Proposal for a Council Decision authorising the Kingdom of Spain 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: 2005-12-23
Institutions: European Commission
Subjects: EC Directive, Spain, VAT, basis of tax assessment, derogation from EU law

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 23.12.2005 
COM(2005) 697 final 

Proposal for a 

COUNCIL DECISION 

authorising the Kingdom of Spain 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 

110 

•  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  Kingdom  of 
Spain  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 extended to 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  Spain  on  7  October  2005.  The 
Commission notified Spain on 10 October 2005 that it had received all the information 
that it considered necessary for appraisal of the request  

120 

•  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  order  to  prevent  tax  losses  arising  through  such  variations  in  value,  Spain  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 Spanish law. 

The  proposal  allows  the  Spanish  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 
acquisitions are treated equally and that the counter measure cannot be easily avoided 
through the exploitation of connected persons in other Member States, Spain wishes to 

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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 

130 

141 

•  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 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 
Spain as a 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 Spain to apply a measure derogating from Articles 11(A)(1) and 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  intra-Community 
acquisitions  in  certain  cases  where  the  value  is  significantly  below  the  open  market 

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value; the parties are connected and where the recipient has a restricted right to deduct. 
The value may be taken to be the open market value of the supply as defined in Article 
11(A)(1)(d) of the Sixth Directive.  

310 

•  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 

533 

The proposal includes a sunset clause. 

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Proposal for a 

COUNCIL DECISION 

authorising the Kingdom of Spain 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 Spanish 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  in  relation  to  turnover  taxes  –  Common 
System  of  Value  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 a letter dated 21st June 2005 and received in the Commission's Secretariat-General 
on 22nd July 2005, the Kingdom of Spain 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 Kingdom of Spain in a letter dated 
7  October  2005.  In  a  letter  dated  10  October  2005,  the  Commission  notified  the 
Kingdom of Spain 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, p. 1 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 a vendor charges a reduced price to a 
connected purchaser who 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 under 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 
Kingdom  of  Spain  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 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. 

This  measure  may  only  be  used  in  order  to  counter  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. 

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. 

3 

OJ C 125, 24.5.2005, p. 12. COM(2005) 89. 

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Article 3 

This Decision is addressed to the Kingdom of Spain. 

Done at Brussels,  

For the Council 
The President 

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