Proposal for a Council Decision amending Council Decision 1998/20/EC authorising the Kingdom of the Netherlands to apply a measure derogating from Article 21 of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes
Date: 2004-03-01
Institutions: European Commission
Subjects: Netherlands, VAT, clothing industry, derogation from EU law, tax harmonisation

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 1.3.2004 
COM(2004) 135 final 

Proposal for a 

COUNCIL DECISION 

amending Council Decision 1998/20/EC authorising the Kingdom of the Netherlands to 
apply a measure derogating from Article 21 of the Sixth Council Directive (77/388/EEC) 
of 17 May 1977 on the harmonisation of the laws of the Member States relating to 
turnover taxes 

(presented by the Commission) 

EN 

   EN 

 
 
 
  
1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

1 
2 
3 
4 

EXPLANATORY MEMORANDUM 

Under  Article  27  of  the  Sixth  Council  Directive  of  17  May  1977  on  the 
harmonisation of the laws of the Member States relating to turnover taxes – Common 
System  of  value  added  tax:  uniform  basis  of  assessment,1  –  the  Council,  acting 
unanimously on a proposal from the Commission, may authorise any Member State 
to introduce special measures for derogation from the provisions of the Directive, in 
order to simplify the procedure for charging the tax or to prevent certain types of tax 
evasion or avoidance. 

As a rule, such authorisations are given on a temporary basis, so that an assessment 
can be made after a few years as to whether the special measures are appropriate and 
effective. 

Council Decision 1998/20/EC2 authorised the Kingdom of the Netherlands to apply a 
measure  derogating  from  Article  21  of  the  Sixth  Directive.  The  validity  of  that 
Decision  (31  December  1999),  was  extended  until  31  December  2003  by  Council 
Decision  2000/435/EC3.  In  particular,  the  decision  authorised  the  Netherlands  to 
introduce in the ready-to-wear clothing industry, a scheme for shifting the obligation 
to  pay  over  VAT  to  the  tax  authorities  from  the  subcontractor  to  the  clothing  firm 
(the contractor). 

By letter registered by the Secretariat-General on 26 November 2003, the Kingdom 
of  the  Netherlands  requested  authorisation  to  extend  application  of  this  measure. 
According  to  the  request,  the  derogation  has  proved  extremely  effective  in 
combatting VAT fraud in this sector.  

The requested measure is to be considered first and foremost as a measure to prevent 
certain types of tax evasion in the ready-to wear clothing industry, such as the non-
payment of invoiced VAT by subcontractors, who subsequently become untraceable. 
The measure also has the effect of simplifying the work of the tax authorities, which 
very  frequently  face  major  problems  collecting  VAT  due  by  subcontractors  in  that 
sector. 

The  measure  is  proportionate  to  the  objectives  pursued,  since  it  is  not  intended  to 
apply to all taxable operations in the sector concerned but only to specific operations 
which pose considerable problems of tax evasion.  

This  measure  does  not  adversely  affect  the  VAT  Communities'  own  resources,  nor 
does it have any effect on the amount of tax due at the final stage of consumption.  

In its communication of 7 June 2000 to the Council and the European Parliament on 
a  strategy  to  improve  the  operation  of  the  VAT  system  within  the  context  of  the 
internal  market,4  the  Commission  undertook  to  rationalise  the  large  number  of 
derogations currently in force.  

OJ L 145, 13.6.1977, p. 1 Directive last amended by Directive 2004/7/EC (OJ L 27, 30.1.2004, p.44). 
OJ L 8, 14.1.1998, p. 16 
OJ L 172, 12.7.2000, p. 24 
COM(2000) 348 final. 

2 

 
 
  
 
                                                 
9. 

The  Commission  accepts  that,  pending  more  permanent  changes,  this  derogation 
significantly counters abuse of the VAT system. It also accepts that the situation in 
the Netherlands affecting this particular sector which justified the application of the 
special  measures  has  not  changed.  In  view  of  its  continuing  work  towards  the 
rationalisation  of  Article  27  derogations,  it  considers  that  the  request  made  by  the 
Kingdom  of  the  Netherlands  for  an  extension  of  the  authorisation  contained  in 
Decision 1998/20/EC should be granted until 31 December 2006.  

3 

 
 
  
 
Proposal for a 

COUNCIL DECISION 

amending Council Decision 1998/20/EC authorising the Kingdom of the Netherlands to 
apply a measure derogating from Article 21 of the Sixth Council Directive (77/388/EEC) 
of 17 May 1977 on the harmonisation of the laws of the Member States relating to 
turnover taxes 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, 

Having  regard  to  the  Sixth  Council  Directive  (77/388/EEC)  of  17  May  1977  on  the 
harmonisation of the laws of the Member States relating to turnover taxes - Common system 
of value added tax: uniform basis of assessment,5 and in particular Article 27 thereof, 

Having regard to the proposal from the Commission,6 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

Pursuant to Article 27(1) of the Sixth VAT Directive, the Council, acting unanimously 
on a proposal from the Commission, may authorise any Member State to introduce or 
extend  special  measures  for  derogation  from  that  Directive  in  order  to  simplify  the 
procedure for charging the tax or to prevent certain types of tax evasion or avoidance. 

letter 

registered  with 

the  Commission  on 
By 
26 November 2003,  the  Dutch  Government  requested  the  extension  of  Decision 
1998/20/EC7 authorising it to apply special tax measures to the ready-to wear clothing 
industry. 

the  Secretariat-General  of 

The  other  Member  States  were  informed  of  the  Netherlands's  request  on  14 January 
2004. 

Decision 1998/20/EC, authorised the Kingdoms of the Netherlands to introduce in the 
ready-to-wear clothing industry, a scheme for shifting the subcontractor's obligation to 
pay  over  VAT  to  the  tax  authorities  from  the  subcontractor  to  the  clothing  firm  (the 
contractor). 

These  arrangements  constitute  an  effective  fraud-prevention  measure  in  a  sector  in 
which  collecting  VAT  is  rendered  awkward  by  the  difficulty  of  identifying  and 
supervising the activities of subcontractors. 

5 
6 
7 

OJ L 145, 13.6.1977, p. 1. Directive last amended by Directive 2004/7/EC (OJ L 27, 30.1.2004, p.44). 
OJ C No ... 
OJ L 8, 14.1.1998, p. 16 

4 

 
 
  
 
                                                 
(6) 

(7) 

(8) 

(9) 

On 7 June 2000 the Commission published a strategy to improve the operation of the 
VAT system in the short term, in which it undertook to rationalise the large number of 
derogations  currently  in  force.  In  some  cases  however,  this  rationalisation  could 
involve extending certain particularly effective derogations to all Member States. The 
Commission's communication of 20 October 2003 reiterates this compromise. 

The requested measure is to be considered first and foremost as a measure to prevent 
certain types of tax evasion in the ready-to- wear clothing industry. 

The  Kingdom  of  the  Netherlands  should  be  granted  an  extension  for  the  current 
derogation until 31 December 2006. 

The derogation has no adverse impact on the European Communities' own resources 
accruing from VAT nor does it affect the amount of VAT charged at the final stage of 
consumption. 

HAS ADOPTED THIS DECISION:  

In  Article  1  of  Decision  1998/20/EC,  the  date  31  December  2003  shall  be  replaced  by  31 
December 2006. 

Article 1 

Article 2 

This Decision is addressed to the Kingdom of the Netherlands. 

Done at Brussels,  

For the Council 
The President 

5