Opinion of the European Economic and Social Committee on the "Proposal for a Council Directive amending Directive 77/388/EEC as regards reduced rates of value added tax" (COM/2003/0397 final — 2003/0169 (CNS))
Date: 2003-10-30
Institutions: European Economic and Social Committee
Subjects: ESC opinion, VAT rate, fiscal policy, tax harmonisation

5.2.2004

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Official Journal of the European Union

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therefore their success or failure, will depend ultimately on
them being not only pushed forward by political
leaders
through laws and regulations but also — and above all — on

them being supported and passed on by the economic and
social players in their specific capacity as contractual partners
and creators of initiatives ‘on the ground.’

Brussels, 30 October 2003.

The President

of the European Economic and Social Committee

Roger BRIESCH

Opinion of the European Economic and Social Committee on the ‘Proposal for a Council
Directive amending Directive 77/388/EEC as regards reduced rates of value added tax’

(COM(2003) 397 final — 2003/0169 (CNS))

(2004/C 32/24)

On 1 August 2003 the Council of the European Union decided to consult the European Economic and
Social Committee, under Article 262 of the Treaty establishing the European Community, on the above-
mentioned proposal.

In view of the urgent nature of the work, the Committee decided at its 403rd plenary session of 29 and
30 October 2003 (meeting of 30 October) to appoint Mr Bedossa as rapporteur-general and adopted the
following opinion by 66 votes to three with five abstentions.

1.

Introduction

other kinds of charges (specific indirect taxes, direct taxes,
social security contributions and local taxes). As a matter of
fact, VAT collection requires an exact registration of turnover,
making other taxes and parafiscal charges much more difficult
to evade.

1.1.
For tax consultants, VAT rates are more a question of
political marketing and tax policy than of structural measures
with an impact on company competitiveness and competition.
However, in economic terms, any modification in the VAT
rate has an immediate and long-term impact on consumption;
cutting rates boosts consumption and thus has a direct impact
on production and jobs, particularly when local activities are
involved that do not distort competition. Creating jobs by
cutting VAT in this way also has a major indirect impact on
government income through the increased tax revenue from
corporate earnings, earned income and social security charges
and a cut in the cost of unemployment benefit.

1.3.
Despite the fact that VAT rates are often the subject of
intense lobbying and political activity, it is debatable whether
they do in fact generate significant administrative difficulties
for companies. Difficulties may perhaps be caused by having a
plethora of rates, making it hard to determine which rate
applies in a particular case. Problems do arise from time to
time.

1.2.
Unlike other levies, VAT on final consumption is a
visible tax and, because of that, is used as an excuse to cut

1.4.
The Commission is right to say that companies are at
a loss to understand how the system works, and that the rules
do sometimes lead to incredible complexity, but this is not a

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Indeed, there have been
matter specific to rates of VAT.
considerably fewer problems since the number of rates was
cut in 1993 and premium rates were curtailed. Very many
companies operate using a single rate and the problems that
do arise can be managed centrally and definitively for very
long periods.

2. General comments

2.1.
The European Economic and Social Committee wel-
comes the Proposal for a Council Directive amending Directive
77/388/EEC as regards reduced rates of value added tax
adopted by the Commission on 16 July 2003.

In its opinion of 26 May 1999 and in accordance with
2.2.
the wishes of the European Council on employment, the
Committee stated that, despite the manifold criticisms that can
be levelled against this proposal, the VAT rate also had to be
used in the fight against unemployment and as a weapon to
combat the black economy.

had to be a close link between the lower prices resulting from
the rate reduction and the foreseeable increase in demand.

Higher VAT can only influence those businesses
2.6.2.
which have legal status but which operate in part in the black
economy. The problem with evaluation is that it is difficult to
measure activity which is, in essence, ‘unobserved’.

The Committee also notes the key importance of
2.7.
the observation period selected. Employment
trends vary
depending on whether the period selected is one of high
growth or, as now, severe recession, as the economic environ-
ment has to be taken into account.

3. Specific comments

3.1.

The Commission proposal has four facets.

3.1.1.
The list of goods and services on which Member
States have the option of applying reduced rates of VAT is to
be rationalised in four main ways, namely by:

The Committee recognises that, not least with enlarge-
2.3.
ment imminent, this proposal seeks to give all Member States
equal opportunities to apply reduced rates in very specific,
defined and clearly itemised areas.

— not extending the option to apply reduced rates to new
categories on which no Member State applies reduced
rates at the moment;

2.4.
The Committee notes that the draft directive seeks to
rationalise the numerous derogations that have grown up in
some — but not all — Member States in respect of VAT rates.

2.5.
The Committee notes that the recitals to Council
Directive 1999/85/EC set out the aims of this experiment,
namely to boost employment and curb the black economy. A
global evaluation report was also to be drawn up on the
experiment. Nine Member State elected to take part in the
evaluation, which culminated in July 2002 in an exchange of
views on the evaluation methods and the difficulties encoun-
tered in drawing up the report.

The underlying economic mechanism was based on

2.6.
boosting employment and curbing the black economy.

2.6.1.
The purpose of lower VAT is to cut consumer prices
for the services concerned and thus increase demand. Increased
production is meant not to boost productivity but to encourage
recruitment. Directive 1999/85/EC clearly stated that there

— extending the option to apply reduced rates only to the
categories of goods and services for which specific
derogations already authorise a Member State to apply
reduced rates, provided this does not hinder the proper
functioning of the internal market: restaurant services,
housing and gas and electricity supplies;

— introducing the option to apply reduced rates to plants

and floricultural products;

— introducing special provisions, for instance for material
used by disabled people, for sewage and street cleaning
services and for waste recycling.

3.1.2.

Rationalisation of other reduced rates:

— abolition of the derogations which, in the past, enabled
some Member States to maintain reduced rates for goods
and services not contained on the restrictive list;

— restriction of zero and super-reduced rates to the goods

and services listed in Annex H.

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The lower rates applicable in certain territories are to
3.1.3.
be rationalised in order to define a clear legal basis for each of
the derogations and to restrict their scope to prevent abuse.

which confirmed the many discrepancies on the list of services
that will be eligible for lower VAT.

3.1.4.
VAT on certain labour-intensive services: the Com-
mission claims that the reduction in VAT rates has had very
little, if any, impact on prices and job creation and thus feels
that this may be a waste of budget resources which could be
more usefully deployed — and thus have better results. The
Commission does not, however, call into question the optional
nature of applying reduced VAT rates.

3.2.3.1. With regard to these many discrepancies,
the
Committee agrees with the Commission, on the issue of
passing on the VAT rate in consumer prices. Often, this is
highly negligible and, if anything, temporary. It is undoubtedly
a step backwards for the single market, given the high cost to
the budget of measures of this kind.

3.2. Objectives and constraints

3.2.1.
namely:

The Committee notes the directive’s objectives,

— to implement the new VAT strategy to improve the
functioning of the common VAT system in the single
market;

— to preserve the Community acquis on rates and prevent

current differences widening;

— to reduce inconsistencies in the current system, i.e. in the
many specific derogations currently granted to certain
Member States.

If the aim is to simplify the VAT system and make
3.2.3.2.
it more coherent, maintaining these very many derogations
may distort competition.

3.2.4.
The Committee notes the growing importance of
Court of Justice case law — including the judgements delivered
on 18 January, 8 March, 3 May and 8 May 2001 — for
assessing the various measures taken by the Member States to
define the scope of the reduced rates. This case law will from
now on serve as a guideline for revising and rationalising
Annex H.

3.2.2.
in the draft directive:

The Committee welcomes the following points made

— In line with the principle of subsidiarity, there is no
impingement of Member States’ tax competence beyond
what is necessary to ensure the proper functioning of the
single market.

3.3.
The economic activities eligible for reduced VAT rates
set out in Annex K have their own hallmarks that differ from
other industrial goods and services. They are mostly performed
by small and micro enterprises at local level. These small and
micro enterprises are vital, not least for the local economy,
and the immediate impact of any expansion of their activities
is to boost local jobs rather than relocate operations.

— The scope of reduced VAT rates is to be carefully defined
to ensure that such factors do not disrupt the operation
of the internal market.

— The derogations should apply for a very short period of

time.

— It is vital not to lose sight of the Lisbon Strategy, which
was expanded at Gothenburg, to promote sustainable
development, increase employment and introduce econ-
omic reform and social cohesion in a knowledge-based
society.

3.2.3.
The Committee took note of the conclusions of the
informal Council meeting in Stresa on 13 September 2003

In its findings on the experiment with reduced VAT,
3.3.1.
the Commission underlines the fact that the participating
Member States failed to furnish proof of the effectiveness of
this measure on employment and curbing undeclared work.
While it is true that the information provided by some of the
Member States involved is inadequate, France reports a very
large number of new jobs created in the construction industry,
while Luxembourg and the Netherlands report a similar
development in the hairdressing sector. Broadly speaking,
reports from the organisations representing the eligible com-
panies highlight the benefits of this measure. Moreover, the
positive effects vary depending on the sector and Member
State concerned. To give a fuller picture, the findings should
also have analysed the impacts of new job creation on
government (tax and social welfare) revenue.

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The Commission feels that reduced VAT has not
3.3.1.1.
done enough to secure lower prices for consumers. The
Commission’s arguments are not convincing. According to the
French government report, 75 % of VAT cuts have been passed
onto the final price in the construction business. This has
enabled consumers to commission more work, generating
added business for companies and creating jobs.

— the reintroduction of hairdressing and small repair ser-

vices mentioned in the former Annex K;

— the addition, in category 10, of historic and religious
buildings and buildings of private and professional/
industrial cultural and architectural heritage.

3.3.1.2.
By its very nature, it is hard to show the impact of
this measure on undeclared work — given the lack of
information even about the scale of the problem. For the
moment, we must make do with random, unquantifiable
approaches. A number of reports note the views of grassroots
entrepreneurs from the construction industry and elsewhere,
who feel that undeclared work is on the wane both inside and
outside companies.

3.3.2.
The Committee feels therefore that, given the findings
of some of the national reports, it is possible to objectively
endorse the benefits of VAT reduction in certain sectors that
have experience of this measure.

The Committee would also draw the attention of
3.3.2.1.
the Commission, the Parliament, the Council and the Member
States to the serious economic consequences — in terms of
jobs being destroyed — of discontinuing the experiment. The
Committee feels therefore that this experiment now has to be
turned into a definitive measure.

3.3.3. With regard to the activities mentioned in the new
Annex H, the Committee is pleased with the Commission’s
proposal and the introduction of new sectors and new
operations such as restaurant services. However, it is not clear
why two sectors that used to be included in the former Annex
K — hairdressing and small repair services — have been left
out:

— It is unreasonable to definitively rule out any activities on
the basis of inconclusive, disputed findings of short-term
studies.

— It is vital to bear in mind the risk of losing the new jobs

created in these two sectors.

— Restoring normal instead of reduced VAT rates in these

sectors would have adverse economic effects.

4. Conclusions

VAT rates are undoubtedly a tax policy concern, as

4.1.
rates on final consumption impact public revenue.

The rates issue played a potentially key role in the
4.1.1.
European Commission draft papers discussed in the late 1980s
and early 1990s where the aim was to abolish VAT exemptions
in intra-Community relations and to introduce a system of
VAT levied in the country of origin. Against that background,
it was important to harmonise the rates.

Thankfully, however, the plan to levy VAT in the
4.1.2.
country of origin was deferred. At that time, there was much
questioning of Member States’ egotism, what was seen as their
refusal to give up their tax prerogatives, the fear of an all-
powerful European Commission, etc.

4.1.3.
Under the Commission’s plans it was not possible to
allocate precisely each rate of VAT on consumption in the
territory concerned. That does not mean that the aim of
introducing VAT levied in the country of origin as propounded
by the Commission was a mistake. It simply means that the
ways of achieving that aim were not consistent the objective
in mind.

4.1.4.
Quite the reverse in fact: the abolition of exemptions
in intra-Community relations would be likely to significantly
cut ‘carousel’ fraud perpetrated by criminal organisations at
the expense of the public purse and, above all, the companies
concerned. This is a serious problem to which many companies
fall victim.

4.2.
The Committee welcomes the moves to draft the new
Annex H, with a view to rationalising and simplifying it so
that it becomes ipso facto the sole reference for defining the
scope of reduced, super-reduced and zero rates.

3.3.4.
Member States, the Committee calls for:

Since Annex H is an option, not an obligation for

— confirmation of the twenty categories of activity in the

new Annex H;

4.2.1.
The addition of new categories comes in response to
pressing demands from the Member States who had not
secured the requisite authorisation. This applies particularly to
category 14 (restaurant services). This addition is designed to
allow the reduced rate to be applied to restaurant services in
more Member States and is thus a decisive step towards the
more uniform application of reduced rates.

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The Committee does not wholly share the Com-
4.3.
mission’s view on the outcome of the evaluation of the
experiment’s effectiveness, not least in terms of job creation
and efficiency.

4.3.1.
Although the studies that have been carried out do
point in the same direction, in one category at least (catego-
ry 10: housing), convincing results have been achieved for
small and medium-sized enterprises (SMEs)
in one of the
Member States applying the scheme. The rate rise has stimu-
lated demand and boosted employment for craft workers in
the sector concerned.

Nonetheless, the Committee welcomes the proposed
4.4.
revision, which is an important step towards improving the
common VAT system with a view to improving the func-
tioning of the single market.

4.4.1.
This major simplification of the VAT rate for the
European Union as a whole also maintains Member States’ tax
competence in setting the VAT rates applicable on their
territory.

4.5.
The Committee endorses the plan for a revision to be
carried out in 2004 to allow an assessment of the economic,
environmental and social impacts of the proposal.

4.6.
The Commission proposal is useful in that it reintro-
duces a more rational approach and removes some of the
inequalities in the application of the common VAT system.
However, this situation is not specific to VAT rates and the
adoption of the directive would not warrant the abandonment
of other priorities such as, for example, eradicating discrimi-
nation and the serious inconsistencies in the economic sectors
to which VAT exemptions apply. With this in mind, it would
be advisable to allow Member States to extend the zero rate to
all operations falling under Article 13 of the sixth directive.

In view of

4.6.1.
the above, we would propose that
the Committee ask the Commission to amend the second
subparagraph of Article 1(2)(a) of the proposal as follows:

Brussels, 30 October 2003.

‘The derogation laid down in the first subparagraph may
relate only to supplies of goods or services of one of the
categories listed in Annex H or Article 13’.

4.6.2.
‘which give rise to consumption in those territories’.

In Article 1(2)(c), the proposal is to delete the words

4.7.
The Committee challenges the Commission’s finding
that lower VAT rates are never the most effective tool, that the
cost of such a measure to the budget is high when set against
its economic impact, and that a preferable option is to reduce
labour costs. Cutting costs and lowering VAT are interactive
measures and, under the subsidiarity principle, the Com-
mission must leave it up to the Member States to select the
measures they feel best fit in with their own policies.

4.7.1.
The Committee would again draw attention to
the indicative, non-mandatory nature of the Commission’s
proposed directive. As the Annex H categories deal with local
activities unlikely to distort cross-border competition, it is vital
that Member States do not oppose the idea simply because
they do not want to apply a particular measure contained in
the directive in their particular country. In order to boost the
ongoing development of dynamic policies to assist the sectors
concerned and to avert the risk of a sharp economic and social
slump that would result if VAT were to return to its normal
rate, the Committee urges the Member States to adopt the
proposed directive, bearing in mind the proposals set out
above.

The Committee notes that this measure — which
4.7.1.1.
reflects the priorities of
the European Charter for Small
Enterprises — is of major benefit to local small and micro
enterprises and must be stepped up accordingly. Like the
Parliament, the Committee would like to see VAT reduction
extended to all highly labour-intensive activities.

4.7.1.2.
The Committee has been informed of the difficult-
ies experienced by the companies concerned, not least in the
construction business, in planning their operations for 2004
in the absence of any clear decision. The Committee asks the
governments to adopt the proposal for a directive so as not to
put a brake on company activities over the coming months.

The President

of the European Economic and Social Committee

Roger BRIESCH