Opinion of the European Economic and Social Committee on the  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 (COM(2005) 89 final — 2005/0019 (CNS))
Date: 2005-12-15
Institutions: European Economic and Social Committee
Subjects: ESC opinion, VAT, basis of tax assessment, tax avoidance, tax evasion, tax exemption, tax harmonisation

17.3.2006

EN

Official Journal of the European Union

C 65/103

Opinion of the European Economic and Social Committee on the ‘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 Deci-
sions granting derogations’

(COM(2005) 89 final — 2005/0019 (CNS))

(2006/C 65/19)

On 14 April 2005 the Council decided to consult the European Economic and Social Committee, under
Article 93 of the Treaty establishing the European Community, on the abovementioned proposal.

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 8 November 2005. The rappor-
teur was Mr Páleník.

At its 422nd plenary session, held on 14 and 15 December 2005 (meeting of 15 December), the European
Economic and Social Committee adopted the following opinion by 69 votes to 1 with 3 abstentions.

1. Introduction

— clarification and highlighting of

the status of capital

services,

1.1
In March 2005 the Commission presented a proposal
for a Council Directive (1) amending the Sixth VAT Directive
(77/388/EEC) in order to simplify the collection of VAT and to
assist in countering tax evasion and avoidance.

Under Article 27 of

the Sixth VAT Directive,

1.2
the
Council, acting on a proposal from the Commission, may allow
Member States to introduce special measures for derogation
from the provisions of the Sixth VAT Directive in order to
simplify the procedure for collecting the tax or to prevent tax
evasion. This provision has been used very frequently and at
present Member States can make use of more than 140 deroga-
tions. The Commission anticipates that the number of deroga-
tions granted will continue to rise in the near future due to the
new Member States.

2. The Commission proposal — COM(2005) 89 final

2.1
As part of the strategy to improve the operation of the
VAT system in the internal market (2), the Commission has
undertaken to rationalise the large number of special deroga-
tions. Many of these have proved themselves effective and have
the
been used in more than one Member State. However,
Council examines each application for these special derogations
individually and the process is therefore very lengthy. The
Commission document therefore proposes that frequently used
derogations be made available to all Member States through an
amendment to the Sixth VAT Directive.

2.2
The Commission document proposes
following measures into the Sixth VAT Directive:

inserting the

— changes to the rules on ‘grouping’ and ‘transfers of going
concerns’ to prevent unjustified benefit or disadvantage to
those involved,

— measures to prevent the avoidance of VAT on gold held as
an investment which is then used as a raw material for
making consumer goods,

— re-valuation in special cases of the taxable value of goods

or services on the basis of their open market value,

(1) COM(2005) 89 final.
(2) COM(2000) 348 final and COM(2003) 614 final.

— changes to the reverse charge mechanism in certain sectors

of industry.

In the case of grouping of businesses and the transfer of
2.3
going concerns,
the Commission takes the opportunity to
strengthen the powers of Member States in areas which can be
exploited for tax avoidance and evasion. In its proposal, there-
fore, it allows the Member States to take steps to ensure that
the operation of the rules leads to a fair result which does not
unjustifiably benefit or prejudice those concerned.

2.4
Investment gold, held in the form of bars or wafers, for
example, is exempt from VAT. When the gold is sold in a form
in which it no longer qualifies as investment gold, for example
when it is used for jewellery, VAT is payable. If a customer
provides his own gold for working, only the service is taxable.
The gold itself will not be taxable even though it has lost its
status as investment gold and no longer qualifies for exemp-
tion. This is the abuse which a number of existing derogations
seek to counteract, and the Commission is therefore submitting
a proposal for an optional rule allowing all Member States to
rule that the gold contained in the product shall also be taxable
on the basis of its current open market value.

In order to counter tax avoidance and evasion,

the
2.5
Commission proposal enables Member States
to revalue
supplies, providing further criteria are met. This revaluation
can be done in three precisely defined circumstances only and
only if there is some connection between the parties involved.
Member States will have to define this connection in terms of
the categories set out in the Directive in order to apply the
rule. The proposal requires revaluation on the basis of the open
market value. The open market value means the full amount
that a customer would have to pay to obtain the goods or
services in question at the marketing stage at which the supply
takes place, at the time of the supply and under conditions of
fair competition. The proposal explicitly states that, unless justi-
fied by market conditions, the open market value shall not be
less than the cost to the supplier of making the supply.

C 65/104

EN

Official Journal of the European Union

17.3.2006

2.6
The Commission specifies that the adjustment of deduc-
tions of input VAT on capital goods under Article 20 of the
Sixth VAT Directive may equally apply to services of a capital
nature which are treated as having a continuing asset book
value.

2.7
At the same time, the Commission extends the use of an
optional reverse charge mechanism to specified supplies made
the economy which have
to taxable persons in sectors of
proved difficult to police. The application of this mechanism
transfers the obligation to pay tax to the recipient of a service.
The areas covered are services relating to buildings, supplies of
staff relating to building services, the supply of land and build-
ings 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, and supply of waste, scrap and recyclable material
from some treatment services. Member States may similarly use
the reverse charge mechanism in special cases when the supply
is made by a vendor in financial difficulties who is unable to
honour his debts, including his obligations to the tax authori-
ties. Use of the reverse charge mechanism in the Member States
is subject to consultation with the VAT Committee.

According to the Commission, there are ten decisions
2.8
under Article 27 of the Sixth VAT Directive to which the
proposal would apply and which would be repealed by the
Directive as a result. It has determined that there are seven
decisions to which the proposal would apply, but which would
not need to be repealed.

fers of going concerns and taxation of investment gold used,
for example, for making jewellery, and the Committee sees it as
a logical solution to previous shortcomings.

3.5
The EESC recognises that in a few cases, where there is
suspicion of tax evasion by over- or undervaluing transactions,
the taxable amount should be set at the open market value.
Difficulties may arise in practice, however,
in determining a
significant difference between the value of the transaction and
the open market value, as there is no clear definition of either
open market value, which depends on the assessment of the
parties involved, or of a significant difference of value. The
EESC is concerned that lack of clarity could cause uncertainty
for businesses. The use of the instrument in the legislation of
Member States should, therefore, be conditional upon a precise
definition of open market value and quantification of what is
deemed a significant difference.

The EESC shares the Commission's view that it needs to
3.6
be made clear that the adjustment of deductions of input VAT
on capital goods also applies to services of the same character.

3.7
The EESC considers the reverse charge mechanism to be
a tool that could be needed for preventing tax avoidance and
evasion. It is particularly apt where the vendor is in financial
difficulties and there are real doubts about his ability to meet
his
charge
mechanism in practice may suggest other areas in which its
optional use could be considered.

tax obligations. Experience with the

reverse

3. The EESC's remarks on the proposal

4. General remarks of the Committee

The EESC supports simplification of the VAT system in
3.1
the internal market in line with the provisions of Commission
Communication COM(2000) 348 final.

3.2
The EESC agrees with the Commission that the number
of special measures for derogations from the provisions of the
Sixth VAT Directive should be rationalised, as they make it
difficult for those trading across borders to understand the tax
system. The EESC supports making some frequently used dero-
gations available to all Member States by amending and
expanding the Sixth VAT Directive.

3.3
The EESC takes the view that these changes and addi-
tions to the Sixth VAT Directive, if correctly implemented in
the Member States, will be an effective instrument in coun-
tering the problem of tax evasion and avoidance.

The EESC has no objections

3.4
to the Commission's
proposal where it relates to the grouping of businesses, trans-

The proposal for a Council Directive is realistic in terms
4.1
of
implementation and meets the Commission's aim — to
which it committed itself in its Communication to the Council
and the European Parliament of 7 June 2000 — of rationalising
some of the large number of derogations from the Sixth VAT
Directive currently in force. The EESC points out, however, that
a more comprehensive overhaul of VAT law and further
harmonisation of tax rules would do far more to make the
common VAT system simpler and more effective.

It should be pointed out that the undue complexity of
4.2
EU laws and directives generally hampers their correct and
prompt
in the
implementation and effective enforcement
Member States. In this sense, the proposal, assuming it is imple-
mented in the Member States correctly and quickly enough, is
a step in the right direction. The EESC takes the view that it
should be followed by further steps to simplify the common
VAT system.

Brussels, 15 December 2005.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND