Opinion of the European Economic and Social Committee on the "Proposal for a Council Directive amending Directive 77/388/EEC as regards value added tax on services provided in the postal sector" (COM(2003) 234 final — 2003/0091 (CNS))
Date: 2003-12-10
Institutions: European Economic and Social Committee
Subjects: ESC opinion, VAT, postal service, tax harmonisation

30.3.2004

EN

Official Journal of the European Union

C 80/135

Opinion of the European Economic and Social Committee on the ‘Proposal for a Council
Directive amending Directive 77/388/EEC as regards value added tax on services provided in the
postal sector’

(COM(2003) 234 final — 2003/0091 (CNS))

(2004/C 80/32)

On 13 May 2003 the Council decided to consult the European Economic and Social Committee, under
Article 262 of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was
responsible for preparing the Committee’s work on the subject, adopted its opinion on 26 November
2003. The rapporteur was Ms King.

At its 404th plenary session (meeting of 10 December 2003), the European Economic and Social
Committee adopted the following opinion by 101 votes in favour and 4 votes against, with 6 abstentions.

1. Commission’s proposal — background

1.1.
The European Commission proposes to amend the
Sixth VAT Directive by making services provided by the postal
sector subject to VAT. Postal services are exempt from the
Sixth VAT Directive dating from the 1970s.

1.2.

The reason for this exemption is two-fold:

— firstly, they were seen as part of the state-funded activities
in the public interest for which the VAT system has
always included a series of exemptions;

— secondly, when the VAT system was established, the
postal sector was characterised by monopolies and a
limited range of services. These postal services were not
subject to any competition.

1.3.
VAT is a tax on consumer spending and not on the
goods and services a commercial enterprise buys as part of its
profit-making activities. Since no distinction is made as
whether the purchaser is a private person or a business, the
business purchaser reclaims the VAT via the tax authorities.

1.5.
This exemption gives a competitive advantage to the
public postal sector when selling to customers who are not
able to claim back VAT — such as individuals, financial
institutions and non-profit organisations — as these customers
will benefit from a lower price despite the hidden tax. The
Committee has produced the Appendix — compare situation 2
columns (c) and (e) with situation 3 columns (f) and (h).

1.6.
Public postal sector operators have a competitive
disadvantage when selling to VAT registered businesses when
compared to the private sector. This is because although the
overall price of the private operator may be higher, the
business customer can reclaim the VAT which generally results
in a lower net cost to the business. This is illustrated in the
Committee’s Appendix — compare situation 2 column (d)
with situations 3 column (g) and 4 column (j). 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. The
Commission estimates that this type of business is currently
responsible for just over 60 % of the public postal operators’
turnover for mail services within the European Community.

1.4.
Certain sectors are exempted which means these do
not have to pay VAT on their receipts but it also means that
VAT paid on products and services purchased cannot be
reclaimed. So, although no VAT is charged on sales, the
customer pays VAT on the purchases made by the exempt
suppliers (i.e. the non-reclaimed VAT), which is ‘hidden’ in the
sales price.

1.7.
The public operators have two further disadvantages
as a result of the exception in that their inability to reclaim the
VAT on the purchases of goods and services discourages
investment and favours self-supply. An example of self-supply
given by the Commission is the Royal Mail in the UK, that
recently decided to stop using rail services, and to transport
the mail by road with its own fleet of lorries.

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2. Commission’s proposal — recommendations

The Commission states that the situation described
2.1.
above where the public and private operators are not able to
compete effectively in all markets — due to the exemption —
is increasingly hard to justify as public and private operators
as well as customers are all disadvantaged in one way or the
other. This also regularly gives rise to complaints on the part
of both private and public operators.

2.2.
The Commission is therefore proposing to end the
exemption, with the result that postal services should in future
be subject to VAT. The Commission realises that making all
postal services subject to the normal VAT rate would mean
that prices for private customers would rise substantially, even
if not to the full extent of that normal rate (as postal operators
would themselves be entitled to reclaim input tax).

2.3.
To limit the impact on the consumer the Commission
proposal contains an option for the Member States to intro-
duce a reduced VAT rate for standard postal services —
addressed envelopes and packages with an individual weight
of no more than 2 kg per item. This range would also cover a
part of the commercial postal service. As the Committee’s
Appendix demonstrates the impact in terms of price increases
to consumers would be negligible. This is so because once the
postal operators are subject to VAT, they will also be able to
reclaim input VAT paid thus lowering their overall costs. The
Commission estimates that, on average, costs will go down by
some 4,2 % even taking account that wage and related costs
account for 40-60 % of total costs, depending on country.

For non-standard services, services relating to unad-
2.4.
dressed mail and services relating to items greater than 2 kg
the Commission is proposing that these should come under
the normal VAT place-of-supply rules for transport services
and will therefore be ineligible for reduced rate.

Therefore the Committee strongly believes that the
3.2.
impact on the consumer in terms of affordable postal services
and the universal commitment must also be given equal
priority. Although the 2 kg weight limit goes some way to
address this the EESC feels this should be made more explicit
and that the Council need to ensure that private individuals do
not face any price increases for postal services, with the
removal of the VAT exemption.

3.3.
To ensure that any price increases are negligible, the
EESC proposes that each Member State should aim to choose
the rate that ensures that the removal of the exemption has no
impact on the private consumer of postal services.

3.4.
The EESC recognises that if no action is taken in the
legislative field, that VAT at the standard rate could be imposed
by the European Court of Justice. This is because the Court
presently is considering how the current exemption should be
interpreted in an ever more liberalised postal market. Of
particular interest is case C-169/02 Dansk Postordreforening
v. Skatteministeriet where Advocate General Geelhoed recently
concluded that:

‘A Member State is required to levy VAT on services which are
not “reserved” under Article 7 of Directive 97/67/EC /.../. The
concept of “public postal services” used in Article 13(A)(1)(a)
of the Sixth Directive 77/388/CEE/.../ must be interpreted as
applying equally to commercial undertakings, in so far as they
have services reserved for them as described in Article 7 of
Directive 97/67/EC.’

If that line is followed by the Court in its judgement, it would
mean that everything that falls outside the reserved area in the
individual Member States would thus, taking into account the
direct and immediate effect of the jurisprudence of the Court,
be subject to VAT at the standard rate.

4. Specific comments

3. General comments

3.1. While the EESC agrees with the Commission that
exemption of public-sector postal services is creating distor-
tions in a situation where these services are increasingly being
liberalised in a number of Member States, it also notes the
Commission has made no reference to the vital social role of
stamped mail and other postal services as stipulated in the
universal postal provision each Member State has a statutory
requirement to provide. This means that an affordable postal
service must be available to all — including those in geographi-
cally remote areas.

4.1.
The EESC notes that taxation of private-sector oper-
ators while exempting the public sector infringes the principle
of neutrality, which is one of the merits of VAT. However, the
EESC strongly believes it is important that there is no price
increase and no reduction in the universal commitment for
consumers of postal services.

4.2.
The Committee is concerned that the introduction of
the full taxation at the standard rate could lead to price
increases to private consumers and exempt organisations.

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The Committee welcomes the solution to provide for
4.3.
the possibility of a limited reduced VAT rate for letters and
small packages as it would mean no price increases for those
persons and organisations that do not have a right of
deduction.

covers or if the philately is sold from a dedicated area.
Otherwise there would be a heavy and unacceptable burden
placed on the postal sector to identify and separate philately
purchases from other over-the-counter stamp purchases.

4.4.
The Committee however does not agree that ‘it does
not matter that the reduced rate is also available to business’
as financial and insurance companies will continue to be
exempt which means end-consumers for these services will
continue to pay more tax, by having to pay the hidden VAT of
these companies.

Ideally the EESC would prefer that the removal of
4.5.
the VAT exemption should coincide with the complete
liberalisation in this sector.

5. Conclusions

The EESC strongly believes that the Universal Postal
5.1.
commitment guaranteeing affordable postal provision for all
must be safeguarded and be given the same importance as the
removal of competitive distortions in the postal market. The
EESC also strongly believes that the removal of the exemption
should have no impact on the private consumer of postal
services.

4.6.
The Committee welcomes the proposal that all postal
services concerning all addressed items weighing 2 kg or less
will have a special place-of-supply-rule minimising the impact
on both the final consumers and the control systems.

5.2.
The Committee welcomes the recommendation to
introduce a reduced rate for standard postal services but has
the misgiving that some Member States may not do this.

The EESC accepts that non-standard services (e.g.
4.7.
express mail) and services relating to items greater than 2 kg
will come under the normal VAT place-of-supply-rules for
transport of goods and will be ineligible for reduced rate as
they are more generally services supplied to business customers
and is the area where most of the competition is focussed.

However, the Committee does not agree that services
4.8.
relating to unaddressed mail should be ineligible for the
reduced rate. There is no reason for such a distinction. In the
case of certain Member States, charities send direct mail as a
key method for recruiting new donors and monies for
their charitable causes. As charities are exempt this would
significantly increase their postal costs. Secondly this may
place an undue burden and complication on the postal
service, therefore contradicting the Commission’s statement
‘to simplify control systems’.

The Committee accepts the general provisions that
4.9.
postal services should be treated as a single supply of transport
services and that stamps will be treated as evidence of advance
payment.

4.10.
However, the proposal that the supply of stamps for
philatelic purposes should be a supply of goods at the standard
rate needs to recognise that this can only apply to first day

5.3.
The Committee believes that any temptation for postal
authorities to use the ending of exemption as an excuse for
increasing postal charges would be resisted by the regulator.

The Committee accepts the Commission’s proposal for

5.4.
postal services for packages greater than 2 kg.

The EESC agrees with the paragraphs covering the
5.5.
treatment of terminal dues and the treatment of reply-paid
mail.

5.6.
The Committee is concerned about the proposal for
the special tax accounting scheme for postal operators that
would require them to account
three levels
(standard rate, reduced rate and zero-rated). The Commission
is recommending that each Member State should tailor its own
alternative method to work out the amount of VAT due from
its postal operations.

for VAT at

5.7.
From past experience the Committee knows that
bespoke Member State solutions can often lead to confusion,
divergence and inconsistency within the Community. Even if
each Member State introduces a system that works perfectly
within its territory, it may be incompatible with one or more
Member State system. It is very important that any system that
is developed works cross EU borders.

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For these reasons the Committee strongly recommends
5.8.
that the Commission provides guidance on this special scheme
by which postal operators develops an alternative method to
calculate the amount of VAT due from their postal operations.

5.9.
The Committee also notes that the Commission does
not propose, or even mention, how business customers are
going to get a refund on the VAT for postal services. It is vital
that any system developed is not complex or resource heavy,
especially with regards to small and medium- sized enterprises.

5.10.
Nor does the Commission discuss the effect on
Member States’ tax receipts from VAT. It may seem obvious

increase
that changing from exemption to taxation will
receipts, but this is not necessarily so. This is because each
Member State would receive VAT on its public postal sector
sales, but would have to make two refunds. The first would be
to the public postal service on the goods and services it buys,
the second refund would be to the postal service’s VAT
registered customers. The two refunds could exceed the tax
received especially if the proportion of the postal service
receipts from VAT-registered customers is high.

5.11.
The Committee agrees with the Commission’s sur-
mise that the removal of the exemption would slightly increase
the Community’s VAT own resource base. This benefit to the
Community would not be affected by the VAT rate, for postal
services, chosen by Member States.

Brussels, 10 December 2003.

The President

of the European Economic and Social Committee

Roger BRIESCH