Proposal for a Council Directive amending Directive 77/388/EEC as regards certain measures to simplify the procedure for charging value added tax and to assist in countering tax evasion and avoidance, and repealing certain Decisions granting derogations
Date: 2005-03-16
Institutions: European Commission
Subjects: VAT, basis of tax assessment, tax avoidance, tax evasion, tax exemption

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 16.3.2005 
COM(2005) 89 final 

2005/0019 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending Directive 77/388/EEC as regards certain measures to simplify the procedure 
for charging value added tax and to assist in countering tax evasion and avoidance, and 
repealing certain Decisions granting derogations  

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

Background 

Under Article 27 of the Sixth VAT Directive, 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 Sixth VAT Directive, in order to simplify the procedure 
for charging the tax or to prevent certain types of tax evasion or avoidance. 

Currently, Member States have been allowed to apply over 140 derogations. This number will 
grow in the near future, since Member States which joined the EU on the 1st of May 2004 are 
now introducing requests for derogations. In addition, in a relatively short timescale they will 
almost certainly come across other special measures in their legislation which will require a 
Community legal base. 

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  market1,  the 
Commission  undertook  to  rationalise  some  of  the  large  number  of  derogations  currently  in 
force. The Commission's communication2 of 20 October 2003, which reviewed and updated 
the strategy, reiterated this. It was envisaged that such a rationalisation would involve making 
certain  individual  derogations  available  to  all  Member  States  through  an  amendment  to  the 
Sixth  VAT  Directive3.  These  derogations  would  be  those  which  had  already  proved 
themselves  effective  and  which  tackled  problems  which  were  shared  by  more  than  one 
Member State. 

The number of derogations and the similar problems they tackle is indicative of the fact that 
in  recent  years  VAT  avoidance  and  fraud  has  become  a  very  real  issue.  Both  the  national 
authorities of the Member States as well as business federations have pointed out that evading 
VAT  has  become  so  widespread  in  certain  sectors  that  it  puts  honest  traders  under  a 
competitive disadvantage. Charging VAT but not paying it over to the State results in not only 
a loss of revenue for the State but also enables dishonest traders to offer goods or services at 
lower prices than their compliant competitors. 

In  addition,  Member  States  are  more  and  more  frequently  confronted  with  artificial 
constructions  –  often  involving  a  series  of  transactions  -  set  up  with  the  sole  purpose  of 
obtaining  a  VAT  advantage  either  by  lowering  the  final  VAT  charge  or  by  increasing  the 
recovery of VAT. While the artificial character of the chain of transactions is usually obvious, 
it  is  much  more  difficult  to  tackle  them  effectively  or  quickly  from  a  legal  point  of  view, 
especially since counter measures or court action inevitably take a long time. In the meantime, 
experience in Member States demonstrates that VAT avoidance schemes are worked out by 
specialists  and  successful  ones  subsequently  marketed  as  a  product  to  businesses.  It  is 
therefore questionable whether a piecemeal approach to tackling this problem where there is 
evidence of common problems is still appropriate. 

1 
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COM(2000) 348 final 
COM(2003) 614 final 
Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member 
States relating to turnover taxes – Common system of value added tax: uniform basis of assessment (OJ 
L 145, 13.6.1977, p 1. Directive as last amended by Directive 2004/66/EC (OL L 168, 1.5.2004, p. 35)). 

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When Member States want to amend their national VAT legislation in order to counter these 
avoidance  schemes,  the  question  of  the  compatibility  of  the  envisaged  measures  with 
Community law, and the Sixth VAT Directive in particular, arises. Especially in the area of 
avoidance, the mechanisms for artificially lowering the VAT charge are set up after a careful 
analysis of the strict wording of national VAT provisions and the Sixth VAT Directive. The 
principles of the common VAT system laid down in the Sixth VAT Directive seem designed 
first  and  foremost  for  genuine  transactions.  Very  little,  if  anything,  within  the  Sixth  VAT 
Directive  itself  caters  for  cases  where  a  taxable  person  tries  to  circumvent  these  principles. 
Only the abovementioned Article 27 provides a legal base whereby the Council, on the basis 
of  an  individual  request  from  a  Member  State,  can  authorise  the  application  of  special 
measures which derogate from the normal rules. This, however, is a cumbersome route. 

The  Commission  is  therefore  of  the  opinion  that  specific  known  schemes  could  be  more 
effectively  tackled  through  an  amendment  to  the  Directive  to  provide  a  permanent  viable 
alternative to the standard treatment where it can be justified through evidence of avoidance 
or evasion activity.  

The Proposal 

The  current  proposal  aims  to  amend  the  6th  Directive  to  provide  Member  States  with  the 
option of quickly adopting legally sound measures in order to counter avoidance and evasion 
in certain specific and targeted areas. This will not only be to the benefit of national treasuries 
but  also  to  businesses  who  suffer  from  unfair  competition  because  they  do  not  wish  to  get 
involved in the setting up of avoidance schemes. In addition to measures to combat avoidance 
and  evasion,  the  rationalisation  proposal  also  includes  some  measures  aimed  at  simplifying 
the  application  of  the  tax  in  certain  circumstances  where  those  liable  to  pay  the  tax  are  in 
financial  difficulties.  The  rationalisation  exercise,  however,  does  not  affect  either  specific 
measures designed to deal with a particular situation in a single Member State, or the ability 
of Member States to continue to request derogations under Article 27 of the Sixth Directive in 
the future where justified.  

The  material  in  the  resultant  proposal,  therefore,  introduces  changes  in  some  areas  where 
there are proven difficulties with the operation of the sixth Directive and a demonstrable need 
to allow some limited flexibility more generally. In common with the derogations from which 
they  spring,  these  measures  represent  an  alternative  to  the  normal  rules  and  are  only  being 
made available to all Member States to help counter avoidance and evasion or to simplify the 
operation  of  the  tax.  The  Commission  is  also  of  the  view  that  in  some  areas,  such  as  in 
relation to the taxation of waste and  scrap  material, it  is  preferable and more  appropriate to 
have the permanency of an amended 6th Directive rather than being over-reliant on temporary 
derogations. To a large degree the proposed changes represent no more than a codification of 
what would, in any case, be available through a derogation under Article 27, and the proposed 
alternative  treatments  are  similarly  subject  to  the  same  restrictions.  In  addition,  however,  it 
does include an extension, in two areas, of a measure already found in the Directive (rather 
than in derogations) which has been of use to Member States in controlling the tax.  

The  measures  (as  befits  legislation  targeted  towards  specific  problems)  provide  Member 
States  with  the  option  of  using  the  alternative  rule,  rather  than  making  their  application 
mandatory. There is thus no obligation for a Member State to adopt the rule if there is no need 
for  such  a  rule  in  that  Member  State.  In  addition,  given  the  variety  of  mutations  through 
which avoidance schemes pass in response to counter-measures, the proposal allows Member 
States  some  room  to  adapt  the  measures  to  their  specific  national  situations.  Thus,  once 

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having opted to apply the rule, Member States are authorised to limit their application of the 
new rules in order to target their specific avoidance or evasion problem. Businesses, therefore, 
are  not  penalised  by  the  mandatory  application  of  inappropriate  rules.  Instead  they  should 
benefit  from  a  selective,  rather  than  a  blanket,  application  which  affects  tax  avoiders,  not 
business generally. The Commission believes that this approach of setting the boundaries of 
the  derogation  and  allowing  flexibility  of  application  within  those  boundaries  is  the  most 
appropriate  response  to  identified  general  problems  which  require  individually  tailored 
solutions. 

Since  one  of  the  objectives  of  the  proposal  is  to  reduce  the  number  of  derogations,  most 
particularly  where  there  is  duplication  between  Member  States,  the  Directive  also  formally 
repeals a number of Council Decisions. Although a significant number of these have a limited 
life  and  would  eventually  run  their  course,  some  (for  various  reasons)  are  not  time  limited. 
Since  the  amended  Directive  77/388/EEC  will  provide  the  legal  base  for  the  measures 
currently contained in the derogations, there is no need to confuse by maintaining a dual legal 
base. Accordingly, those derogations incorporated within the Directive will be repealed after a 
reasonable period for any necessary changes to be made to national legislation. The proposed 
time limit of a year will allow for any re-consultation with the VAT Committee, for example, 
that might be necessary and will also allow time for any necessary changes at national level to 
be completed. 

The  opportunity  of  this  rationalisation  is  also  being  taken  to  formally  identify  derogations 
notified under article 27(5) of Directive 77/388/EC which are no longer used by the relevant 
Member State because they have lapsed or have been superseded. Since these derogations are 
defunct there is no need to repeal them through the proposed instrument. 

An additional objective of the rationalisation is to improve transparency. This process started 
with amendments to Article 27 at the beginning of 2004, embodied in Directive 2004/7/EC. 
These eliminated the provision under which the Council was deemed to have tacitly approved 
a derogation if it did not object to the measure within two months of being notified. Under the 
revised  procedure,  the  Commission  has  to  respond  to  every  request  for  special  treatment 
introduced by a Member State either by presenting a proposal to the Council if the request is 
acceptable or by presenting its grounds for opposing the measure to the Council if it is not.  

This  objective  has  been  further  pursued  as,  linked  to  this  proposal,  the  Commission  has 
published a list on the TAXUD website giving references to all the measures which are still in 
force and which were authorised under Article 27(1) – (4) or notified under Article 27(5). 

Specific contents 

Article 1(1): Grouping and Article 1(2): Transfers of going concerns 

Although  not  arising  from  existing  derogations,  in  Article  1(1)  and  1(2)  the  Commission  is 
taking the opportunity to propose changes to strengthen areas which Member States find can 
be  exploited  to  avoid  VAT.  In  both  the  area  of  "grouping"  in  Article 4(4)  of  the  Sixth 
Directive and in "transfers of going concerns" (Article 5(8)) the proposal allows for Member 
States  to  take  steps  to  ensure  that  the  operation  of  the  rules  does  not  allow  an  unfair  result 
which would unjustifiably benefit or prejudice those concerned. Member States already have 
the  discretion  to  set  the  circumstances  in  which  the  both  of  these  rules  can  apply.  The  new 
rule,  already  applied  to  capital  goods  through  Article 20(6),  would  help  Member  States 
prevent unfair results arising from the operation of the rules.  

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Article 1(3)(a): Deletion  

This  Article  simply  deletes  the  current  definition  of  open  market  value  in  the  6th  Directive, 
which only applies to Article 11(A)(1)(d). An amended definition is inserted later through the 
addition of new paragraph 8 to Article 11(A) in Article 1(3)(b) of the proposed Directive. 

Article 1(3)(b): New Paragraph 5 - Investment Gold 

Several Member States already apply a special measure on the basis of Article 27 to counter 
an arrangement which avoids the payment of VAT on untaxed investment gold used as a raw 
material  for  making  consumer  goods.  It  is  now  proposed  to  provide  within  the  Sixth  VAT 
Directive  the  means  for  all  Member  States  to  apply  this  measure.  Article 1(3)(b)  of  the 
proposal  introduces  an  optional  rule  derived  from  the  existing  derogations  through  the 
insertion of a new paragraph (5) to Article 11(A) of the 6th Directive.  

Investment  gold,  held  in  the  form  of  bars  or  wafers  of  a  specified  purity  recognised  by  the 
bullion markets, or gold coins fulfilling the legal criteria, is exempt from VAT. When the gold 
is sold in a form in which it no longer qualifies as investment gold, VAT should be charged 
on  the  supply.  This  happens  for  example  when  a  gold  bar  is  worked  into  jewellery.  The 
amount of tax payable can be minimised if a customer provides their own investment gold for 
working since the supply will only consist of the service of working the gold. Since there is 
no supply of the exempt gold, tax will not be accounted for even though it has lost its status as 
investment gold and it no longer qualifies for exemption. This is the abuse which the existing 
derogations seek to counteract. Similarly, where investment gold is provided by the customer 
and the jeweller works it into an item which also incorporates goods provided by the jeweller 
the  value  of  the  gold  will  not  be  included  in  the  resultant  supply  of  goods.  This  Article 
requires those working exempt gold to account for VAT on the value of the gold when it no 
longer qualifies as exempt gold. 

Article 1(3)(b): New Paragraphs 6 – 8 Valuation of supplies 

One  of  the  vulnerable  areas  for  avoidance  relates  to  the  valuation  of  supplies  since  that 
directly affects the amount of tax which is charged. The new paragraph (6) to Article 11(A) of 
the  6th  Directive,  to  be  found  in  Article 1(3)(b),  introduces  an  optional  rule  which  enables 
Member States to revalue certain supplies.  

Since the valuation rule in Article 11 of the Sixth Directive is clear and forms one of the key 
tenets  of  the  tax,  any  deviation  needs  to  be  carefully  circumscribed.  In  particular,  the 
proposals observe the principle that the tax authority should not interfere in the taxable value 
of  a  supply  as  a  matter  of  course  but  only  in  specified  circumstances,  and  even  then  not 
routinely.  The  Article  therefore  only  allows  re-valuation  in  the  context  of  combating  tax 
avoidance  and  evasion  and  in  order  to  do  so,  a  series  of  additional  tests  also  need  to  be 
satisfied.  The  rule  can  only  be  applied  when  the  parties  are  connected  and  that  connection, 
rather than demonstrable commercial reasons, has led to a value other than the usual market 
value  being  placed  on  the  supply.  In  addition  re-valuation  of  a  supply  is  only  allowed  in  3 
circumstances:  (in  the  case  of  an  undervaluation)  where  VAT  has  been  charged  and  the 
recipient of the supply is not entitled to a full right of deduction of VAT; or (in the case of an 
overvaluation)  VAT  has  been  charged  and  the  supplier  is  not  entitled  to  a  full  right  of 
deduction  of  VAT.  Where  VAT  has  not  been  charged,  the  revaluation  is  only  applicable 
where  an  exempt  supply  has  been  undervalued  by  a  partly  exempt  person.  Finally,  the  rule 
cannot apply if the difference between the open market value and the value of the supply is 

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not  significant,  or  where  it  can  be  shown  that  the  supply  is  available  for  the  same 
consideration to others who are not connected under the definition. 

Thus, the scope of the re-valuation measure is limited. It is envisaged that it will not be used 
in  relation  to  normal  everyday  transactions  but  apply  only  to  a  very  small  number  of 
transactions made within specific categories and in specific circumstances. The tests to be met 
mean that re-valuation will also not apply to such transactions as supplies of goods or services 
made below cost price as part of a promotion; a sale of damaged stock at a discount; or where 
there is a clearance sale for the end of a line, for example, or at the end of a season. 

This measure aims to combat avoidance where a taxable supply is made at a low value to a 
purchaser who is not able to deduct all his VAT and thus the lower amount of tax represents a 
real and lasting loss to tax revenues. The consideration is only set at that level because links 
exist between the supplier and purchaser. In order to apply the rule, Member States will need 
to  define  the  relevant  connections  between  the  parties.  This  definition  must  be  within  the 
categories set out in the Directive.  

Similarly, the rule in relation to overvalued supplies is aimed at businesses who do not have 
full  right  of  deduction,  and  who  inflate  their  taxable  supplies  to  a  fully  taxable  business 
connected  to  them.  The  recipient  is  able  to  recover  input  tax  in  full,  but  by  increasing  the 
value the supplier manages to shift the balance between the value of taxable and non taxable 
supplies that they are making in order to engineer an increase in the proportion of deductible 
VAT. Businesses can achieve the same result by reducing the value of an exempt supply to 
decrease their exempt turnover relative to the value of their taxable supplies and thus increase 
their recovery rate.  

Under this proposal the ability to re-value should only be applicable when the alteration of the 
value  of  a  supply  leads  to  a  direct  loss  of  tax  either  through  increased  recovery  or  because 
irrecoverable tax is reduced. There should be no tax loss where the supply is being made by a 
fully taxable person to another fully taxable person since the tax on the supply can simply be 
reclaimed  and  the  valuation  has  no  impact  on  the  recovery  of  the  supplier.  These  supplies 
have therefore been excluded from the alternative new rules. This is consistent with the fact 
that the optional rules are still a form of derogation from the normal rules which (in line with 
ECJ rulings) should be strictly limited to tackling the problem.  

It is worth noting that acquisitions resulting from intra-EC trade as well as supplies within a 
Member  State  are  covered  by  the  rule  since  the  proposal  amends  Article  11(A)  of  the  6th 
Directive  which  is  the  provision  used  under  Article  28e  to  define  the  valuation  of  intra 
Community supplies.  

The  proposal  allows  for  re-valuation  of  the  supplies  to  the  open  market  value  (OMV).  The 
proposed new paragraph (8) to Article 11(A) of the Sixth Directive adjusts and replaces the 
definition  of  OMV  found  in  Article 11(A)(1)(d)  to  cater  for  this  change.  Of  the  two  main 
options, re-valuing using the OMV or the cost price, the Commission feels that OMV is the 
most  appropriate.  The  cost  price  would  only  have  the  effect  of  enabling  Member  States  to 
neutralise the tax loss suffered through the low value whilst OMV allows the tax authorities 
the possibility to protect some of the tax on the value added. Neither the OMV nor the cost 
price are necessarily easily calculated on each supply but the OMV gives Member States the 
greatest scope to collect something approximating to the tax which would otherwise be due. 
To provide some additional protection for the taxpayer, the proposal re-affirms that the OMV 

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may  be  below  the  cost  of  making  the  supply,  but  also  establishes  that  the  OMV  should 
normally be, as a minimum, the cost price. 

The introduction of the measure together with the national legislation and rules governing it 
are  subject  to  consultation  with  the  VAT  Committee,  established  by  Article  29  of  the  6th 
Directive. This is with a view to ensuring that the interpretation of the legislation is consistent 
throughout the Member States which opt to adopt the measure. It flows from this requirement 
to consult that Member States who currently have a derogation covered by this new rule will 
need  to  re-notify  the  details  of  their  domestic  legislation  once  the  Community  legal  base 
changes. 

Article 1(4) and (5): Reference changes 

Both these paragraphs make consequential amendments to references to Article 21 in Articles 
17 and 18 of the 6th VAT Directive. These cater for a new optional reverse charge rule added 
to Article 21(2) of the 6th VAT Directive by Article 1(7) of this Directive.  

Article 1(6): Capital items 

Article 20(2) and (3) of the Sixth VAT Directive lay down some specific rules for adjustment 
of deductions of input VAT on capital goods. Article 20(4) stipulates that Member States may 
define the concept of capital goods.  

While it seems logical that services above a certain value, which are used for a longer period 
within  a  business,  are  treated  in  a  similar  fashion  to  goods  this  is  not  explicit  within  the 
Directive  as  it  now  stands.  As  a  consequence,  some  Member  States  have  refrained  from 
applying  Article  20(2)  and  (3)  to  services,  although  the  Commission  is  aware  that  this 
approach has given rise to avoidance opportunities. The proposed amendment in Article 1(6) 
is intended to clarify that adjustment of deductions relating to capital items under Article 20 
of the Sixth Directive may apply equally to services - provided that they are of a capital nature 
and are treated as such. 

Article 1(7): Reverse charges 

Article 1(7)  extends  the  use  of  an  optional  reverse  charge  mechanism  for  specified  supplies 
made to taxable persons. These are in sectors of the economy which have proved particularly 
difficult for Member States to police, for example because of the nature of the industry or its 
structure.  Often  substantial  revenue  losses  arise  from  taxable  persons  invoicing  for  supplies 
prior to disappearing without accounting for the VAT on the invoice, whilst at the same time 
the recipient legitimately exercises his right to deduct. 

The areas covered are services relating to buildings (including any, or all, of the services of 
construction, repair, cleaning and demolition); supplies of staff relating to building services; 
land and buildings on which the option to tax has been exercised; and supplies of waste, scrap 
and recyclable material together with some products resulting from their treatment and some 
treatment services. What is covered by the term "waste" is defined in a new annex containing 
a  list  covered  by  existing  derogations.  Although  some  Member  States  are  currently 
empowered to apply an exemption by derogation to supplies of waste, a reverse charge offers 
the  opportunity  to  recover  tax;  is  easy  to  administer;  has  proved  to  work  well  where  it  has 
already been introduced; and ensures that hidden tax is not passed on to the purchaser through 

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the irrecoverable tax of the vendor. In addition, a new exemption, even if optional, would not 
sit well with the general need to limit extensions to the exemptions. 

In addition, some Member States have a derogation which prevents tax losses arising in the 
following  three  circumstances:  sales  of  immovable  property  in  the  course  of  judicial 
liquidation  where  the  option  to  tax  in  Article 13(C)  has  been  exercised;  the  sale  of  goods 
taken  as  security;  and  when  goods  are  supplied  following  the  cession  of  the  reservation  of 
ownership  to  an  assignee  and  the  exercise  of  the  assignee's  right.  In  all  three  scenarios  the 
supply  is  usually  made  by  a  vendor  who  is  in  financial  difficulties  and  who  is  unable  to 
honour his debts, including his obligations to the tax authorities. The result is that either the 
tax is counted as proceeds from the sale and is retained by the creditor to offset the taxable 
person's debt, or (when it does reach the taxable person) the taxable person disappears without 
paying the tax to the authorities. Article 1(7) has the effect of making taxable persons who are 
the recipients of the supplies in these circumstances responsible for paying and accounting for 
the VAT on those supplies. This both simplifies and makes the system more efficient, with no 
impact in tax terms on the customer and with minimal additional compliance costs. 

The second subparagraph identifies where Member States have the discretion (subject to the 
consultation process identified in the first sub paragraph) to apply limiting measures, and the 
nature of those measures. 

Article 1(8): New Annex 

The annex inserted by Article 1(8) identifies the types and forms of waste materials covered 
by the reverse charge. 

Article 2: Repeals 

This Article provides  that Council Decisions under Article 27(1) and Article 27(4) (prior to 
amendment by Directive 2004/7/EC), are repealed when the contents come within the scope 
of the proposed Directive. 

The  date  of  repeal  allows  a  year  for  those  Member  States  needing  to  reflect  the  change  of 
legal base and any changes of substance within their national measures to amend legislation. 
It also provides time for any required consultations with the VAT Committee. 

In Annex I to this Explanatory Memorandum is a list of the Article 27(1) and (4) Decisions 
which, in the Commission's view, would be covered by Article 2 of the proposed Directive. 
Annex  II  identifies  Decisions  whose  content  matter  is  considered  by  the  Commission  to  be 
covered by the terms of the proposal but which do not require repeal since the terms of the 
Decisions  provide  for  expiry  on  a  particular  date  or  when  alternative  rules  come  into  force, 
whichever  is  the  earlier.  The  Commission  will  propose  measures  to  ensure  that  derogations 
within this last category may be maintained after entry into force of the proposed Directive in 
cases  where  Article  29  consultation  is  required.  The  references  used  are  to  the  original 
Decisions rather than to any subsequent renewals. 

Finally  Annex  III  to  this  Memorandum  includes  a  list  of  the  derogations  notified  to  the 
Commission  under  Article  27(5)  but  which  the  Commission  has  been  informed  by  Member 
States are no longer in use. In the Commission's view there is no need to formally withdraw 
the derogations listed, but there have been included here to assist transparency. 

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Article 3: Implementation, notification and references 

Article 3 achieves two objectives. Paragraph 1 provides a time limit by which Member States 
have to makes changes to their domestic legislation to give effect to the parts of the Directive 
which have mandatory effect. The construction "necessary to comply" indicates that where a 
Member State does not choose to exercise an option introduced by the Directive then there is 
no  requirement  for  national  legislation.  On  the  other  hand,  where  existing  options  are 
amended through the proposed Directive, (for example the option for grouping in Article 4(4) 
of  Directive  77/388),  and  where  they  have  already  been  exercised  by  a  Member  State,  that 
Member  State  will  have  to  implement  the  changes.  If  the  option  is  not  currently  used  by  a 
Member State then there will be no effect until the option is adopted.  

The second sub paragraph and paragraph 2 establish that Member States adopting legislation 
under the Directive must notify the Commission, and that a reference to the Directive must be 
included either at publication or in the text.  

Article 4: Entry into force and Article 5: recipients 

Self explanatory. 

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ANNEX I 

List of Decisions under article 27 considered by the Commission to be covered by the 
terms of the proposal, and therefore repealed by the Directive. 

An unpublished Council Decision from 1979 regarding the valuation of supplies of 
goods  or  services  effected  by  certain  connected  persons  requested  by  the 
Federal Republic of Germany;  

The Council Decision deemed to have been adopted on 11 April 1987 authorising the 
United  Kingdom  to  apply  a  measure  derogating  from  Article  11  of  Directive 
77/388/EEC on the harmonisation of the laws of the Member States relating to 
turnover taxes.4  

Council  Decision  88/498/EEC  of  19  July  1988  authorising  the  Kingdom  of  the 
Netherlands to apply a measure derogating from Article 21(1)(a) of Directive 
77/388/EEC on the harmonisation of the laws of the Member States relating to 
turnover taxes.5  

A Council Decision deemed to be adopted on 18 February 1997 under the procedure 
contained  in  Article  27(4)  of  Directive  77/388/EEC  in  its  version  of  17  May 
1977  authorising  the  Republic  of  France  to  apply  a  measure  derogating  from 
Articles 2 and 10 of Directive 77/388/EEC on the harmonisation of the laws of 
the Member States relating to turnover taxes. This decision follows notification 
of the request to Member States on 18 December 1996.  

Council Decision 98/23/EEC of 19 December 1997 authorising the United Kingdom 
to apply a measure derogating from Article 28e(1) of Directive 77/388/EEC on 
the harmonisation of the laws of the Member States relating to turnover taxes.6  

Council  Decision  2002/439/EC  of  4  June  2002  authorising  the  Federal  Republic  of 
Germany  to  apply  a  measure  derogating  from  Article  21  of  Directive 
77/388/EEC on the harmonisation of the laws of the Member States relating to 
turnover taxes.7  

Council  Decision  2002/880/EC  of  5  November  2002  authorising  the  Republic  of 
Austria  to  apply  a  measure  derogating  from  Article  21  of  Directive 
77/388/EEC on the harmonisation of the laws of the Member States relating to 
turnover taxes.8  

4 
5 
6 
7 
8 

OJ L 132, 21.5.87, p22 
OJ L 269, 29.9.1988, p54 
OJ L 8, 14.1.1998, p24 
OJ L 151, 11.6.2002, p12 
OJ L 306, 8.11.2002, p24 

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Council Decision 2004/290/EC of 30 March 2004 authorising the Federal Republic 
of  Germany  to  apply  a  measure  derogating  from  Article  21  of  Directive 
77/388/EEC on the harmonisation of the laws of the Member States relating to 
turnover taxes.9  

Council Decision 2004/736/EC of 21 October 2004 authorising the United Kingdom 
to apply a measure derogating from Article 11 of Directive 77/388/EEC on the 
harmonisation of the laws of Member States relating to turnover taxes.10  

Council  Decision  2004/758/EC  of  2  November  2004  authorising  the  Republic  of 
Austria  to  apply  a  measure  derogating  from  Article  21  of  Directive 
77/388/EEC on the harmonisation of the laws of the Member States relating to 
turnover taxes.11  

9 
10 
11 

OJ L 94, 31.3.2004, p59 
OJ L 325, 28.10.2004, p58 
OJ L 336, 12.11.2004, p38 

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List of Decisions under article 27 considered by the Commission to be covered by the 
terms of the proposal but not requiring repeal. 

ANNEX II 

Council  Decision  98/161/EC  of  16  February  1998  authorising  the  Kingdom  of  the 
Netherlands  to  apply  a  measure  derogating  from  Articles  2  and  28a(1)  of 
Directive 77/388/EEC on the harmonisation of the laws of the Member States 
relating to turnover taxes.12  

Council  Decision  2000/256  of  20  March  2000  authorising  the  Kingdom  of  the 
Netherlands  to  apply  a  measure  derogating  from  Article  11  of  Directive 
77/388/EEC on the harmonisation of the laws of the Member States relating to 
turnover taxes.13 

Council  Decision  2000/746/EC  of  27  November  2000  authorising  the  Republic  of 
France to apply a measure derogating from Article 11 of Directive 77/388/EC 
on  the  harmonisation  of  the  laws  of  the  Member  States  relating  to  turnover 
taxes. 14 

Council  Decision  2001/865/EC  of  6  November  2001  authorising  the  Kingdom  of 
Spain  to  apply  a  measure  derogating  from  Article  11  of  Directive  77/388/EC 
on  the  harmonisation  of  the  laws  of  the  Member  States  relating  to  turnover 
taxes.15  

Council Decision 2002/736/EC of 12 July 200216 authorising the Hellenic Republic 
to  apply  a  measure  derogating  from  Articles  2  and  28a  of  Directive 
77/388/EEC on the harmonisation of the laws of the Member States relating to 
turnover taxes. 

Council  Decision  2004/228/EC  of  26  February  2004  authorising  the  Kingdom  of 
Spain to apply a measure derogating from Article 21 of Directive 77/388/EEC 
on  the  harmonisation  of  the  laws  of  the  Member  States  relating  to  turnover 
taxes.17 

Council Decision 2004/295/EC of 22 March 2004 authorising the Republic of Italy 
to apply a measure derogating from Article 21 of Directive 77/388/EEC on the 
harmonisation of the laws of the Member States relating to turnover taxes18.  

12 
13 
14 
15 
16 
17 
18 

OJ L 53, 24.2.1998, p19 
OJ L 79, 30.3.2000, p36 
OJ L 302,1.12.2000, p61 
OJ L 323, 7.12.2001, p24 
OJ L 233, 30.8.2002, p36 
OJ L 70, 9.3.2004, p37 
OJ L 97, 1.4.2004, p63 

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ANNEX III 

List of article 27 (5) notifications identified by the relevant Member States to be 
redundant and therefore considered by the Commission to be repealed. 

(1) Notifications for the Republic of France relating to 

- Article 2 and 21 and the taxation of purchases from non-taxable persons;  

-  Article  11  and  the  flat  rate  determination  of  maximum  taxable  amounts  for 

imports and supplies of horses of high value 

-  Article  11  and  the  taxation  of  the  total  amount  of  transactions  effected  by 
persons involved in the supply of products by non-taxable persons 

(2) Notifications for the Federal Republic of Germany relating to 

- Art 10 and the suspension of tax for certain supplies following importation.  

- Art 17 and flat rate deductibility of VAT on travel expenses 

(3) Notifications for the Grand Duchy of Luxembourg relating to  

- Article 9 and the treatment of transport operations 

-  Article  11(C)  and  the  conversion  of  values  into  Luxembourg  Francs  at  the 

average rate for the month 

- Article 13(A) and the exclusion from the scope of tax of activities carried out 
by  non  profit  making  associations  for  the  benefit  of  their  members  in 
return for a subscription 

- Article 21 and the appointment of a tax representative to account for VAT on 
sales made by suppliers of goods or services who are not established in 
Luxembourg. 

(4)  Notifications  for  the  United  Kingdom  of  Great  Britain  and  Northern  Ireland 

relating to: 

- Articles 6, 11, 13 and special arrangements applied to the taxable amount for 

long stays in hotels 

-  Article  11  and  the  treatment  of  intermediaries  involved  in  the  sale  of 

cosmetics 

- Article 11 and the arrangements applied to discount stamps 

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2005/0019 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending Directive 77/388/EEC as regards certain measures to simplify the procedure 
for charging value added tax and to assist in countering tax evasion and avoidance, and 
repealing certain Decisions granting derogations  

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article 93 thereof, 

Having regard to the proposal from the Commission19, 

Having regard to the opinion of the European Parliament20, 

Having regard to the opinion of the European Economic and Social Committee21, 

Whereas: 

(1) 

In  order  to  combat  tax  avoidance  and  evasion  and  to  simplify  the  procedure  for 
charging  value  added  tax,  certain  derogations  applied  for  and  granted  in  respect  of 
individual Member States but covering similar problems should be made available to 
all Member States through incorporation in Council Directive 77/388/EEC of 17 May 
1977 on the harmonization of the laws of the Member States relating to turnover taxes 
– Common system of value added tax: uniform basis of assessment22. Those measures 
should be proportionate and limited to countering the problem. Given that the Member 
States  have  different  needs,  that  incorporation  should  be  limited  to  extending  the 
option  of  adopting  the  rules  concerned  to  all  Member  States,  as  and  when  the  need 
arises. 

(2)  Member States should be able to take action to ensure that facilitations provided for in 
Directive 77/388/EEC for the benefit of business relating to the taxable person and the 
transfer of a business as a going concern are not being exploited to avoid tax. 

(3) 

It should be possible for Member States to intervene as regards the value of supplies in 
specific limited circumstances, to ensure that there is no loss of tax through the use of 
connected parties to derive tax benefits. 

19 
20 
21 
22 

OJ C , , p. . 
OJ C , , p. . 
OJ C , , p. . 
OJ  L  145,  13.6.1977,  p.  1.  Directive  as  last  amended  by  Directive  2004/66/EC  (OJ  L  168,  1.5.2004, 
p. 35). 

EN 

14 

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(4) 

(5) 

It  should  be  possible  for  Member  States  to  include,  within  the  taxable  amount  of  a 
transaction,  the  value  of  investment  gold  used  to  make  a  finished  product,  where  by 
virtue of being worked the gold loses its status of investment gold.  

It  should  be  clearly  established  that  certain  services  with  the  nature  of  capital  items 
may be included in the scheme allowing for the adjustment of deductions for capital 
items over the lifetime of the asset, according to its actual use. 

(6)  Member States should be able, in specific cases, to designate the recipient of supplies 
as the person responsible for paying and accounting for value added tax. This should 
assist Member States in countering tax evasion and losses in identified sectors and on 
certain types of transactions. 

(7) 

Directive 77/388/EEC should therefore be amended accordingly. 

(8) 

(9) 

Consequently, certain Council Decisions authorising individual derogations, pursuant 
to Article 27 of Directive 77/388/EEC should be repealed and Member States should 
not  be  able  to  avail  themselves  of  those  derogations  under  that  article  which  are 
covered by the measures laid down in this Directive.  

In order that certain of the measures allowing Member States discretion of application 
and implementation may be applied consistently, their introduction should be subject 
to  consultation  in  the  Advisory  Committee  on  value  added  tax  established  under 
Article 29 of Directive 77/388/EEC.  

HAS ADOPTED THIS DIRECTIVE: 

Article 1 

Directive 77/388/EEC is amended as follows: 

(1) 

In Article 4(4), the following subparagraph is added: 

"Where a Member State exercises the option provided for in the second subparagraph, it shall 
ensure  that  the  application  of  this  option  creates  neither  unjustifiable  benefit  nor  unjustified 
disadvantage for taxable persons." 

(2) 

In Article 5(8) the second sentence is replaced by the following: 

"Where appropriate, Member States may, in cases where the recipient is not wholly liable to 
tax, take the necessary measures to prevent distortion of competition. They shall ensure that 
there is no unjustifiable benefit or unjustified disadvantage conferred." 

(3) 

Article 11(A) is amended as follows:  

(a) 

In paragraph (1)(d) the second subparagraph is deleted. 

(b) 

The following paragraphs 5, 6, 7 and 8 are added: 

"5. 

"Where a supply of goods or services involves the working of tax-exempt investment 
gold within  the  meaning  of Article  26b(A) to the extent that it ceases to qualify as 

EN 

15 

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such, Member States may provide that the taxable amount is to include the value of 
the gold contained in the finished product calculated on the basis of the current open 
market value of the investment gold. 

6. 

Member  States  may,  subject  to  the  consultation  provided  for  in  Article 29,  provide 
that the taxable amount of a supply of goods or services shall be the same as the open 
market value in any of the following circumstances:  

(a)  where the consideration is significantly lower than the open market value and 
the recipient of the supply does not have a full right of deduction under Article 
17; 

(b)  where the consideration is significantly lower than the open market value and 
the  supplier  does  not  have  a  full  right  of  deduction  under  Article  17  and  the 
supply is subject to an exemption under Article 13; 

(c)  where the consideration is significantly higher than the open market value and 

the supplier does not have a full right of deduction under Article 17; 

The option shall only be applied in order to prevent tax evasion and avoidance and 
when the consideration on which the taxable amount would otherwise be based has 
been influenced by family, management, ownership, financial or legal ties as defined 
by  the  Member  State.  For  these  purposes  legal  ties  shall  include  the  formal 
relationship between employer and employee. 

7. 

The  option  provided  for  in  paragraph  6  shall  not  apply  in  either  of  the  following 
circumstances: 

(a)  where the supplier can demonstrate a commercial reason for the consideration 

charged for the goods or services 

(b)  where it can be shown that a similar consideration would be charged in the case 
of  a  person  who  has  no  ties  with  the  supplier  of  the  kind  referred  to  in  the 
second subparagraph of paragraph 6. 

For  the  purposes  of  this  Directive,  ‘open  market  value’  shall  mean  the  full  amount 
that, in order to obtain the goods or services in question, a customer at the marketing 
stage  at  which  the  supply  takes  place  would  have  to  pay,  at  the  time  of  the  supply 
and  under  conditions  of  fair  competition,  to  a  supplier  at  arm's  length  within  the 
Member State in which the supply is taxable. Unless justified by market conditions, 
the  open  market  value  shall  not  be  less  than  the  cost  to  the  supplier  of  making  the 
supply."  

Article 17(4), in the version set out in Article 28f(1), is amended as follows: 

In  point  (a)  of  the  second  subparagraph,  the  words  "Article  21(1)(a)  and  (c)"  are 
replaced by "Article 21(1)(a), (1)(c) or (2)(c) "; 

In point (b) of the second subparagraph the words "Article 21(1)(a)" are replaced by 
"Article 21(1)(a) or (2)(c);  

8. 

(4) 

(a) 

(b) 

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16 

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In Article 18(1)(d), in the version set out in Article 28f(2), the words "Article 21(1)" 

(5) 
are replaced by "Article 21(1) or 21(2) (c)"; 

(6) 

In Article 20(4), the following subparagraph is added:  

"Member  States  may  also  apply  paragraphs  2  and  3  to  services  which  have  characteristics 
similar  to  those  normally  attributed  to  capital  goods,  including  where  those  services  are 
treated not as current expenditure but as having a continuing asset book value."  

(7) 

In Article 21(2), in the version set out in Article 28g, the following point (c) is added: 

"(c) 

where  the  following  supplies  are  carried  out  Member  States  may,  subject  to  the 
consultations provided for in Article 29, lay down that the person liable to pay tax is 
the taxable person to whom those supplies are made : 

(i) 

the  supply  of  construction,  repair,  cleaning,  maintenance,  alteration  and 
demolition services in relation to immovable property; 

(ii) 

the supply of staff engaged in activities covered by point (i) ; 

(iii) 

the  supply  of  immovable  property,  as  referred  to  in  Article 13(B)(g)  and  (h), 
where the supplier has opted for taxation of the supply pursuant to point (C)(b) 
of that Article; 

(iv) 

the supply of used material, used material incapable of re-use in the same state, 
scrap,  industrial  and  non-industrial  waste,  recyclable  waste,  part  processed 
waste, and certain specified services listed in Annex M; 

(v) 

the  supply,  outside  a  judicial  liquidation  procedure,  of  goods  provided  as 
security by one taxable person to another in execution of that security; 

(vi) 

the  supply  of  immovable  property  on  which  the  option  to  tax  under 
Article 13(C) has been exercised in the course of the judicial liquidation of the 
enterprise that owned the immovable property thus sold; 

(vii)  the supply of goods following the cession of the reservation of ownership to an 

assignee and the exercising of this right by the assignee. 

For the purposes of the first subparagraph, Member States may specify the supplies 
covered by point (i) as well as the categories of suppliers or recipients to whom that 
point may apply. They may also limit the application of this measure to some of the 
supplies listed in point (iv) and in Annex M." 

(8) 

Annex M set out in Annex I to this Directive is added. 

Article 2 

Any Decisions granting derogations pursuant to Article 27 of Directive 77/388/EEC that are 
covered by the provisions of this Directive are repealed with effect from [date – one year after 
entry into force]. 

EN 

17 

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Article 3 

1. 

Member  States  shall  bring  into  force  the  laws,  regulations  and  administrative 
provisions necessary to comply with this Directive on [one year after the entry into 
force] at the latest. They shall forthwith communicate to the Commission the text of 
those provisions.  

When  Member  States  adopt  those  provisions,  they  shall  contain  a  reference  to  this 
Directive  or  be  accompanied  by  such  a  reference  on  the  occasion  of  their  official 
publication. Member States shall determine how such reference is to be made.  

2. 

Member States shall communicate to the Commission the text of the main provisions 
of national law which they adopt in the field covered by this Directive. 

This Directive shall enter into force on the day following that of its publication in the Official 
Journal of the European Union. 

Article 4 

Article 5 

This Directive is addressed to the Member States. 

Done at Brussels,  

For the Council 
The President 

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ANNEX I 

"Annex M  

List of supplies of used material referred to in Article 21(2)(c)(iv) 

(a) 

(b) 

(c) 

(d) 

the  supply  of  ferrous  and  non  ferrous  waste,  scrap,  and  used  materials 
including  that  of  semi-finished  products  resulting  from  the  processing, 
manufacturing or melting down of non-ferrous metals; 

the  supply  of  ferrous  and  non-ferrous  semi-processed  products  and  certain 
associated processing services 

the supply of residues and other recyclable materials consisting of ferrous and 
non-ferrous  metals,  their  alloys,  slag,  ash,  scale  and  industrial  residues 
containing  metals  or  their  alloys  and  the  supply  of  selection,  cutting, 
fragmenting and pressing services for these products; 

the supply of, and certain processing services relating to, ferrous waste as well 
as parings, scrap, waste and used and recyclable material consisting of cullet, 
glass,  paper,  paperboard  and  board,  rags,  bone,  leather,  composition  leather, 
parchment,  raw  hides  and  skins,  tendons  and  sinews,  twine,  cordage,  rope, 
cables, rubber and plastic; 

(e) 

the supply of the materials referred to in point (d) after processing in the form 
of cleaning, polishing, selection, cutting or casting into ingots; 

(f) 

the supply of scrap and waste from the working of base materials." 

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