international  and  intra-community  supplies  of  such  services
achieve  the  correct  results,  in  the  context  of  the  review  which  it  is  obliged  to  carry  out
under Article 5 of the E-Commerce VAT Directive.

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