Proposal for a Council Decision authorising the Kingdom of the Netherlands to apply a measure derogating from Article 193 of Directive 2006/112/EC on the common system of value added tax (Only the Dutch version is authentic)
Date: 2007-09-03
Institutions: European Commission
Subjects: Netherlands, VAT, clothing industry, derogation from EU law, subcontracting, tax system

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 3.9.2007 
COM(2007) 491 final 

Proposal for a 

COUNCIL DECISION 

authorising the Kingdom of the Netherlands to apply a measure derogating from 
Article 193 of Directive 2006/112/EC on the common system of value added tax 

(Only the Dutch version is authentic) 

(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  395  of  Directive  2006/112/EC  of  28  November  2006  on  the 
common  system  of  value  added  tax,  the  Council,  acting  unanimously  on  a  proposal 
from the Commission, may authorise any Member State to apply special measures for 
derogation from the provisions of that Directive, in order to simplify the procedure for 
collecting VAT or to prevent certain forms of tax evasion or avoidance. 

By letter registered with the Secretariat-General of the Commission on 24 November 
2006,  the  Kingdom  of  the  Netherlands  requested  authorisation  to  apply  a  derogating 
measure  in  the  ready-to-wear  clothing  industry,  as  previously  granted  for  a  limited 
period  by  Decision  1998/20/EC  (as  amended).  In  accordance  with  Article  395(2)  of 
Directive  2006/112/EC,  the  Commission  informed  the  other  Member  States  by  letter 
dated 10 July 2007 of the request made by the Kingdom of the Netherlands. By letter 
dated  17  July  2007,  the  Commission  notified  the  Kingdom  of  the  Netherlands  that  it 
had all the information necessary to consider the request. 

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•  General context 

The requested measure is essentially to be considered as a measure to prevent certain 
types  of  tax  evasion  in  the  ready-to-wear  clothing  industry.  Subcontractors  in  the 
ready-to-wear  clothing  industry  are  sometimes  small  companies,  which  have  often 
proved  to  be  transitory  businesses,  difficult  for  the  tax  administration  to  control  and 
vehicles  for  tax  evasion.  A  common  form  of  evasion  is  the  non-payment  to  the  tax 
authorities of invoiced VAT by subcontractors, who subsequently become untraceable 
but  leaving  the  customer  (contractor)  in  receipt  of  a  valid  invoice  for  tax  deduction. 
The Decision authorises the Kingdom of the Netherlands to apply in the ready-to-wear 
clothing industry, a scheme for shifting the obligation to pay over the VAT to the tax 
authorities from the subcontractor to the clothing firm (the contractor). 

Previously, Council Directive 1998/20/EC authorised the Kingdom of the Netherlands 
to  apply  this  scheme  which  derogates  from  Article  193  of  the  VAT  Directive 
2006/112/EC.  The  initial  validity  until  31  December  1999  was  extended  until  31 
December 2003 by Council Decision 2000/435/EC and again until 31 December 2006 
by Council Decision 2004/516/EC. 

The Kingdom of the Netherlands has argued that the previous derogations have led to a 
decrease of fraud by subcontractors in the ready-to-wear clothing industry. 

However, the Commission is not entirely sure to what extent the derogation has led to 
this decrease and to what extent changes in the sector itself are responsible. The ready-
to-wear  clothing  industry  is  continually  changing  whereby  subcontractors  move  from 
one  country  to  another,  inter  alia,  because  of  labour  costs.  It  can  therefore  not  be 
excluded that certain subcontractors have simply left the Kingdom of the Netherlands 
for economic reasons. 

In  order  to  assess  the  impact  of  the  current  derogation  on  the  one  hand  and  other 

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factors  on  the  other  hand,  the  Kingdom  of  the  Netherlands  is  requested  to  submit  a 
report to the Commission on the effectiveness of the measure. 

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•  Existing provisions in the area of the proposal 

Council  Decision  98/20/EC  of  19  December  1997  authorising  the  Kingdom  of  the 
Netherlands to extend the application of a measure derogating from Article 21 of the 
Sixth  Council  Directive  77/388/EC  on  the  harmonisation  of  the  laws  of  the  Member 
States  relating  to  turnover  taxes  (OJ  L  8,  14.1.1998,  p.  16.  Decision  amended  by 
Decision 2000/435/EC (OJ L 172, 17.2.2000, p. 24) and Decision 2004/516/EC (OJ L 
221, 21.6.2004, p. 17). 

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•  Consistency with the other policies and objectives of the Union 

Not applicable. 

2)  CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

•  Consultation of interested parties 

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Not relevant. 

•  Collection and use of expertise 

There was no need for external expertise. 

•  Impact assessment 

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The Decision proposal aims at combating possible VAT evasion in the ready-to-wear 
clothing industry and has therefore a potential positive economic impact. 

However, because of the narrow scope of the derogation and the limited application in 
time, the impact will in any case be limited. 

3)  LEGAL ELEMENTS OF THE PROPOSAL 

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•  Summary of the proposed action 

Authorisation for the Kingdom of the Netherlands to apply a measure derogating from 
Article  193  of  Directive  2006/112/EC  as  regards  the  use  of  a  reverse  charge 
mechanism for certain transactions in the ready-to-wear clothing industry. 

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•  Legal basis 

Article 395 of the VAT Directive 2006/112/EC of 28 November 2006 on the common 
system of value added tax. 

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•  Subsidiarity principle 

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

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•  Proportionality principle 

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

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

Given the very 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  395  of  the  VAT  Directive  2006/112/EC  on  the  common  system  of  the 
value added tax system, derogation from the common VAT rules is only possible with 
the  authorisation  of  the  Council  acting  unanimously  on  a  proposal  from  the 
Commission. A Council Decision is therefore the most suitable instrument since it can 
be addressed to individual Member States. 

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. 

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E-3837 

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Proposal for a 

COUNCIL DECISION 

authorising the Kingdom of the Netherlands to apply a measure derogating from 
Article 193 of Directive 2006/112/EC on the common system of value added tax 

(Only the Dutch version is authentic) 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, 

Having  regard  to  Council  Directive  2006/112/EC  of  28  November  2006  on  the  common 
system of value added tax1, and in particular Article 395(1) thereof, 

Having regard to the proposal from the Commission2, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

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2 
3 

By letter registered with the Secretariat-General of the Commission on 24 November 
2006,  the  Kingdom  of  the  Netherlands  requested  authorisation  to  apply  special  tax 
measures in the ready-to-wear clothing industry as previously authorised for a limited 
period by Decision 1998/20/EC3. 

In  accordance  with  Article  395(2)  of  Directive  2006/112/EC,  the  Commission 
informed the other Member States by letter dated 10 July 2007 of the request made by 
the  Kingdom  of  the  Netherlands.  By  letter  dated  17  July  2007,  the  Commission 
notified  the  Kingdom  of  the  Netherlands  that  it  had  all  the  information  necessary  to 
consider the request. 

The  arrangement  would  authorise  the  Kingdom  of  the  Netherlands  to  apply  in  the 
ready-to-wear clothing industry a scheme for shifting the subcontractor's obligation to 
pay  over  VAT  to  the  tax  authorities  from  the  subcontractor  to  the  clothing  firm  (the 
contractor). 

These arrangements have proven in the past to be an effective prevention measure in a 
sector  in  which  collecting  VAT  is  made difficult  by  the  problems  of identifying and 
supervising the activities of subcontractors. The requested measure is therefore to be 
considered as a measure to prevent certain types of tax evasion and avoidance in the 
ready-to-wear clothing industry. 

OJ L 347, 11.12.2006, p. 1. Directive amended by Directive 2006/138/EC (OJ L 384, 29.12.2006, p. 92) 
OJ C, , p. 
OJ L 8, 14.1.1998, p. 16. Decision amended by Decision 2000/435/EC (OJ L 172, 12.7.2000, p. 24) and 
Decision 2004/516/EC (OJ L 221, 21.6.2004, p. 17) 

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(5) 

(6) 

(7) 

Since,  however,  the  location  for  the  manufacture  of  ready-to-wear  clothes  is 
influenced by low labour costs and subcontractors relocate easily from one country to 
another,  the  Kingdom  of  the  Netherlands  should  monitor  and  evaluate  the  impact  of 
these  factors  on  the  effectiveness  of  the  derogation  and  inform  the  Commission 
accordingly. 

It is appropriate that the measure is limited in time in order to allow the Commission 
to evaluate the measure on the basis of the report provided by the Netherlands. 

The  derogation  will  not  have  an  adverse  effect  on  the  European  Communities'  own 
resources accruing from value added tax nor does it affect the amount of VAT charged 
at the final stage of consumption. 

HAS ADOPTED THIS DECISION:  

Article 1 

By way of derogation from Article 193 of Council Directive 2006/112/EC, the Kingdom of 
the  Netherlands  is  hereby  authorised  to  apply  until  31  December  2009  in  the  ready-to-wear 
clothing industry a scheme for shifting the subcontractors' obligations to pay over VAT to the 
tax authorities from the subcontractor to the clothing firm (the contractor). 

Article 2 

The Kingdom of the Netherlands shall by 31 July 2009, submit a report to the Commission on 
the overall evaluation of the operation of the measure concerned, in particular as regards the 
effectiveness  of  the  measure  and  any  other  evidence  of  relocations  of  subcontractors  in  the 
ready-to-wear clothing industry to other countries. 

Article 3 

This Decision is addressed to the Kingdom of the Netherlands. 

Done at Brussels,  

For the Council 
The President 

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