Report from the Commission to the Council and the European Parliament - Sixth Report under Article 12 of Regulation (EEC, Euratom) n° 1553/89 on VAT collection and control procedures {SEC(2008) 2759}
Date: 2008-11-11
Institutions: European Commission
Subjects: VAT, VAT resource, own resources, report

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 11.11.2008 
COM(2008) 719 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

Sixth report under Article 12 of Regulation (EEC, Euratom) n° 1553/89 on VAT 
collection and control procedures 

{SEC(2008) 2759} 

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TABLE OF CONTENTS 

1. 

1. 

EXECUTIVE SUMMARY.......................................................................................... 3 

Chapter 1: Introduction & SCOPE............................................................................... 4 

1.1.  What is an Article 12 Report?...................................................................................... 4 

1.2.  What are the sources of the information in the Reports? ............................................. 4 

1.3. 

1.4. 

1.5. 

2. 

Previous Article 12 Reports ......................................................................................... 4 

Purpose of the Report................................................................................................... 4 

Scope of this Report ..................................................................................................... 4 

Chapter 2: Follow-up to the recommendations............................................................ 5 

2.1.  Why look at the past recommendations ....................................................................... 5 

2.2. 

2.3. 

2.4. 

2.5. 

3. 

3.1. 

3.2. 

3.3. 

4. 

4.1. 

4.2. 

4.3. 

Gathering the evidence................................................................................................. 5 

Analysing the responses............................................................................................... 5 

Results .......................................................................................................................... 6 

Evaluation .................................................................................................................... 6 

Chapter 3: Operational conclusions from the seminar................................................. 7 

Introduction .................................................................................................................. 7 

VAT gap....................................................................................................................... 7 

Evaluation .................................................................................................................... 8 

Chapter 4: Conclusions ................................................................................................ 9 

Context and objectives ................................................................................................. 9 

Indicators of success .................................................................................................... 9 

Overall evaluation ........................................................................................................ 9 

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1. 

EXECUTIVE SUMMARY 

This is the sixth in a series of reports the Commission provides to the budgetary authority at 
three-yearly intervals concerning Member States' VAT collection and control procedures. Past 
reports  have  covered  all  the  subject  areas  proposed  by  Regulation  1553/89  and  have  made 
recommendations  designed  to  obtain  improvements  concerning  almost  all  of  them.  This 
edition of the report is a little different. It takes a realistic look at what has been achieved as a 
result  of  the  previous  five  reports  –  trying  to  evaluate  whether  the  reporting  process  can  be 
shown to have been effective.  

In earlier reports, the question of the underlying purpose of Article 12 reports had been aired. 
Although there are very detailed uniform procedures concerning calculating the amount (the 
VAT base) from which the Commission's VAT own resources is derived, this process starts 
with  the  amount  of  VAT  Member  States  actually  collect.  In  the  context  of  own  resources 
controls  the  Commission  verifies  the  accuracy  of  Member  States'  calculations  but  does  not 
inspect  Member  States'  arrangements  for  managing,  controlling  and  collecting  VAT.  The 
information in the reports is collected from Member States - usually by questionnaire. Their 
arrangements and procedures can be very diverse - this is not an area where there is only one 
correct method and certainly no "one-size-fits-all" solutions.  

The  Commission  considers  that  the  Article  12  reports  should  be  a  driver  for  change.  This 
change might be achieved by precipitating debate in the European Parliament and in Council 
or  by  triggering  change  in  Member  States  as  a  result  of  a  recommendation  made  in  the 
reports. This report summarises the findings of how successful the reporting process has been 
when measured against these two yardsticks. 

The  results  are  not  encouraging.  None  of  the  previous  reports  has  elicited  any  identifiable 
response from the European Parliament or the Council, much less generate debate. A survey 
of all Member States asking about the activity they had initiated because of Article 12 reports 
did not provide extensive or convincing evidence that any specific action had been made as a 
result of the reports.  

The absence of reaction from the budgetary authority does put into to question whether there 
is any continuing requirement for the report beyond simply fulfilling a regulatory obligation 
and  the  Commission  has  numerous  other  opportunities  to  enhance  VAT  collection  and  to 
contribute  to  reducing  VAT  fraud.  Nonetheless  the  Commission  considers  it  important  that 
the debate on VAT control, collection and management should continue at all useful levels. 
The  Commission  will  therefore  continue  to  use  the  Article  12  arrangements  to  provide  an 
impetus for reflection and change in Member States by providing a platform for discussions, 
exchange of ideas and for pooling experiences in  the  VAT  field  among  Member  States  and 
between Member States and the Commission. 

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1. 

CHAPTER 1: INTRODUCTION & SCOPE 

1.1.  What is an Article 12 Report? 
Article  12  of  Regulation  1553/891  requires  the  Commission  to  report  to  the  budgetary 
authority  (the  European  Parliament  and  the  Council)  every  three  years  on  the  procedures 
applied by Member States to register taxable persons and to determine and collect  VAT, as 
well  as  on  the  modalities  and  results  of  their  VAT  control  systems.  The  report  should  also 
consider whether improvements to procedures can be contemplated.  

1.2.  What are the sources of the information in the Reports? 

The information in the reports is collected from Member States. The usual collection method 
has been to compile and issue questionnaires focusing on particular areas of Member States' 
VAT administration and collection arrangements. Their replies are collated to form the report. 
For the fifth report (published in early 2005) this approach was supplemented by visits to all 
the then Member States to clarify and elaborate the replies they had made in response to the 
questionnaire. As well as replies to a specially-prepared questionnaire this report draws on the 
findings of a seminar involving all Member States which the Commission organised in 20062. 

Previous Article 12 Reports 

1.3. 
This report is the sixth in the series3. Past reports have covered all the subject areas proposed 
by the regulations and have made recommendations concerning almost all of them. 

1.4. 

Purpose of the Report 

What the underlying purpose of such a report is might be questioned as, after all, Article 3 of 
the same Regulation makes it clear that the VAT resources base is derived from the total net 
revenue actually collected by a Member State during the year in question. When the Council 
approved  the  relevant  regulatory  provisions  it  took  the  view  that  the  reporting  procedure 
would contribute to strengthening measures combating fraud. For the Commission, the report 
provides a vehicle for it to comment publicly on the efficiency and effectiveness of Member 
States' management of VAT and should be a driver for change. The reports also contribute to 
the exchange of best practice and reflect the concern that all Member States be treated equally 
in respect of their contributions to the Community budget. 

1.5. 

Scope of this Report 

This  report  covers  the  period  2003  to  2006  and  deals  with  two  main  areas.  The  first  is  a 
realistic  look  at  what  has  been  achieved  as  a  result  of  the  recommendations  made  in  the 
previous five reports. The second is to build upon the seminar the Commission organised in 
2006,  the  year  after  the  publication  of  the  fifth  report.  The  seminar  showed  that  voluntary 
compliance  and  the  use  and  importance  of  evaluation  -  major  topics  underlying 
recommendations  in  the  VAT  field  -  had  been  very  differently  interpreted  by  various 
administrations.  The  opportunity  has  been  taken  to  present  the  conclusions  the  Tallinn 
seminar drew about voluntary compliance and evaluation. 

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Council Regulation (EEC, EURATOM) No 1553/89 of 29 May 1989 OJ L155, 7.6.89 on the definitive uniform arrangements for 
the collection of own resources accruing from value added tax 
The  seminar  took  place  in  Tallinn,  Estonia  the  11th  –  13th  October  2006  under  the  Community’s  administrative  co-operation 
programme for tax administrations and their officials – Fiscalis 2007. 
5th Report: COM/2004/0855 final + Annexe SEC (20004) 1721 
4th Report: COM/00/0028 final 
3rd Report: COM/98/0490 final 
2nd Report: COM/95/354 final  
1st Report: SEC(92) 280 final  

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2. 

CHAPTER 2: FOLLOW-UP TO THE RECOMMENDATIONS 

2.1.  Why look at the past recommendations 

As explained in the introduction this is the sixth report in this series that the Commission has 
prepared  based  on  information  supplied  by  Member  States.  The  previous  Article  12  reports 
presented to the budgetary authority had not generated any debate. This lack of reaction poses 
questions  about  the  effectiveness  of  the  reporting  process.  However  Member  States  might 
themselves be using the findings of the reports as a basis for taking action to improve their 
own  administrative  arrangements.  After  the  publication  of  the  fifth  report  the  Commission 
organised  a  seminar  with  the  idea  of  exploring  whether  or  not  this  was  the  case.  While  the 
seminar was hailed as successful by participating Member States and certainly proved a useful 
vehicle for them to network, to exchange best practice and explain initiatives that they were 
taking to other Member States the seminar did not in the end provide the most suitable forum 
for charting progress in implementing recommendations. This could partly have been because 
of the timing of the seminar - not long after the EU-10 enlargement – around one-third of the 
attendees  came  from  countries  which  had  been  members  of  the  EU  for  only  two  years  and 
would thus have had very little time to react to the recommendations. 

The  recommendations  had  provided  the  structure  of  the  seminar  and  influenced  its  content. 
However, the gritty issues of how far the action needed to implement them had progressed or 
whether  Member  States  intended  to  take  action  on  them  had  not  been  addressed 
systematically  across  all  Member  States  for  the  full  spectrum  of  recommendations.  By 
returning to the issue for the next report and once again utilising the questionnaire approach 
the discussions at the seminar which had ensured all Member States had been reminded of or 
acquainted  with  the  recommendations  could  be  built  upon.  The  Commission  would  gain 
evidence to make a realistic assessment of the degree of improvement the recommendations 
had triggered and thus obtain an evaluation of how far the reports had been drivers for change. 

2.2. 

Gathering the evidence 

A questionnaire was devised to gather information for this report using the distillation of the 
recommendations  made  in  all  the  previous  reports.  This  distillation  originally  drawn  up  for 
the  seminar  had  eleven  items.  Some  items  were  specific,  others  more  abstract.  The  full  list 
appears  in  an  annexe  to  this  report  but  the  primary  areas  covered  were  the  following: 
improving voluntary compliance together with recovery and enforcement; use of IT; feedback 
and other evaluation arrangements; plus improving records and information flows. 

The questionnaire asked Member States to: 

•  describe  any  developments  that  had  taken  place  in  relation  to  each  of  the  eleven 

recommendations since the beginning of 2003; 

•  state whether there had been any evaluation of the impact of those developments; 

•  explain the reasons for no action having been taken if that was the case; and finally  

•  outline any alternative action they had undertaken to remedy potential shortcomings in the 

areas covered by the recommendations and the results that had been achieved. 

2.3. 

Analysing the responses 

All Member States replied to the questionnaire. Their responses were collated and an analysis 
made for each recommendation of what action had been taken, whether its success had been 
evaluated  and,  where  appropriate  what  had  prevented  action.  The  analysis  was  difficult  as 

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Member States were not always specific in their responses. Most Member States had replied 
by  describing  the  system  they  operated  in  the  area  concerned  by  the  recommendation  but 
much less frequently gave time-based information and almost never linked any innovations to 
a specific recommendation. 

The second-stage question concerning whether or not a particular activity had been evaluated 
was  even  more  difficult  to  examine.  Few  Member  States  responded  other  than  in  general 
terms. Explanations for not taking action or alternative choices (the final two questions) were 
rarely provided. 

2.4. 

Results 

A table listing all eleven recommendations together with a brief description of Member States' 
responses  and  a  short  evaluation  of  progress  towards  implementation  was  prepared  and  has 
been annexed to this report.  

Looking overall at the results achieved the initial outcome looks positive. Almost all Member 
States  have  reported  some  activity  in  areas  corresponding  to  those  specified  by  the 
recommendations. However there were some exceptions such as the use of VAT control plans 
plus the importance of central risk assessment. In both of these areas significant numbers of 
Member  States  reported  different  views  from  those  embodied  in  the  recommendations.  For 
example  a  group  of  Member  States  were  convinced  that  VAT  control  plans  should  be 
incorporated in control plans for other taxes rather than being stand-alone entities. This seems 
a  plausible  response  to  another  subject  discussed  in  previous  Article  12  reports:  that  of  the 
benefits  of  VAT  being  part  of  a  single  large  revenue  collecting  department  rather  than 
operating separately. Similarly some Member States were firmly of the belief that local risk 
assessment  was  the  preferred  model  although  the  central  level  should  be  kept  informed.  A 
third  area  where  there  was  little  apparent  activity  was  individual  official  performance 
evaluation.  Here  most  Member  States  simply  described  the  evaluation  process  made  for 
human resources and career planning reasons. Only one Member State described any further 
evaluation tailored to the success or otherwise of its VAT control activities. 

It was found that few Member States had related their activity to the period since 2003 (save 
those  Member  States  who  had  joined  since  that  date).  In  fact  some  'old'  Member  States 
specifically  observed  that  particular  activities  had  taken  place  or  goals  had  been  achieved 
before the Article 12 recommendations had been made. 

When it came to answering the subsequent questions posed: the results of any evaluation of 
the  impact  of  the  developments  or  action  taken;  the  reasons  for  any  lack  of  action;  and 
commenting on any alternative action preferred it was very difficult indeed to glean any really 
clear response except in very isolated instances. 

2.5. 

Evaluation 

The objective of the evaluation was to assess whether the recommendations made in Article 
12 reports had been drivers for change. Little evidence was found that this was the case. The 
results  did  provide  reassurance  that  the  recommendations  were  in  the  main  in  line  with 
initiatives Member States had pursued or were pursuing. However it was difficult to find any 
evidence tying Member State action specifically to the report recommendations. 

The next focus was on the results Member States reported of activity in evaluating the success 
of  their  initiatives.  This  would  be  a  key  indicator  of  the  influence  and  importance  of  the 
Article 12 reporting process because of the stress that the questionnaire had put on this aspect 
coupled with the importance that had been assigned to it at the seminar in 2006. The outcome 

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of this part of the evaluation was disappointing with hardly any Member States commenting 
on any assessment or ongoing measurement and review processes. 

3. 

CHAPTER 3: OPERATIONAL CONCLUSIONS FROM THE SEMINAR 

3.1. 

Introduction 

The seminar was built around a mix of presentations from national administrations and from 
external experts, together with workshops and a panel discussion. 

The seminar was aimed at officials working at a strategic level in the participating countries 
rather  than  those  working  with  VAT  based  own  resources.  Those  involved  in  setting  the 
overall  direction  of  control  of  VAT,  making  control policy, and in evaluating VAT control, 
collection, and enforcement were the target audience. 

This Commission-organised seminar was a welcome opportunity to bring the subject matters 
of an Article 12 report into a discussion arena, for the exchange of ideas and the pooling of 
experience. This Commission initiative was much appreciated by the participating countries 
irrespective of their accession date. 

Focus  was  not  only  placed  on  following-up  previous  recommendations,  but  also  on  the 
qualitative  aspects  of  the  VAT  gap  coupled  with  voluntary  compliance,  and  to  the  role  of 
evaluation cycles in a modern administration. 

3.2. 

VAT gap 

The  VAT gap is the difference between  the  expected or anticipated revenue from VAT and 
the  revenue  that  is  in  fact  actually  collected.  The  gap  arises  largely  as  a  consequence  of 
revenue  loss  through  cases  of  fraud,  insolvency,  tax  evasion  and  tax  avoidance.  From  a 
narrow viewpoint this might seem a surprising subject for a VAT own resources seminar as 
the arrangements for calculating VAT own resources deliberately exclude the VAT gap. The 
starting point for calculating the VAT base is the revenue actually collected, not the amount 
that should have been4. However there is a clear link between devising measures to improve 
voluntary compliance, which can encompass customer service and expectation issues, and the 
process of qualifying rather than merely quantifying the VAT gap. 

During  the  seminar  it  became  clear  that  Member  States  had  different  understandings  of  the 
utility of estimating the size of the VAT gap. There were also many different approaches to 
the estimation process, with some placing greatest emphasis on  quantifying the  gap and the 
need for a standard method of calculation. However, once the gap size has been quantified, 
there is little a Member State can do with that discernment. Mere knowledge of its size does 
not itself remedy the situation. 

A  qualitative  analysis  of  the  VAT  gap  based  on  techniques  for  identifying  those  economic 
operators who constitute the VAT gap is therefore essential in order to reduce the number of 
traders that do not fully comply. The particularities of each segment of traders that populate 
the  gap  needs  to  be  investigated  and  established  and  thereafter  the  correct  compliance 
methods – ranging from targeted voluntary compliance measures to criminal prosecution for 
that particular segment need to be devised and applied. 

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- save for various adjustments and compensations required because VAT law provides Member States 
with some options and the VAT base is calculated as if the law was fully harmonised. 

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As  this  brief  summary  shows  the  issue  was  thoroughly  ventilated  during  the  seminar  no 
consensus was reached: stakeholders, although all recognising the importance of the concept, 
did not identify any remedial action that all could agree. 

3.3. 

Evaluation 

In  its  fifth  Article  12  report  the  Commission  placed  emphasis  on  the  importance  of  proper 
evaluation by Member States of the functioning of their VAT collection activities, as it was 
noted that evaluation had not received the level of attention that it deserved in every Member 
State’s tax administration. 

Evaluation has become more important because of decentralisation of management and other 
tasks, as well because of the increased importance attributed to efficiency, effectiveness and 
quality  of  service.  This  tendency  has  been  further  accentuated  in  the  face  of  budget  cuts  or 
more active scrutiny of how allocated funds have been spent. 

A  proper  evaluation  should  include  an  assessment  of  the  situation  before  and  after  the 
implementation of the actions concerned and use indicators to monitor progress from period 
to period. 

It became clear from the seminar that the distinction between the concepts of monitoring and 
evaluation  was  not  entirely  clear  in  many  Member  States.  The  Commission  considers  that 
both are needed to improve performance and to make sure that “the right things are done in 
the right way”. However it was apparent that Member States did not all attach the same value 
to  evaluation  techniques  when  developing  and  improving  their  VAT  control  policies  and 
strategies. 

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4. 

CHAPTER 4: CONCLUSIONS 

4.1. 

Context and objectives 

Regulation  1553/89  which  deals  with  the  arrangements  for  the  collection  of  own  resources 
arising  from  value  added  tax  requires  the  Commission  to  report  to  the  budgetary  authority 
every three years. The reports are compiled from information supplied by Member States. The 
regulatory  provisions  envisage  that  the  report  process  will  focus  on  Member  States' 
procedures for registering taxable persons, calculating and collecting VAT due together with 
their control and verification systems. 

It is important to observe that although there are uniform procedures set up concerning how to 
calculate  the  amount  (the  VAT  base)  from  which  the  amount  to  be  made  available  to  the 
Commission  is  derived,  Member  States  have  much  more  latitude5  when  it  comes  to  fixing 
registration  limits  and  processes,  tax  rates  and  control  arrangements.  So  this  is  not  an  area 
where there is only one correct answer and certainly one-size-fits-all options are unlikely to 
be available.  

Recognising those constraints the Commission nevertheless has made in past reports a variety 
of recommendations aimed at securing improvements in Member States' methods of working. 
In  this  particular  report  the  issue  of  evaluating  whether  the  preceding  reports  and  the 
recommendations therein had indeed been drivers for change is explored. 

4.2. 

Indicators of success 

Two  potential  indicators  which  could  be  used  to  measure  the  success  of  the  reports  were 
identified. The most positive feedback would be evidence that the reports triggered debate by 
the  budgetary  authority  and  in  turn  that  that  debate  had  resulted  in  improvements  in  the 
arrangements for managing and collecting VAT. No such evidence was found. 

Feedback  was  also  sought  from  Member  States  about  what  action  they  had  taken  to 
implement  the  recommendations.  The  Commission  starting  laying  the  foundations  for  this 
report  after  the  publication  of  the  last  one  in  2005  by  arranging  a  seminar  to  which  all 
Member  States  were  invited  to  consider  the  wider  issues  which  had  generated  earlier 
recommendations. It was intended that this should trigger analysis and evaluation in Member 
States of how far they had implemented the recommended action or, if they had not, why not 
or what alternatives they had pursued. The fruits of this activity would then be harvested in 
the questionnaires for this report. 

As  the  results  described  in  Chapter  2  and  the  annexe  show,  the  realistic  and  deliberately 
rigorous evaluation performed of what has been achieved as a result of the recommendations 
made  in  the  previous  five  reports  provides  little  evidence  for  taking  a  positive  view.  It 
provides  reassurance  that  the  majority  of  the  recommendations  were  apposite  and  that 
Member States have or had taken action on similar themes but not that the recommendations 
themselves provided the trigger. 

4.3. 

Overall evaluation 

Given  the  arrangements  for  the  VAT  own  resource  the  question  arises  as  to  what  is  the 
underlying  purpose  of  producing  Article  12  reports.  It  could  be  argued  that  to  fulfil  a  truly 

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Within the constraints of the VAT Directive – Council Directive 2006/112/EC of 28 November 2006 on 
the Common System of Value Added Tax, OJ L 347, 11.12.2006. Directive as last amended by Council 
Directive 2008/8/EC of 12 February 2008, OJ L 44, 20.2.2008, p.11. 

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useful  purpose  the  reports  should  be  a  driver  for  change  and  the  Member  States'  view  that 
they might have a contribution to make in the fight against VAT fraud is also worthy of note. 

This report describes how an attempt was made to measure the contribution the reports have 
made towards securing beneficial change or improvements in the methods Member States use 
to manage VAT. One measure examined was whether the Article 12 reports published in the 
past had been catalysts precipitating debate in the European Parliament or in Council. As the 
reports had not elicited any response from the European Parliament or the Council there was 
no  success  to  point  to  there.  Member  States  were  also  asked  about  the  activity  they  had 
initiated  because  of  Article  12  reports.  Although  they  provided  some  positive  feedback  it 
would  be  difficult  to  point  to  any  specific  action  that  incontrovertibly  would  not  have 
happened save for an Article 12 report. The Commission therefore will initiate a discussion 
between  the  relevant  players  from  Member  States  within  the  forum  of  the  Advisory 
Committee  on  Own  Resources  on  the  matters  addressed  under  Article  12  of  Regulation 
1553/89 including the conclusions that can be drawn from this report. 

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