Proposal for a Council Directive amending Directive 77/388/EEC as regards value added tax on services provided in the postal sector
Date: 2003-05-05
Institutions: European Commission
Subjects: VAT, postal service, public service, restriction on competition, tax exemption, tax harmonisation, tax system

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 5.5.2003
COM(2003) 234 final

2003/0091 (CNS)

Proposal for a

COUNCIL DIRECTIVE

amending Directive 77/388/EEC
as regards value added tax on services provided in the postal sector

(presented by the Commission)

EXPLANATORY MEMORANDUM

1.

BACKGROUND

When the Sixth Value Added Tax Directive1 was adopted in the 1970s, the postal sector was
characterised by a monopoly situation and a limited range of services that were not subject to
any competition. The tax arrangements then adopted, i.e. exemption of public postal services,
were suited to that situation.

In some Member States, public postal services are still considered to fall outside the scope of
Value Added Tax (VAT) since they are deemed to be provided by a public authority within
the meaning of Article 4(5) of the Sixth Directive.

In other Member States, Article 13(A)(1)(a) is applied. This exempts:

The  supply  by  the  public  postal  services  of  services  other  than  passenger  transport  and
telecommunications, and the supply of goods incidental thereto.

Moreover, Article 13(B)(e) exempts:

The  supply  at  face  value  of  postage  stamps  valid  for  use  for  postal  services  within  the
territory of the country, fiscal stamps, and other similar stamps.

The  exemption  for  postal  services  does  not  cover  similar  services  supplied  by  other  bodies
such as railways, airlines or other carriers. However the supply of the postage stamps in this
context is exempt, irrespective of who sells them.

There  is  however,  some  confusion  across  the  Community  as  to  the  correct  interpretation  of
this exemption. For example at least two Member States consider that it does not apply when
public postal services are carried out by a limited company.

2.

COMPETITIVE DISTORTIONS FROM EXEMPTIONS

Exemption does not mean tax-free. It simply means that tax is not charged on the value added
of  a  particular  supply.  But  this  also  means  that  VAT  incurred  on  related  costs  cannot  be
deducted. This inevitably causes distortion. This is due to the effect of the exemption on the
normally  transparent  nature  of  VAT  in  a  chain  of  supplies  and  the  effects  of  the  resultant
“hidden” VAT (often known as the cascade effect).

In the normal course of events, each taxable person in a chain of transactions will charge VAT
and deduct the VAT that he has been charged. In this way the tax flows down the chain until
it reaches the final consumer  who  is  unable to deduct.  Where  there  is a business within  the
chain  that  makes  supplies  that  are  exempt  of  VAT,  it  cannot  deduct  the  VAT  it  has  been
charged. That VAT will be a cost that will feed through to its sales and will feature in its own
selling prices (as “hidden” VAT). As a result, its prices will be slightly lower than they would

1

Sixth  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,  OJ  L  145,  13.6.1977,  p.  1,  as  last  amended  by  Directive  2002/92/EC,  OJ  L 331,  7.12.2002,
p. 27.

2

                                                
have been had it been charging VAT on its sales, because the hidden VAT does not include
that business’ own added value. It is the VAT on its costs not the VAT on its sales.

Where the person making an exempt supply sells to final consumers, they will benefit from a
reduced price because the value added by that supplier has not been subject to tax. Even so,
because  the  exempt  business  cannot  deduct  tax,  the  customer  will  pay  hidden  tax  on  the
supplier’s costs. However, where  a taxable business is the consumer of  an exempt supply it
will  incur  costs  from  the  exempt  business  that  will  include  hidden  VAT  which  it  will  be
unable to deduct. The result is higher costs to the taxable business. When this taxable business
charges VAT on its own sales, the value-added calculation will include the hidden VAT in its
tax base. As a result the final consumer will pay more tax, as it will pay VAT on the hidden
VAT.

3.

DISTORTION IN THE POSTAL SECTOR.

In  the  context  of  postal  services,  the  current  exemption  causes  a  distortion  between  similar
services supplied by the public operator and the private operator because only the services of
the  former  are  exempt.  The  public  operator’s  prices  will  be  more  favourable  where  postal
services are supplied to persons who do not have  a right  of deduction  (e.g.  private  persons,
banks,  insurance  companies,  charities  etc.).  Such  consumers  cannot  recover  all  the  VAT
charged to  them  so  it  is  currently  more  advantageous  for  them  to  buy  such  services  from  a
VAT exempt service provider because they will benefit from a lower price despite the hidden
tax. On the other hand, a business that is able to deduct VAT will prefer the prices of a taxed
service provider (a private operator) who will charge him VAT that he will be able to deduct.
This type of  business,  which  currently  is  responsible  for  just  over  60%  of  the  public  postal
operators’ turnover for mail services within the European Community, will prefer to go to an
operator that charges VAT. This is because there will be no hidden tax and, although the price
plus VAT charged will be higher, the VAT can be deducted, leaving a lower actual price paid.
The consequence of the current exemption is that the public and private operators are not able
to  compete  effectively  in  all  markets.  Furthermore,  given  that  a  large  part  of  the  sector
remains reserved for public operators, the incidence of hidden VAT is very high.

Since public postal services now operate in markets that are subject to competition,  the  fact
that VAT exemption is limited solely to the public sector inevitably distorts that competition.
This situation, which is increasingly hard to justify, regularly gives rise to complaints on the
part of both private and public operators. Increasing liberalisation in the sector increases the
incidences of distortion.

The  existing  system  also  complicates  internal  commercial  relations  within  public  operator
based groups, whose independent subsidiaries (eg a transport company) are usually subject to
the normal VAT rules and as a result, charge and deduct VAT. When a subsidiary supplies a
service to the public operator, the VAT invoiced cannot be recovered by the public operator,
and it therefore incurs a cost. Conversely, when the public operator supplies a service to its
subsidiary, the supply will be exempt but will include hidden VAT. Thus VAT which in the
normal course of events should flow through the businesses to the final consumer gets caught
in the system, causing increased costs to business and consumer.

Some countries  in the context of  privatising their  postal  operators  fully  or  partially,  already
tax the postal sector and this in turn gives rise to problems with regard to relations with postal
operators in other countries in which the public operator is still exempt.

3

All  of  these  problems  indicate  that  the  principle  of  neutrality  at  the  heart  of  the  common
system of VAT is no longer respected in this sector. The purpose of this proposal is therefore
to amend the Sixth Directive, with a view to making all the services provided by this sector
subject  to  VAT.  This  will  modernise  and  simplify  the  tax  by  removing  the  distortion  and
make  the  application  of  the  tax  in  this  sector  fairer.  This  is  in  line  with  the  Commission’s
Communication on a strategy to improve the operation of the VAT system published in June
20002.

4.

THE PROPOSED SOLUTION TO THE PROBLEMS ENCOUNTERED

From a purely technical viewpoint, the best and most straightforward solution would be to tax
all postal services at a standard rate. Taxation would bring to the public postal operators the
right to deduct VAT incurred on purchases, thus removing the hidden VAT from the system
for everyone and solving most of the problems of distortion for suppliers.

However, the introduction of full taxation at the standard rate could lead to price increases, in
particular  to  postal  services  supplied  to  private  consumers.  It  should  be  stressed  that,  in
allowing postal operators associated input tax deduction, this taxation would not give rise to a
price increase equivalent to the standard rate of VAT. Nevertheless, given the margins applied
by postal operators and the standard VAT rates in the Community, some price increases for
the  final  consumer  would  be  likely,  unless  this  additional  income  from  taxation  is  used  by
Member States to increase their postal subsidies (either  to  the operator or to the  consumer).
Full taxation  could also have  significant  impact in  some  sensitive  areas  of  business  such  as
charities and health, where non-deductible costs will increase.

The  Commission  has  therefore  sought  to  achieve  a  solution  that  will  remove  the  distortion
produced  by  exemption  while  allowing  Member  States  to  minimise  the  resultant  impact  of
price  increases  on  final  consumers  through  the  tax  mechanism.  This  can  be  achieved  by
providing  for  the  possibility  of  a  reduced  rate  for  those  postal  services  used  by  private
consumers. This is because the total tax on a postal operator’s outputs at a reduced rate will
not be significantly different from the total input tax at the standard rate on his inputs. (The
actual result will depend on the relative levels of the reduced and standard rates applied and
the degree of “value added” by the postal service supplier.)

In applying a reduced rate, however, it is necessary to bear in mind the unique nature of postal
operations, in particular the ability for customers to buy stamps in various denominations in
advance and to  deposit their mail for  collection in post boxes, without any  contact  with  the
operator. The dividing line between various products subject to different VAT rates is crucial
if the key objective of simplification is to be achieved.

However, it has not been found to be technically feasible to target a reduced rate exclusively
at private consumers alone, on account of the nature of the operations involved. Instead, it is
proposed that a  reduced  VAT  rate is  made  available to  Member  States  to  apply  to  standard
postal  services.  This  will  include  the  majority  of  private  mail  but  will  also  apply  to  some
business mail. In fact it does not matter that the reduced rate is also available to businesses,
given that taxable businesses  can  deduct VAT  whatever  the  rate  charged,  and  VAT  exempt
businesses  will,  like  the  final  consumers,  be  in  broadly  the  same  position  as  they  would  be
under the existing rules.

2

A  strategy  to  improve  the  operation  of  the  VAT  system  within  the  context  of  the  internal  market
COM(2000) 348 final.

4

                                                
The attached proposal for a Directive therefore seeks to amend  the  VAT rules  applicable to
public postal services by making them generally taxable. However, to minimise the impact of
this change on prices paid by final consumers, the proposed solution includes an option for a
limited  reduced  VAT  rate  for  letters  and  small  packages.  These  arrangements,  a  detailed
description of which is given in the next section of this document, are intended to enable all
enterprises operating in this sector to be treated more fairly, while minimising the impact of
the change on final consumers.

It  should  nevertheless  be  stressed  that  the  approach  of  taxing  all  postal  services  does  not
affect the process of liberalisation of the postal sector, which remains subject to the provisions
of Directive 97/67/CE of 15 December 1997 (as amended)3. The application of VAT is not a
prerequisite  for  greater  liberalisation  in  this  sector  but  merely  the  solution  to  the  current
difficulties arising in this partly liberalised market.

5.

SUMMARY OF THE PROPOSED CHANGES

The proposal has three key elements:

(cid:1)  Removal of the exemption for the public postal services and postage stamps.

(cid:1)  Amended place-of-supply-rules to ensure only one VAT rate for most private post.

(cid:1)  An option for a reduced rate.

It is proposed that the postal services exemption and the exemption for postage stamps will be
abolished. In principle this will mean that all postal services will follow the basic VAT rules
for  transport  as  set  out  in  Articles  9(2)(b)  and  28B(C)(2)  of  the  Sixth  VAT  Directive.
Transport  is  taxable  to  the  extent  that  it  takes  place  within  the  Community  but  transport  of
goods destined to a place outside the Community is exempt with a right to deduct.

Without additional change, the immediate effect of removing the exemption would therefore
be  to  create  two  liabilities  for  postal  services:  Post  collected  for  delivery  within  the
Community  would  be  standard  rated,  whereas  post  collected  for  delivery  outside  the
Community  would  be  exempt  with  a  right  to  deduct.  This  would  cause  some  difficulty,  for
example  requiring  two  sets  of  stamps  which  would  be  further  complicated  by  the  fact  that
stamps are generally available in a variety of values. Therefore, in order to ease the impact of
this change on final consumers, and to simplify control systems, it is proposed that standard
postal  services  concerning  all  addressed  items  weighing  2  Kg  or  less  will  have  a  special
place-of-supply-rule.  It  is  proposed  that  all  such  supplies  destined  for  delivery  outside  the
Community should be treated as if they are for delivery within the Community. At the same
time  changes  are  proposed  for  the  export  rules  to  remove  the  exemption  (with  a  right  to
deduct) for this category of service. Thus only one rate would apply. This is consistent with
similar VAT systems in this sector outside the Community.

In principle,  therefore  all  basic  postal  services  involving  addressed  items  weighing  2  Kg  or
less would become taxable at the standard rate. However it is also proposed that there should
be an option for Member States to apply a reduced VAT rate to all of these services.

3

OJ L 15, 21.1.1998, p. 14.

5

                                                
Non  standard  services,  services  relating  to  unaddressed  mail  and  services  relating  to  items
greater  than  2  Kg  will  come  under  the  normal  VAT  place-of-supply-rules  for  transport
services and will be ineligible for the reduced rate. Such post collected for delivery within the
Community  would  be  standard  rated,  whereas  such  post  collected  for  delivery  outside  the
Community would be exempt with a right to deduct.

6.

DETAILS OF THE PROPOSED TAXATION SYSTEM

6.1.

General provisions

Although postal services comprise various activities including the clearance, sorting, transport
and distribution of postal items, as far as the customer is concerned the service provided is the
movement of goods from one place to another. It is therefore proposed that the provision of
postal  services  should  be  treated  as  a  single  supply  of  transport  services.  Various  sub-
contracted services such as railway transport will remain unaffected by these measures.

It is further proposed that stamps will be treated as evidence of advanced payment, unless a
special scheme is used, in which case it is proposed that the possibility be available for them
to be deemed to be supplies of goods and exempt with a right to deduct. (This special scheme,
which is to avoid the need for several sets of stamps, is set out in more detail below.)

Finally it is proposed that the supply of stamps for philatelic purposes should be a supply of
goods at the standard rate, since they are unconnected with the supply of postal services. They
would  therefore  be  outside  the  scope  of  the  postal  operators  scheme  and  the  normal  supply
rules would apply.

6.2.

Special place-of-supply-rule for mail destined to third countries

It is proposed that the place of supply of the basic transport of letters and small packages no
heavier than 2 Kg will be in the country of departure. This will remove the difficulties arising
from  the  adoption  of  the  normal  place  of  supply  of  transport  rules  and  related  control
problems for stamps for cross border postal services, which would be exempt with a right to
deduct. It will also remove the need for third country operators to register for VAT in respect
of the Community leg of postal transport originating in a third country.

The  proposed  place-of-supply-rules  will  cover  all  the  activity  of  the  postal  services  (ie
clearance, sorting, transport, and delivery) in relation to the defined postal items but not the
activity  of  any  component  part  provided  by  a  subcontractor.  They  will  cover  any  ordinary
item  up  to  the  given  weight,  marked  with  the  name  and  address  of  the  recipient.  They  will
apply  to  such  items  transported  by  any  carrier,  including  addressed  direct  mail,  books
catalogues,  newspapers  and  any  small  packages.  But  this  will  not  include  any  services
provided by an operator that are additional to basic mail services, such as express mail. These
are excluded, as they are more generally services supplied to business customers.

In combination with the special place-of-supply-rule, it is proposed that the exemption with a
right to deduct for basic transport to a third country, of postal items weighing less than 2 Kg
be removed by an amendment to Article 15(13).

These  special  place-of-supply-rules  will  mean  a  simpler  rule  for  operators  and  customers
alike, namely only one VAT rate (which would be either at the standard or reduced rate) for
all mail below 2 Kg. At the same time opportunity for error and abuse is greatly reduced by
having a high weight threshold.

6

6.3.

Optional reduced rate

Against a background of full taxation at the standard rate, It is proposed that Member States
will  be  given  the  option  to  apply  a  reduced  rate  for  the  standard  postal  service  relating  to
addressed  letters  and  packets  no  heavier  than  2  Kg.  This  will  include  direct  mail,  books,
catalogues, newspapers etc provided that they have been addressed to a named person. Direct
mail addressed  “To  the  Occupier”  will  therefore  not  be  eligible.  With  an  upper  limit  of  the
reduced rate up to and including 2 Kg there is a reduced need for different sets of stamps. The
majority of postal activity concerns far lighter items. The reduced rate will only apply when
postal  services  are  supplied  to  the  customer.  It  will  not  apply  to  sub-contracted  elements
supplied to the supplier of the postal services.

The principle aim of this reduced rate is to ensure that the removal of exemption in this area
will not result in price increases for the private customer. Of course the appropriate rate will
be  different  in  each  Member  States  because  the  standard  rate  is  different.  Where  Member
States decide not to take up the option of a reduced rate, the standard rate will apply.

This reduced rate will be one of the two already available under Article 12(3) and will involve
an additional category in Annex H.

Many  businesses  will  also  benefit  from  a  reduced  rate,  as  it  is  impossible  to  distinguish
between  private  and  business  mail.  For  the  vast  majority  of  businesses  which  themselves
make taxable supplies, this is of absolutely no consequence. They are able to deduct the VAT
charged  to  them  whatever  the  rate.  For  VAT  exempt  businesses,  (banks,  insurers,  schools,
charities etc) the result will be the same as for final consumers. However, un-addressed direct
mail cannot be confused with private mail and is therefore outside the scope  of the  reduced
rate.

In some Member States all postal services are already taxed at the standard rate in the context
of a fully liberalised market while in some others, taxation is applied to non-reserved services
irrespective  of  who  provides  the  service.  Thus  not  all  Member  States  will  wish  to  apply  a
reduced rate to minimise the impact of the introduction of taxation since the impact will vary
considerably from state to state.

6.4.

Postal services for packages greater than 2 Kg

With  regard  to  services  in  relation  to  packages  greater  than  2  Kg  it  is  proposed  that  no
reduced  rate  be  available  and 
transport
(Articles 9(2)(b) and 28B(C)(2)) will apply. This will mean:

the  normal  place-of-supply-rules  for 

that 

(cid:1)  Items collected and delivered in a Member State will be taxable in that Member State.

(cid:1)  Items collected in a Member State and delivered to another Member State will be taxable

in the Member State of departure.

(cid:1)  Items collected in a Member State and delivered to a place outside the Community will be
taxable  in  that  Member  State  for  the  element  of  the  journey  that  takes  place  in  the
Community. It is proposed that this supply will be exempt with a right to deduct under an
amended Article 15(13).

7

(cid:1)  Items collected in a place outside the Community and delivered to a Member State will be
within the scope of VAT of any Member State of the Community for any element of the
journey that takes place in that Member State. This supply will still be exempt with a right
to deduct by existing Article 14(1)(i).

6.5.

Treatment of Terminal Dues

As  well  as  delivering  goods  collected  within  the  Member  State,  the  activities  of  operators
include  the  delivery  of  items  collected  in  another  Member  State  or  third  countries.  The
operator  who  collects  the  mail  will  charge  the  customer  for  its  complete  transport  and
delivery. He  will  subcontract  the  delivery  element  to  the  operator  in  the  other  country.  The
payment  received  by  the  second  operator  is  called  a  terminal  due.  This  represents  the
consideration for  a supply  from the operator who delivers to the operator who collects. It is
proposed that the tax treatment of these will be as follows:

Cross border terminal dues involving a third country, will be exempt with a refund of tax at
the preceding stage, under Article 14(1)(i). The alternative would be for Community operators
to  charge  VAT,  which  would  in  principle,  be  eligible  for  deduction  by  the  third  country
operator.  However,  many  third  country  postal  operators  would  be  ineligible  for  a
13th Directive  claim,  because they  are state  operations  and  not  taxable  persons.  Furthermore
the 13th Directive permits Member States to reject claims by third country entities where there
is no reciprocity between the  countries.  Given that postal operations involve operators  from
almost every country in the world, there would be significant distortion in terms of eligibility
for refund.

With  regard  to  intra-Community  terminal  dues  it  is  necessary  to  identify  where  the  postal
items in question are at the moment the subcontractor takes over the transport. The result is
the same but for different reasons.

Where  the  principal  operator,  X  based  in  Member  State  A,  delivers  the  item  to  the
subcontractor Y, based in Member State B, and the hand-over takes place in Member State A,
the place of supply of the services will be in Member State A, by virtue of Article 28B(C)(1)
and 28B(C)(2).  This  is  because  the  subcontractor’s  services  are  an  intra-Community  supply
and the place of supply is the place of departure of the transport. VAT will be due in Member
State A and should be accounted for  by operator X under the reverse  charge rule set  out  in
Article 21(1)(b).

Where  the  principal  operator,  X  based  in  Member  State  A,  delivers  the  item  to  the
subcontractor Y, based in Member State B, and the hand-over takes place in Member State B,
the  place  of  supply  of  the  services  will  still  be  in  Member  State  A,  by  virtue  of
Article 28B(C)(1) and 28B(C)(3). This is because the subcontractor’s services are linked to an
intra-Community  supply  and  the  customer  is  in  a  member  state  other  than  that  of  the
departure of the transport. VAT will be due in Member State A and should be accounted for
by operator X under the reverse charge rule set out in Article 21(1)(b).

However, where the sub-contractor, Y, is identified for  VAT purposes in the other Member
State (A), he will, in both cases above, be responsible for accounting for the tax.

8

6.6.

Treatment of reply paid mail

Businesses  can  register  with  their  postal  operator  under  the  Business  Reply  Service,  which
enables the addressee to offer a message free of charge. For VAT purposes there are two types
of reply paid mail. The first is given by businesses to customers who are in the same country
as the business. The second is where the business and customer are in different countries.

In the first case the situation is straightforward. The postal operator charges the business a fee
for registration and charges again per item delivered to it. Both these charges will be subject
to VAT in the normal way and eligible for the reduced rate where applied.

In the second case the situation is more complex. The business registers with its local operator
and pays the registration fee and a charge for each item received. Both these charges will be
subject to VAT in the normal way and eligible for the reduced rate where  applied.  There is
however an additional charge from the foreign operator to the local operator for the collection
of the item. These charges form part of the terminal dues. They will be exempt with refund
under Article 15(13) when the collection is of an item destined to a third country.

When the item is being collected in one Member State and sent to another, it will be taxable
in the Member States of departure in accordance with Article 28B(C)(1) and 28B(C)(2). This
is because the subcontractor’s services are linked to an intra-Community supply and the place
of supply is the place of departure of the transport. It will be subject to a reverse charge under
Article 21(1)(b) in cases where the sub-contractor is not identified  for VAT  purposes  in  the
other Member State.

6.7.

Option for special tax accounting scheme for postal operators

Operators in Member States that adopt the reduced rate may have to account for VAT at three
levels  (Standard  rate,  reduced  rate  and  nil  ie  exempt).  Where  no  reduced  rate  is  adopted,
operators will have to account for VAT at two levels. This implies the necessity for separate
sets of stamps, although, with the proposed changes both to the place-of-supply-rules and to
the  exemption  for  mail  below  2  Kg,  and  the  setting  of  a  reduced  rate  at  the  same  level  of
2 Kg, the need for separate sets of stamps is greatly reduced.

As a simplification, in order to avoid the need for different classes of stamps, it is proposed
that postal operators should be permitted to operate a special scheme by which they work out
the  amount  of  VAT  due  from  their  postal  operations  by  an  alternative  method.  This  would
leave  the  customer  to  have  to  deal  with  only one set of stamps.  It  is  clear  from  discussions
with  various  operators  that  some  operators  would  not  be  interested  in  a  special  scheme,
whereas others recognise that several sets of stamps would unnecessarily complicate the issue
for their customers and such operators would welcome the opportunity for a simplification. At
the  same  time  it  is  also  clear  that  systems  and  the  extent  of  technology  vary  greatly  from
Member  State  to  Member  State.  Whatever  scheme  is  suitable  for  one  operator  would  not
necessarily be appropriate for another. It is therefore proposed that Member States should be
able to design their own special scheme tailored to the systems in their territory.

Whatever the scheme, in principle it would have to determine:

(cid:1)  The extent of mail for which VAT will be due at the reduced rate

(cid:1)  The extent of mail for which VAT will be due at the standard rate

9

(cid:1)  The extent of mail above 2 Kg destined to non  Community countries for which no  VAT

will be due

(cid:1)  Any  reverse  charges due by the  operator in  respect  of  terminal  dues  received  from  other

Member States (standard rate)

This  system  will  also  need  to  include  a  scheme  to  ensure  proper  evidence  for  deduction  is
available to business customers.

This  approach  includes  the  possibility  of  avoiding  the  double  taxation  of  postage
stamps/postal services by, for example treating the stamps as goods and zero-rating them.

The  advantage  of  using  such  a  scheme  is  that  the  introduction  of  taxation  would  mean  no
change in the operation of the postal service from the consumer’s point of view.

7.

CONCLUSION

When the Sixth VAT Directive was adopted, postal services were almost exclusively supplied
by  national  monopolies,  a  fact  that  explains  the  decision  made  at  that  time  in  favour  of  a
system  of  general  exemption  of  postal  services.  Nowadays,  however,  these  services  are
increasingly  being  provided  within  a  competitive  environment.  Exempting  the  activities  of
public operators therefore creates distortions of competition  vis-à-vis  private operators,  who
are subject to VAT.

In order to rectify the distortions that arise from this exemption, the only viable solution is to
tax all activities of this type. Nevertheless, the impact on the final consumer of such a change
could be mitigated  by the introduction of  a  limited reduced rate without  significant  revenue
effect or distortion.

The  proposed  change  to  the  VAT  treatment  of  postal  services  will  mean  that  for  any
addressed postal item below 2 Kg there will be one rate of VAT for the standard service. This
will be either at the standard rate or the reduced rate, depending on whether the Member State
has taken up the option  for  the  latter.  For any postal item over 2 Kg there  are  two  possible
rates. The services will be standard rated if the item is to be delivered within the Community
and exempt with a right to deduct if it is to be delivered to a third country.

8.

COMMENTS REGARDING THE INDIVIDUAL PROVISIONS

Article 1

Point 1

Place of supply of services relating to letters

This provision provides for postal services relating to certain mail below 2 Kg to be taxed in
the Member State of departure, and the service in question is deemed to have been carried out
within that country. Consequently, the service is always taxable, even if the mail is intended
for  a  third  country.  This  outcome  is  obtained  by  derogating  from  the  principle  set  out  in
Article 9(2)(b), under which the place where transport services are supplied is the place where
transport takes place, having regard to the distances covered. This links also to the place of
departure rules for intra-community transport of goods under Article 28B(C)(2).

10

However,  where  the  recipient  of  the  mail  is  also  the  recipient  of  the  service  (eg  Business
Reply Mail), the place of supply becomes the place of delivery of the item in question, even
in cases where that item is transported through different countries.

These  rules  only  apply  to  standard  postal  services,  which  can  be  provided  by  any  operator.
They apply only to items of correspondence, direct mail, books, catalogues, newspapers and
small packages where the items are addressed to a named person. They do not therefore cover
direct  mail  addressed  “To  the  Occupier”.  These  rules  cover  the  basic  standard  service,
sometime  referred  to  as  the  “second-class”  service.  Also  included  would  be  the  accelerated
delivery service sometimes referred to as “first-class” or “courrier prioritaire”. Standard postal
services in this context do not, however, include express services. This is to focus them as far
as possible to the services mostly used  by  final  consumers.  Having  a high  weight  limit  sets
one rule for the majority of standard post and aligns the place-of-supply-rule demarcation line
to the reduced rate option borderline, making the overall package simpler.

Point 2

Taxation of postal services

It  is  proposed,  in  order  to  provide  for  taxation  of  postal  services,  that  those  provisions  of
Article 13 providing for exemption be deleted.

Point 3

Removal of zero-rating

In  addition  to  the  amendment  to  the  place-of-supply-rule,  it  is  proposed  that  there  be
exception  to  the  principle  of  exemption  under  Article  15(13)  (supply  of  services  linked  to
export).  This  provision  in  effect,  limits  the  exemption  of  any  postal  services  in  relation  to
addressed  items  destined  to  third  countries,  to  non-standard  postal  services  and  to  goods
heavier than 2 KG.

Point 4

Special scheme for postal operators

In  order  to  further  simplify  the  postal  system  in  relation  to  VAT,  this  provision  makes  a
further option available to those Member States that take up the reduced rate option, to allow
operators  to  account  for  VAT  under  a  special  scheme.  Because  postal  systems  and  their
degree of technology vary  greatly from Member State to Member State,  the exact  nature of
the scheme may vary. However the broad principle remains the same: Stamp prices are set for
each product according to the VAT liability but no VAT is shown on the actual stamp. This
allows  one  set  of  stamps  to  be  used  for  all  products.  The  correct  amount  of  VAT  due  is
calculated  by  the  operator  during  processing,  on  the  basis  of  counting  the  numbers  of  each
product sold at the given price.

To  enable  taxable  businesses  to  deduct  VAT  on  postal  services,  the  system  would  have  to
incorporate an agreed document for evidence.

11

Point 5

Changes to Annex F

At  the  same  time  it  is  proposed  that  the  exemption  for  telecommunications  services  in
Annex F will be abolished.

This provision stems from the transitional provisions set out in Article 28(3)(b) of the Sixth
VAT Directive which permitted Member States to continue to exempt certain activities listed
in  Annex  F.  Category  5  of  that  annex  covered  the  provision  by  public  postal  services  of
telecommunications  services.  However  no  Member  State  currently  makes  use  of  this
provision and, given the construction of the transitional provisions in Article 28, they will not
be able to use this provision in the future.

Point 6

Optional reduced rate

This provision provides for a new optional limited reduced rate to be introduced for standard
postal  services  relating  to  correspondence,  direct  mail,  books,  catalogues,  newspapers  and
small packages, which is addressed to a named person. Standard postal services here means
the basic standard service, sometimes referred to as the “second-class” service. Also included
would be the accelerated delivery  service  sometimes  referred  to  as  “first-class”  or  “courrier
prioritaire”. Standard postal services in this context do not, however, include express services.
The  services  in  question  can  be  provided  by  any  operator.  This  reduced  rate  is  aimed  at
minimising  the  impact  of  the  move  from  exemption  to  taxation  for  the  majority  of  services
enjoyed by the private consumer. In principle the reduced rate set by Member States for these
postal  services  should  mirror  the  effect  of  the  current  exemption  and  obviate  the  need  for
price  increases.  Given  that  the  standard  rate  percentages  vary  between  Member  States,  the
reduced rate percentage will also vary. This would be one of  the  existing two reduced rates
permissible under Article 12(3)(a).

The  borderline  for  the  reduced  rate  is  set  at  2  Kg  to  reduce  the  need  for  different  sets  of
stamps in practice and to reduce the possibility of error or abuse through the use of incorrect
stamps.  The  high  weight  limit  means  that  it  is  virtually  impossible  to  put  mail  for  which  a
standard rate stamp would be required, in a letterbox.

Further simplicity is achieved by linking the borderline for the reduced rate with that for the
place-of-supply-rule,  making  it  easier  for  operators  and  customers  alike.  There  is  one
borderline, 2 Kg for VAT issues, below which special rules apply. Above 2 Kg, normal VAT
rules for transport apply.

12

2003/0091 (CNS)

Proposal for a

COUNCIL DIRECTIVE

amending Directive 77/388/EEC
as regards value added tax on services provided in the postal sector

THE COUNCIL OF THE EUROPEAN UNION,

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular
Article 93 thereof,

Having regard to the proposal from the Commission4,

Having regard to the opinion of the European Parliament5,

Having regard to the opinion of the European Economic and Social Committee6,

Whereas:

(1)

(2)

(3)

(4)

The  existing  value  added  tax  (VAT)  exemption  of  postal  services  under  the  Sixth
Directive  77/388/EEC  of  the  Council  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 assessment7, is limited solely to public postal operators, and the
resulting  discrepancy,  whereby  those  services  are  exempt  if  they  are  supplied  by
public operators but taxed if supplied by private operators, gives rise to distortions of
competition.

The  proper  functioning  of  the  internal  market  requires  that  wherever  possible,  such
distortions be eliminated.

The  Commission  is  committed  to  a  strategy  of  modernising  and  simplifying  the
operation of the VAT system within the context of the internal market8.

As  regards  to  the  application  of  VAT  to  postal  services  all  such  services  should  be
made  taxable  by  treating  them  as  goods  transport  services,  thereby  allowing  postal
operators to deduct input tax incurred on purchases. In consequence, overall net prices
should decrease and  any overall price increase  arising from the  introduction of  VAT
would be unlikely to be equal to the standard rate percentage applying in each Member
State.

4

5

6

7

8

OJ C …, …, p. …
OJ C …, …, p. …
OJ C …, …, p. …
OJ L 145, 13.6.1977, p.1. Directive as last amended by Directive 2002/92/EC (OJ L 331. 7.12.2002. p. 27).
COM(2000) 348 final.

13

                                                
(5)

(6)

(7)

(8)

(9)

In  order  to  counter  gross  price  increases  in  certain  limited  areas,  for  private
consumers, it is appropriate to apply a reduced rate, which produces the same revenue
effect as the current exemption. However, a reduced rate across the sector should not
be introduced, since it would lead to greater instances of distortion.

The  place-of-supply-rules  for  letter  post  should  be  amended  in  order  to  reduce  the
possibilities for error or fraud, provide simplification and ensure that the Community
system is comparable to other similar systems.

In  order  to  enhance  the  efficiency  of  a  simplified  accounting  scheme  for  postal
operators, it should be possible to treat postage stamps as  goods but  ignore them for
tax purposes when they are supplied for the purpose of obtaining postal services.

Given the differing levels of technology used by national postal operators, it should be
left to Member States to design the most appropriate special accounting system.

In  principle,  a  refund  of  VAT  would  be  available  to  postal  operators  established  in
third countries, under the Thirteenth Council Directive 86/560/EEC of  17  November
1986 on the harmonisation of laws of the Member States relating to turnover taxes –
Arrangements for the refund of value added tax to taxable persons not established in
the  Community  Territory.9  However,  given  that  the  activities  of  some  state  owned
postal  operators  might  not  be  considered  to  be  economic  activities,  thus  preventing
such  refund,  exemption  with  the  right  of  deduction  should  be  provided  for  any
terminal  dues  within  the  meaning  of  Article 2(15)  of  Directive 97/67/EC  of  the
European Parliament and of the Council of 15  December 1997 on  common  rules  for
the  development  of  the  internal  market  of  Community  postal  services  and  the
improvement of quality of service10, in respect of the distribution of incoming cross-
border mail from third countries.

(10)

Since the objectives of this Directive cannot be sufficiently achieved by the Member
States  for  the  above  mentioned  reasons  and  can  therefore  be  better  achieved  at
Community  level,  the  Community  may  adopt  measures,  in  accordance  with  the
principle of subsidiarity as set  out in Article 5  of  the  Treaty.  In accordance  with  the
principle  of  proportionality,  as  set  out  in  that  Article,  this  Directive  does  not  go
beyond what is necessary in order to achieve those objectives.

(11) Directive 77/388/EEC should therefore be amended accordingly,

HAS ADOPTED THIS DIRECTIVE:

Article 1

Directive 77/388/EEC is amended as follows:

(1) 

In Article 9 the following paragraph 2a is inserted:

“By way of derogation from paragraph 2(b), the standard postal services relating to
any  addressed  envelopes  or  packages,  of  ordinary  correspondence,  direct  mail,

9

10

OJ L 326, 21.11.1986, p. 40.
OJ L 15, 21.1.1998, p. 14.

14

                                                
books,  catalogues  and  newspapers,  which  individually  weigh  no  more  than  2  kg,
shall  be  deemed  to  be  supplied  within  the  country  in  which  transport  commences,
save  where  the  collection  and  delivery  are  paid  for  by  the  recipient,  in  which  case
any such item shall be deemed to be supplied at the place of delivery.

For  the  purposes  of  this  Directive,  “standard  postal  services”  means  the  traditional
basic  service  supplied  to  the  sender  of  the  mail,  including  deliveries  in  the  fastest
standard  category,  where  more  than  one  category  exists,  and  the  delivery  of  items
registered or recorded, but not any express delivery services or services provided by
sub  contractors,  or  any  services  relating  to  terminal  dues  within  the  meaning  of
Article 2(15) of Directive 97/67/EC of the European Parliament and of the Council11.
An addressed envelope or package is  one  on  which is  marked  a named  person at  a
given address.”

(2) 

Article 13 is amended as follows:

a) In Title A, paragraph 1(a) is deleted;

b) In Title B, point (e) is replaced by the following:

“e)  the  supply  at  face  value  of  fiscal  stamps  and  other  similar  stamps  other  than
postage stamps;”

(3) 

In Article 15, point (13) is replaced by the following:

“13.  the  supply  of  services,  including  transport  and  ancillary  operations,  but
excluding  the  supply  of  services  exempted  in  accordance  with  Article  13  and
standard postal services relating to any addressed envelopes or packages, of ordinary
correspondence,  direct  mail,  books,  catalogues  and  newspapers,  which  individually
weigh no more than 2 kg, where they are directly linked to the export of goods or the
import of goods covered by Article 7(3) or Article 16(1), Title A.”

(4) 

In Title XIV the following Article 26d shall be added:

“Article 26d Special Scheme for Postal Operators

Where  Member  States  apply  a  reduced  rate  for  postal  services  in  accordance  with
Article  12(3)(a)  and  Annex  H,  category  18,  they  may,  without  prejudice  to  other
Community provisions and under  conditions  which they may determine in  order  to
prevent any possible evasion, avoidance or abuse, allow the amount of tax due to be
determined on the basis of the numbers of items transported.

In order to avoid double taxation, Member States adopting such a scheme may vary
the treatment of postage stamps to such an  extent  as they  see  fit  in order to  ensure
that only the postal services are taxed.

Where such a regime is adopted, Member States shall include suitable provision for
any taxable person who, as a customer of the postal service provider, has a right of
deduction under Article 17.”

11

OJ L 15, 21.1.1998, p. 14.

15

                                                
(5) 

In Annex F, Category 5 is deleted.

(6) 

In Annex H, the following category is added:

“18.  Standard  postal  services  relating  to  any  addressed  envelopes  or  packages,  of
ordinary correspondence, direct mail, books, catalogues and newspapers, where that
item  individually  weighs  no  more  than  2  Kg,  that  being  a  fixed  ceiling  for  the
purposes of exercising this option.”

Article 2

Member  States  shall  bring  into  force  the  laws,  regulations  and  administrative  provisions
necessary to comply  with this Directive by  … at  the  latest. They  shall  forthwith  inform  the
Commission thereof.

When Member States adopt those provisions, they shall contain a reference to this Directive
or be accompanied by such a reference on the occasion of their official publication. Member
States shall determine how such reference is to be made.

This Directive shall enter into force on the twentieth day following that of its publication in
the Official Journal of the European Union.

Article 3

Article 4

This Directive is addressed to the Member States.

Done at Brussels, …

For the Council
The President

16

FINANCIAL STATEMENT

Once  adopted,  this  proposal  for  a  Directive  will  have  a  slight  positive  impact  on  the
Community’s VAT own resources base.

This is because taxing public postal services, which have hitherto been exempt, will give rise
to an increase in the total VAT revenues collected by the Member States.

It is nevertheless very difficult to make estimation of this increase in own resources given the
enormous difficulty of quantifying all the variables influencing the net result and the fact that
no reliable statistics are available.

17