CELEX: 51992PC0591
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 17(2) of the sixth Directive 77/388/EEC on the harmonization of the laws of the Member States relating to turnover taxes

COMMISSION OF THE EUROPEAN COMMUNITIES
                                           C0M(92) 591 final
                                           Brussels, 22 December 1992
            REPORT FROM THE COMMISSION TO THE COUNCIL
              PRESENTED IN ACCORDANCE WITH ARTICLE 2
                OF THE COUNCIL DECISION 89/488/EEC
                           OF 28 JULY 1989
            (Application of a measure derogating from
         Article 17(2) of the sixth Directive 77/388/EEC
      on the harmonization of the laws of the Member States
                    relating to turnover taxes)
                            Proposal for a
                          COUNCIL DECISION
          authorizing the French Republic to extend the
     application of a measure derogating from Article 17(2)
     of the sixth Directive 77/388/EEC on the harmonization
                 of the laws of the Member States
                     relating to turnover taxes
                   (presented by the Commission)
 ---pagebreak---                      -4 -
      REPORT FROM THE COMMISSION TO THE COUNCIL
        PRESENTED IN ACCORDANCE WITH ARTICLE 2
          OF THE COUNCIL DECISION 89/488/EEC
                    OF 28 JULY 1989
      (Application of a measure derogating from
   Article 17(2) of the sixth Directive 77/388/EEC
on the harmonization of the laws of the Member States
              relating to turnover taxes)
 ---pagebreak---                                  ~>l^o -
                               !• INTRODUCTION
By Council Decision 89/48Ç/EEC of 28 July 1989,* the French Republic was
authorized on the basis of Article 27 of the sixth VAT Directive, still in
force, to derogate from Article 17(2) of the sixth VAT Directive.
The derogation consists in excluding altogether from the right to deduct VAT
previously charged expenditure in respect of goods and services in cases
where private use of those goods and services accounts for more than 90% of
their total use.
The Council Decision authorizes application      of that derogation until
31 December 1992. Article 2 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, if appropriate, by     a proposal for a Council
Decision authorizing its extension.
The purpose of the present report is to give an account of the application
of the derogation and to examine the application for an extension submitted
by the French Republic by letter registered by the Secretariat-General of
the Commission on 22 October 1992.
                      **• APPLICATION OF THE DEROGATION
1.  Background
    On 3 February 1989 the French Council of State, in the "Alitalia" case,
    gave a condemnatory ruling in respect of Article 230-1 of Annex II to
    the French General Tax Code, which excluded from the right to deduct VAT
    previously charged expenditure on goods and          services not used
    exclusively for the purposes of the taxable person's business.
    By that ruling, and in accordance with Community law, exclusive use
    ceased to be one of the conditions governing the right to deduct VAT in
    France. From now on, where goods and services are used partly for non-
    business purposes, tax is deducted in full but, instead, private use of
    goods or services is taxed on the basis of Article 6(2) of the sixth
    Directive.
    OJ No L 239, 16.8.1989.
 ---pagebreak---                                    - 2 -
   In the interests of simplification, the French Republic has requested
   authorization from the Council to continue on a temporary basis to
   exclude from the right to deduct VAT previously charged on expenditure
   on goods and services in cases where private use of those goods and
   services accounts for more than 90% of their total use.           Such a
   provision is designed to avoid having to tax self-services, something
   which would raise difficulties since the taxable amount would be based
   on an assessment of the value of self-supplies resulting from the
   private use of the goods.
2. Entry into force in France
   Articles 1, 3 and 5 of Decree No 89-885 of 14 December 1989, published
   in the Official Journal of the French Republic of 15 December 1989
   (p. 15578), transpose the Council Decision into national law.         The
   Decree entered into force in Paris on 17 December 1989 and in the
   provinces, in principle, on 18 December 1989. It gave rise inter alia
   to new Article 230-1 of the General Tax Code and was the subject of an
   Administrative Instruction of 21 February 1990, published         in the
   Official   Tax  Gazette   (ref.   3 D-3-90) and      registered  in the
   administrative documentation under reference 3-D-1512 (updated on
   1 May 1990).
3. Quantitative assessment of private use (threshold of 90%)
   The quantitative assessment is based on the following:
   -   nature of the goods or services;
       function of the goods or services;
   -   possible use of the goods or services        in   the business  under
       consideration;
   -   apportionment of the periods of use of the   goods or services under
       consideration in terms of the calendar year  or as a fraction of the
       calendar year in cases where possible total   use can, in any event,
       be only seasonal (e.g. pleasure boats).
4. Practical application of the derogation in France
   The derogation in question is applied in the following circumstances:
       Purchases by a business of goods and services that are to be made
       immediately available to, or used in connection with the main
       activity of the business by, the head of the business, the managers,
       the staff or a third party: in this case, exclusion from the right
       to deduct tax is automatic.
 ---pagebreak---                                   - 3 -
       Examples
       . Purchase or leasing of a video camera for the use of the manager,
         with the camera being used exceptionally for in-house vocational
         training purposes;
       . Pleasure vessel used essentially for private purposes but rented
         out for one week of each year.
       Purchase of goods and services that are normally used for the
       purposes of the business but which, after being used for one year,
       are found to have been used for private purposes to the extent of
       more than 90% of their total use:     In this case, after the first
       year of use, the business will have to make an adjustment in respect
       of the VAT initially deducted.      The adjustment will consist in
       payment of all the tax deducted.
       Where the circumstances referred to above are discovered during the
       adjustment period provided for in Article 20(2) of the sixth
       Directive, tax is paid in respect of the years of the adjustment
       period that have elapsed.     It will, therefore, be equal to the
       amount of the previous deduction less one fifth (movable property)
       or one tenth (immovable property) for each year that has elapsed.
5. Special case of local authorities (non-taxable institutional     persons
   within the meaning of Article 4(5) of the sixth Directive)
   In this case, the use of goods and services for the purposes of an
   activity falling outside the scope of VAT is regarded by France as
   corresponding to private use.
   Example
       Computer used simultaneousy by a municipality for the purposes of
       taxable transactions and for the purposes of non-taxable services
       supplied by it in connection with civil status and social
       assistance.
       In addition, the French administration has informed its departments
       that, in any event, in the interests of simplification, there is no
       reason to call into question the situation of local authorities
       which, in cases where a capital good is used for both non-taxable
       and taxable transactions, consider that use in respect of the former
       accounts for more than 90% of their total use even where this is not
       actually the case.
 ---pagebreak---                                      - 4 -
6. Position of the French administration on the application of
    the derogation
    The French administration takes the view that the derogation has
    simplified administration of the tax, both for itself and for the
    businesses concerned.     Moreover, as far as it is aware, no dispute
    regarding application of the derogation has arisen between itself and
    the businesses concerned.     Until recently, the derogation had, in any
    event, been applied only in a very few, marginal cases not caught by the
    statistics.
           III.  APPLICATION FOR AN EXTENSION OF THE AUTHORIZATION
In this connection, the French Republic points out that the derogation in
question might be applied more often in future in view of the fact that,
since 1991, a number of liberal professions            (lawyers, solicitors,
translators, interpreters, sports people, authors and artists) have carried
out transactions that are taxed and no longer exempt.
Now, such professionals, given the liberal nature of their activities,
commonly use goods forming part of their business for their own private
purposes (e.g. mixed-use apartment, computer, or even photographic or hi-fi
equipment in the case of a performing artist).     If the derogation did not
apply, such private use would require supervision by the tax authorities of
such equipment throughout its useful life and, in any case, taxation of the
self-supplies resulting from such private use. Calculation of the taxable
amount for such supplies would not be straightforward and it would be no
easy matter convincing the person liable to pay tax that the taxable amount
had   been    calculated    correctly    since,   in    such   circumstances,
Article 11(A)(1)(c) of the sixth Directive stipulates that the taxable
amount is the full cost to the taxable person of the self-supplies
corresponding to the private use of the business asset (e.g. in the case of
a car, purchase, fuel, repairs, maintenance, etc.).
                  IV.  OPINION OF THE COMMISSION DEPARTMENTS
1.  Case for extending the derogation
    Since the derogation in question is designed to avoid "consumption
    without taxation", the Commission departments take the view that it is
    justified.
 ---pagebreak---                                     - 5 -
    However, they are also aware of the fact that, from a financial
    viewpoint (in terms of a cash-flow benefit), taxation of the use for
    private purposes of goods or services is more favourable for the person
    liable to pay tax than is automatic exclusion of the right to deduct VAT
    previously charged.   However, in cases where private use accounts for
    more than 90% of total use, the cash-flow benefit is not justified since
    the business makes virtually no use of the goods or services in
    question.
2. Period covered by the derogation
    The Commission departments take the view that a definite expiry date
    should be set for the derogation so that an assessment can be made
    notably in the light of the progress in Community work on the proposal
    for a twelfth. VAT Directive and in the light of the actual application
    of the derogation. Bearing in mind the observations set out below, the
    derogation could, therefore, be extended on a temporary basis until
    adoption of the twelfth VAT Directive if that takes place by
    31 December 1996. If the twelfth VAT Directive were not adopted by that
    date, the derogation would, in any event, expire on 31 December 1996.
3. Application of the derogation in France
    1.1 Application of the derogation to local authorities calls for the
        following observations and questions from the Commission:
                France has been authorized to exclude "expenditure in
                respect of goods and services in cases where private use of
                those goods and services accounts for more than 90% of their
                total use" from the right to deduct value added tax
                previously charged.
                The Commission departments consider that partial use of
                goods by a local authority for activities; falling outside
                the scope of VAT pursuant to Article 4(5) of the sixth
                Directive could not be regarded as giving rise to private
                use within the meaning of Article 6(2) of the sixth
                Directive. Nor do such cases involve use for purposes other
                than those of the local authority since the very purpose of
                 local authorities is to carry out transactions as public
                authorities.
                A local authority should, in fact, be regarded as using the
                goods in question partly for the purposes of a "non-taxable
                transaction".
 ---pagebreak---                                 - 6 -
            The Commission departments would note that, from a strictly
            legal viewpoint, the sixth Directive provides for an option
            to tax only in respect of "the application of goods by a
            taxable   person   for   the   purposes  of   a   non-taxable
            transaction", that is to say, in the case in point, where
            self-supplies of goods take place. Where goods are used for
            the   purposes    of   a     non-taxable  transaction,    the
            sixth Directive does not introduce on either an optional or
            a compulsory basis any arrangement "parallel" to that
            provided for in Article 5(7) (b) with a view to bringing a
            self-supply of services within the scope of VAT.
            In such cases, however, there is no denying that local
            authorities must be treated in the same way as fully taxable
            persons and that, where they use goods or services partly
            for the purposes of a non-taxable transaction, such use
            should be taxed if VAT previously charged on those goods and
            services was deductible.         For this to happen, the
            Member States should agree to treat such use as use for
            purposes other than those of the business within the meaning
            of Article 6(2) of the sixth Directive.       Such treatment
            could be the subject of a decision by the VAT Committee.
            Accordingly, the Commission departments propose that the
            legal arrangements for the derogation granted to France
            should be adjusted in such a way as to duly establish that
            it applies to the type of use in question here.        France
            would then be authorized to "exclude expenditure in respect
            of goods and services in cases where use of those goods and
            services for the purposes of a non-taxable transaction
            accounts for more than 90% of their total use from the right
            to deduct value added tax previously charged".
1.2 More generally, the Commission departments would note that France
    makes extensive use of the derogation in that it applies it as soon
    as use for non-business purposes accounts for more than 90% of total
    use.    Now, Article 1 of the Council Decision introducing the
    derogation is concerned solely with those cases where private use
    accounts for more than 90% of total use. As a result, uses other
    than those for the private purposes of the taxable person or his
    staff are not expressly concerned by the derogation.     Among other
    things, private use by a third party is not covered.
    In this respect, the Commission departments, which would like to
    observe the neutrality of VAT and take the view that any consumption
    without taxation should be avoided, propose that the legal
    arrangements for the derogation be improved by restoring a parallel
    with Article 6(2) of the sixth Directive, which, in the absence of
    any derogation, should be applied in its entirety. Accordingly, the
    derogation could apply in all cases where goods are, in any event,
    used for purposes other than those of the business.
 ---pagebreak---                         3
                     Proposal for a
                    COUNCIL DECISION
     authorizing the French Republic to extend the
application of a measure derogating from Article 17(2)
of the sixth Directive 77/388/EEC on the harmonization
           of the laws of the Member States
               relating to turnover taxes
 ---pagebreak---                                      £
                            EXPLANATORY MEMORANDUM
1.   By letter registered by the Secretariat-General of the Commission on
     22 October 1992, the Government of the French Republic submitted a
     request for an extension of the derogation previously granted to it for
     a limited period by Council Decision 89/488/EEC of 28 July 1989, which
    was based on Article 27 of the sixth VAT Directive with a view to
     avoiding tax evasion and avoidance.
                                                                   2
     This derogation from Article 17(2) of the sixth VAT Directive consists
     in excluding altogether from the right to deduct VAT previously charged
     expenditure in respect of goods and services in cases where private use
     of those goods and services accounts for more than 90% of their total
     use.
2.   The Council Decision authorizes application of that derogation until
     31 December 1992.    Article 2 stipulates that the Commission is to
     present to the Council, prior to the date of expiry of the derogation, a
     report   on  the   application  of   the derogation,    accompanied, if
     appropriate, by a proposal for a Council Decision authorizing its
     extension.
3. In support of its request, the Government of the French Republic points
out that the derogation in question will probably have to be applied more
often in future in view of the fact that, since 1991, a number of liberal
professions (lawyers, solicitors, translators, interpreters, sports people,
authors and artists) have been carrying out, on the basis of the eighteenth
VAT Directive, operations that are taxed and no longer exempt, with such
individuals, on account of the liberal nature of their profession, using
goods forming part of the assets of their business for their own private
use.    If the derogation did not exist, such private use would necessitate
surveillance by the tax authorities of such goods throughout their useful
life and, in any case, the taxation of self-supplies resulting from such
private use. Calculation of the taxable amount for such supplies would not
be straightforward and it would be no easy matter convincing the person
liable to pay the tax that the taxable amount had been calculated correctly.
1    OJ No L 239, 16.8.1989.
2    OJ No L 145, 13.6.19^7.
3    OJ No L 226, 3.8.1989.
 ---pagebreak---                                    9
   Under such circumstances, it is advisable to withhold any entitlement to
   tax deduction rather than to tax self-supplies, notably with a view to
   preventing tax evasion and avoidance, which have hitherto been so easy
   to perpetrate.
   However, the Commission report on the application of the derogation over
   the period 1990-92 showed that the legal arrangements for the derogation
   should be adapted so as to ensure that they cover local authorities and
   all possible types of use for purposes other than those of the business.
   The Commission proposal for a Decision also sets a definite date for the
   expiry of the derogation so that a new assessment of its application can
   be made in four years' time.
4. The Commission informed the other Member States by         letter  dated
   20 November 1992 of the French request for an extension.
 ---pagebreak---                                   ^o
                                 Proposal for a
                                COUNCIL DECISION
          authorizing the French Republic to extend the application
                   of a measure derogating from Article 17(2)
                      of the sixth Directive (77/388/EEC)
             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 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, as last
amended by the Council Directive of 16 December 1991 with a view to the
          •*                    2
abolition of fiscal frontiers,
Having regard to the proposal from the Commission consequent upon its report
on the application by the French Republic of Council Decision 89/488/EEC of
28 July 1989,
Whereas, under Article 27(1) of the sixth Directive, the Council, acting
unanimously on a proposal         from the Commission, may authorize any
Member State to introduce special measures for derogation from that
Directive, in order to simplify the procedure for charging tax or to prevent
certain types of tax evasion or avoidance;
1   OJ No L 145, 13.6.1977, p. 1.
2   OJ No L 376, 31.12.1991, p. 1.
 ---pagebreak---                                11
Whereas, by letter registered by the Secretariat-General of the Commission
on 22 October 1992, the French Republic requested authorization to extend
application of the derogation previously granted to it for a limited period
by Council Decision 89/488/EEC of 28 July 19893 on the basis of Article 27
of the sixth Directive;
Whereas the said measure consists in excluding altogether from the right to
deduct VAT previously charged expenditure in respect of goods and services
in cases where private use of such goods and services accounts for more than
90% of their total use, in order to refrain from taxing self-supplies the
taxable amount of which is particularly difficult to establish under those
circumstances ;
Whereas, moreover, the said measure makes it possible to prevent certain
types of tax evasion or avoidance and, in any event, combats certain forms
of consumption without taxation while, at the same time, simplifying the VAT
treatment of certain transactions;
Whereas the said measure constitutes a derogation from Article 17(2) of the
sixth Directive, whereby a taxable person is entitled to deduct the tax
charged on goods and services used by him in so far as those goods and
services are used for the purposes of his taxable transactions;
Whereas the said measure also constitutes, as demonstrated in the Commission
report on its application over the period 1990-92, a derogation from
Article 6(2) of the sixth Directive, whereby the use of goods forming part
of the assets of a business for the private use of the taxable person or of
his staff or, more generally, for purposes other than those of his business
where the value added tax on such goods is wholly or partly deductible must
be treated as a supply of services for consideration;
Whereas the request for an extension of the said measure can be accepted
subject to certain conditions and adjustments to its legal arrangements in
accordance with the observations made by the Commission in respect of its
application over the period 1990-92;
    OJ No L 239, 16.8.1989.
 ---pagebreak--- Whereas, without a new authorization from the Council based on a proposal
from the Commission, the said measure          cannot be extended beyond
31 December 1996, by which time the Commission is to present a report on its
application to the Council;
Whereas the temporary extension of the said derogation will not a priori
affect the amount of tax due at the final consumption stage, taking into
account Article 11(A)(1)(b) of the sixth Directive, which defines the
taxable amount for self-services caught by Article 6(2) of that Directive;
Whereas, moreover, it will not a priori have a negative effect on the
European Communities' own resources accruing from value added tax;
Whereas the other Member States were informed on 20 November 1992 of the
request for an extension of the said derogation submitted by the Government
of the French Republic,
HAS ADOPTED THIS DECISION:
                                  Article 1
By way of derogation from Articles 6(2) and 17(2) of the sixth Council
Directive (77/388/EEC), as last amended by Directive 91/680/EEC, the French
Republic is hereby authorized until 31 December 1996 to exclude expenditure
in respect of goods and services in eases where use of such goods and
services for the private use of the taxable person or of his staff or, more
generally, for purposes other than those of his business account for more
than 90% of their total use from the right to deduct value added tax
 ---pagebreak---                                    43
previously charged.   Similarly, the French Republic is hereby authorized
until 31 December 1996 to exclude expenditure in respect of goods and
services in cases where use of those goods and services for the purposes of
a non-taxable transaction accounts for more than 90% of their total use from
the right to deduct value added tax previously charged.
                                 Article 2
On the basis of a report on the application of the authorizations referred
to in Article 1, accompanied, if appropriate, by a proposal for a Decision,
the Council shall determine on the basis of that proposal before
31 December 1996 whether the said authorizations are to be extended.
                                  Article 3
This Decision is addressed to the French Republic.
Done at Brussels,                               For the Council
                                                The President
 ---pagebreak---  ---pagebreak---                                                                     ISSN 0254-1475
                                                              COM (92) 591 final
                                                     DOCUMENTS
EN                                                                             09
                                Catalogue number : CB-CO-92-618-EN-C
                                                             ISBN 92-77-51312-8
Office for Official Publications of the European Communities
Lr2985 Luxembourg