Proposal for a Council Decision authorising Italy to apply a measure derogating from Article 2(1) of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes
Date: 2004-08-11
Institutions: European Commission
Subjects: Italy, Switzerland, VAT, VAT resource, derogation from EU law, tax harmonisation, toll

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 11.8.2004 
COM(2004) 553 final 

Proposal for a 

COUNCIL DECISION 

authorising Italy to apply a measure derogating from Article 2(1) of the Sixth Directive 
77/388/EEC on the harmonisation of the laws of the Member States relating to turnover 
taxes 

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

Under  Article  30  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  conclude  with  a  third  country  or  any  international  organisation  an  agreement, 
which may contain derogations from this Directive. 

In  a  request  submitted  to  the  Commission  and  registered  by  the  Commission's 
Secretariat-General  on  24.03.2004,  the  Italian  Government  sought  authorisation  to 
conclude  an  agreement  with  Switzerland  that  includes  provisions  derogating  from 
Article 2(1) of Directive 77/388/EEC. 

In  accordance  with  Article  30(2)  of  the  Sixth  Directive,  the  Commission  informed 
the  other  Member  States  by  letter  of  11.05.2004  of  the  request  made  by  the  Italian 
Government and by letter of 12.05.2004 the Commission notified Italy that it had all 
the information it considers necessary for appraisal of the request.  

Article 2(1) of Directive 77/388/EEC stipulates that the supply of goods or services 
effected  for  consideration  within  the  territory  of  the  country  by  a  taxable  person 
acting as such shall be subject to value added tax (VAT). 

The purpose of the derogation requested by Italy is to seek authorisation to conclude 
an agreement with Switzerland that includes provisions derogating from Article 2(1) 
of  Directive  77/388/EEC  and  exempt  tolls  for  the  Gran  San  Bernardo  tunnel  from 
VAT.  The  reasons  for  this  request  are  twofold:  Firstly  the  introduction  of  VAT  on 
tolls for the Gran San Bernardo tunnel as of 1 January 2003 has led to competitive 
distortions in multi-journey season ticket sales. Secondly the breakdown of proceeds 
for  VAT  purposes  in  proportion  to  the  physical  demarcation  between  the  countries 
causes high administrative costs because the proceeds are calculated and distributed 
in accordance with economic criteria reflecting the breakdown of tunnel management 
and  maintenance  costs.  These  tunnel  management  costs  do  not  only  concern  the 
tunnel itself but include a highway linking the tunnel on Italian territory to the Italian 
road net. 

Article  21  of  the  Italian  Law  No  289  of  27  December  2002  (the  2003  Budget) 
repealed  Article  9(11)  (international  services  and  services  relating  to  international 
trade)  of  Presidential  Decree  No  633  of  26  October  1972  on  the  introduction  and 
implementation  of  value-added  tax  and  lead  to  the  levying  of  VAT  (by  the  Italian 
tunnel  operator)  on  tolls  for  the  Gran  San  Bernardo  tunnel  as  of  1  January  2003. 
However, Switzerland does not apply VAT or any similar tax on the toll; under the 
1958 Convention concluded between Italy and Switzerland before the introduction of 
a common VAT system, Switzerland cannot be obliged to apply and collect Italian 
VAT on tolls for the Gran San Bernardo tunnel. Therefore the introduction of VAT 
only  on  tolls  collected  by  the  Italian  operator  led  to  a  difference  in  user  costs  and 
distorted  competition  in  season-ticket  sales.  Users  can  pay  for  their  multi-journey 

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OJ L 145, 13.6.1977, p.1. Directive last amended by Directive 2003/92/EC (OJ L 260, 11.10.2003, p.8) 

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season tickets at either end of the tunnel and purchase them where they are cheaper, 
which is in Switzerland.  

The tunnel crosses an international border and is run by an Italo-Swiss joint venture 
and  two  operating  companies,  based  in  their  respective  countries.  The  Italian 
operator, in line with the territoriality principle, should  levy VAT (at 20%) only in 
respect  of  the  part  of  the  tunnel  on  Italian  soil.  However,  under  a  legally  binding 
agreement  between  the  operators  concluded  in  1963  and  applied  until  today,  the 
proceeds  of  the  toll  are  not  shared  out  in  proportion  to  the  physical  demarcation 
between the countries but must be shared in line with economic criteria reflecting the 
breakdown  of  tunnel  management  and  maintenance  costs  (57,5%  for  the  Italian 
operating  company  and  42,5%  for  the  Swiss  operating  company).  The  tunnel 
management  and  maintenance  costs  also  include  the  use  of  a  section  of  motorway 
which gives access to the tunnel. This means that the exact amount of the proceeds 
divided  and  distributed  in  accordance  with  these  criteria  can  only  be  established  a 
posteriori.  For  VAT  purposes  this  amount  must  then  be  recalculated  to  obtain  a 
breakdown  reflecting  the  territoriality  principle,  extrapolating  management  and 
maintenance  costs  for  the  use  of  a  section  of  motorway  which  gives  access  to  the 
tunnel. Such a burdensome ex post calculation and collection of VAT generates high 
administrative  costs  and  cannot  be  rendered  consistent  with  a  consumption  tax 
system requiring that VAT is levied and collected immediately. 

Against  this  background,  the  only  viable  option  is  in  fact  to  authorise  Italy  to 
conclude an agreement with Switzerland in view of exempting tolls for the Gran San 
Bernardo tunnel from VAT. The derogation will allow Italy to lift any reservations 
on the implementation of Article 8 of the Convention between Italy and Switzerland 
which  stipulates  that:  “Les  questions  de  douane,  de  police,  monétaires,  fiscals  et 
socials  soulevées  par  la  construction  et  l’exploitation  du  tunnel  feront  l’objet 
d’accords particuliers entre le Gouvernement italien et le Gouvernement Suisse.” The 
derogation represents a major simplification for the Italo-Swiss joint venture and its 
two operating companies. 

The  requested  exemption  will  have  an  impact  on  the  European  Communities’  own 
resources from valued added tax. The Italian government has calculated this possible 
impact on the basis of declarations by the Italian operating company in 2002. In 2002 
the Monte Bianco Tunnel was closed because of works in progress and consequently 
more traffic was rolling through the Gran S.Bernardo Tunnel. Therefore the amount 
calculated  on  this  basis  must  be  considered  as  a  “peak  value”  which  will  be  much 
lower  in  the  following  years.  The  declarations  of  the  operating  company  reflect  a 
taxable amount of approximately EUR 7.5 million in 2002. The Italian government 
estimates  that  exemption  from  VAT  will  therefore  not  exceed  a  loss  of  revenue  of 
approximately EUR 1.5 million a year. According to the Italian government about a 
quarter  of  the  services  are  rendered  to  persons  entitled  to  deduct  VAT,  so  that  the 
taxable amount should actually be closer to EUR 5.625 million a year and the loss of 
revenue  caused  by  a  derogation  would  be  EUR  1.125  million.  In  terms  of  own 
resources the possible loss of revenue to the Community budget from the derogation 
would in any case be lower than EUR 28 125 from 2004 onwards, if levied on EUR 
5.625 million at the maximum rate of 0.5% under the Berlin decision of 24-25 March 
1999.  It  is  therefore  necessary  that  the  Italian  Republic  estimates  every  year  the 
amount  of  losses  in  VAT  at  the  stage  of  final  consumption  and  adds  an  equivalent 

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compensation to the VAT base which is used for establishing its contributions to the 
Community's own resources. 

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Proposal for a 

COUNCIL DECISION 

authorising Italy to apply a measure derogating from Article 2(1) of the Sixth Directive 
77/388/EEC on the harmonisation of the laws of the Member States relating to turnover 
taxes 

THE COUNCIL OF THE EUROPEAN UNION, 

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 assessment2, and in particular Article 30 thereof, 

Having regard to the proposal from the Commission3, 

Whereas: 

(1) 

(2) 

(3) 

In  a  request  submitted  to  the  Commission  and  registered  by  the  Commission's 
Secretariat-General  on  24.03.2004,  the  Italian  Government  sought  authorisation  to 
conclude  an  agreement  with  Switzerland  which  include  provisions  derogating  from 
Article 2(1) of Directive 77/388/EEC. 

The reasons for this request are twofold: Firstly the introduction of VAT on tolls for 
the Gran San Bernardo tunnel as of 1 January 2003 has led to competitive distortions 
in  multi-journey  season  ticket  sales.  Secondly  the  breakdown  of  proceeds  for  VAT 
purposes in proportion to the physical demarcation between the countries causes high 
administrative costs because the proceeds are calculated and distributed in accordance 
with  economic  criteria  reflecting  the  breakdown  of  tunnel  management  and 
maintenance  costs.  These  tunnel  management  costs  do  not  only  concern  the  tunnel 
itself  but  include  a  highway  linking  the  tunnel  on  Italian  territory  to  the  Italian  road 
net. 

As of 1 January 2003, the Italian tunnel operator levies and collects VAT on tolls for 
the  Gran  San  Bernardo  tunnel.  However,  Switzerland  does  not  apply  VAT  or  any 
similar  tax  on  the  toll;  under  the  1958  Convention  concluded  between  Italy  and 
Switzerland before the introduction of a common VAT system, Switzerland cannot be 
obliged  to  apply  and  collect  Italian  VAT  on  tolls  for  the  Gran  San  Bernardo  tunnel. 
Therefore the introduction of VAT only on tolls collected by the Italian operator led to 
a  difference  in  user  costs  and  distorted  competition  in  season-ticket  sales.  Users  can 
pay for their multi-journey season tickets at either end of the tunnel and purchase them 
where they are cheaper, which is in Switzerland. 

2 
3 

OJ L 145, 13.6.1977, p.1. Directive last amended by Directive 2003/92/EC (OJ L 260, 11.10.2003, p.8) 
OJ C , , p. . 

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(4) 

(5) 

(6) 

The  tunnel  crosses  an  international  border and  is  run  by  an  Italo-Swiss  joint  venture 
and two operating companies, based in their respective countries. The Italian operator, 
in line with the territoriality principle, should levy VAT only in respect of the part of 
the  tunnel  on  Italian  soil.  However,  under  a  legally  binding  agreement  between  the 
operators concluded in 1963 and applied until today, the proceeds of the toll are  not 
shared out in proportion to the physical demarcation between the countries but must be 
shared in line with economic criteria reflecting the breakdown of tunnel management 
and  maintenance  costs.  The  tunnel  management  and  maintenance  costs  also  include 
the use of a section of motorway which gives access to the tunnel. This means that the 
exact amount of the proceeds divided and distributed in accordance with these criteria 
can only be established a posteriori. For VAT purposes this established amount must 
then  be  broken  down  in  accordance  with  the  territoriality  principle,  extrapolating 
management and maintenance costs for the use of a section of motorway which gives 
access to the tunnel. This ex post calculation and the collection of VAT is burdensome 
and  generates  high  administrative  costs.  It  cannot  be  rendered  consistent  with  a 
consumption tax system requiring that VAT is levied and collected immediately. 

Against this background, the only viable option is in fact to exempt tolls for the Gran 
San Bernardo tunnel from VAT. The derogation represents a major simplification for 
the Italo-Swiss joint venture and its two operating companies. 

However, 
the  requested  derogation  will  have  an 
Communities’  own  resources  from  valued  added 
compensatory measures.  

impact  on 
tax  and 

the  European 
therefore  require 

HAS ADOPTED THIS DECISION:  

Article 1 

By  way  of  derogation  from  Article  2(1)  of  Directive  77/388/EECthe  Italian  Republic  is 
hereby authorised, to conclude an agreement with Switzerland in view of exempting tolls for 
the  Gran  San  Bernardo  tunnel  from  VAT.  The  authorisation  is  granted  under  the  condition 
that the Italian Republic estimates every year the amount of losses in VAT at the stage of final 
consumption  and  adds  an  equivalent  compensation  to  the  VAT  base  which  is  used  for 
establishing its contributions to the Community's own resources.  

Article 2 

This Decision is addressed to the Italian Republic. 

Done at Brussels,  

For the Council 
The President 

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