Proposal for a Council Decision authorising the Republic of Lithuania to apply a measure derogating from Article 11(A)(1) and Article 28e of the Sixth Council Directive (77/388/EEC) on the harmonisation of the laws of the Member States relating to turnover taxes
Date: 2005-11-22
Institutions: European Commission
Subjects: Lithuania, VAT, approximation of laws, derogation from EU law, tax system

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 22.11.2005 
COM(2005) 581 final 

Proposal for a 

COUNCIL DECISION 

authorising the Republic of Lithuania to apply a measure derogating from Article 
11(A)(1) and Article 28e of the Sixth Council 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 

1)  CONTEXT OF THE PROPOSAL 

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•  Grounds for and objectives of the proposal 

Pursuant to Article 27(1) of the Sixth Council Directive 77/388/EEC of 17 May 1977 
on  the  harmonisation  of  the  laws  of  the  Member  States  relating  to  turnover  taxes  - 
Common system of value added tax: uniform basis of assessment, the Council, acting 
unanimously on a proposal from the Commission, may authorise any Member State to 
apply  special  measures  for  derogation  from  that  Directive  in  order  to  simplify  the 
procedure for charging the tax or to prevent certain types of tax evasion or avoidance. 

By  letter  registered  with  the  Secretariat-General  of  the  Commission,  the  Republic  of 
Lithuania  requested  an  authorisation  to  introduce  measures  derogating  from  Article 
11(A)(1)  of  Directive  77/388/EEC,  subsequently  confirming  to  the  Commission  that 
the application also included a request for a  derogation  from  Article  28e  of  the  same 
Directive. In accordance with Article 27(2) of Directive 77/388/EEC the Commission 
informed the other Member States of the request by Lithuania on 7th June 2005. The 
Commission notified Lithuania on 14 June 2005 that it had received all the information 
that it considered necessary for appraisal of the request  

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•  General context 

Article 11(A)(1) of Directive 77/388/EEC establishes the taxable amount of a supply of 
goods or services to be "everything which constitutes the consideration which has been 
or is to be obtained by the supplier from the purchaser….". This provision is normally 
sufficient in cases where the supply is solely a commercial transaction and where there 
is no connection between the supplier and purchaser which would affect the value of 
the  supply.  However,  where  the  parties  to  the  transaction  are  connected  there  is 
evidence  that  some  supplies  incur  less  tax  through  the  manipulation  of  their  value. 
Where  the  connected  recipient  does  not  have  a  full  right  to  deduction,  an 
undervaluation  by  reference  to  the  normal  market  value  reduces  their  exposure  to 
irrecoverable input tax. In cases where the supplier only has a limited right to deduct, 
an overvaluation of a supply to a fully taxable recipient will have no effect, other than 
cash flow, on the recipient but by altering the ratio of the value of taxable and exempt 
supplies it may improve the supplier's recovery position. 

In  order  to  prevent  tax  losses  arising  through  such  variations  in  value,  Lithuania  has 
requested the ability to amend the taxable amount in those cases described where the 
taxable amount varies significantly from the open market value and where the supply is 
between  connected  persons.  Connected  persons  for  the  purposes  of  applying  the  re-
valuation are objectively defined and set out in Lithuanian VAT law. 

The proposal allows the Lithuanian tax authorities to apply the open market value (as 
defined in Article 11(A)(1)) to the supply for the purposes of calculating VAT, rather 
than the consideration that was actually paid. 

The rules for the valuation of intra-Community acquisitions are found in Article 28e of 
Directive  77/388/EEC  which  extends  the  Article  11(A)  rules  to  intra-Community 
acquisitions.  In  order  to  ensure  that  both  domestic  supplies  and  intra-Community 

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acquisitions are treated equally and that the counter measure cannot be easily avoided 
through  the  exploitation  of  connected  persons  in  other  Member  States,  Lithuania 
wishes  to  include  intra–Community  acquisitions  within  the  scope  of  the  special 
measure. 

The  proposal  allows  for  the  authorisation  of  the  special  measure  until  31  December 
2009. It is time limited to allow a review of the measure in the light of experience and 
an assessment of any continuing need. However, on 16th March 2005 the Commission 
presented  document  COM(2005)89  to  the  Council.  This  is  a  proposal  for  a  Directive 
modifying Directive 77/388/EEC as regards certain measures to simplify the procedure 
for charging VAT and to assist in countering tax evasion and avoidance, and repealing 
certain  Decisions  granting  derogations.  The  so-called  "Article  27  rationalisation 
proposal" includes, amongst other things, legislation which covers the same ground as 
the requested measure. The proposed derogation will therefore cease to have effect as 
from the entry into force of measures in this area contained in the Directive resulting 
from the rationalisation proposal. 

•  Existing provisions in the area of the proposal 

Similar  derogations  in  relation  to  Article  11(A)(1)  and  Article  28e  of  Directive 
77/388/EEC have been granted to other Member States. 

•  Consistency with other policies and objectives of the Union 

Not applicable. 

2)  CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

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•  Consultation of interested parties 

219 

Not relevant 

•  Collection and use of expertise 

There was no need for external expertise. 

•  Impact assessment 

229 

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The  proposal  is  designed  to  counter  potential  VAT  avoidance  and  evasion  and  has, 
therefore, a potential positive impact, not least from its compliance effect. 

The path followed is one which other Member States have taken and was identified by 
Lithuania as  suitable measure to counter  tax  losses. The requested  measure  is  also in 
line with the Commission's proposal found in COM(2005)89 to rationalise the number 
of Article 27 derogations. 

3)  LEGAL ELEMENTS OF THE PROPOSAL 

305 

•  Summary of the proposed action 

Authorisation for Lithuania to apply a measure derogating from Articles 11(A)(1) and 

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28e of the Sixth Council Directive 77/388/EEC so as to allow the recalculation of the 
taxable  value  of  supplies  of  goods  and  services  as  well  as  of  intra-Community 
acquisitions in certain cases where the value differs significantly from the open market 
value; the parties are connected and where one party to the transaction has a restricted 
right  to  deduct.  The  revaluation  may  be  to  the  open  market  value  of  the  supply  as 
defined in Article 11(A)(1)(d) of the Sixth Directive.  

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•  Legal basis 

Article 27(1) of the Sixth Council Directive 77/388/EEC of 17 May 1977 (as amended) 
on  the  harmonisation  of  the  laws  of  the  Member  States  relating  to  turnover  taxes  - 
Common system of value added tax: uniform basis of assessment. 

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•  Subsidiarity principle 

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The proposal falls under the exclusive competence of the Community. The subsidiarity 
principle therefore does not apply. 

•  Proportionality principle 

The proposal complies with the proportionality principle for the following reason(s): 

This Decision concerns an authorisation granted to a Member State on its own request 
and does not constitute any obligation. 

Given the limited scope of the derogation, the special measure is proportionate to the 
aim pursued. 

•  Choice of instruments 

Proposed instruments: other. 

Other means would not be adequate for the following reason(s): 

Under Article 27 of the Sixth Council Directive 77/388/EEC on the harmonisation of 
the laws of the Member States relating to turnover taxes, derogation from the common 
VAT  rules  is  only  possible  on  the  authority  of  the  Council  acting  unanimously  on  a 
proposal  from  the  Commission.  A  Council  Decision  is  the  only  suitable  instrument 
since it can be addressed to an individual member state. 

4)  BUDGETARY IMPLICATION 

409 

The proposal has no implication for the Community budget. 

5)  ADDITIONAL INFORMATION 

•  Review/revision/sunset clause 

The proposal includes a sunset clause. 

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Proposal for a 

COUNCIL DECISION 

authorising the Republic of Lithuania to apply a measure derogating from Article 
11(A)(1) and Article 28e of the Sixth Council Directive (77/388/EEC) on the 
harmonisation of the laws of the Member States relating to turnover taxes 

(Only the Lithuanian version is authentic) 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, 

Having  regard  to  the  Sixth  Council  Directive  (77/388/EEC)  of  17  May  1977  on  the 
harmonisation of the laws of the Member States relation to turnover taxes – Common System 
of Valued Added Tax; uniform basis of assessment1, and in particular Article 27 thereof, 

Having regard to the proposal from the Commission2, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

Under  Article  27(1)  of  Directive  77/388/EEC,  the  Council,  acting  unanimously  on  a 
proposal  from  the  Commission,  may  authorise  any  Member  State  to  apply  special 
measures  for  derogation  from  that  Directive  in  order  to  simplify  the  procedure  for 
charging the tax or to prevent certain types of tax evasion or avoidance. 

In  letters  dated  3  August  2004  and  16  December  2004  the  Republic  of  Lithuania 
sought  authorisation  to  introduce  a  measure  derogating  from  the  provisions  of 
Directive 77/388/EEC governing the taxable amount for VAT purposes.  

In accordance with Article 27(2) of Directive 77/388/EEC, the Commission informed 
the other Member States of the request made by the Republic of Lithuania in a letter 
dated  7  June  2005.  In  a  letter  dated  14  June  2005,  the  Commission  notified  the 
Republic  of  Lithuania  that  it  had  all  the  information  it  considered  necessary  for 
appraisal of the request. 

Article  11(A)(1)(a)  of  Directive  77/388/EEC  establishes  the  taxable  amount  of  a 
supply  for  value  added  tax  (VAT)  purposes  to  be  everything  which  constitutes  the 
consideration  paid  for  the  supply.  Article  28e(1)  of  the  same  Directive  governs  the 
taxable amount of intra–Community acquisitions, by reference to Article 11(A). 

1 
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OJ L 145, 13.6.1977, p1 as last amended by Directive 2004/66/EC (OJ L 168, 1.5.2004, p.35) 
OJ C , , p. . 

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(5) 

(6) 

(7) 

(8) 

The measure requiring a derogation is intended to counter tax losses arising from the 
manipulation  of  the  taxable  amount  of  supplies  of  goods,  services  and  intra-
Community acquisitions subject to VAT where one of the parties does not have a full 
right of deduction.  

The measure should be targeted so that it applies only in cases of VAT avoidance or 
evasion  and  only  when  a  number  of  conditions  have  been  met.  The  measure  is 
therefore proportionate to the aim pursued. 

Similar derogations have been granted to other Member States in order to counter tax 
avoidance or evasion and have been found to be effective. 

Derogations  pursuant  to  Article  27  of  Directive  77/388/EEC  which  counter  VAT 
avoidance  linked  to  the  taxable  amount  of  supplies  between  related  parties  are 
included in the Commission proposal of 16 March 2005 for a Directive rationalising 
some of the derogations pursuant to that Article3. It is therefore necessary to limit the 
application period of this derogation until this Directive comes into effect. 

(9) 

This derogation will safeguard the amount of VAT due at the final consumption stage 
and has no negative impact on the European Communities' own resources from VAT, 

HAS ADOPTED THIS DECISION:  

Article 1 

By way of derogation from Article 11(A)(1)(a) and Article 28e of Directive 77/388/EEC, the 
Republic of Lithuania is hereby authorised to provide that the taxable amount of a supply of 
goods or services or of an intra-Community acquisition of goods shall be the same as the open 
market value, as defined in Article 11(A)(1)(d) of the said Directive, in either of the following 
circumstances: 

(a) 

(b) 

where the consideration is significantly lower than the open market value and 
the  recipient  of  the  supply,  or  in  the  case  of  an  intra-Community  acquisition, 
the  acquirer,  does  not  have  a  full  right  of  deduction  under  Article  17  of 
Directive 77/388/EEC. 

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  of 
Directive 77/388/EEC. 

This  measure  may  only  be  used  in  order  to  prevent  tax  avoidance  or  evasion  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 in national legislation. For 
these  purposes,  legal  ties  shall  include  the  formal  relationship  between  employer  and 
employee.  

3 

OJ C 125, 24.5.2005, p12. COM(2005)89 

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Article 2 

The  authorisation  granted  under  Article  1  shall  expire  on  the  date  of  entry  into  force  of  a 
Directive rationalising the derogations pursuant to Article 27 of Directive 77/388/EEC which 
counter  avoidance  or  evasion  of  value  added  tax  through  the  valuation  of  supplies  between 
connected persons, or on the 31 December 2009 whichever is the earlier. 

Article 3 

This Decision is addressed to the Republic of Lithuania. 

Done at Brussels,  

For the Council 
The President 

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