Opinion of the European Economic and Social Committee on the ‘Proposal for a Council Directive amending Directive 77/388/EEC as regards the place of supply of services’ (COM(2003) 822 final - 2003/0329 (CNS))
Date: 2004-04-28
Institutions: European Economic and Social Committee
Subjects: VAT, administrative formalities, interpretation of the law, provision of services, tax collection, tax harmonisation, tax system

30.4.2004

EN

Official Journal of the European Union

C 117/15

Opinion of the European Economic and Social Committee on the ‘Proposal for a Council Directive
amending Directive 77/388/EEC as regards the place of supply of services’

(COM(2003) 822 final - 2003/0329 (CNS))

(2004/C 117/06)

On 13 January 2004, the Council decided to consult the European Economic and Social Committee, under
Article 262 of the Treaty establishing the European Community, on the ‘Proposal for a Council Directive
amending Directive 77/388/EEC as regards the place of supply of services’
(COM(2003) 822 final –
2003/0329 (CNS)).

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 14 April 2004. The rapporteur
was Mr Burani.

At its 408th plenary session on 28 and 29 April 2004 (meeting of 28 April) the European Economic and
Social Committee adopted the following opinion by 99 votes to one with one abstention.

1.

Introduction

1.1 On 23 December 2003, the Commission presented a
proposal
amending Directive
77/388/EEC, known as the Sixth Directive, as regards the place
of supply of services.

a Council directive (1)

for

1.5
Similar ideas worthy of a brief mention are allowing all
taxable persons to carry out their obligations by electronic
means, the harmonisation of the content of invoices and the
acceptance of
and the directive
concerning e-commerce.

an electronic

invoice,

1.2
This proposed directive, whose purpose is to change the
place of supply of services where these transactions take place
is part of the Commission's work
between taxable persons,
programme to improve the functioning of the internal market.

1.3 On 7 July 2000, the European Commission adopted a
communication which presented its strategy to improve the
operation of the VAT system within the context of the internal
market (2). The purpose of this strategy was to draw up an
action programme aimed at achieving four key objectives:

— simplification of the existing rules;

— modernisation of the existing rules;

— more uniformity in applying the current rules;

— a relaunch of administrative cooperation.

The proposal submitted to the EESC's scrutiny relates to the
second objective.

1.4
Several other initiatives of the Commission have enabled
progress to be made towards achieving these objectives. Thus,
with regard to simplification, the Council adopted Directive
2000/65/EC of 17 October 2000, which removed, with effect
from 1 January 2003, the right of Member States to impose
the appointment of a fiscal representative on intra-Community
businesses carrying out transactions in a Member State other
than that in which they were established.

(1) COM(2003) 822 final -2003/0329 (CNS).
(2) EESC opinion: OJ C 193 of 10.07.2001, p. 45.

2. Content of the proposed directive

2.1 Current situation

2.1.1
Article 9 of the Sixth Directive defines the place of
VAT taxation of supply of services. The special nature of this
article is that it sets out a general principle, which is being
applied less and less (Article 9-1), and that it provides for
exceptions that now affect an increasing number of transac-
tions (Articles 9-2 and 9-3).

— Article 9-1 defines the place of the supply of services as
being the place where the supplier is established. The
general principle is therefore to tax the supply of services in
the country in which the supplier is established;

— Article 9-2 defines a large number of exceptions to this

principle:

— in point (a), it states that services connected with immo-
vable property are taxed in the country in which the
property is located;

— in point (b), it states that transport services are taxed at
the place where transport takes place, having regard to
the distances covered;

— in point (c),

it states that cultural, artistic, sporting,
leisure, or similar activities are
scientific, education,
taxed in the country in which they are physically
carried out. The same applies to work on and valuations
of movable tangible property;

C 117/16

EN

Official Journal of the European Union

30.4.2004

it gives a list of services for which the
— in point (e),
country of
the country in which the
taxation is
customer is established, where the customer is a taxable
person established in a country of the Union other than
that of the supplier, or where he is established outside
the Union. These services, an exhaustive list of which is
supplied in the appendix, are generally known as
‘immaterial’ services;

— in point (f), it states that for services covered by the last
indent of (e), i.e. services supplied by electronic means,
to non-taxable persons established within the European
Union, the place of taxation is the country of the Union
where these persons are established. This is to take
account of Article 1 of Directive 2002/38/EC of 7 May
2002, which amends Directive 77/388/EEC.

2.2 The reasons for the current situation

2.2.1
The current situation of the regime of the place of
taxation of the supply of services, which is defined by an
unusual principle (taxation in the country in which the supplier
is established), and by various exceptions (taxation in the
country in which the service is carried out or taxation in the
country in which the purchaser is established) is due to the
options that were taken up when the Sixth Directive was
adopted.

2.2.2 During the preparatory work for drafting that text, the
Commission stated that
it was faced with the difficulty of
harmonising the varied legislation of Member States, who had
different rules regarding the place of taxation of supply of
services, with some countries preferring the place of establish-
ment of the supplier, others, the place where the purchaser of
the service was located.

2.2.3
In adopting the Sixth Directive, which represented a
big step in the completion of the Single Market, the Commis-
sion's intention was, of course, to create a unified definition of
the place of taxation of supply of services in order to reduce,
or indeed eliminate, the risks of double taxation or non-taxa-
tion of certain transactions. The choice made by the Commis-
sion in 1978, and agreed by all the Member States, was made
on the basis of the various laws in force at the time and of the
nature of the most commonly supplied services of the era.

2.3 The consequences of the current situation

2.3.1
The Committee shares the widely-held view that the
current situation has two sets of consequences that may be
prejudicial to the development of the Single Market:

marked contrast to the Commission's stated aims of simplifying
the tasks required of businesses and citizens.

2.3.1.2
The current rules lead to unfair situations of non-
taxation or double taxation, which can result in putting busi-
nesses established outside the Union at an advantage, and busi-
nesses established within the Union at a disadvantage. The
main reason for this lies in the fact that Article 9-2(e) applies
only to a specific, limited list of exceptions, and that adding to
this list would entail
the long and laborious process of
amending the directive.

2.3.2
The application of Article 9-2(e) allows for the taxation
of services in the country of the customer, even if the supplier
is established outside the European Union and, conversely, to
exempt from tax those services rendered by suppliers estab-
lished within the territory of the Union to purchasers estab-
lished outside the EU. This mechanism ensures the neutrality of
the tax and equality between EU-based suppliers of
these
services and businesses established outside the Union.

in question are not

2.3.3 However, the above-mentioned rule is not mandatory:
if a Member State decides not to apply it, particularly because
included in the above-
the services
mentioned list,
‘exported’ by our businesses are
subjected to VAT (place of the supplier), and ‘imported’ services
are not, which destroys the neutrality of the tax and puts busi-
nesses established within the European Union at an undue
disadvantage.

services

2.4 The Commission proposals

2.4.1
In order to remedy this situation, the Commission has
presented the proposed directive now under consideration.
This:

— proposes that the place of taxation of services supplied by
one taxable person to another be changed (Article 9). The
general principle will be the taxation of
the supply of
services in the country of the customer;

— takes the opportunity to clarify (Article 1(1)) that services
rendered within the same legal entity – i.e. between
different establishments of the same company, even where
these are established in different countries – are not treated
as supplies.

2.4.1.1
According to the Commission, the application of this
principle would allow the above-mentioned problems to be
remedied, by making it a principle that services supplied
between taxable persons must be taxed in the place of their
actual consumption, which, generally speaking, is the place in
which the customer is established.

The rules currently in force are extremely complex
2.3.1.1
and go against the spirit of simplification on which VAT legis-
lation should be based. They are a hindrance to the activities of
businesses within the Union, particularly SMEs, and are in

2.4.1.2
As regards services supplied to non-taxable persons,
the place of taxation continues to be the country in which the
supplier is established.

30.4.2004

EN

Official Journal of the European Union

C 117/17

2.4.2
Finally, as regards taxable persons who carry out both
activities that are subject to VAT and activities that are not, the
Commission proposes that they be considered, when they are
the purchasers of a service, as taxable persons, except where
the services they are buying are for their own consumption.

According to the Commission,

this redrafting of
2.4.2.1
Article 9 of the Sixth Directive allows most of the difficulties
outlined above to be resolved.

2.4.3 Next, the proposed directive provides for a number of
exceptions:

— for tax purposes, the place of supply of services relating to
an immovable property would continue to be the country
in which the property is located;

— hotel services and motorway tolls are also taxed in the
country in which the buildings or motorways are located;

— for passenger transport services, tax would apply in the
country where the service is carried out, proportionate to
the distance travelled;

— the place of taxation of cultural, artistic, sporting, entertain-
ment or similar services will be the country in which the
service is physically carried out. This exception to the prin-
ciple is in line with the general economic principles of the
tax and allows the effects of service suppliers locating in
countries with low VAT rates to be avoided.

the general principle. The aim of

2.4.4 However, the new version of the article excludes from
its scope scientific and educational activities, which puts them
into the scope of
this,
according to the Commission, is to simplify the obligations of
businesses operating in scientific research and education, which
are key sectors for economic development, and which are also
unlikely to relocate within the Union solely because VAT rates
are different.

3. Comments and proposals

3.1
The Committee is in agreement with the aims of the
proposal and, on the whole, with the formulation of the new
regulations. However, these still seem rather complicated and
therefore give rise to the concerns and the requests for clarifica-
it recognises that the
tion that follow. On the other hand,
matter is complex and that rules of a general nature cannot
always address the various particular cases that arise in the day-
to-day lives of businesses.

firstly, it is not clear what is ‘the place where the transport is
effected’
(point of departure? destination?), especially in the
case of air transport; and secondly, doubts arise about the need
to calculate as many rates of VAT as there are countries
covered by the journey (‘proportionate to the distances
covered’). Establishing criteria for land transport
is difficult
enough, but air and sea transport are likely to face even more
serious problems of interpretation and implementation. The
EESC considers a new, clearer formulation to be necessary.
Above all, the rules should be harmonised such that passenger
transport is treated in the same way as the transport of goods
(see Article 9e).

3.2.2
The Commission states that nothing in this field has
been changed relative to the current situation. However, the
EESC points out that the rules to be applied are, as already
stated, extremely complicated. Furthermore, they may in prac-
tice give rise to different interpretations in individual cases,
which will cause doubts over interpretation and create more
work for taxpayers and the authorities. The whole sector is one
where greater clarity and simplicity are necessary. The EESC
suggests that the rules should be radically revised in terms of
their wording and, if necessary, their substance.

3.3 Specific services to taxable persons (Article 9d)

3.3.1
The Commission proposes that these be taxed in the
country of the supplier, subject to all three of the following
conditions being fulfilled:

— the services are rendered in the Member State in which the

supplier is established;

— the services require the physical presence of the service

provider and that of the customer;

— the services are provided directly to an individual

for

immediate consumption.

to the third condition,

3.3.2 With respect
‘individual’
means a natural person who belongs to an organisation subject
to VAT, the rule seems to make sense; however, if this is the
case, the EESC would suggest that,
in order to reduce the
burdens on businesses, it would be useful to repeal the Eighth
VAT Directive and introduce a cross-border right of deduction.

if

3.2 Passenger transport (Article 9b)

3.2.1
The Commission proposes to define the place of
supply as ‘the place where the transport is effected, propor-
tionate to the distances covered’. This is difficult to interpret:

This category of exception does not include hire and
3.3.3
long-term (more than thirty days)
lease transactions. These
transactions would therefore be taxed in the country of the
customer, contrary to what is currently the case. A conse-
quence of this would be to prevent certain customers from
taking advantage of the rights of deduction in the supplier's
country when these are more favourable than those in the
country in which they are established.

C 117/18

EN

Official Journal of the European Union

30.4.2004

3.3.3.1 However, the EESC notes that large transactions such
as the leasing of aircraft and ships are included in this category;
the benefits to businesses of moving takings from one country
to another could be significant enough to encourage reloca-
tions.

principles of taxation between taxable persons and non-taxable
persons, steps must be taken to ensure that such a change
would not increase the administrative burden on suppliers or
consumers. This development should enable a universal roll-out
of one-stop shops of the type that now exists for services
supplied electronically.

3.4 Transport of goods for non-taxable persons (Article 9e)

3.4.1
Article 9e defines the place of supply of these services
as the place of departure. The Committee would like clarifica-
tion as to how this article, which clearly concerns transport
carried out for the account of private persons,
is consistent
with the way in which passenger transport is treated, which
does not distinguish between taxable and non-taxable persons
and defines the place of taxation as being ‘the place where
transport takes place, having regard to the distances covered’.

The second paragraph of this article says that Member
3.4.2
States need not apply the tax to that part of the transport that
is made over waters which do not form part of the territory of
the EU. This exemption may well be logical, but the EESC
firmly opposes the granting to Member States of powers (in
other articles as well as this one) to grant exceptions or not. In
an area such as taxation, where harmonisation is a long way
from being achieved, the freedom to choose carries the risk of
worsening the existing differences in the way taxpayers are
treated.

3.4.3
and suggestions made in paragraph 3.2.2 above also apply.

As regards the application of the rule, the criticisms

3.5 Electronically supplied services to non-taxable persons (Article

9g)

This article provides that

3.5.1.
the place of supply for
services supplied by persons established outside the Com-
munity shall be the place where the non-taxable person is
established. The Commission has made it clear that non-EU
suppliers must register for VAT in the country of the customer,
collect any VAT that is due and remit it to the country of the
customer. This rule would apply until July 2006. Apart from
the obvious consideration that the above period is extremely
limited, and that nothing is said about what decisions will
subsequently be taken, the EESC would point out that such a
rule might be observed by large suppliers of electronic services,
is likely to be largely evaded by small or occasional
but
suppliers of services to individuals.

3.6 Other provisions

3.6.1
The other exceptions relate to non-taxable persons,
whom the text is obliged to take into account, as it amends the
whole of Article 9. The current rules are maintained and
require no comment. The Committee would point out that
whilst it may be desirable at a later stage to harmonise the

4. Conclusions

4.1
As a general comment, the EESC notes that, with regard
to taxable persons, the proposed directive enables the principles
governing the place of taxation of goods and those governing
the supply of services to be brought closer together. This devel-
opment will simplify traders' obligations and, in certain cases,
put EU businesses on an equal footing with those outside the
EU, as is already the case for the rules on import and export of
goods. The Committee can only agree with this approach.

In this context, the EESC calls for an accurate reflection
4.1.1
of the different types of services provided, with a distinction
being made between universal services of general interest and
private services.

4.2
The proposed directive needs clarifying in a number of
places; the number of exceptions to exceptions also needs to be
reduced to a minimum, as these risk further complicating a
subject that is already quite complex in and of itself. Ultimately,
the new rules are a long way from achieving the Commission's
general aim of simplifying matters. The text should also be
revised so as to remove as far as possible Member States' room
for interpretation of the provisions and the tax authorities'
margin of decision-making autonomy.

4.3
The new rules have reduced to a minimum the cases in
which suppliers are obliged to register for VAT in the custo-
mer's country, and they therefore favour the reverse-charge
mechanism, i.e. payment by the taxable person, giving rise to
the right of deduction for taxable activities.

4.3.1
The reverse-charge mechanism raises the problem of
the Commission also
checks.
In order to allow for these,
proposes to extend to services the VIES (VAT Information
Exchange System), which has been in existence for goods since
1993. However, it is well known – and the Commission itself
admits – that this system does not work satisfactorily, despite
having been in operation for over ten years. The Commission
maintains that adding in the system data relating to services to
those relating to goods ‘would not impose a significant burden
on administrations’. The EESC does not agree with this point of
view. Not only would there be an additional burden, but it is
also doubtful that the 2008 deadline for putting this system
into operation will be met, given the difficulties that
the
existing system already faces.

30.4.2004

EN

Official Journal of the European Union

C 117/19

4.4
In conclusion, the EESC would like to make two final
comments. The first is that VAT is the most widely-evaded tax
in Europe, and that such evasion a) encourages large-scale
fraud, which in turn feeds organised crime, and b) requires
Member States to expend significant resources to combat such
evasion. The cost of collecting this tax is not known, but it is
certainly very high. We must add to our conclusions that this
state of affairs arises not from the rules, but from the system
itself. It is surely time that the experts thought up alternative
systems that would ensure a level of revenue at least equal to
the current one but would be less costly to society as a whole
and more efficient from the point of view of collection. The

EESC believes that the time has come for the Commission and
the Member States to set up a think tank of experts, econo-
mists, and tax specialists in order to seek an innovative and
bold solution.

4.4.1
The second comment is a socio-economic one: the
application of VAT, with all its faults outlined above, creates
inequalities in treatment within the internal market of citizens/
consumers, which are diametrically opposite to the much-
talked-about policy of cohesion, and furthermore has quite a
number of exceptions to the rule. This is another reason for
reviewing VAT.

Brussels, 28 April 2004

The President

of the European Economic and Social Committee

Roger BRIESCH

C 117/20

EN

Official Journal of the European Union

30.4.2004

List of services covered by Article 9-2 (c)

c)

the place of supply of services relating to:

APPENDIX

— cultural, artistic, sporting, scientific, educational, entertainment or similar activities, including the activities of the

organizers of such activities, and where appropriate, the supply of ancillary services;

— ancillary transport activities such as loading, unloading, handling and similar activities;

— valuations of movable tangible property;

— work on movable tangible property;

shall be the place where those services are physically carried out.

List of services covered by Article 9-2 (e)

e) The place where the following services are supplied, when performed for customers established outside the Com-
munity or for taxable persons established in the Community but not in the same country as the supplier, shall be
the place where the customer has established his business or has a fixed establishment to which the service is
supplied or, in the absence of such a place, the place where he has his permanent address or usually resides:

— transfers and assignments of copyrights, patents, licences, trade marks and similar rights;

— advertising services;

— services of consultants, engineers, consultancy bureaux, lawyers, accountants and other similar services, as well

as data processing and the supplying of information;

— obligations to refrain from pursuing or exercising, in whole or in part, a business activity or a right referred to

in this point (e);

— banking, financial and insurance transactions including reinsurance, with the exception of the hire of safes;

— the supply of staff;

— the services of agents who act in the name and on behalf of another, when they procure for their principal the

services referred to in this point (e);

— the hiring out of movable tangible property, with the exception of all forms of transport;

— telecommunications. Telecommunications services shall mean services relating to the transmission, emission or
reception of signals, words, images and sounds or information of any nature by wire, radio, optical or other elec-
tromagnetic systems, including the related transfer or assignment of the right to use capacity for such transmis-
sion, emission or reception;

— telecommunications services within the meaning of this provision shall also include provision of access to global

information networks;

— radio and television broadcasting services;

— electronically supplied services, inter alia, those described in Annex L.