CELEX: 51992PC0582
Language: en
Date: 1992-12-22
Title: Proposal for a COUNCIL DECISION authorizing the French Republic to extend the application of a measure derogating from Article 2 of the sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes

COMMISSION OF THE EUROPEAN COMMUNITIES
                                          COM(92) 582 final
                                          Brussels, 22 December 1992
                  COMMISSION REPORT TO THE COUNCIL
             PRESENTED IN ACCORDANCE WITH ARTICLE 3 OF
                  THE COUNCIL DECISION 89/683/EEC
                         OF 21 DECEMBER 1989
       (Application of a measure derogating from Article 2
            of the sixth Directive (77/388/EEC) on the
          harmonization of the laws of the Member States
 relating to turnover taxes - Common system of value added tax)
                            Proposal for a
                           COUNCIL DECISION
   authorizing the French Republic to extend the application
          of a measure derogating from Article 2 of the
       sixth Council Directive (77/388/EEC) of 17 May 1977
                on the harmonization of the laws of
           the Member States relating to turnover taxes
                    (presented by the Commission)
 ---pagebreak---                                >Cc^
                COMMISSION REPORT TO THE COUNCIL
           PRESENTED IN ACCORDANCE WITH ARTICLE 3 OF
                 THE COUNCIL DECISION 89/683/EEC
                       OF 21 DECEMBER 1989
      (Application of a measure derogating from Article 2
          Of the sixth Directive (77/388/EEC) on the
        harmonization of the laws of the Member States
relating to turnover taxes - Common system of value added tax)
 ---pagebreak---                                     - 2 -
                               I. INTRODUCTION
Bv Council Decision 89/683/EEC of 21 December 1989, France was authorized,
on the basis of Article 27 of the sixth VAT Directive and following the
entry into force of the eighteenth VAT Directive, to introduce special VAT
arrangements derogating from the sixth Directive in respect of taxable
transactions involving fresh industrial waste and récupérable material.
Pursuant to Article 1 of that Decision, the authorization expires on
31 December 1992.
In addition, Article 3 of the Decision stipulates that the Commission is to
present to the Council, prior to the date of expiry of the derogation, a
report on its application, accompanied, where appropriate, by a proposal for
a Council Decision providing for its extension.
The purpose of the present report is, therefore, to give an account of the
application of that derogation and to examine the request for an extension
of that derogation submitted by the French Republic by letter registered by
the Secretariat-General of the Commission on 22 October 1992.
                      II. APPLICATION OF THE DEROGATION
1.  Background
    By virtue of Article 1(2)(a) of the eighteenth VAT Directive, France was
    obliged to abolish with effect from 1 January 1990 the derogation it
    applied on a transitional basis to supplies of récupérable material and
    fresh industrial waste pursuant to Article 28(3)(b) of the sixth
    Directive, read in conjunction with point 20 of Annex F.
    However, point 4 ("Re Article 2, point F20") in the minutes adopting the
    eighteenth Directive contains the following declaration:
    "The Council and the Commission agree that they will consider with an
    open mind a request from France, on the basis of Article 27(1) to (4) of
    Directive 77/388/EEC, concerning a derogation based on the following
    principle:
1   OJ No L 398, 30.12.1989.
2   Council document 6016/89, Annex II, p. 8.
 ---pagebreak---                                      - 3 -
       Sales, commission and brokerage operations relating to fresh
       industrial waste and récupérable material shall be subject to value
       added tax on the authorization of the competent tax authority.
       This authorization may be subject, inter alia, to the following
       conditions: permanent installation, adequate annual turnover, the
       possible provision of a sufficient security*"
   At the time, the taxation of transactions involving fresh industrial
   waste and récupérable material were liable to give rise to substantial
   fraud, particularly in the "metal materials" sector.             Such fraud
   consists in the issuing of false invoices designed to transfer a
   notional entitlement to tax deduction ("taxis") or in the invoicing of
   taxes never paid to the Treasury. In both cases, the revenue losses for
   the Treasury are considerable, with the waste-recovery sector in France
   having a total turnover of some FF 18 billion in 1989, a figure which
   this year will rise to FF 25 billion, and this for IS million tonnes of
   recovered product and 5 000 waste-recovery firms.
2. Entry into force in France
   The derogation was transposed into national law by Article 33 of
   Law No 90-1168     of   29 December 1990     (1991   Finance    Law), with
   Articles 260, 261, 277, 273, 256, 290 and 1784 of the French General Tax
   Code being amended.
   Administrative Instruction 3-A-1-91 of 27 December 1990, which was
   published in Official Tax Gazette No 9 of 14 January 1991 (Series 3 CA),
   contains a commentary on the provisions of national law arising from the
   derogation. Those provisions entered into force on 1 January 1991.
3. pjjPQfflrHPP of tfre special arrangements, introduced, jn France u^der cover
   of the derogation
   The arrangements consist of the following three provisions:
   3.1 Automatic taxation of supplies in respect of fresh industrial waste
       or récupérable material made by firms that satisfy the following two
       conditions simultaneously:
       - existence of a permanent establishment
          and
 ---pagebreak---                                    - 4 -
       - turnover, exclusive of taxes,       in respect of fresh industrial
         waste or récupérable material of not less than FF 6 million in the
         previous calendar year.
   3.2 A "limited" exemption applicable in the case in point solely to
       supplies of fresh industrial waste and récupérable material made by
       firms:
       - which either do not have a permanent establishment
       - or which, although they have a permanent establishment, have
         achieved in the previous year a turnover figure, exclusive of tax,
         in respect of such supplies of less than FF 6 million.
       This exemption carries an option for taxation, subject to
       authorization, that is available only to firms with a total annual
       turnover, inclusive of all taxes, of more than FF 500 000. In other
       words, the exemption is compulsory only for firms with an annual
       total turnover, inclusive of all taxes, of less than FF 500 000.
   3.3 Compulsory suspension of payment of VAT in respect of supplies to
       taxable persons of fresh industrial waste and récupérable material
       in the form of non-ferrous metals and their alloys where these
       supplies attract tax automatically or subject to authorisation, i.e.
       where they cannot be exempted.
       Firms in the sector which make supplies under a suspension
       arrangement are not entitled to invoice VAT but, instead, they
       retain their entitlement to tax deduction, such entitlement being
       exercised by way of imputation where they carry out taxable
       transactions or by way of refund.
       In addition, all imports of fresh industrial waste and récupérable
       material are exempt from VAT.
       Commission operations in respect of fresh industrial waste or
       récupérable material rank as supplies of goods, unlike brokerage
       operations, which, as a result, are not covered by the derogation.
4. Position of the    French  admj.n4stratj.0n  op  the application 9*. , tftf
   fljgoqfrUpn,
   The French administration has made the following observations!
 ---pagebreak---                                 - 5 -
"1. The waste-recovery sector in France has a turnover          of some
    FF 25 billion, of which over a third is accounted for by    exports,
    and this for a total of 15 million tonnes of recovered      product.
    Some 5 000 firms are engaged in waste-recovery operations   as their
    main activity.
    Half of the firms in this sector are small firms with an annual
    turnover of less than FF 500 000.     They account for some 10% of
    total turnover in the sector.
    These firms differ very widely in nature (specialized small firms,
    charitable organizations, migrants, etc.), and the exemption in
    respect of supplies of fresh industrial waste or récupérable
    material made by them is quite consistent with the dual objective of
    simplification and repression of fraud, which led to the
    introduction of the arrangements provided for by the derogation.
    The other firms, which are firms with an annual turnover exceeding
    FF 500 000 and should, therefore, attract VAT automatically or on
    authorization, account for 90% of total turnover in the sector.
    Of the latter firms, some 60% are taxable automatically and account
    for over two thirds of turnover in this category.
    The remaining firms in this category, which are liable to attract
    VAT subject to authorization, are those that do not have a permanent
    establishment or generate a turnover of between FF 500 000 and
    FF 6 million.
    Of those firms without a permanent establishment, a relatively low
    percentage (some 8%) have a turnover of more than FF 6 million.
    Over half of the firms liable to attract VAT subject to
     authorization have, at their request, been authorized to charge VAT
    on their supplies of fresh industrial waste and récupérable
    material. Very few requests for authorization are rejected.
    Authorization may be conditional on the provision by the firm
     seeking authorization of good security. However, in 80% of cases,
     firms show themselves to be sufficiently solvent and are not
     required to provide any security.
     Lastly, the VAT-suspension arrangement for fresh industrial waste
     and récupérable material in the form of non-ferrous metals is a
     useful complement to the system since the high value of such metals
     increases the risks of fraud.
 ---pagebreak---                                     - 6 -
    2.  Analysis of tax control statistics reveals that the firms in the
        sector that attract VAT present a lower-than-average risk of fraud
        as compared with other firms in France.
        Moreover, if the average size of adjustments generally increases
        with firm size, it does so much less rapidly in the case of firms in
        this sector.
        Lastly, the reasons for carrying out adjustments have more to do
        with errors in applying the tax rules (unjustified deductions) than
        with fraud proper (concealment of, or failure to report, taxable
        transactions).
        This situation stems from the VAT arrangements applicable to firms
        in the sector and to the increased supervision by the administration
        authorized under the arrangements.
    3.  No particular difficulties have been encountered in administering
        the arrangements applicable to these firms (monitoring by the tax
        authorities of authorizations granted and securities provided).
        Furthermore, the firms have welcomed the arrangements and are
        appreciative of them since, among other things, they safeguard
        against the risks to which they might be exposed as a result of
        fraudulent practices on the part of certain firms and for the
        consequences of which they might be liable vis-à-vis the
        administration."
                III. REQUEST FOR EXTENSION OF THE DEROGATION
France is seeking an extension in full of the derogation for the entire
transitional period defined in Article 281 of the sixth Directive, as
amended by Directive 91/680/EEC of 16 December 1991 with a view to the
abolition of fiscal frontiers.
It would also like to see the exemption currently applicable to all imports
of fresh industrial waste and récupérable material being applied as from
1 January 1993 both to imports and to intra-Community acquisitions of such
products.
 ---pagebreak---                                     - 7 -
                 IV. OPINION OF THE COMMISSION DEPARTMENTS
1. Application of the derogation by France
   The transposition of Article 1 of the Council Decision calls for the
   following observations:
       It is not stipulated in the legal instrument amending Article 261-3-
       2 of the French General Tax Code that the exemption which is
       applicable in any event:
       * to firms whose annual turnover is less than FF 500 000
       * to firms not qualifying for the arrangements governing taxation
         subject to authorization
       is limited over time and valid only until 31 December 1992.
       Only Article 260F of the French General Tax Code, which deals with
       the authorization for taxation, expressly stipulates that such
       taxation subject to authorization is valid until 31 December 1992.
       However, it should be   pointed out that the administrative comments
       restore the limitation  over time applicable to the limited exemption
       arrangements provided    for in the Council Decision (see point 1,
       second subparagraph of  Instruction 3-A-1-91);
   -   Only firms in the sector with a turnover, inclusive of all taxes, of
       between FF 500 000 and FF 6 million may be authorized to pay VAT,
       that is to say, to invoice it and, in so doing, to transfer an
       entitlement to tax deduction. These provisions are consistent with
       Article 1 of the Council Decision; they result from the combined
       provisions of the first indent of that Article. Accordingly, and
       this was the very purpose of the derogation, small firms necessarily
       remain exempt since, in the past, it was basically small waste-
       recovery operators that perpetrated fraud by using "taxi" systems.
       It should also be pointed out that the authorization to tax is
       generally granted only to firms which beforehand provide a security
       which, jointly and severally with the firm, must undertake to pay to
       the tax authorities the VAT invoiced in respect of transactions
       carried out during the period covered by the authorization.
 ---pagebreak---                                   - 8 -
       Although there is no express provision to that effect in Article 1
       of the Council Decision, the third recital to that Decision
       stipulates that the authorization procedure "may involve the
       provision of a guarantee";
   -   The examination made by the Commission departments has confirmed
       that supplies of fresh industrial waste and récupérable material
       which are exempt from VAT are not included in the numerator of the
       general deductible proportion in cases where the firm in the sector
       under consideration is a taxable person entitled to deduct tax in
       part. However, it would seem that such supplies, where made by the
       manufacturer himself and involving waste produced on his own
       premises, may be included in both the numerator and the denominator
       of the deductible portion, something which, at first sight, is
       contrary to the general principles of VAT.           The Commission
       departments would, therefore, ask the French authorities to adapt,
       as appropriate the applicable provisions in this context.
2. Case for extending the temporary derogation granted to France
   The Commission departments would note that the transitional period
   provided for in Article 281 of the sixth VAT Directive, as amended with
   a view to the abolition of fiscal frontiers, will not necessarily end on
   31 December 1996. Since the derogation which the French Republic is now
   seeking to extend was initially granted for a period of two years, the
   Commission departments propose that it be extended for a further period
   of four years, so that it will expire on a definite date set in advance,
   namely 31 December 1996. This will make it possible, in particular, to
   ascertain whether extension of the exemption to the new category of
   intra-Community acquisitions is giving rise to any specific difficulties
   or fraudulent practices.
 ---pagebreak---                       Proposal for a
                     COUNCIL DECISION
             authorizing the French Republic
         to extend the application of a measure
derogating from Article 2 of the sixth Council Directive
               (77/388/EEC) of 17 May 1977
            on the harmonization of the laws
            of the Member States relating to
                      turnover taxes
              (presented by the Commission)
 ---pagebreak---                           EXPLANATORY MEMORANDUM
1. By letter registered by the Secretariat-General of the Commission on
   22 October 1992, the Government of the French Republic requested an
   extension of the derogation previously granted to it for a limited
   period by Council Decision 89/683/EEC of 21 December 1989.          That
   Decision, which was based on Article 27 of the sixth VAT Directive,
   authorizes France to introduce special VAT arrangements in respect of
   fresh industrial waste and récupérable material.      The authorization
   expires on 31 December 1992.
2. Article 3 of the Decision stipulates that, in the light of a report from
   the Commission on the application by France of that Decision, the
   Council may, on the basis of a proposal from the Commission, decide
   before 31 December 1992 that the authorization is to be extended.
3. The report presented by the Commission on the application of that
   Decision over the period 1991-92 finds that the provisions of the
   Decision should be extended until 31 December 1996. The Commission will
   have to present to the Council before that date a new report on the
   application of the authorization in question, in particular with a view
   to ascertaining whether extension of the authorization to the new
   taxable category of intra-Community acquisitions is giving rise to any
   specific difficulties or fraudulent practices.
4. In accordance with Article 27(3) of the sixth VAT Directive, the other
   Member States were informed of the French request by letter dated
   20 November 1992.
 1  OJ No L 398, 30.12.1989.
 2  OJ No L 145, 13.6.1977.
 ---pagebreak---                                        M-
                                    Proposal
                                      for a
                                Council Decision
                 authorizing the French Republic to extend the
              application of a measure derogating from Article 2
         of the sixth Council Directive (77/388/EEC) of 17 May 1977
            on the harmonization of the laws of the Member States
                           relating to turnover taxes
THE COUNCIL OF THE EUROPEAN COMMUNITIES,
Having regard to the Treaty establishing the European Economic Community,
Having regard to the sixth Council Directive (77/388/EEC) of 17 May 1977 on
the harmonization of the laws of the Member States relating to turnover
taxes - Common system of value added tax: uniform basis of assessment, and
in particular Article 27 thereof,
Having regard to Council Decision 89/683/EEC of 21 December 1989,
Having regard to the Commission report on            the  application of the
aforementioned Decision over the period 1991-92,
Having regard to the ensuing Commission proposal,
Whereas, under Article 27(1) of the sixth VAT Directive, the Council, acting
unanimously on a proposal from the Commission, may authorize any
Member State to introduce or extend 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;
Whereas the Commission report on the application of the said derogation over
the period     1991-92 has demonstrated       the   latter's usefulness and
effectiveness in the waste-recovery sector, which is particularly vulnerable
to fraud;
Whereas the said report finds that there is no reason to oppose extension of
the derogation provided that the derogation is clearly limited over time and
expires in the short term;
1   OJ No L 145, 13.6.1977.
2   OJ No.L 398, 30.12.1989
 ---pagebreak---                                       -I*-
Whereas the other Member States were informed on 20 November 1992 of the
request from the French Republic,
HAS ADOPTED THIS DECISION:
                                    Article 1
                           ..fe.. •
By way of derogation from Article 2 of the sixth Directive (77/388/EEC), the
French Republic is hereby authorized, until 31 December 1996 and in respect
of fresh industrial waste and récupérable material, to exempt from value
added tax (hereinafter referred to as "VAT"):
    on the one hand, supplies made by:
        undertakings whose annual turnover is less than FF 500 000,
    -•  undertakings which do not have a permanent establishment or which,
        although they have a permanent establishment, have achieved in the
        previous year a turnover figure in respect of such products of less
        than FF 6 million, unless they are authorized to subject such
        transactions to VAT,
-   on the other hand, imports and intra-Community acquisitions.
                                    Article 2
By way of derogation from Article 10(2) of the sixth Directive (77/388/EEC),
the French Republic is hereby authorized until 31 December 1996 to introduce
in respect of supplies to taxable persons of fresh industrial waste and
récupérable material in the form of non-ferrous metals and their alloys,
where these supplies are not exempt from VAT on the basis of Article 1,
arrangements suspending payment of the tax relating to these transactions.
The taxable persons receiving these supplies shall pay the tax on them where
these products are intended neither for the export as such nor for the
manufacture or resale as such of products liable to VAT.
 ---pagebreak---                                    -g -
                                 Article 3
In the light of a report from the Commission on the application of the
authorization referred to in Articles 1 and 2, accompanied, where
appropriate, by a proposal for a Decision extending the said authorization,
the Council, acting on the basis of that proposal, shall decide, before
1 January 1995, whether the said authorization is to be extended.
                                 Article 4
This Decision is addressed to the French Republic.
Done at Brussels,
                                                For the Council
                                                The President
 ---pagebreak---                                                Il
                                                                     ISSN 0254-1475
                                                              COM (92) 582 final
                                                      DOCUMENTS
EN                                                                              09
                                Catalogue number : CB-CO-92-617-EN-C
                                                             ISBN 92-77-51303-9
Office for Official Publications of the European Communities
L-2985 Luxembourg