Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee - Review and update of VAT strategy priorities
Date: 2003-10-20
Institutions: European Commission
Subjects: VAT, administrative cooperation, fiscal policy, report, simplification of legislation, tax harmonisation

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 20.10.2003
COM(2003)614 final

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL,
THE EUROPEAN PARLIAMENT AND THE
EUROPEAN ECONOMIC AND SOCIAL COMMITTEE

Review and update of VAT strategy priorities

.

1

Contents

1.

2.

Introduction.................................................................................................................. 3

a progress report........................................................................................................... 3

2.1.

Simplifying the system................................................................................................. 4

2.1.1.

Simplifying tax obligations .......................................................................................... 4

2.1.2.

Simplification through the use of new technologies .................................................... 5

2.2.

2.3.

2.4.

3.

More uniform application of the common system of VAT.......................................... 6

Modernisation of the present system ........................................................................... 9

Administrative cooperation........................................................................................ 11

Future directions ........................................................................................................ 13

3.1.

Guidelines for future work ......................................................................................... 13

3.1.1.

Taxation at the place of consumption ........................................................................ 13

3.1.2.

Simplifying tax obligations ........................................................................................ 14

3.2.

Review of rules regarding place of taxation .............................................................. 16

3.2.1. Review of the rules regarding the place at which supplies of services are taxed ...... 16

3.2.2. Revision of the rules on place of taxation of supplies of goods................................. 17

3.3.

Consistency with the definitive regime...................................................................... 18

4.

5.

Combating fraud......................................................................................................... 18

Conclusion ................................................................................................................. 20

2

1.

INTRODUCTION

In June 2000, the Commission presented a communication setting out its strategic programme
for improving the operation of the VAT system within the context of the internal market.1

The  strategy  was  for  a  pragmatic  programme  of  action  geared  to  four  main  objectives:  the
simplification and modernisation of existing rules, more uniform application of current rules
and a new system of administrative cooperation.

The strategy was launched on the basis that, given the reservations of the Member States, it
seemed  unlikely  that  significant  progress  towards  a  common  system  of  VAT  based  on
taxation in the Member State of origin would be made in the near future.

Its main objective was to give new momentum in the Council towards concrete and essential
improvements  to  the  existing  tax  system  in  the  near  future,  without,  however,  calling  into
question an ultimate shift to the origin principle (i.e. taxation in the Member State of origin)
as a long-term Community goal.

Now, three years after the action programme was launched, it is time for an initial review of
its  progress.  This  Communication  also  presents  the  new  initiatives  that  the  Commission
intends to propose under the programme over the next few years, and aims to define a number
of emerging guidelines for future action. Lastly, it raises some questions about what kind of
common VAT system is best suited to an internal market of 25 Member States.

2.

A PROGRESS REPORT

This progress report has been drawn up in the light of the four objectives of the new strategy.
However,  the  division  between  objectives  is  not  absolute,  since  certain  proposals  relate  to
more than one objective. A complete list of proposals made in the context of this strategy, and
either adopted or still being discussed in Council, is contained in Annex 1.

As well as reviewing progress with proposals already made, this Chapter introduces a number
of new initiatives for which preparatory work has already been started.

1

COM(2000)348 final.

3

                                                
2.1.

Simplifying the system

2.1.1.

Simplifying tax obligations

During  the  second  stage  of  this  exercise  the  SLIM2  team  came  up  with  a  number  of
recommendations  for  simplifying  VAT  obligations.3  There  was  a  consensus  that  the
obligations  were  so  cumbersome  that  they  placed  a  disproportionate  burden  on  Community
businesses, and this burden should therefore be eased.

In line with these recommendations, the Commission has presented a number of proposals for
directives, which have generally been favourably received by the Council.

Initiatives taken

Elimination of the tax representative

The  Council  adopted  a  Directive  concerning  the  person  liable  for  payment  of  VAT4  which
removed, as from 1 January 2003, Member States’ right to require intra-Community traders to
designate a tax representative for transactions carried out in Member States other than the one
where  they  are  established.  Many  Community  businesses  had  seen  this  fairly  costly  and
complex  obligation  as  an  obstacle  to  the  development  of  their  taxable  activity  in  Member
States other than the one where they were established.

Discharge of tax obligations by electronic means

From 1 July 2003, all taxable persons (established or not) will have the right to discharge their
tax registration and returns obligations by electronic means. This is one of the lesser-known
aspects  of  the  Directive  on  electronically  supplied  services,5  whereby  Member  States  are
required to introduce the facility. However, this measure is part of a more general process of
modernisation and facilitation and is not therefore confined to traders in e-commerce.

Harmonisation of the content of invoices and acceptance of electronic invoicing

The  Directive  concerning  invoicing6  creates  a  legal  framework  in  the  field  of  taxation  for
electronic  invoicing  and  invoice  storage  and  lays  down  harmonised  rules  on  the  content  of
VAT invoices, sub-contracting the issue of invoices and self-invoicing.

2

3

4

5

6

Simpler Legislation in the Internal Market.
COM(1997)618 final report from the Commission to the Council and the European Parliament on the
results  of  the  second  phase  of  SLIM  and  the  follow-up  of  the  implementation  of  the  first  phase
recommendations.
Directive 2000/65/EC (OJ L 269, 21.10.2000).
Directive 2002/38/EC (OJ L 128, 15.5.2002).
Directive 2001/115/EC (OJ L 15, 17.1.2002).

4

                                                
Pending initiatives

Study on VAT obligations

The  study  launched  by  the  Commission  on  the  simplification  and  modernisation  of  tax
obligations is the final stage in the follow-up to the recommendations produced by the SLIM
exercise. Its purpose is to determine how these obligations (setting aside the aspects referred
to above, which have already been dealt with separately) can be simplified and modernised at
Community or national level for all traders, and particularly for small businesses.

Its  findings  have  been  made  available  for  public  consultation  via  the  site  “Your  Voice  in
Europe”,7  which  was  introduced  as  part  of  the  “Interactive  Policy  Making”  initiative.  The
content  of  future  legislative  initiatives  in  this  field  will  take  account  of  the  results  of  this
consultation.

2.1.2.

Simplification through the use of new technologies

Initiatives taken

E-commerce

The  Directive  on  electronically  supplied  services  re-established  a  balance  of  competition
between EU businesses and those not established in the EU when they export internationally
or sell within the EU.

It imposes no additional obligations on providers from non-EU countries supplying services
to businesses established in the EU, since the VAT is payable by the latter on the basis of self-
assessment.  On  the  other  hand,  e-service  providers  must  apply  VAT  to  sales  to  private
individuals established in the EU just as EU service providers have to. To allow traders  not
established  in  the  EU  to  meet  the  VAT  obligations  arising  from  these  transactions,  the
Directive provides for special arrangements allowing them to identify themselves in a single
Member  State  for  all  taxable  transactions  in  the  EU.  Transactions  are  thus  taxed  in  the
Member  State  of  consumption  of  service  and  at  the  rate  applicable  there,  but  the  non-
established trader discharges his returns obligations and pays tax on all his transactions in the
EU in the Member State of identification, which then redistributes the VAT revenue among
the Member States of consumption (a "one-stop shop").

However,  the  Council  decided  that  these  provisions  would  only  apply  for  a  period  of  three
years,  starting  from  1  July  2003.  The  Directive  stipulates  that,  before  30  June  2006,  the
Council  should  either  adopt  measures  on  an  appropriate  electronic  mechanism  on  a  non-
discriminatory  basis  for  charging,  declaring,  collecting  an  allocating  tax  revenue  on
electronically  supplied  services  with  taxation  in  the  place  of  consumption  or,  if  considered
necessary for practical reasons, extend this three-year period.

The European Union is the first tax jurisdiction in the world to have developed and introduced
a simplified framework for the payment of consumption taxes on e-commerce in accordance
with the principles agreed in the OECD.

7

http://europa.eu.int/yourvoice or at
http://europa.eu.int/comm/taxation_customs/taxation/consultations_en.htm

5

                                                
In adopting this Directive the Council took an important step for the operation of the common
system of VAT. The Member States abandoned the principle whereby the place of taxation of
a  taxable  transaction  determines  the  Member  State  in  which  tax  returns  and  payment
obligations for the transaction must be discharged.

The special scheme for travel agents

In  response  to  the  opinion  of  the  European  Parliament,  the  Commission  amended  its  initial
proposal  regarding  the  special  scheme  for  travel  agents8  to  include  the  “one-stop  shop”
facility  for  traders  from  non-EU  countries  falling  within  the  scope  of  this  special  scheme
(see point 2.3).

Replacement of the 8th Directive

The  proposal  for  a  Directive  providing  for  cross-border  deduction  to  replace  the  refund
procedure  under  the  Eighth  Directive9  contains  elements  comparable  to  the  one-stop  shop
system, since the taxable person will be able, in his Member State of establishment, to deduct
VAT on expenditure in other Member States. During Council  negotiations  on this  proposal,
the  Presidency  suggested  using  a  system  of  exchange  of  information  and  redistribution
between Member States of the amounts involved comparable to the one for e-commerce.

2.2.

More uniform application of the common system of VAT

Initiatives taken

VAT rates

To avoid growing differences between the standard rates applied by Member States leading to
structural  imbalances  in  the  EU  and  distortions  of  competition  in  some  sectors,  it  has  been
agreed that, until 31 December 2005, the standard rate must not be below 15%.10

The  Commission  has  also  presented  a  proposal11  relating  to  the  scope  of  reduced  rates  in
order to simplify the rules in this area and achieve a more uniform application of the tax. This
would  give  Member  States  equal  opportunities  to  apply  reduced  rates  in  certain  areas
(e.g.  restaurants,  housing,  the  supply  of  gas  and  electricity  and  home  care  services).  The
proposal is also intended to rationalise the many VAT rate derogations currently available to
individual Member States by making Annex H the sole reference list for all derogations from
the standard rate. The objective is to improve the operation of the internal market and avoid
potential distortions of competition.

8

9

10

11

COM(2002) 64 final of 8.2.2002 and COM(2003) 78 of 24.3.2003.
COM(1998) 377 final of 17.6.1998.
Council  Directive 
2001/4/EC 
OJ L 26, 27.1.2001).
COM(2003) 397 final of 23.7.2003.

19.1.2001 

(OJ  L 

of 

22, 

24.1.2001, 

corrigendum

6

                                                
The  proposal  also  takes  account  of  the  evaluation  report  on  the  experiment  with  labour-
intensive services, which was drawn up on the basis of the reports provided by the Member
States  participating  in  the  experiment.  Taking  into  account  the  information  provided  by  the
Member States and the limitations of the analysis methods used, the report concludes that it
was  impossible  to  identify  with  any  certainty  any  beneficial  impact  on  employment  or
reduction of the black economy resulting from the experimental reduction of the rate of VAT
on labour-intensive services.  However,  it should be  noted that certain  categories of  services
that  took  part  in  this  experiment,  and  in  particular  the  renovation  and  repair  of  private
dwellings, are included in the proposed new Annex H.

Adoption  of  implementing  measures  and  modernisation  of  the  procedure  for  adopting
derogations

The Sixth Directive provides the general framework for a common system of VAT, but does
not contain a mechanism for introducing implementing measures.

Questions relating to the application of the common system of VAT are discussed in the VAT
Committee.  It  is  standard  practice  for  the  results  of  these  discussions  to  be  confirmed  in
guidelines, but the Committee does not have the power to give binding force to its guidelines.

Consequently,  in  1997  the  Commission  presented  a  proposal  for  altering  the  status  of  the
VAT  Committee.  However,  the  Council  could  not  reach  agreement  on  the  matter  and  it  is
unlikely  that  significant  progress  will  be  made  in  the  immediate  future.  The  adoption  of
implementing measures in the field of taxation following the Comitology procedure is still the
main  obstacle  to  getting  the  proposal  adopted.  Probably  only  an  amendment  to  the  Treaty
could give new momentum to this dossier.

However,  given  the  importance  of  uniform  application  of  the  common  VAT  system,
particularly  for  trade  within  the  Community,  the  Commission  has  proposed,12  under  Article
202  of  the  Treaty,  conferring  implementing  powers  on  the  Council  rather  than  the
Commission. In practice, questions of interpretation will continue to be discussed in the VAT
Committee.  When  these  discussions  produce  results  that  should  be  confirmed  in  a  binding
legal  text,  the  Commission  will  present  a  proposal  for  adoption  by  the  Council  acting
unanimously.

The introduction of implementing measures at Community level offers advantages in terms of
transparency and legal certainty for traders and national administrations.

In  the  same  proposal,  the  Commission  suggested  modernising  the  procedure  for  adopting
derogations, which the Council can authorise a Member State to apply in order to simplify the
charging of tax or to help prevent tax fraud or evasion.

At  present  the  Council  can  grant  this  authorisation  by  a  procedure  of  tacit  approval  after  a
given period has elapsed.

The  proposed  Directive  would  ensure  that  every  individual  measure  was  the  subject  of  a
properly substantiated  Council decision. This  would  ensure  transparency  and  legal  certainty
for Member States and traders.

12

COM(2003) 335 final of 10.6.2003.

7

                                                
Pending initiatives

Mechanism for eliminating double taxation in individual cases

Implementing  measures  are  important  for  avoiding  cases  of  double  taxation.  However,
although the Commission frequently receives complaints and letters about individual cases of
double taxation, when  the  case  is  looked  into it  usually transpires  that the  legislation  of  the
Member States concerned complies with the Sixth VAT Directive. The problem is therefore
the result of divergent interpretations of the situation in each particular case.

Under these circumstances there is no reason to initiate an infringement procedure against the
Member States. However, where Member States hold to their positions, the person concerned
still suffers from double taxation. The Commission considers this situation unsatisfactory and
contrary to the principles of the single market. We should therefore consider ways of passing
from the stage of implementing measures, which are of a general nature, to a further stage at
which a mechanism is introduced at Community level for solving individual cases of double
taxation.

Such  a  mechanism  already  exists  for  direct  taxation.  Bilateral  double  taxation  agreements
drafted on the base of  an  OECD standard text provide for a mutual agreement  procedure to
eliminate  cases  of  double  taxation.  Experience  shows  that  simply  getting  the  national
authorities of the Member States concerned to discuss a case very often results in a settlement.

Also  in  the  field  of  direct  taxation,  and  more  specifically  in  relation  to  transfer  pricing,  the
Arbitration  Convention  No  436/EEC  of  23  July  1990  provides  for  a  compulsory  arbitration
procedure  binding  on  the  signatory  Member  States  to  eliminate  double  taxation  in  cases
where the mutual agreement procedure has not achieved that objective within two years.

The  Commission  is  currently  considering  what  legislative  initiatives  could  be  taken  at
Community level to improve the present situation regarding cases of double VAT taxation.

Rationalisation of existing derogations

The Commission has also started on preparatory work towards rationalising the large number
of  derogations  currently  in  force.  In  some  cases  such  this  could  involve  extending  certain
particularly effective derogations to all Member States.

There are a number of points in common between most existing authorisations.

A typical example is the setting of the VAT taxable amount for taxable transactions between
connected  persons,  for  which  a  number  of  derogations  have  been  authorised.  This  concerns
transactions  between  connected  businesses,  between  a  business  and  its  staff  or  between  a
taxable person (natural person) and his family. In practice, national administrations have great
difficulty in taking action in cases in which the price charged has been set abnormally low for
purposes of tax evasion.

However,  it  is  clear  that  some  specific  measures  are  designed  to  deal  with  a  particular
situation in a single Member State. The rationalisation exercise should not call into question
this kind of authorisation.

8

Examination of the different options, rights and transitional arrangements.

Rationalisation  of  derogations  under  Article  27  will  be  followed  by  an  examination  of  the
range  of  options,  rights  and  transitional  arrangements  provided  for  in  the  Directive.  The
objective  is  to  analyse,  on  a  case-by-case  basis,  the  grounds  for  maintaining  them  from  the
standpoint of the single market and, where their continued existence seems justified, to give
all Member States equal opportunities to apply them.

The recast of the Sixth VAT Directive

The Sixth Directive constitutes the legal framework for the common VAT system. However,
it  has  been  amended  more  than  twenty  times  since  it  entered  into  force,  and  has  therefore
become a complicated piece of legislation and difficult to consult.

The  Commission  has  undertaken  to  recast  the  Directive  so  that  it  becomes  an  effective
instrument that clearly sets out the legislation currently in force.

This should not involve a debate on the substance of the 6th VAT Directive; this will come
later, when specific proposals are made for implementing the new strategy.

Therefore,  the  recast  in  no  way  entails  abandoning  the  ultimate  objective  (a  VAT  system
based on the principle of a single place of taxation); its objective is to create a usable tool for
the period during which the present system remains in force.

The  Commission  has  launched  a  public  on-line  consultation13  on  the  basis  of  a  preliminary
draft  of  the  recast  drawn  up  by  Commission  staff.  The  purpose  is  to  collect  positive
contributions that can be used to improve the quality of the legislative text.

2.3.

Modernisation of the present system

in  commercial  practice  and  privatisation  and
Technological  developments,  changes 
liberalisation trends in some sectors have created the need to revise certain provisions of the
Sixth VAT Directive which are unsuited to business transactions.

Initiatives taken

Liberalisation of the gas and electricity market

The  liberalisation  of  the  gas  and  electricity  market  highlighted  the  problems  posed  by
application of the VAT rules, making it necessary to deal with  them  as a matter of urgency
and separately from the broader issue of the place of taxation of supplies of goods generally.
The directive concerning the rules on the place of supply of electricity and gas14 is intended to
facilitate  transactions  between  traders  active  in  those  sectors  and  ensure  that  the  place  of
taxation  corresponds  to  the  place  of  consumption  of  the  energy.  Under  the  rules  adopted,
where the buyer is a trader reselling the supplies, the place of taxation is the place where the
buyer is established. Where the sale is to a final consumer, the place of taxation is the place of
consumption.

13

14

http://europa.eu.int/yourvoice or at
http://europa.eu.int/comm/taxation_customs/taxation/consultations_en.htm
Council Directive 2003/92/EC of 7.10.2003 (OJ L 260, 11.10.2003, p. 8).

9

                                                
Developments in the travel business

The proposal for a directive concerning the arrangements for travel agents (see point 2.1.2) is
intended to modernise those arrangements  and  make  their  application  more  uniform.  At  the
same  time  it  should  eliminate  distortions  of  competition  between  Community  and  non-
Community traders. As a result of commercial developments in this sector, one of the primary
objectives of the special scheme, namely the distribution of VAT revenue among the Member
States where the travel took place and the one where the travel agency is established, was no
longer being achieved.

Competition in the postal sector

The  Commission  has  also  submitted  a  proposal  for  revision  of  the  VAT  rules  applicable  to
postal  services15  designed  to  take  account  of  developments  in  this  sector.  When  the  Sixth
Directive was adopted in the 1970s, the postal sector was in a monopoly position, providing a
limited number of services for which there was no competition. Because of the changes that
have  occurred  in  this  sector,  the  VAT  exemption  allowed  for  postal  services  now  creates
problems involving distortions of competition.

Pending initiatives

Sales promotions using vouchers and payment cards

The tax treatment of vouchers, mainly  used as part of sales  promotion campaigns, has  been
the subject of a number of Court of Justice rulings in recent years.

A number of principles can be derived from these rulings relating to specific cases, but their
application  to  the  multiplicity  of  forms  that  promotion  systems  can  take  continues  to  pose
considerable problems.

Member States  have  also found that the lack  of clear rules has  been  exploited  to  set  up  tax
arrangements designed to artificially reduce the VAT taxable amount for the supply of certain
goods and services.

In addition, changes in the way certain goods and services are paid for, for instance payments
by telephone cards, raises issues of interpretation regarding the point in time at which the tax
becomes chargeable and the nature of the taxable amount for transactions conducted through
intermediaries.

These  subjects  have  been  discussed  with  the  Member  States  on  a  number  of  occasions  in
order to arrive at a common interpretation of the existing rules. However, the Commission has
concluded  from  the  discussions  that  there  is  a  link  between  the  two  subjects  and  that  they
should  be  further  studied  in  a  broader  context  with  a  view  to  drafting  a  proposal  for  a
directive.

15

COM(2003)234 final of 5.5.2003.

10

                                                
Other topics

The Commission is aware that the proposals made so far in the context of modernisation are
aimed at specific sectors of activity and therefore only affect a limited number of traders.

However, preparatory work covering broader areas, such as the VAT arrangements applicable
to public authorities and financial services, is also underway. These are complex subjects with
an  impact  on  other  spheres.  In  particular,  when  considering  the  revision  of  the  VAT
arrangements applicable to public authorities, account must be taken of the knock-on effects
of such changes on the system of exemptions for certain activities in the public interest under
Article 13 of the Sixth Directive, the treatment of subsidies and the right to deductions.

The  Commission  had  initially  planned  to  make  a  proposal  on  the  VAT  arrangements
applicable to public  authorities  in  2003, but given changing priorities (the need to  speed up
work  on  the  place  of  taxation  of  services)  and  the  decision  to  carry  out  an  in-depth  impact
assessment,  it  has  been  postponed  until  2004.  The  impact  assessment  will  analyse  the
economic, environmental  and social  impact  of the  proposal, including its  effect  on  the  final
consumer.

2.4.

Administrative cooperation

There has been major progress in this area in recent years.

Initiatives taken

Mutual assistance in the recovery of claims

The  Council  approved  the  directive  on  mutual  assistance  for  the  recovery  of  claims,16  an
essential component in improving administrative cooperation and a necessary concomitant to
the elimination of compulsory tax representation (see point 2.1.1).

Administrative cooperation for VAT

The Council adopted a proposal for establishing a single legal instrument covering all aspects
of  administrative  cooperation  in  the  field  of  VAT,17  as  the  existence  of  two  different  legal
bases was  found  to  have  an  adverse  affect  on  cooperation  in  the  field  of  VAT  control.  The
new  regulation  not  only  replaces  Regulation  (EEC)  No  218/92  and  the  VAT  clauses  of
Directive  77/799/EEC,  but  tightens  up  on  their  substance.  It  lays  down  clearer  and  more
binding  rules  for  Member  States,  and  provides  for  easier  and  more  direct  contact  between
officials and an enhanced exchange of information between administrations.

16

17

Council Directive 2001/44/EC of 15.6.2001 (OJ L 175, 28.6.2001).
Regulation (EC) 1798/2003 of 7.10.2003 (OJ L 264, 15.10.2003, p. 1).

11

                                                
The Fiscalis programme

The 2003-2007 Fiscalis programme18 has been approved by the European Parliament and the
Council under the co-decision procedure. The programme is designed to help Member States
collaborate more closely in combating tax fraud, through improved electronic systems for the
exchange  of  information  between  national  administrations,  the  introduction  of  cooperation
between  administrations  for  investigations,  training  seminars  for  officials  and  experts  of
national tax administrations and exchanges of officials between national administrations.

Proceedings of the SCAC

The  Standing  Committee  on  Administrative  Cooperation  (SCAC),  jointly  with  the
Commission  and  the  Member  States,  has  been  working  hard  on  risk  analysis,  computerised
audits and targeting of checks to prevent carousel fraud.

A multilateral agreement drawn up by the SCAC has been concluded between the authorities
of  14  Member  States  with  the  aim  of  stepping  up  exchanges  of  information  about  intra-
Community deliveries of new means of transport to help prevent tax evasion and fraud in this
area.

Pending initiatives

Revision of the VIES system

VIES was set up in 1993 to enable Member States to monitor intra-Community exchanges of
goods between taxable persons. The information exchange system was made necessary by the
abolition  of  cross-border  administrative  formalities  and 
internal  frontiers  as  from
1 January 1993.

The system was built to last four years, the time the transitional arrangements were initially
expected to last. It has now been running for much longer and its shortcomings are becoming
more and more apparent.

Rather  than  simply  extending  it  to  cover  services,  therefore,  the  Commission  believes  it
would be better to replace the existing VIES with a higher-powered and more flexible system,
able not only to produce data in a more user-friendly form for customs administrations but to
help them fulfil their obligations towards traders.

The  project  is  still  in  its  early  stages  and  both  the  IT  and  legislative  aspects  will  involve  a
great deal of work. It is seen, therefore, as a medium-term objective.

18

Decision  2235/2002/EC  of 
(OJ L 341, 17.12.2002).

the  European  Parliament  and  of 

the  Council  of  3.12.2002

12

                                                
3.

FUTURE DIRECTIONS

We  have  already  mentioned  a  number  of  the  Commission’s  planned  short-term  legislative
initiatives. A table of pending initiatives, together with a timetable, can be found at Annex 2.

Under  this  section,  however,  we  must  also  draw  attention  to  work  under  way  on  a  crucial
aspect of the common system of VAT - the place of taxation of taxable operations. Work in
this  area  is  proceeding  in  accordance  with  two  guidelines:  reaffirming  the  principle  of
taxation at the place of consumption, and simplifying traders’ obligations.

3.1.

Guidelines for future work

3.1.1.

Taxation at the place of consumption

VAT  is  fundamentally  conceived  as  a  general  consumption  tax,  with  revenue  going  to  the
Member State where actual consumption takes place.

Current  VAT  rules  are  therefore  structured  in  such  a  way  that  the  operation  of  the  system
itself  assigns  the  tax  to  the  Member  State  where  final  consumption  of  goods  or  services  is
deemed to occur. In practice, this means that rules governing the place of taxable operations
are devised to ensure that the tax goes to the Member State of consumption.

But there are limits to the application of this principle. The rules cannot result in excessive tax
obligations on traders which might hamper business activity - such rules would run counter to
the principles of the Single Market itself.

Globalisation, deregulation and technical change, however, have altered economic conditions,
particularly as regards the volume and structure of trade in services. Increasingly, services can
be  provided  remotely  and  some  operations  which  used  to  be  classed  as  supplies  of  goods
(supply of software) are now classed as supplies of services.

In the past, the origin principle, i.e. the rule that provision of services was taxed at the place
where the provider was established - with a few well-defined exceptions - broadly  achieved
the aim of assigning revenue correctly, but this is rapidly changing. Firms providing remote
services often choose their place of establishment mainly for tax-planning reasons.

Transactions taxed  at  the  place  of  consumption  (destination  principle)  are  always  neutral  in
terms  of  VAT  rates.  Regardless  of  the  place  where  the  taxable  person  carrying  out  the
transaction is established, it is taxed at the rate applied in the Member State of consumption,
so  Member  States’  freedom  under  the  current  VAT  regime  to  set  the  rate  of  VAT  will  not
distort competition for these transactions.

13

3.1.2.

Simplifying tax obligations

Reverse charge mechanism

For  B2B  (business  to  business)  transactions  between  taxable  persons,  making  the  business
customer the taxable person (reverse charge mechanism) means taxation occurs in the place of
consumption  and  the  supplier  does  not  acquire  tax  obligations  in  the  Member  State  of
consumption. For B2B transactions, therefore, we need to look at a broader application of this
mechanism  to  cover  cases  where  the  taxable  person  carrying  out  the  transaction  is  not
established in the Member State of taxation.

"One-stop shop" mechanism

For  business  to  consumer  (B2C)  transactions,  where  the  customer  is  generally  a  private
individual, taxation at the place of consumption currently means traders have to be identified
and  make  returns  and  payments  in  every  Member  State  where  they  carry  out  taxable
transactions .

As  Member  States  are,  to  a  great  extent,  free  to  determine  tax  obligations,  the  content  and
frequency  of  VAT  returns  vary  widely  from  one  Member  State  to  another.  This  issue  has
already been examined in the study on VAT obligations mentioned in section 2.1.1.

A  trader  suddenly  faced  with  a  slew  of  obligations  is  likely  to  be  less  enthusiastic  about
expanding activities in Member States other than the one in which he is established, in other
words  taking  advantage  of  the  opportunities  offered  by  the  Single  Market.  This  applies
particularly to SMEs. This results in those consumers domiciled in a Member State other than
the  state  where  the  supplier  is  established  experiencing  difficulty  accessing  the  services,  or
even with the supplier refusing to sell to the consumer. The internal market cannot therefore
realise  its  full  potential  with  regard  to  the  choice  of  goods  and  services  offered  to  the
consumer.

Surveys carried out by the Commission suggest that 26% of traders regard the VAT system
and  VAT  obligations  as  a  hindrance  to  the  Single  Market,  and  10%  think  the  obligations
imposed  by  VAT  are  the  costliest  for  business.  Overall,  businesses  rank  VAT  legislation
fourth  (after  employment,  product  conformity  and  environmental  legislation)  in  terms  of
compliance costs.

The Commission believes the one-stop shop system, which has so far been confined to non-
EU traders, could also overcome administrative difficulties for Community businesses. It thus
provides the hope that, in future, the processing of transactions carried out in a Member State
other than the one where a business is established can be substantially simplified.

This view was reinforced by the findings  of  the  study  on  VAT  obligations:  one  of  its  main
recommendations was the introduction of the one-stop shop system.

The Commission also endorses the recommendation that the system be introduced in stages,
initially as a simplification in those cases where a trader carries out taxable transactions as a
taxable person in a Member State other than the one in which he is established.

14

In such cases the one-stop shop system would not increase the existing level of risk in terms
of  monitoring  or  recovery,  since  a  taxable  person  not  established  in  the  Member  State  in
question  is  already  entitled  to  fulfil  his  tax  obligations  in  the  Member  State  where  he  is
established. The Member State where the transaction is taxed would need the same facilities
for control (production of accounts etc.) as it has today, in order to verify the accuracy of the
amounts declared for locally taxable transactions.

The  one-stop  shop  system  does  rely  heavily  on  computerisation  to  ensure  that  all  Member
States  concerned  receive  the  necessary  information.  As  previously  stated  however
(see  point  2.1.2),  within  the  framework  of  the  e-commerce  directive,  the  Council  has
demanded  an  examination  of  an  appropriate  electronic  mechanism  for  charging,  declaring,
collecting and allocating tax revenue.

The Commission considers that it would be appropriate, rather than limiting this review only
to the electronic supply of services, to extend it to all operations for which a trader is liable
for tax in a Member State where he is not established. It is anticipated that discussions with
Member States on this issue will begin during the current year.

Admittedly, adding other transactions to the one-stop shop system would mean significantly
extending  its scope. However, using  the  system  for  a  wider  range  of  tasks  would  provide  a
higher return on the investment required for computerisation.

The  United  States  is  about  to  introduce  a  very  similar  system,  the  “Streamlined  Sales  Tax
Plan”  (SSTP),  which  will  make  it  possible  to  recover  sales  tax  on  distance  sales  in
38 American states when the vendor is not established in the customer’s state.

The Commission believes it would be possible to apply the one-stop shop system even if not
all  the  Member  States  were  involved.  This  is  one  field  that  lends  itself  to  the  “enhanced
cooperation”  procedure  enhanced  by  the  Treaty  of  Nice.  The  aim  of  simplifying  traders’
obligations  without  affecting  Member  States’  revenue  falls  squarely  within  the  rationale  of
this procedure, which allows those Member States able and willing to do so to proceed further
in the direction of European integration.

The Commission considers that the advantages of the one-stop shop would be fully realised if
it  were  backed  up  by  a  right  to  cross-border  deduction  so  that  a  taxable  person  is  able  to
deduct VAT in his Member State of establishment on expenditure incurred in other Member
States (see section 2.1.2).

Combining the one-stop shop for payment of VAT due on taxable transactions in the EU with
a right  to cross-border  deduction, so that  VAT can be recovered  on expenditure in  Member
States other than the country of establishment, would enable taxable persons to deal with all
their  VAT  obligations  via  the  administration  in  their  own  Member  State,  which  for  its  part
would gain a much wider overview of these businesses’ operations.

15

Reviewing the scheme for small businesses

As part of the drive to simplify VAT obligations the Commission is also planning to look at
the  special  arrangements  for  small  businesses  whereby  Member  States  offer  tax  relief  if  a
taxable person’s turnover is below  a particular threshold.  The rules  currently in force  under
the Sixth Directive are fairly strict, and a number of Member States would like to extend the
benefits  of  this  scheme  more  widely.  We  hope  to  achieve  greater  consistency  in  threshold
levels,  while  giving  Member  States  greater  flexibility  to  decide  on  the  coverage  of  the
scheme.

3.2.

Review of rules regarding place of taxation

3.2.1.

Review of the rules regarding the place at which supplies of services are taxed

Preliminary discussions with the Member States suggests that we should initially concentrate
on services to taxable persons (B2B).

The individual amendments to the rules made at the time the Single Market was set up, and
since,  have  one  thing  in  common  -  they  shift  taxation  from  the  service  provider’s  place  of
establishment to the customer’s.

Some of the changes were needed to prevent distortions of competition affecting Community
traders, by ensuring that traders inside and outside the Community were treated the same for
tax purposes (telecommunications, radio and television broadcasting and electronic services).

Others were aimed  at simplifying tax obligations in relation to the intra-Community  service
provision  (intra-Community  carriage  of  goods  and  related  services,  services  performed  by
intermediaries).

In  the  light  of  this  general  trend,  we  should  consider  an  across-the-board  switch  from  the
origin  to  the  destination  principle  though  there  would,  of  course,  still  be  exceptions  to  the
rule, as there are today.

We have started consultations with business; a consultation paper was published on the “Your
Voice  in  Europe”  site  and  generated  a  wide  and  constructive  response  from  contributors,
demonstrating the industry’s interest in this issue.

A  draft  directive  on  B2B  transactions  will  be  proposed  later  this  year,  and  will  at  any  rate
address  the  specific  problems  of  some  Member  States,  including  cross-border  leasing  of
means of transport.

The  Commission  will  then  start  working  on  a  revision  of  the  rules  on  place  of  taxation  for
B2C transactions.

The  current  rule  (taxation  at  the  service  provider’s  place  of  establishment)  is  very
straightforward for traders, but when services can be provided remotely it does not ensure that
the  tax  goes  to  the  Member  State  of  consumption,  and  is  increasingly  likely  to  distort
competition.

When the Council adopted the e-commerce directive it provided for a review of the provisions
before  30  June  2006  with  a  view  to  having  electronic  services  taxed  at  the  place  of
consumption.

16

The Commission would like the review extended to cover all services to final consumers. The
rule should be revised in such a way as to ensure that the destination principle is applied more
carefully without leading to any significant increase in traders’ administrative costs.

The  Commission  believes  that  this  can  be  achieved  by  using  the  one-stop  shop  system  for
distance supplies of B2C services.

This will also be an occasion for looking at the issue of tax on passenger transport. In addition
to the  place  of  taxation,  we  should  also  be  looking  at  the  exemptions  currently  available  in
this  area,  particularly  as  regards  any  resultant  distortion  of  competition  between  different
modes of transport.

3.2.2.

Revision of the rules on place of taxation of supplies of goods

When  the  Single  Market  came  into  being  on  1  January  1993  special  arrangements  were
incorporated  into  the  common  system  of  VAT  to  provide  for  taxation  at  destination  in  the
case of intra-Community sales of new means of transport, intra-Community sales to exempt
taxable persons or non-taxable legal persons, and distance sales.

It  is  clear  that  the  rationale  for  setting  up  the  special  schemes  in  1993  -  i.e.  the  risk  of
insufficiently  harmonised  tax  rates  leading  to  distortion  of  competition  -  still  exists.  Rather
than  calling  for  abolition  of  the  special  schemes,  therefore,  we  should  be  considering  the
changes needed to simplify and monitor their application.

The planned shift in the place of taxation of supplies of goods will mainly affect supplies to
individuals (B2C). Apart from that, the Commission is not looking at any fundamental change
in  the  way  the  place  of  taxation  is  determined,  but  rather  at  ways  of  simplifying  the
obligations of traders supplying goods in more than one Member State.

The  special  scheme  for  distance  selling  is  typical  of  the  areas  in  which  the  one-stop  shop
could bring about substantial simplification for traders established in the Community.

The Commission therefore believes it would be desirable to subsume the proposal regarding
the place of  taxation of supplies of goods into  the  upcoming  initiative  on  the  simplification
and modernisation of tax obligations, with the one-stop shop as one of its main components.

The proposal on the place of supply of goods was originally scheduled for 2003 but we think
it would be better if the Commission and the Member States first had a chance to evaluate the
operation of the one-stop shop for electronic services, which was introduced on 1 July 2003.

This  would  mean  programming  the  proposal  on  the  simplification  of  tax  obligations,  to
include a section on the place of taxation of supplies of goods, for the third quarter of 2004.

17

3.3.

Consistency with the definitive regime

The Commission accepts that the developments outlined above show the common system of
VAT moving away from a regime based on the origin principle.

It should be pointed out, however, that in an origin-based taxation system as envisaged by the
Commission  in  1996  the  rules  regarding  the  place  of  taxation  merely  identify  the  Member
State to which the taxable person must pay tax. It is then up to the system that reassigns VAT
revenue to ensure that each Member State gets the appropriate revenue.

In a regime of this kind revenue is collected by a given Member State when taxable persons
pay their VAT to the treasury,  regardless of whether actual consumption took place  locally,
and hence regardless of the final amount that a Member State is ultimately entitled to. This is
fundamentally different from the way the present regime is structured and could only work if
VAT rates were much more closely aligned than they are at present (see section 3.3.1.).

For,  so  long  as  there  is  no  political  will  to  switch  to  an  origin-based  system,  any
improvements to the existing common VAT system must be in line with the structure of the
system  as  it  exists.  To  ensure  that  the  revenue  goes  to  the  Member  State  of  consumption,
transactions should be taxed as close as possible to the place of destination (consumer) rather
than  the  place  of  origin  (supplier).  This  regime  still  allows  Member  States  a  degree  of
flexibility in setting the rates.

4.

COMBATING FRAUD

VAT fraud, particularly carousel fraud, has become a real worry to Member States. There are
no  reliable  statistics  for  its  incidence  at  EU  level,  but  the  amount  of  VAT  evaded  is
undoubtedly considerable.

Carousel  fraud  works  by  combining  transactions  on  which  suppliers  charge  VAT  to  their
customers  (as  a  rule  transactions  within  a  Member  State)  and  those  on  which  they  do  not
(intra-Community  transactions).  By  exploiting  this  loophole  in  the  current  system  a  taxable
person  is  able  to  acquire  goods  without  paying  VAT  in  advance,  and  subsequently  charge
VAT on an internal delivery of the goods. That person then vanishes without paying the VAT
owed to the treasury, while the purchaser of the goods claims his deduction.

Quite apart from loss of revenue, this distorts competition to the benefit of dishonest traders.

In  the  light  of  Member  States’  concerns  about  fraud,  the  Council  set  up  an  ad  hoc  group
which agreed broadly, regarding VAT, with the conclusions set out in the Commission’s third
report on the application of Regulation No 218/92 on administrative cooperation in the field
of  VAT.19  On  the  strength  of  its  conclusions,  the  Commission  proposed,  and  the  Council
swiftly  adopted,  the  new  regulation  concerning  administrative  cooperation  on  VAT
(see point 2.4.).

More recently continuing concern has prompted further consideration of a substantial change
in  the  way  the  VAT  regime  operates,  and  national  authorities,  industry  representatives  and
academics are studying the possibilities.

19

COM(2000)28 final.

18

                                                
The  various  proposals,  focusing  on  B2B  transactions,  all  envisage  a  ban  on  combining
transactions  on  which  VAT  is  paid  and  those  on  which  it  is  not,  and  aim  to  ensure  that
transactions  inside  a  Member  State  and  intra-Community  transactions  are  accorded  equal
treatment throughout the EU .

Actual payment of VAT on all transactions in the EU

One possibility is to charge VAT on all transactions within the EU.

First  of  all  we  must  point  out  that  a  VAT  regime  based  on  a  single  place  of  payment,  as
suggested by the Commission in 1996,20 would eliminate the loopholes in the current system
that  allow  carousel  frauds.  However,  such  a  regime  would  require  a  far  greater  degree  of
harmonisation than currently exists.

Another suggested way of combating fraud is to switch to a system based on actual payment
of  VAT  on  all  intra-Community  transactions  at  the  rate  applying  in  the  Member  State  of
destination.

Suspensive arrangements

The other possibility is to stop charging VAT on B2B transactions within the Community.

One  place  where  this  has  been  discussed  is  Austria,  where  the  authorities  have  been
considering a system that allows traders to opt out of paying and deducting VAT on national
transactions between taxable persons.

In  Germany  the  authorities  in  some  of  the  Länder  have  argued  for  the  reverse  charge
mechanism to be applied more widely, perhaps up until sales to wholesalers or even until the
retail sale to the end customer.

Such  strategies  undermine  one  of  the  basic  principles  of  VAT,  the  cascade  payment
mechanism  designed  to  ensure  that  the  tax  system  is  self-managing  and  clearly  shares  out
responsibilities between buyer and seller.

They do admittedly offer certain advantages when it comes to combating carousel fraud, but
they  entail  a  considerable  extra  administrative  burden  for  traders,  since  all  domestic
transactions then involve a check on the customer’s status, which then has to be declared to
the authorities. In any case such a system, where the entire burden  of tax collection falls on
the retailer, generates its own opportunities for fraud.

20

Common  system  of  VAT  -  working  programme  for  the  Single  market  (COM(1996)328  final
of 22.7.1996).

19

                                                
Combating fraud under the existing system

There are in fact several ways of combating carousel fraud - which, it should be said, involves
a relatively small number of traders.

The  first  is  to  improve  administrative  cooperation.  The  new  legal  framework  coming  into
force  on  1  January  2004  gives  Member  States  the  legal  instruments  to  step  up  cooperation,
and the Commission will be working with Member States to ensure that these instruments are
used in an effective way.

Secondly, the Commission believes Member States could improve their controls by drawing
on experience elsewhere in the EU, using risk analysis techniques, and giving the necessary
staffing priority to this work.

SCAC has carried out an in-depth examination of carousel fraud and produced a guide giving
an overview of various national enforcement techniques.

This  is  not  a  definitive  list  of  recommended  Community  measures.  What  works  in  one
Member State will not necessarily be effective elsewhere given differences in administrative
structures and national rules.

Nevertheless,  the Commission believes that intelligent  use of  such  measures,  tailored  to  the
circumstances  of  a  particular  Member  State,  could  substantially  reduce  the  incidence  of
carousel  fraud.  A  number  of  Member  States  have  recently  introduced  national  strategies
targeting  defaulting  traders  -  a  characteristic  feature  of  carousel  frauds  -  and  seen  a  steady
decline in the scale of losses detected.

Such  measures  can  be  refined  and  extended.  Working  closely  with  the  Member  States,  the
Commission will continue in the SCAC and under the Fiscalis programme to work intensively
on this issue. It will shortly be submitting its fourth report on the application of Regulation No
218/92 concerning administrative cooperation on VAT, the bulk of which deals with carousel
fraud.

5.

CONCLUSION

Since  the  new  strategy  was  initiated  some  three  years  ago,  the  Council  has  adopted  nine
proposals on VAT.

This suggests that the pragmatic approach has succeeded in one very important aim - giving
fresh impetus to discussion of VAT within the Council.

But  if  the  veto  continues  to  apply  after  enlargement  to  decisions  on  tax  matters  this
achievement  will  be  under  threat.  Since  work  will  be  continuing  under  Article  93  of  the
Treaty the Member States will have to show even more flexibility in negotiations than they do
now to keep things moving, especially as future activities will be dealing with a key aspect of
the VAT system - the place of taxation.

The  more  widespread  use  of  electronic  communications  between  traders  and  the  tax
administration,  and  among  the  different  national  tax  administrations,  could  make  the  VAT
system simpler for businesses to operate while preserving or even enhancing control methods.

20

Introducing  the  one-stop  shop  would  make  it  possible  for  traders  established  in  the  EU  to
handle all their declaration and payment obligations via their local administration, a valuable
facility  for  traders  carrying  out  taxable  transactions  involving  liability  for  VAT  in  other
Member  States.  It  would  also  secure  the  principle  of  taxation  at  the  place  of  consumption
without imposing administrative burdens on EU traders that could jeopardise the working of
the Single Market.

Taxation at destination, at the rate prevailing in the Member State of consumption, is not only
conducive  to  the  working  of  the  Single  Market  but  leaves  the  Member  States  free,  up  to  a
point, to set their own national VAT rates.

The  Commission  is  continuing  with  its  efforts  to  modernise  the  existing  system  and  ensure
that it is more uniformly applied. The proposal to give legal status to the proceedings of the
VAT Committee, and  the planned initiative to set  up  machinery  for  dealing  with  individual
cases,  should  make  it  possible  to  deal  with  the  double  taxation  cases  which  still  arise;  a
situation which would be unthinkable in a genuine Single Market

It  is  hardly  news  to  anyone  that  the  current  system  has  its  defects  and  contains  scope  for
fraud. Carousel fraud exploits loopholes that are inherent in the regime.

The  Commission  believes,  nevertheless,  that  with  increasing  cooperation  among  Member
States and backing from the Commission it should be possible to keep fraud within acceptable
limits.

If,  despite  these  efforts,  carousel  fraud  takes  on  such  proportions  that  it  starts  to  affect  the
workings  of  the  economy  by  distorting  competition  to  an  extent  that  is  unacceptable  for
honest  traders,  then  a  debate  must  be  launched  at  Community  level  on  the  future  of  the
common system of VAT. The Commission must be prepared to engage in such a debate with
an open mind.

21

ANNEX 1

Proposals before the Council when the launch of the new strategy was launched

Proposal

State of play in the Council

Change 
[COM(1997) 325]

the  status  of 

the  VAT  Committee

No progress

Improve  mutual  assistance  for  the  recovery  of
claims [COM(1998) 364]

Adopted  as  Council  Directive  2001/44/EC  of
15.6.2001 (OJ L 175, 28.6.2001)

Right to deduct VAT [COM(1998) 377]

Still being discussed in the Council

Determining 
[COM(1998) 660]

the 

taxable 

person

Adopted  as  Directive  2000/65/EC  of  17.10.2000
(OJ L 269, 21.10.2000)

Proposals presented after the launch of the new strategy (June 2000)

Proposal

State of play in the Council

Electronic services [COM(2000) 349]

Adopted as Directive 2002/38/CE and Regulation
792/2002 of 7.5.2002 (OJ L 128, 15.5.2002)

Setting 
[COM(2000) 537]

the  minimum  normal  rate  of  VAT

Adopted  as  Directive  2001/41/CE  of  19.1.2001
(OJ L 22, 24.1.2001)

Invoicing [COM(2000) 650]

Adopted as Directive 2001/115/CE of 20.12.2001
(OJ L 15, 17.1.2002)

Administrative  cooperation  in  the  field  of  VAT
[COM(2001) 294]

Adopted as Regulation xx/2003 of 7.10.2003
(not published yet)

22

of 
Extension 
[COM(2002) 10]

the 

Fiscalis 

programme

Adopted as Decision 2235/2002/EC of the
European Parliament and of the Council of
3.12.2002 (OJ L 341, 17.12.2002)

Special 
[COM(2002) 64]

scheme 

for 

travel 

agencies

Still being discussed in the Council

Extending the scheme allowing Member States to
apply  reduced  VAT  to  certain  labour-intensive
services [COM(2002) 525]

Adopted as Directive 2002/93/EC of 3.12.2002
(OJ L 331, 7.12.2002, amended 23.1.2003
(OJ L 18, 23.1.2003).

Place  of 
[COM(2002) 688]

supply  of 

electricity 

and  gas

Adopted as Directive 2003/XX/EC, 7.10.2003
(not published yet)

Postal services [COM(2003) 234]

Still being discussed in the Council

for 

Procedure 
conferring 
[COM(2003) 335]

adopting 
implementing 

derogations 

and
powers

Still being discussed in the Council

Scope of reduced rates [COM(2003) 397]

Still being discussed in the Council

23

ANNEX 2

Legislative proposals in the pipeline

Proposal

Scheduled  date  of  presentation  by 
Commission

the

Place of taxation of services (B2B)

4th quarter 2003

Recast of Sixth Directive

Rationalisation of derogations

Promotions and payment cards

Simplification of obligations (including review of
place  of  taxation  for  goods  and  small  business
scheme)

4th quarter 2003

2nd quarter 2004

2nd quarter 2004

3rd quarter 2004

Elimination of double taxation in individual cases

3rd quarter 2004

VAT regime for public authorities

4th quarter 2004

Place of taxation of services (B2C)

2005

Survey  of  various  options, 
transitional provisions

facilities  and

2005

Taxation of financial services

Revision of VIES

2005

p.m.

24