Proposal for a Council Directive amending Directive 2006/112/EEC with regard to certain temporary provisions concerning rates of value added tax {SEC(2007) 910}
Date: 2007-07-05
Institutions: European Commission
Subjects: EU Member State, VAT, VAT rate, derogation from EU law, fiscal policy, tax harmonisation, tax law, tax relief

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 5.7.2007 
COM(2007) 381 final 

2007/0136 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending Directive 2006/112/EEC with regard to certain temporary provisions 
concerning rates of value added tax 

{SEC(2007) 910} 

(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 

In its Communication to the Council and the European Parliament on VAT rates other 
than VAT standard rates1, the Commission has launched a broad debate on the use of 
reduced rates in order to identify a sustainable way forward which could be acceptable 
by  all  Member  States  and  provide  a  step  forward  for  the  EU.  This  Communication 
reports on the main results of the study carried out for the Commission by Copenhagen 
Economics2.  The  study  mainly  examined  the  impact  of  reduced  VAT  rates  and  of 
derogations in this field, not only for locally supplied services, but also more globally, 
notably in terms of economic growth, employment and the functioning of the internal 
market. The effects on income distribution, the informal economy and on compliance 
costs for businesses were also taken into consideration 

Considerable time will be needed in order to identify the suitable way forward. In the 
meantime,  it  is  important  to  avoid  that  some  Member  States  would  be  obliged  to 
modify  the  VAT  rates  currently  applicable  on  their  territory,  before  clear  lines  have 
been agreed by the Council on the use of rates other than the standard rate. 

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•  General context 

The study conducted by Copenhagen Economics concludes that a single VAT rate is by 
far the best policy choice from a purely economic point of view. A move towards more 
uniform  rates  has  thus  considerable  advantages.  However,  there  may  be  specific 
benefits from operating with reduced VAT in carefully targeted sectors. 

In its Communication, the Commission points out that although reduced rates, as they 
divert from the standard rate, appear to create distortions from an economic perspective 
and may affect fiscal neutrality, in reality they are applied to a greater or lesser degree 
in all but one Member State. 

This  is  done  not  only  on  the  basis  of  general  provisions  which  apply  to  all  Member 
States,  but  also  on  the  basis  of  different  temporary  derogations  granted  to  particular 
Member States. These exceptions derogate either from the level of the rate fixed by the 
rules (zero rates, super reduced rates of less than 5%), or they concern supplies which 
should  be  taxed  at  the  standard  rate  (as  the  intermediary  rates,  the  so-called  parking 
rates set at a minimum of 12 %) or they can derogate to both. Whereas the derogations 
granted during the last enlargement have precise deadlines, the earlier ones are allowed 
until the entry into force of the "definitive system" for intra-Community transactions3. 
As  the  definitive  system  has  never  been  adopted  -  and  will  not  be  adopted  in  the 
foreseeable  future  -  these  transitional  arrangements  stay  in  force,  until  a  new 
unanimous decision of the Council. In the case of the Member States which joined the 

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COM(2007)380 final 
Copenhagen Economics ApS, Nyropsgade 13/1, DK-1602 Copenhague 
Directive 2006/112/EC of 28.11.2006. OJ L 347 of 11.12.2006, p.1. See Title VIII, chapter 4 (special 
provisions applying until the adoption of definitive arrangements) and chapter 5 (temporary provisions).  

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EU after the 1st January 1995 the temporary derogations resulting from the accession 
negotiations apply for a more limited period of time, i.e. in many cases till the end of 
2007. 

ASSESSMENT BY THE COMMISSION 

Some  derogations  are  covered  by  the  general  provisions  on  reduced  rates  or  may  be 
covered by the outcome of the political debate on the scope and level of the reduced 
rates.  However,  the  Council  will  need  time  to  reach  a  global  agreement:  there  is 
practically no realistic prospect that this could be reached before end 2007. This means 
that  some  Member  States  would  see  their  derogations  expire  whilst  others  would 
continue  to  benefit  from  them.  This  difference  in  treatment  provides  unequal 
opportunities  to  Member  States  without  any  substantial  justification  and,  due  to  this 
unfair character, would certainly create unacceptable tensions.  

In  the  light  of  these  considerations,  most  of  the  derogations  coming  to  an  end  soon 
should be temporarily prolonged until the end of 2010, i.e. the expiry of the minimum 
of 15% for the standard rate and of the experiment on the application of reduced VAT 
rates to certain labour-intensive services.  

Derogations  cannot,  however,  be  prolonged  where  they  conflict  with  a  smooth 
functioning  of  the  internal  market  and/or  with  other  Community  policies  (e.g. 
derogations  regarding  coal,  coke,  fuel,  oil)  or  where  they  already  are  covered  by 
general  provisions  on  rates  (e.g.  district  heating).  On  the  other  hand,  for  the  sectors 
bound to be at the core of the discussions in the Council, such as the restaurants or the 
housing sector, or the question concerning the continuation of a zero rate for food and 
pharmaceuticals,  derogations  could  be  prolonged.  This  selective  extension  aims  at 
avoiding that Member States currently applying derogations would have to modify the 
level  of  their  rates  this  year  and  then  be  allowed  to  come  back  to  their  present  rates. 
This  would  allow  the  European  institutions  till  the  end  of  2010  to  develop  further  a 
coherent approach in the field of VAT rates. 

•  Existing provisions in the area of the proposal 

The  exercise  involves  the  implementation  of  Article  123  to  130  of  Directive 
2006/112/EC.  

•  Consistency with the other policies and objectives of the Union 

The current proposal is fully in line with established EU VAT policy as well as other 
policies and objectives of the EU.  

This  proposal  aims  at  a  prolongation,  for  practical  reasons,  of  some  derogations 
coming to an end as from 31.12.2007, for practical reasons: to give enough time to the 
Council to decide on the future scope and level of reduced rates. It is part of this global 
exercise  which  will  have  to  be  in  line  with  the  main  policies  and  objectives  of  the 
Union,  in  particular  those  relating  to  the  Lisbon  strategy.  On  the  basis  of  a  study 
carried out by an independent economic think-tank which had to assess the impact of 
reduced rates on locally-supplied services, notably in terms of job creation, economic 
growth and the proper functioning of the internal market, this exercise aims at bringing 
consistency in the field of reduced VAT rates.  

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Moreover,  the  proposal  at  issue  does  not  prolong  derogations  that  conflict  with  the 
proper  functioning  of  the  internal  market  and/or  with  other  Community  policies  (e.g. 
derogations regarding agricultural input, or, coal, fuel, etc. that are contrary to energy 
and environmental objectives). 

2)  CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

•  Consultation of interested parties 

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Not relevant. 

•  Collection and use of expertise 

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There  was  no  need  for  additional  external  expertise.  The  study  conducted  by 
Copenhagen economics on the reduced rates is a sufficient basis. 

•  Impact assessment 

This proposal for a Directive only prolongs the current situation for a limited period of 
time. 

The  study  conducted  by  Copenhagen  economics  on  the  reduced  rates  provides 
sufficient elements for the impact assessment. 

3)  LEGAL ELEMENTS OF THE PROPOSAL 

•  Summary of the proposed action 

To prolong until 31/12/2010, on selective basis, the derogations granted in the field of 
VAT rates to the Member States which joined the EU after the 1st January 1995.  

•  Legal basis 

Article 93 of the Treaty. 

•  Subsidiarity principle 

The  subsidiarity  principle  applies  insofar  as  the  proposal  does  not  fall  under  the 
exclusive  competence  of  the  Community.  The  objectives  of  the  proposal  cannot  be 
sufficiently achieved by the Member States for the following reasons. 

The  Community  has  already  laid  down  harmonised  provisions  on  the  application  of 
VAT reduced rates, namely in Council Directive 2006/112/EC. These provisions may 
only be amended or extended by a Community act and the legislations of the Member 
States cannot deviate from the harmonised rules. 

For the reasons outlined above, only Community action can achieve the objectives of 
the  proposal  and  ensure  equal  treatment  of  citizens  in  the  European  Union.  The 
proposal therefore complies with the subsidiarity principle. 

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331 

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•  Proportionality principle 

The proposal complies with the proportionality principle for the following reasons. 

The  Directive  authorises  some  Member  States  to  continue  to  derogate  to  the  normal 
rules in the field of VAT rates. It therefore imposes no obligation. 

Given the limited scope and duration of the prolongation, the measure is proportionate 
to  the  aim  pursued.  The  directive  involves  no  financial  cost  to  the  Community. 
Although  reduced  rates  of  VAT  may  involve  a  reduction  in  revenue  for  States,  they 
place no financial burden on economic operators, and consumers should, in principle, 
benefit from the continued reduction in rates, in so far as this will be reflected in final 
prices.  

•  Choice of instruments 

Proposed instruments: directive. 

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

This  Proposal  extends  the  period  of  application  of  derogations  already  enacted  in  a 
Directive. 

4)  BUDGETARY IMPLICATION 

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The proposal has no implication for the Community budget. 

5)  ADDITIONAL INFORMATION 

•  Review/revision/sunset clause 

The proposal includes a sunset clause. 

•  Detailed explanation of the proposal 

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Ad Article 1 

Derogations  which  already  are  covered  by  general  provisions  on  rates  are  not 
prolonged:  this  concerns  derogations  on  natural  gas,  electricity  and  district  heating 
(Article 102) and firewood (Article 122) granted to CZ and EE.  

Derogations  which  conflict  with  other  Community  policies  are  not  prolonged:  this 
concerns derogations regarding coal, coke, fuel and oil granted to EE. 

Derogations which conflict with the smooth functioning of the internal market are not 
prolonged: this concerns the derogation concerning a super reduced rate for agricultural 
inputs granted to PL. It should be noted that the reduced rate permitted under Annex 3 
can be applied to such supplies. 

Derogations  to  which  the  Member  States  concerned  have  already  renounced  are  not 
prolonged, as they are obsolete. This concerns HU and SK. 

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Derogations concerning the following points are prolonged:  

•  Reduced  rates in  sectors bound to be at  the core of the discussions in the 
Council,  such  as  the  restaurants  or  the  housing  sector.  This  concerns  CZ, 
CY, PL and SI. 

•  Zero rate or super reduced rates for food, books and pharmaceuticals. This 

concerns CY, MT and PL. 

Articles 2, 3 and 4: final provisions. 

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2007/0136 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending Directive 2006/112/EEC with regard to certain temporary provisions 
concerning rates of value added tax 

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 Commission4, 

Having regard to the opinion of the European Parliament5, 

Having regard to the opinion of the European Economic and Social Committee6, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

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Council Directive 2006/112/EC of 28 November 2006 on the common system of value 
added tax7, provides for certain derogations in the field of VAT rates. Some of these 
derogations  expire  at  a  precise  date,  while  others  last  until  the  adoption  of  the 
definitive arrangements. 

In order to ensure more equality of treatment among Member States, derogations that 
do  not  conflict  with  a  smooth  functioning  of  the  internal  market  and  with  other 
Community policies should be prolonged until the end of 2010, date of the expiry of 
the minimum of 15% for the standard rate and of the experiment on the application of 
a reduced rate to labour intensive services. By contrast, certain derogations should not 
be prolonged. 

The derogations granted to the Czech Republic and Estonia for the supply of natural 
gas, electricity and district heating should not be prolonged because they are already 
covered by general provisions on reduced rates) 

The  derogation  granted  to  Estonia  for  the  supply  of  coal,  fuel  and  oil  should  not  be 
prolonged because it conflicts with other Community policies. 

OJ C , , p. . 
OJ C , , p. . 
OJ C , , p. . 
OJ  L  347,  11.12.2006,  p.1.  Directive  as  amended  by  Directive  2006/138/EC  (OJ  L  384,  29.11.2006, 
p.92). 

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(5) 

(6) 

The derogation allowing Poland to apply a super reduced rate to the supply of goods 
and services of a kind normally intended for use in agricultural production should not 
be prolonged because it conflicts with the smooth functioning of the internal market. 

The  derogations  granted  to  Hungary  and  Slovakia  should  not  be  prolonged  because 
those Member States have not applied or no longer apply a reduced rate.  

(7) 

Directive 2006/112/EC should therefore be amended accordingly, 

HAS ADOPTED THIS DIRECTIVE: 

Article 1 

Directive 2006/112/EC is hereby amended as follows: 

(1) 

Article 123 is replaced by the following: 

'Article 123  

(2) 

(3) 

(4) 

(5) 

(6) 

The Czech Republic may, from 1 January 2008 until 31 December 2010, continue to 
apply  a  reduced  rate  of  not  less  than  5 %  to  the  supply  of  construction  work  for 
residential  housing  not  provided  as  part  of  a  social  policy,  excluding  building 
materials.' 

Article 124 is deleted.  

In paragraphs 1 and 2 of Article 125, "until 31 December 2007" is replaced by "from 
1 January 2008 until 31 December 2010". 

Article 126 is deleted.  

In Article 127, "1 January 2010" is replaced by "31 December 2010". 

Article 128 is replaced by the following: 

'Article 128 

1.  Poland  may,  from  1 January  2008  until  31 December  2010  grant  an  exemption 
with  deductibility  of  VAT  paid  at  the  preceding  stage  in  respect  of  the  supply  of 
certain books and specialist periodicals. 

2.  Poland  may,  from  1 January  2008  until  31 December  2010  or  until  the 
introduction  of  definitive  arrangements,  as  referred  to  in  Article 402,  whichever  is 
the  earlier,  continue  to  apply  a  reduced  rate  of  not  less  than  7 %  to  the  supply  of 
restaurant services. 

3.  Poland  may,  from  1 January  2008  until  31 December  2010,  continue  to  apply  a 
reduced rate of not less than 3 % to the supply of foodstuffs as referred to in point (1) 
of Annex III. 

4.  Poland  may,  from  1 January  2008  until  31 December  2010,  continue  to  apply  a 
reduced rate of not less than 7 % to the supply of services, not provided as part of a 

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social  policy,  for  construction,  renovation  and  alteration  of  housing,  excluding 
building materials, and to the supply before first occupation of residential buildings 
or parts of residential buildings, as referred to in point (a) of Article 12(1).' 

(7) 

In paragraphs 1 and 2 of Article 129, "until 31 December 2007" is replaced by "from 
1 January 2008 until 31 December 2010". 

(8) 

Article 130 is deleted.  

Article 2 

Transposition 

1. 

Member  States  shall  bring  into  force  the  laws,  regulations  and  administrative 
provisions  necessary  to  comply  with  this  Directive  by  ….  at  the  latest.  They  shall 
forthwith  communicate  to  the  Commission  the  text  of  those  provisions  and  a 
correlation table between those provisions and this Directive. 

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 twentieth day following that of its publication.  

Article 3 

Article 4 

This Directive is addressed to the Member States. 

Done at Brussels,  

For the Council 
The President 

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