Opinion of the European Economic and Social Committee on the "Proposal for a Council Directive amending Directive 77/388/EEC as regards the rules on the place of supply of electricity and gas" (COM(2002) 688 final — 2002/0286 (CNS))
Date: 2003-03-26
Institutions: European Economic and Social Committee
Subjects: VAT, delivery, electrical energy, electricity supply, energy distribution, gas

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4.7. Conclusions

The communication from the Commission closes
4.7.1.
with a question concerning the future of the Urban initiative.
The EESC recommends that these innovative programmes be
continued and be stepped up, and that greater economic
resources be brought to bear on them, and also calls for many
of the methods and practices created through the Urban
programmes to be applied to the more general management
of the Structural Funds.

Once the specific nature of urban questions has
4.7.2.
been highlighted,
there will be an increasing need to
implement action strategies which can effectively link the
intervention approaches to a culture of
necessary sectoral
integration between economic development,
social and
economic cohesion, employment, the importance of involv-
ing economic and social players, and restoring and protec-
ting the quality of the environment and the built heritage,
within a framework of developmental compatibility and
consistency.

Brussels, 26 March 2003.

The President

of the European Economic and Social Committee

Roger BRIESCH

Opinion of the European Economic and Social Committee on the ‘Proposal for a Council
Directive amending Directive 77/388/EEC as regards the rules on the place of supply of electricity
and gas’

(COM(2002) 688 final — 2002/0286 (CNS))

(2003/C 133/13)

On 16 December 2002 the Council decided to consult the Economic and Social Committee, under
Article 262 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 6 March 2003.
The rapporteur was Mr Pezzini.

At its 398th plenary session on 26 and 27 March 2003 (meeting of 26 March), the Economic and Social
Committee adopted the following opinion by 97 votes to one with four abstentions.

1.

Introduction

laying down the following requirements for Member

cess,
States:

1.1.
Following the establishment of the EU internal market,
the electricity and gas market in the Member States has been
gradually liberalised in order to increase efficiency in this
sector. The European Council meeting in Lisbon on 23-
24 March 2000 called for ‘rapid work’ to complete the internal
market and asked ‘the Commission ... to speed up liberalisation’
in areas such as gas and electricity. The Energy Council of
30 May 2000 invited the Commission ‘to present timely
proposals for further action’.

— liberalisation of non-household markets for energy and

gas by 1 July 2004;

— liberalisation of household markets by 1 July 2007;

— compulsory legal separation between network operating

companies and energy production companies;

1.2.
The Energy Council of 25 November 2002 gave
further impetus to the gas and electricity liberalisation pro-

— public service obligations (including provision of energy

at reasonable prices);

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— rules on pricing of network transmission, and;

2. Problems encountered under the current rules

— rules for allocation of available interconnection capacities

for cross-border exchanges in electricity.

2.1.

Place of supply

1.2.1.
The European Economic and Social Committee is
fully aware that while most of the Member States support
liberalisation within the deadlines set, the situation is at present
far from uniform. Moreover, the variation in the degree of
energy market liberalisation in the Member States gives rise
to significant discrepancies in the level of single market
completion.

1.2.2.
The EESC therefore supports all efforts aimed at
achieving a market which can operate effectively. Market
liberalisation cannot by itself guarantee that the market will
function in practice.

1.3.
The liberalisation of these markets requires increasing
deregulation and is resulting in an increase in cross-border
trade between Member States. As a result of new EU and
national measures a considerable change in the operation of
these markets is taking place.

1.3.1.
In the traditional electricity market the major elec-
tricity generators, transmission system operators and national
and local distribution companies in most Member States
were almost completely state-owned. Generally speaking, the
electricity market was mainly a national market limited to
trade within each country’s borders. The same was true of the
gas market.

1.4.
As a result of liberalisation, energy markets have ceased
to be purely national and have started to operate on a
European basis. This led to the arrival of new market players
such as power exchanges,
independent power producers,
brokers and traders. The dominant position of the state-owned
companies, such as the large generators, is changing through
privatisation and mergers. In countries where liberalisation is
in full process, changes in methods of doing business and in
the market place itself have been seen.

1.5.
This increasing liberalisation of the gas and electricity
distribution sector has led to an urgent need for a review of
the current VAT rules to ensure that they are compatible with
the need for correct and simple taxation of such supplies. The
new markets also bring new problems, such as the question of
the taxation of transmission costs.

2.1.1.
Under VAT the ‘place of supply’ decides which
Member State is entitled to tax a transaction. It therefore also
decides the rate of VAT payable and (usually) the Member
State in which the supplier must register. It is elaborately
defined and is not necessarily the place where, in a physical
sense, one might regard the supply as occurring.

Under Article 5(2) of the Sixth VAT Directive (1)
2.1.2.
electricity and gas are considered tangible property. The supply
of them is therefore regarded as a supply of goods, and the
place of supply has to be determined in accordance with
Article 8 of the Directive. Until
the liberalisation of the
electricity and gas markets, the question as to whether the
supply fell under Article 8(1)(a) or 8(1)(b) — supply with or
supply without transport — was not raised, because in almost
all EU Member States the generation, distribution and trade of
electricity was a national matter and hence cross-border trade
did not occur. The occasional cross-border transactions were
no cause for problems and where a distributor did make a
cross-border supply, he would register in the other Member
State.

2.1.3.
In the new liberalised market cross-border trans-
actions are frequent. The characteristics of electricity and gas
make it almost impossible to trace their physical flows. For
example, if a generator in northern Europe sells electricity to a
consumer in southern Europe, this does not mean that the
electrons produced by the generator will in fact flow from
north to south. Similarly one cannot apply the idea of
transportation to electricity and gas and it does not make sense
to ask someone making a cross-border supply of
these
commodities to provide documentary evidence that a consign-
ment has departed or arrived.

2.1.4.
The physical flows do not coincide with the contrac-
tual relationship between the seller and the buyer; this is
particularly true if the buyer asks for delivery to go direct to
his customer.

2.1.5.
The present rules sometimes require a supplier to
register for VAT in a Member State other than his own; this
causes trouble and expense and can hinder the development
of the single market.

There might also be difficulties because of differences
2.1.6.
in the civil law of the Member States as regards determining
the time and place of supply.

(1) OJ L 145, 13.6.1977, p. 1.

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2.2.

Transmission costs

3.2.2.

F i r s t r u l e

2.2.1.
According to Article 7 of Directive 96/92/EC Mem-
ber States must designate a system operator to be responsible
for operating, ensuring the maintenance of, and, if necessary,
developing the transmission system in a given area and its
in order to guarantee
interconnectors with other systems,
security of supply. The system operator is responsible for
managing energy flows on the system, taking into account
exchanges with other interconnected systems.
In case of
import of electricity, the system operator allocates the available
capacity.

2.2.2.
The national system operator carries the cost of the
network. This network is used for national and international
transport of electricity. Within the overall costs incurred by a
Transmission Systems Operator, an allocation is made of costs
related to national transmission services and to cross-border
exchanges. Market participants who export electricity pay a
fee covering the total network costs. This fee is in VAT terms
the consideration for a service. If the fee is charged to a trader
established in a different Member State from the TSO, the
place of supply of these services becomes important. If this fee
is considered as the payment for an intra-community transport
service, the VAT would be due in the Member State where the
trader is registered for VAT. If, on the other hand,
is
considered that the fee is charged to provide access to the
electricity distribution network, the place of taxation would be
determined according to Article 9(1), namely the country
where the TSO is established. Uncertainty as to which para-
graph of Article 9 is applicable could lead to differences in
interpretation, resulting in double or non-taxation.

it

3. The proposed solution

3.1. General approach

3.1.1.
The current VAT system, in particular the rules on
supplies between Member States, gives rise to unnecessary
problems when applied to gas and electricity. New rules on
the place of supply will take into account the specific nature
of these commodities and facilitate the functioning of the
internal market for them. A basic principle of the normal VAT
system — taxation where the goods are physically located —
is abandoned for these supplies since in most cases it is
impossible to establish a link between the transaction and any
physical flow of goods.

3.2.

The new rules

3.2.1.
matter in informal language but with sufficient accuracy.

The ‘rules’ set out below are an attempt to state the

3.2.2.1.
A supply of electricity or gas to a person in the
same Member State as the seller will be taxable in that Member
State and the person liable for the tax will be the seller. A sale
to a person outside the EU will not be liable to EU VAT. In
both respects this is a continuation of the present state of
affairs.

3.2.3.

S e c o n d r u l e

3.2.3.1.
A supply of electricity or gas to a person in a
different Member State from the seller will, if the purchaser is
engaged in the business of re-selling that commodity, be
taxable in the purchaser’s Member State. The person liable for
the tax will be the purchaser. The seller will not have to register
in the purchaser’s Member State.

3.2.4. T h i r d r u l e

3.2.4.1.
A supply of electricity or gas to a person in a
different Member State from the seller will, if the purchaser is
NOT engaged in the business of re-selling that commodity, be
taxable in the Member State where the energy is consumed.
The person liable for the tax will be the seller, who will have
to register in that Member State.

However, if the purchaser of the energy is registered
3.2.4.2.
for VAT in the Member State where the energy is consumed,
the government of that Member State can opt to shift the
liability from the seller to the purchaser, in which event the
seller would not have to register in that Member State.

3.2.4.3.
consumed is the place where the meter is located.

On a practical point, the place where the energy is

3.2.5.

F o u r t h r u l e

3.2.5.1.
Purchases of electricity or gas from someone
outside the EU are not explicitly dealt with. The position seems
to be:

— If the purchaser is engaged in the business of re-selling
that commodity, the purchase will be taxable in the
purchaser’s Member State and the person liable for the
tax will be the purchaser.

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— If the purchaser is not engaged in the business of re-
selling that commodity, the purchase will be taxable in
the Member State where the energy is consumed. The
person primarily liable for the tax would be the seller, but
if he did not register in that Member State, the government
could use its right to shift the liability to the purchaser if
he is registered there.

supplier in one Member State may have many customers in
another Member State who do not sell energy but use it. The
government of the customers’ Member State may exercise its
option as regards one customer and not another; moreover, as
regards any one customer it may change its mind and take the
opposite decision for later supplies and even change yet again.
The supplier may have customers in other Member States and
face the same uncertainties there.

3.2.6.

F i f t h r u l e

3.2.6.1.
The present uncertainty regarding charges for the
transmission of electricity will be removed by providing that:

4.2.2.
The Commission’s paper does not say why it chose
this arrangement, which conflicts with the principle that
taxation should be certain and above all not be discretionary,
especially on such a vital matter as who has to pay.

— As now,

if the person providing the service and his
customer are in the same Member State, the service is
taxable in that Member State and the person liable is the
person providing the service.

4.2.3.
concerns:

The Commission has provided two answers to our

— If the two persons are in different Member States, the

customer owes VAT to his Member State.

— A supplier with several customers in another Member
State would probably be registered there for VAT pur-
poses, in which case no problem would arise.

— If the supplier is outside the EU, the customer owes VAT

to his Member State.

— A Member State wishing to shift VAT liability should

apply it to all suppliers and all supplies.

4. Comments

4.1. General

4.1.1.
This proposal by the Commission to amend the VAT
rules to take account of the liberalisation of the energy market
will play a valuable part in liberalising it still further by
removing constraints on the industry which were not foreseen
when electricity and gas were largely state monopolies that did
not operate beyond the state’s borders. Such changes have
been requested by the industry, which broadly supports the
present proposals. At present
there are about 200 firms
making supplies of electricity or gas into another Member
State; the number is expected to increase, perhaps tenfold,
over the coming years.

4.1.2.
Our welcome for the proposal is, however, subject
to two reservations and a suggestion, which are set out in the
next three paragraphs.

4.2.3.1.
As for the Commission’s first answer, the EESC
maintains that it is quite possible for suppliers to have more
than one customer in a another country without being
registered there themselves.

4.2.3.2.
As regards the Commission’s second answer, the
EESC, in line with the provisions of the Directive, maintains
the view that a Member State has the option of shifting the
liability for some supplies only. It would be desirable if the
Commission could assure us, in writing, that all the Member
States accept this interpretation.

4.2.4.
The provision which appears to take precedence, i.e.
which applies if the option is not exercised, requires the
supplier to register outside his own Member State, a burden
which the new Directive should aim to reduce.

4.2.5. We suggest that the ‘Third rule’ should be refashioned
on the following lines:

4.2.5.1.

The Third rule, a suggested new version.

4.2.

First reservation

4.2.1.
the ‘Third rule’

The provisions which we have described above as
introduce uncertainty into the scheme. A

4.2.5.2.
A supply of electricity or gas to a person in a
different Member State from the seller should, if the purchaser
is not engaged in the business of re-selling that commodity, be
taxable in the Member State where the energy is consumed.

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The person liable for the tax should be the purchaser if he is
registered for VAT in that Member State. If he is not registered
there the person liable should be the seller, who would have
to register there.

The EESC considers that ‘intention’

4.3.2.
is a difficult
criterion to verify and is not appropriate for taxation purposes;
is too vague. Clarification of this
similarly, the word ‘most’
provision would prevent difficulties in applying the proposed
Directive.

4.3.

Second reservation

The new rules depend on whether or not

4.3.1.
the
purchaser is engaged in the business of re-selling electricity
or gas. In response to the EESC’s question concerning the
case of a municipality, which buys electricity and sells some
of it to the people in its area and uses some of it in its own
offices and for lighting the streets, the Commission states
that it is necessary to know the intention of the purchaser
at the time of purchase. If the intention is to re-sell most of
the electricity, the purchase will be subject to the second
rule, according to which the transaction is taxable in the
located and the
Member State where the purchaser
purchaser is the person liable to pay the tax. If not, the third
rule is applicable.

is

Brussels, 26 March 2003.

4.4.

Suggestion

4.4.1.
If, by way of an example, an Italian company buys
gas from a French producer and uses it entirely for the
generation and sale of electricity, the purchase of gas would at
present, according to the Commission’s proposed Directive, be
subject to the third rule. However, the EESC believes it would
be more in keeping with the principles of the Directive to
apply the second rule in such cases.

5. Conclusion

The Committee agrees with the aims of the proposal
5.1.
its provisions, but withholds its approval
and some of
until satisfactory replies are received to the reservations in
paragraphs 4.2 and 4.3 above.

The President

of the European Economic and Social Committee

Roger BRIESCH