Opinion of the European Economic and Social Committee on the Amended proposal for a Council Directive amending Directive 77/388/EEC as regards the place of supply of services (COM(2005) 334 final — 2003/0329 (CNS))
Date: 2006-05-17
Institutions: European Economic and Social Committee
Subjects: VAT, head office, provision of services, services company, tax system

C 195/54

EN

Official Journal of the European Union

18.8.2006

Opinion of the European Economic and Social Committee on the Amended proposal for a Council
Directive amending Directive 77/388/EEC as regards the place of supply of services

(COM(2005) 334 final — 2003/0329 (CNS))

(2006/C 195/13)

On 14 October 2005, the European Commission decided to consult the European Economic and Social
Committee, under Article 250 of the Treaty establishing the European Community, on the

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 28 April 2006. The rapporteur
was Mr Metzler.

At its 427th plenary session, held on 17 and 18 May 2006 (meeting of 17 May), the European Economic
and Social Committee adopted the following opinion by 143 votes to 0 with 4 abstentions.

Summary and recommendations

the objectives set out

The Committee welcomes the initiative as a step in the right
direction. The proposal under review aims to make some parti-
cularly controversial VAT rules concerning the place of supply
of services simpler and more transparent. The Committee
welcomes this initiative on the sixth VAT directive; it is a step
in the right direction towards implementation of the Lisbon
process and achievement of
in the
Internal Market Directive. In order to function effectively, Euro-
pean civil society needs an effective and competitive economy.
Comparable rules must be applied if this key objective is to be
achieved. The amended proposal is welcome in that it seeks to
avoid distortions of competition, by extending taxation at the
place where services are supplied. As explained below, this
requires the requisite accompanying mechanisms to be estab-
lished in parallel, to enable small and medium enterprises to
participate in intra-Community trade without having to deal
with excessive extra red tape. A case in point is the establish-
ment of an effective one-stop shop system.

In its opinion of 28 April 2004,
the EESC has already
mentioned the vulnerability of VAT to tax evasion and recom-
mended the development of an alternative system capable of
ensuring more effective tax collection. The same opinion criti-
cised the unequal treatment of individuals/consumers arising
from the deficiencies of the current VAT system. These defi-
ciencies should be quickly dealt with.

Distortions of competition should be eliminated as soon as
possible. An example of distortion arises if a company can only
offer its services on the market at an advantageous price by
evading VAT at an intermediary stage, thus securing an unjusti-
fied competitive advantage. The Committee would therefore
remind the competent institutions that there is a need for them
to act.

mentioned in Article 9a of the amended proposal is a good
example of how the ECJ is trying to remedy confusion arising
from divergent definitions in the various Member States. In
doing so, it assumes that distinct concepts under Community
law are fundamental to the sixth VAT directive (cf. the concept
of
immovable property’, Mayerhofer, C-315700,
judgment of 16 January 2003).

‘letting of

This also means that legal acts which have been acknowledged
as necessary must be implemented without delay, in order to
give legislators a chance to transpose them into national VAT
legislation as soon as possible. However,
it may be doubted
whether implementation of the directive in question can be
achieved on 1 July 2006.

Explanatory statement

1. Introduction

In the Lisbon conclusions, the EU resolved inter alia to become
the most competitive economy in the world over the next few
years. For this to happen, the European Union and the Member
States comprising it need to have coherent, coordinated and
competitive fiscal legislation in place. VAT is closely harmo-
nised by the 6th EC directive in particular; however, barriers
and obstacles to intra-Community trade still exist, as the EESC
has already pointed out in its opinion of 28 April 2004 on
Rules/place of supply of services (ECO/128) concerning the draft
Directive of 23 December 2003.

The proposal to amend the sixth VAT directive ties in with the
proposal for a directive of 23 December 2003 and includes a
coherent revision of the rules determining the place of taxation
for services to businesses (B2B) and to private clients (B2C).

2. Historical background

Linguistic confusion can spell
joint action and
common markets. Agreement on definitions is a precondition
for the application of harmonised laws. The EESC would there-
fore call for efforts to overcome confusion in the establishment
‘immovable property’
of basic concepts. The concept of

the end of

2.1
Since the first and second EC directives of 11 April
1967, the Community has set itself the goal of dismantling
fiscal barriers between Member States. A unified place of taxa-
tion is needed to make this vision come true. The country of
origin principle which the Directive aims to apply would result

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in taxation in the country of establishment of all taxable activ-
ities conducted by economic operators in that country and
within the framework of the European Community. According
to this principle, goods delivered from, say, France to another
Member State would be subject to taxation at French VAT
rates. The same would apply to services provided from France.

However,

to avoid distortions of competition,

2.2
the
country of origin principle would require VAT rates in indivi-
dual Member States to be aligned. Above all, an internal
clearing system would be needed, given that value added tax
represents a significant proportion of tax revenue in Member
States and of EU funding.

2.3 With this in mind, the EU has decided not to apply the
country of origin principle, or at least not during a lengthy
transition period.

2.4
However, the European Commission has taken various
measures to boost trade between individual Member States, to
remove bureaucratic obstacles and to reduce or if possible
entirely avoid distortions of competition,
in particular those
arising from differing taxation rates. In the past, the Council in
particular has contributed to the retention of divergent systems.
The EESC continues to support
its
efforts to align these systems and to promote the Internal
Market.

the Commission in all

amending Directive 77/388/EEC as regards the place of supply
of services (COM(2003) 822 final -2003/0329(CNS)).

the new rules fell

The European Economic and Social Committee commented on
this proposal for a Directive on 28 April 2004. In this opinion,
the EESC emphasised that
far short of
achieving the Commission's general goal of simplification. The
Committee stressed that scope for differing interpretations of
the rules by Member States and for independent decisions by
tax authorities should be limited as far as possible. Above all,
in view of the problems which had already arisen, it felt that
VIES was insufficient as a monitoring system.

4.2 Consu lta t i on doc u me n t

In the meantime, several consultations have been held on the
place of supply of services. A general conclusion of
these
consultations was that the rules on the place of supply of
services needed to be reviewed, as the existing rules were seen
as problematic. At the same time, it was generally acknowl-
edged that any changes in this area should comply with
requirements for monitoring by tax authorities and the tax obli-
gations of businesses, while also reflecting the principle that
value added tax should flow to the Member State in which
services are used. A point that was repeatedly emphasised by
those taking part in consultations was the need for workable
rules, which would not be too costly to apply and which would
not impede intra-Community trade.

3. The purpose and objective of the new legislation

4.3 G e ne r a l r u le s i n th e a me nde d p r op o sa l

In general, the place of supply of services determines where
VAT is applied. Given that basic VAT rates within the EU range
from 15 to 25 %, there is considerable scope for distortion of
competition in the areas which the amended proposal would
regulate, both between companies/VAT payers within the EU
and also vis-à-vis companies from third countries. ECJ case law
is increasingly tending to proscribe distortions of competition
through other VAT procedures; this also applies to competition
between taxable enterprises and public sector agents. For
example, in its judgment of 13 October 2005 on Case C-200/
04 (Heidelberg Tax Office vs.
iSt internationale Sprach- und
Studienreisen GmbH), the ECJ ruled that in the case in question
any additional conditions for the application of Article 26 of
the sixth EC directive would clearly result in unlawful discrimi-
nation between economic operators, thus inevitably causing a
distortion of competition between the economic operators
concerned and impairing consistency in the application of the
directive.

4. Amended proposal of 20 July 2005 for a Council Regulation

4.1 G e ne r a l r e ma r k

services

A strict distinction needs to be drawn between busi-
4.3.1
taxable
ness-to-business
persons (1))
(services
business-to-consumer
provided to non-taxable persons (2)). The proposal in question
clearly differentiates between treatment of these two eventuali-
ties.

provided

(services

services

and

to

4.3.2
In the case of services to taxable persons, the general
rule should be that the place of supply of services depends on
the place where the client is established, rather than the service
provider.

4.3.3
The document under review proposes to maintain the
place of establishment of the service provider as the general
rule, in the case of services provided to non-taxable persons.
The reason for this decision is that taxation of services provided
to non-taxable persons in other EU Member States would result
in an excessive administrative burden on enterprises providing
the services, such as a requirement to register as a VAT payer
in the countries concerned.

4.3.4
In the absence of a mechanism enabling tax to be
collected in the Member States of consumption without
creating undue administrative complications, it is unrealistic to
tax all supplies to non-taxable persons at the place of consump-
tion.

the above-mentioned measures is reflected in the
One of
amended proposal of 20 July 2005 for a Council Regulation
(COM 334/2005 final). This amended proposal was preceded
by the proposal of 23 December 2003 for a Council Directive

(1) In this context, a taxable person is a business which has to pay VAT
on the services which it provides, and can usually offset VAT on
inputs against the VAT payable on its own activity.

(2) A non-taxable person is a non-business person, usually a private
individual/end user who is not required to file a VAT tax return.

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4.3.5
necessary.

However, some exceptions to this general rule are

5. Gist of the proposal for a directive (amendments)

5.1 E x ce pti ons to th e g e n e r al r u le

Although there has been a lot of support from those concerned
by this subject within the EU for the proposed changes in the
place of taxation for services, there have also been various calls
for continued validity of the country of origin principle and
retention of the existing general provisions.

— In the case of long-term hire, i.e. for longer than 30 days,
the place of supply of a means of transport to non-taxable
persons is defined as the place where the customer is estab-
lished, has his permanent address or usually resides.

— In the case of short-term hire (e.g. hire of a car for a few
days), the place of supply is the place where the means of
transport is put at the disposal of the non-taxable person.
This provision was also welcomed by the majority of
respondents to the consultation process.

5.2.4 Article 9g — Services which can be supplied at a

distance to non-taxable persons

5.2 De tai ls of t h e ne w p r oposa ls

The remarks briefly outline only the changes which would
result from the proposed directive:

— This article has been completely overhauled. The services
listed in Article 9g(1) are supplied in the place where the
client is established, has his permanent address or usually
resides.

5.2.1 Article 6 — Services

— It is proposed to insert a sixth paragraph, which stipulates
that services rendered between establishments shall not be
treated under the directive as supplies.

5.2.2 Article 9d — Specific services to taxable persons

— Paragraph 2 has been reinserted and defines the place of
supply for restaurant and catering services provided to
taxable persons on board ships, aircraft or trains during a
passenger transport service as the place of departure of the
transport service.

The concern shared by the EESC for greater clarity has thus
been taken into account.

— Paragraph 3 has been amended to define long-term hiring
or leasing as an arrangement governed by an agreement
providing for continuous possession or use of the movable
tangible property throughout a continuous period of more
than thirty days. This provision should rule out disputes
(for example car hire by taxable persons for immediate use).

5.2.3 Article 9f — Specific services to non-taxable persons

— Paragraph 1(c) has been amended to exempt the distance-
learning services referred to in point (d) of Article 9g(1),
which are the subject of a separate provision.

— In paragraph 1(d), restaurant and catering services have
been included to ensure that they are taxed at the place
where they are actually carried out.

— In paragraph 2,

the place of supply of restaurant and
catering services on board ships, aircraft or trains during a
passenger transport service has been notionally defined as
the place of departure of the transport service. This amend-
ment was made in response to a proposal which came up
during the consultation process.

During consultation there was an overwhelmingly negative
response to this provision due to the introduction of exces-
sive red tape arising from compliance with VAT obliga-
tions. For
introduction of one-stop shop
arrangements were seen as a precondition for this provi-
sion.

reason,

this

— The EESC calls for a clearer definition of the services to be

subsumed under this article.

5.2.5 Article 9h — Services supplied by an intermediary to

non-taxable persons

— The amendment makes it clear that the place of supply of
services is determined by the place in which the principal
transaction is carried out according to the provisions of
Articles 9a to 9g and 9i.

5.2.6 Article 9i — Services to non-taxable persons outside

the Community

— The changes here follow on from the deletions in Article

9g, as mentioned earlier.

5.2.7 Article 9j — Avoidance of double taxation

for determining the place of supply of e-
— The rules
commerce,
telecommunication and broadcasting services
provided by a supplier established outside the EU will
remain unchanged in future. The place of supply will there-
fore remain the Member State in which a non-taxable client
is established or the Member State in which the service is
actually used.

As the relevant provisions are now covered by Articles 9 g and
9h, former points (h), (j) and (l) are deleted.

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5.2.8 Article 22(6)(b) in the version set out in Article 28h

6.2 Se r vi ce s pr ovi de d to non-taxable p er sons

— Extension of the recapitulative statement

— The proposed amendment to the text of this article envi-
sages extending the recapitulative statement submitted by
each taxable person identified for value added tax purposes
to certain transactions arising from the provision of
services. This
services provided to
to other
consignees identified for value added tax purposes in the
transactions referred to in the fifth subparagraph and to the
taxable customers supplied with services under the condi-
tions provided for in Article 9(1).

applies

5.2.9 Technical changes

Other amendments are mainly technical changes; we would
therefore refer to point 2.12 of the proposal's explanatory
memorandum.

6. Own proposals and observations

6.1 Pla ce of su p p ly of se r vi c e s for th e p r ov i si on of

se r v i c e s to ta xable p e r sons

6.1.1
The Committee welcomes the planned extension of
the reverse-charge procedure to company level and thus to the
exchange of services between taxable persons.

6.1.2
However, this is dependent on the persons concerned
being able to carry out all aspects of the reverse-charge proce-
the
dure without any problems. Difficulties could arise if
service provider delegates the evaluation of turnover or of VAT
details, the place of supply, taxation obligations and tax rates,
or the possibility of tax exemption to the recipient of services,
without giving the latter the option of assessing this informa-
tion reliably.

Companies

6.1.3
should not be burdened with extra
recording and reporting requirements. There is no doubt that
businesses within the EU should be enabled to reliably deter-
mine whether a taxable person or company established in
another EU country is obliged to apply the reverse-charge
mechanism to the relevant transaction. Excessive liability of the
company providing services in the event of a subsequent failure
to reverse VAT charges would undermine the system as a
whole and lead to resistance from those affected by it.

Brussels, 17 May 2006.

the

reverse-charge procedure

If services are provided by a company/taxable person
6.2.1
is
to non-taxable persons,
excluded a priori. This mean that in the event of taxation being
applied at the place where services are used, a company from
another EU country would have to register as a VAT payer in
the country where services are provided and to comply with
VAT obligations there. To avoid red tape in this situation and
thus minimise obstacles to intra-Community trade, unbureau-
cratic rules are needed.

the EU,

6.2.2
Any obligation to register as a VAT payer would result
in significant extra red tape, additional costs and, in doubtful
cases, to reluctance on the part of the taxable company to
provide the service. Far from opening up the single market and
creating a level playing field for companies in all Member
States of
this would significantly disadvantage EU
companies established in other countries in comparison to
domestic service providers. This can hardly be in the interests
of dismantling barriers to trade. Therefore, extending taxation
at the place where services are used to non-taxable persons is
only a viable option if the proposed one-stop shop system
operates smoothly and rapidly. Only then could companies be
expected to provide taxable services, possibly in all 25 Member
States, in the absence of the reverse-charge option. Otherwise
there is a danger of the opposite effect, with small and medium
enterprises being excluded from the single market.

7. Refund procedure for input VAT

7.1
The same applies to simplification of VAT obligations
arising from the input VAT refund procedure. As is well
known, problems connected with input VAT refunds mean
that, particularly when the sums in question are relatively
small, companies need to decide whether it is ‘worth’ submit-
ting a claim to a foreign tax office or whether giving up any
entitlement to a refund is a much more advantageous option.
However, this is in de facto contradiction with the principle of
the deductibility of input VAT which underlies the sixth VAT
directive.

In this connection, the Committee feels that efforts in some
Member States to apply VAT at uniform rates across the board
are severely in need of improvement.

7.2
For this reason, it must be ensured that the Commis-
sion's proposals concerning the introduction of a one-stop
shop system are implemented and monitored for effectiveness.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND