Opinion of the European Economic and Social Committee on the ‘communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee: Review and update of VAT strategy priorities’ (COM(2003) 614 final)
Date: 2004-03-31
Institutions: European Economic and Social Committee
Subjects: VAT, administrative cooperation, customs formalities, fiscal policy, provision of services, simplification of legislation, tax evasion, tax harmonisation

C 112/60

EN

Official Journal of the European Union

30.4.2004

Opinion of the European Economic and Social Committee on the ‘communication from the
Commission to the Council, the European Parliament and the European Economic and Social
Committee: Review and update of VAT strategy priorities’

(COM(2003) 614 final)

(2004/C 112/18)

On 20 October 2003 the Commission decided to consult the European Economic and Social Committee,
under Article 262 of the Treaty establishing the European Community, on the above-mentioned communi-
cation.

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 11 March 2004. The rappor-
teur was Mr Pezzini.

At its 407th plenary session (meeting of 31 March 2004), the European Economic and Social Committee
adopted the following opinion by 101 votes to 0 with 1 abstention.

1.

Introduction

1.1
At the time of adoption of the first and second Com-
munity Directives on value added tax, the Community had
undertaken, among other things, to take steps to set up a joint
system in the context of intra-Community trade which would
provide in the medium term for abolition of taxes on imports
as well as de-taxation of exports. This commitment was based
on the declared intention to create a system which would be
capable of functioning both within the single market and in
each individual Member State.

1.2
The Commission drew up the proposals for setting up
such a system in 1987, as part of the initiatives to prepare for
the completion of the single market planned for 1993.

1.2.1
The system envisaged in particular the setting up of a
harmonised structure based on two categories of rates, the
approximation - within a predetermined range - of the rates
applying in the individual Member States, and a compensation
mechanism for reallocating tax revenues among the various
financial administrations.

1.3 Once it realised that it was impossible to adopt the
Commission's proposals before January 1993,
the Council
decided as early as 1989 to apply a transitional system which
would make it possible on the one hand to abolish all forms of
frontier controls and on the other to ensure that the tax was
levied in the Member State of destination of the goods and/or
service.

1.5 Nonetheless, given the continuing differences of view
within the individual states on the desirability of setting in train
a genuine process of reforming the VAT system, the results
achieved remained modest. Indeed, to guarantee the neutrality
of the tax with regard to the normal process of competition
between firms, it would have been necessary to achieve, as the
Commission repeatedly proposed, a certain degree of harmoni-
sation both of rates and of taxation mechanisms.

In June 2000 the Commission presented a communica-
1.6
tion to the Council and the European Parliament in which it set
out the initiatives to be taken to define a sustainable strategy
for perfecting the common system of value added tax. The
guiding principles of this programme were in particular the
simplification and modernisation of the system of rules, the
adoption of measures designed to ensure more uniform appli-
cation of
the existing provisions, and greater cooperation
between the tax administrations of the Member States.

1.7
The transitional system, albeit modified in various ways,
is still in force and there is no likelihood of its replacement in
the immediate future, although according to a widely held view
it has significant imperfections which are such as to prejudice
the proper functioning of the single market. Three years having
passed since the launching of the programme in 2000, the
Commission, in a communication to the Council, the European
Parliament and the Economic and Social Committee, is now
proposing a review and update of VAT strategy priorities, not
least in the light of initiatives taken in the meantime.

1.3.1
At the same time the Council reaffirmed its wish to set
up a definitive system based on the principle of taxing goods
and services in the Member State of origin, stipulating 31
December 1996 as the time limit for achieving that objective.

2. General comments

1.4
In accordance with the wishes expressed by the Council,
the Commission therefore drew up a structured action
programme to achieve a system based on modernisation and
uniform application of the existing system, as well as on the
introduction of gradual changes intended to encourage the
process of transition towards a definitive common system of
value added tax.

2.1 Over the years the Committee has several times had
occasion to confirm its unconditional support for establishing a
definitive common system of value added tax, and has repeat-
edly called on the Member States to adopt the appropriate stra-
tegies to that end. Similarly, it has repeatedly expressed dissatis-
faction with the many imperfections of the present provisional
system, and has called for
the necessary modernisation
measures to be adopted.

30.4.2004

EN

Official Journal of the European Union

C 112/61

2.2
the
As early as 1988 the Committee pointed out
anachronistic nature of a system in which transactions between
parties operating within the same market, albeit residing in
different Member States, were defined as imports and exports –
terms which could at most be suitable for transactions with
trading partners operating outside that market.

2.3 Moreover, the opinion is widely held that the current
system is in general inadequate, and in the final analysis even
hinders the operation of the single market.

2.7
The Committee feels that the proposed strategy should
give top priority to the adoption of measures designed to guar-
antee the uniform application at Community level of
the
common system of VAT. The EESC has already expressed the
view elsewhere that it would be desirable to transform the VAT
committee into a regulatory committee with the task of
assisting the Commission in adopting measures to implement
existing provisions, along the lines set out in the draft directive
June
of 1997 and in the Commission's Communication of
2000 on the strategy to improve the operation of the VAT
system in the internal market (6).

the present stage,

2.3.1
Although it is of course desirable to move on quickly
to a definitive system, the Committee is nonetheless aware that
in which the Council expresses the
at
demands of the national governments rather than Community
interests, the only feasible objective is an action programme
based on modernisation of the existing system and the adop-
tion of measures to assist the transition to a definitive VAT
system.

2.4
The Committee appreciates the fact that the Commission
does not question the idea of a definitive system, and it shares
its cautious attitude of confining itself to pursuing at present a
strategy of gradual modernisation of the existing system. In
that context it is pleased with the results finally achieved in
terms of simplification and more uniform application of the
system.

The Committee particularly welcomes the adoption of
the

2.5
the initiatives taken by the Commission to implement
action programme launched in 2000.

2.5.1
In particular, it is pleased with the adoption of Direc-
tive 2000/65/EC, which abolished the institution of tax repre-
from 1 January 2003 (1), Directive
sentation with effect
2002/38/EC on services provided electronically (2), Directive
2003/92/EC on the rules on the place of supply of electricity
and gas (3), Directive 2001/44/EC on mutual assistance on reco-
vering credits (4),
adoption of Regulation (EC)
1798/2003 on administrative cooperation in the field of
VAT (5). It would also wish to point out that in the context of
initiatives intended to encourage closer cooperation among the
tax authorities of the Member States in fighting tax fraud, the
adoption of the Fiscalis programme is of particular importance.

and the

2.6 While appreciating the work carried out by the Commis-
sion, the EESC would point out that at times the Commission's
work has seemed, because of continuing positions in the
Council which seek to preserve national interests, to show a
certain lack of coherence and lack of clarity in setting priori-
ties.

(1) EESC opinion: OJ C 409 of 30.12.1998, page 10
(2) EESC opinion: OJ C 116 of 20.4.2001, page 59
(3) EESC opinion: OJ C 133 of 6.6.2003, page 58
(4) EESC opinion: OJ C 101 of 12.4.1999, page 26
(5) EESC opinion: OJ C 80 of 3.4.2002, page 76

3.

Initiatives in the process of being adopted

3.1 Simplification of the system

3.1.1
The Committee shares the view that simplification of
the tax obligations imposed on operators by the current system
should constitute a priority of the Commission's strategy, not
least to meet consumers' requirements.

3.1.2
In this context the Committee hopes that work can
resume as soon as possible on a draft directive providing for
the cross-frontier deduction of tax already paid, in place of the
system provided for by the 8th VAT Directive. It also welcomes
in particular the suggestion made by the Council presidency to
use to this end a system of information exchange and redistri-
bution of the tax among Member States similar to that envi-
saged by the directive on electronic trade.

the Committee appreciates the Commis-
3.1.3 Moreover,
sion's initiative of
launching a public consultation on the
simplification and harmonisation of tax obligations with regard
to VAT. In this context it hopes that measures will be adopted
to differentiate the system for meeting obligations according to
the size of the commercial operators involved. From the 1990s
onwards the Commission has collated a number of good prac-
tices adopted by the Member States to streamline the way
micro-enterprises and small enterprises meet the obligations
placed on them by the VAT rules (7). Moderating the legal obli-
gations would also have the effect of containing the problem of
undeclared work.

(6) EESC opinions: OJ C 19 of 21.1.1998, page 56, and OJ C 32 of

5.2.2004, page 120

(7) See the EESC's own-initiative opinion on the European Charter for
Small and Medium-sized Enterprises (OJ C 204 of 18.7.2000, p. 57,
points 1.6 – 12), the EESC opinion on the Proposal for a Council
decision on a multi-annual programme for enterprises and entrepre-
(OJ C 116 of 20.4.2001) and the EESC
neurship (2001/2005)
opinion on The role of micro and small enterprises in Europe's
economic life and productive fabric (OJ C 220 of 16.9.2003, p. 50,
point 3.5).

C 112/62

EN

Official Journal of the European Union

30.4.2004

3.1.4
The EESC appreciates and supports the work being
done by the Commission to encourage the creation of a ‘one-
stop shop’ system whereby firms registered in more than one
Member State can meet their EU-level VAT obligations in the
country where they are established (1).

4.1.2
The rule of taxation in the place of residence of the
service provider has worked up until now; however, the prolif-
eration of cross-border services is likely to create complex
administrative situations and distortions of competition, giving
rise to cases of double taxation or non-taxation of international
services. The problem has been brought to light particularly by
services linked to e-commerce.

3.2 Harmonisation and modernisation of the system

The EESC shares the view that it would be desirable to
3.2.1
adopt measures to prevent the occurrence of double taxation.
On this point it endorses the Commission's approach of setting
up instruments to solve individual cases of double taxation on
the model of those provided for in the international conven-
tions applicable to direct taxation.

the common system,

3.2.2
In the context of the initiatives to be taken to ensure a
the
higher level of harmonisation of
recasting of the 6th Community Directive on VAT appears to
be particularly important. Having been subjected to numerous
changes, it has become in the course of time a complex set of
rules which is not easy to consult. Moreover, technological
progress, new commercial practices and privatisation and liber-
alisation processes which have affected large sections of the EU
economy necessitate a review of those specific provisions of
this directive which no longer correspond to the reality of
economic transactions.

3.2.3 Moreover, the Committee agrees with the Commission
on the need for an early rationalisation of the current system of
derogations by eliminating those which distort competition and
generalising those which are more effective.

4.1.3
The amendment therefore provides that, in the same
way as for voluntary bankruptcy, for the provision of services
the person liable for VAT would be the beneficiary (where a
VAT-taxable dealer is concerned) and not the provider. The
amendment would make it possible, among other things, to
reduce the administrative load on operators, because the
service provider would no longer be obliged, as at present, to
register at the border when he carries out taxable operations in
a state different to his state of residence. Moreover, to the
extent that the changes are harmonised with rules applicable in
third countries which have their own taxes on consumption,
the result would be to reduce the risks of double taxation or
non-taxation of international services.

4.1.4
The Committee agrees there is a need for revision of
the rules on the place of taxation of services along the lines set
out above, but thinks it desirable to extend the review to all
services intended for final consumers. It also agrees with the
Commission that in this context it would be desirable to extend
to services the system of information exchange used by the tax
authorities of the Member States (VIES system).

4. Guidelines for the future

4.2 Combating tax fraud

4.1 Revision of the rules on the place where services are taxed

4.1.1
The Commission has launched a public consultation to
assess the need for amendment of the rules on the place where
services are taxed. The consultation is based on a document
drawn up by the Commission's Directorate-General for Taxa-
tion and the Customs Union, which assesses the desirability of
changing from the principle of taxation in the country of
origin to that of taxation in the country of destination, or
regarding as the place of taxation of services no longer the
place where the service provider resides but the place where
the beneficiary of the service resides (2).

(1) Cf. point 3.1.2 of COM(2003) 614 of 20.10.2003.
(2) The summary report on the results of the consultation carried out
by DG TAXUD (VAT – place of taxation for the provision of
document
services
COM(2003) 822 final, expressed the view that the overwhelming
majority of the 57 organisations interviewed are in favour of the
approach indicated above.

(TAXUD/C3/2357)) which

inspired

the

4.2.1
The Committee agrees that combating VAT fraud
should constitute one of the priorities for Commission action.
Indeed, as well as having a significant financial impact, fraud
involves distortions of competition which benefit
the less
honest operators.

4.2.2
The Committee is aware that the present system is
highly vulnerable to fraud. Cases of fraud are encouraged by
the possibility of combining operations to which VAT is applic-
able with operations for which actual payment of VAT is not
required. Nonetheless, the Committee takes the view that fraud
should be combated not so much by introducing amendments
to the current system, but in the context of the existing rules.
The results of a strategy based on introducing substantial modi-
fications to the current system would be uncertain, while the
direct and indirect administrative costs of such a strategy
would be enormous.

30.4.2004

EN

Official Journal of the European Union

C 112/63

4.2.3
Thus the EESC suggests making the best use of existing
instruments for administrative cooperation between states, as
well as providing further instruments. In this context, more-
over, considerable progress has already been made: Regulation
1798/2003 lays down particularly effective rules on this which
should facilitate contacts among the national administrations;
while adoption of the Fiscalis programme will, for its part,
make possible closer cooperation between states in combating
tax fraud, through the use of advanced electronic systems for
the exchange of information. Finally, the Committee takes the
view that an important contribution to combating the most
excessive forms of tax evasion could be made by developing
specific strategies at national level. In this context it particularly
welcomes the initiative which has emerged in the SCAC to
draw up a guide to some of the practices adopted by individual
national administrations in combating tax fraud.

5. Conclusions

5.1
The Committee reiterates the view that the many serious
limitations of the current system can be eliminated only by
introducing a new definitive system. Nonetheless, it is aware
that at present such an objective cannot be achieved in the
short term. It therefore appreciates the Commission's realism in
pursuing a strategy of gradual
improvement of the existing
system.

The EESC urges the Member States and the Council to
5.1.1
abandon their current positions in favour of policies with a real
chance of encouraging the development of the internal market
to the benefit of firms but above all of consumers. It points out
that, given the single currency, Europe can no longer tolerate

Brussels, 31 March 2004

the deficiencies of the current transitional system for value
added tax. In particular, it hopes that in the context of the insti-
tutional reform set in train by the European Convention the
Commission will be given suitable powers to implement Euro-
pean legislation, and that the unanimity rule will be abandoned
for types of taxation which affect competition on the internal
market. Any discussions on revising the rules for taking deci-
sions on taxation in the EU should also include VAT matters.

5.2 However, given the current climate of reluctance to
adopt a common VAT system of a definitive nature, and given
the need for modernisation of the transitional system, the EESC
agrees that the central elements of the improvement should be
simplification, modernisation of current rules, more uniform
application of those rules and greater administrative coopera-
tion among the tax authorities of the Member States.

The Committee also shares the Commission's view that
5.2.1
modernisation and simplification on the one hand, and coop-
eration and fraud prevention on the other, are part of a single
package and must therefore proceed in parallel.

The EESC therefore appreciates the initiatives taken by the
Commission, as well as the other initiatives currently under
consideration to implement the 2000 strategy. The Committee
endorses in particular the revision of the rules on the place of
taxation of services along the lines set out in the communica-
tion in question, and takes the view that fraud should be
combated in the framework of current law. Finally, it hopes
that the work on the draft directive to change the status of the
VAT committee can be resumed as soon as possible.

The President

of the European Economic and Social Committee

Roger BRIESCH