Sixth VAT Directive: uniform basis of assessment

Outline of the Community (European Union) legislation about Sixth VAT Directive: uniform basis of assessment

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Sixth VAT Directive: uniform basis of assessment

The EU authorities are abolishing tax controls at internal frontiers for all transactions carried out between Member States, approximating the value-added tax (VAT) rates applicable to those transactions and making provision for a transitional phase of limited duration that will ease the transition to the definitive arrangements for the taxation of trade between Member States.

Document or Iniciative

Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value-added tax: uniform basis of assessment. [See amending acts]

Summary

The following text summarises a consolidation of existing Directives in this field.

Scope

VAT is applicable to the supply of goods or services affected for a consideration within the territory of the country by a taxable person acting as such and to the importation of goods.

Territoriality

The following territories of individual Member States are excluded from the scope of the Directive:

• the island of Helgoland and the territory of Büsingen (Germany);
• Greenland (Denmark);
• Livigno, Campione d’Italia, the Italian waters of Lake Lugano (Italy).

Taxable persons

The taxable person is the person who independently carries out in any place one of the following economic activities, whatever the purpose or results: the activities of producers, traders and persons supplying services, including mining and agricultural activities and activities of the professions. Member States may also treat as a taxable person anyone who carries out one of these activities on an occasional basis, and in particular one of the following: the supply before first occupation of buildings or parts of buildings and the land on which they stand; the supply of building land.

The word “independently” excludes employed and other persons from the tax in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee.

States, regional and local government authorities and other bodies governed by public law are not considered taxable persons in respect of the activities or transactions in which they engage as public authorities, except where their not being taxable would lead to distortions of competition of a certain magnitude.

Place of taxable transactions

The place of supply of goods is deemed to be:

• the place where the goods are at the time when dispatch or transport to the person to whom they are supplied begins (in the case of goods that are dispatched or transported);
• the place where the goods are when the supply takes place (in the case of goods not dispatched or transported).

The place where a service is supplied is deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied or, in the absence of such a place of business or fixed establishment, the place where he has his permanent address or usually resides. However,

• the place of the supply of services connected with immovable property, including the services of estate agents and experts such as architects, is the place where the property is situated;
• the place where transport services are supplied is the place where transport takes place, having regard to the distances covered;
• the place of supply of services relating to ancillary transport activities, cultural, sport, scientific or educational activities, as well as valuations of or work on movable tangible property, is the place where the services are physically carried out;
• the place of supply of services in the case of hiring out of movable tangible property, with the exception of all forms of transport, is the place of utilisation;
• the place of supply of the following services is the place where the customer has established his business or has a fixed establishment or, in the absence of such a place, the place where he has his permanent address or usually resides: transfers and assignments of copyrights, advertising services, the services of consultants, engineers, lawyers or accountants; banking, financial and insurance transactions.

In order to avoid double taxation, non-taxation or the distortion of competition the Member States may consider:

• the place of supply of services situated within the territory of the country as being situated outside the Community in cases in which the effective use and enjoyment of the services take place outside the Community;
• the place of supply of services situated outside the Community as being within the territory of the country in cases in which the effective use and enjoyment of the services take place within the territory of the country.

Chargeable event and chargeability of tax

The chargeable event is the occurrence by virtue of which the legal conditions necessary for the tax to become chargeable are fulfilled.

The chargeability of tax is the tax authority’s entitlement under the law at a given moment to claim the tax from the person liable to pay, even if the time of payment may be deferred.

The chargeable event occurs and the tax becomes chargeable when the goods are delivered or the services are performed, with the sole exception of certain specified cases.

For imported goods, the chargeable event occurs and the tax becomes chargeable at the time when goods enter the territory of the country.

Taxable amount

Within the territory of a country, the taxable amount is, according to the type of supply of goods or services:

• everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies, or
• the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined as the time of supply, or
• the full cost to the taxable person of providing the services, or
• the open market value of the services (‘open market value’ of services means the amount which a customer, at the marketing stage at which the supply takes place, would have to pay to a supplier at arm’s length within the territory of the country at the time of the supply under conditions of fair competition to obtain the services in question).

For the importation of goods, the taxable amount is:

• the price paid or to be paid by the importer, where this price is the sole consideration, or
• the open market value of the goods where the price paid or to be paid is not the sole consideration for the imported goods (‘open market value’ of imported goods means the amount which an importer at the marketing stage at which the importation takes place would have to pay to a supplier at arm’s length in the country from which the goods are exported at the time when the tax becomes chargeable under conditions of fair competition to obtain the goods in question).

Rate

These transactions are subject to tax at the rates and under the conditions prevailing in the Member State of destination of the goods or services supplied within the limits of the approximation of rates provided for in the above-mentioned Directives:

• the standard rate of VAT must be at least 15% in each Member State until 31 December 2000;
• one or two reduced rates of at least 5% are authorised for supplies of goods or of services having a social or cultural purpose (Annex H, the scope of which the Council examines every two years);
• rates of 12% or more are authorised for goods and services other than those referred to in Annex H which qualified for a reduced rate on 1 January 1991;
• zero rates and extra-low rates (below 5%) existing on 1 January 1991 may be maintained, in principle, until 1997;
• all increased rates are abolished.

Exemptions

Exemptions are possible within the territory of a country for certain activities of public interest, insurance and reinsurance transactions, the leasing or letting of immovable property (with the exception of the provision of accommodation, the letting of premises and sites for parking vehicles, lettings of permanently installed equipment and machinery, hire of safes), supplies of goods used wholly for an exempted activity, and many other activities such as the granting and negotiation of credit, transactions and negotiations concerning deposit funds, payments, transfers, transactions and negotiations concerning currency, and transactions and negotiations concerning shares, or interests in companies or associations.

Exemptions for imports are also possible, in particular for the final importation of goods of which the supply by a taxable person would in all circumstances be exempted within the country; for importation of goods under a declaration for transit arrangements; for importation of goods declared to be under temporary importation arrangements, which thereby qualify for exemption from customs duties, or which would so qualify if they were imported from a third country; for final importation of goods qualifying for exemption from customs duties other than as provided for in the Common Customs Tariff or which would qualify for exemption if they were imported from a third country. However, Member States have the right not to grant exemption where, for example, it would be liable to have a serious effect on conditions of competition on the home market.

There is also provision for exemptions for export and like transactions and international transport, as well as special exemptions linked to international goods traffic.

Deductions

Origin and scope of the right to deduct: the right to deduct arises at the time when the deductible tax becomes chargeable. In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person is entitled to deduct from the tax which he is liable to pay: value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person; value added tax due or paid in respect of imported goods; value added tax due in respect of;

• goods produced, constructed, extracted, processed, purchased or imported in the course of his business for the purpose of his business, where the value added tax on such goods, had they been acquired from another taxable person, would not be wholly deductible;
• services supplied by his business for the purposes of his business where the value added tax on such a service, had it been supplied by another taxable person, would not be wholly deductible.

Member States must also grant every taxable person the right to the deduction or refund of value added tax in so far as the goods and services are used for the purposes of:

• transactions relating to economic activities carried out in another country which would be eligible for deduction of tax if they had occurred in the territory of the country;
• its exempted transactions;
• any of its exempted transactions where the customer is established outside the Community or when these transactions are directly linked with goods intended to be exported to a country outside the Community.

Rules governing the exercise of the right to deduct: to have the right to exercise the right to deduct, the taxable person must, depending on the case, hold an invoice, hold an import document, specifying him as consignee or importer, and stating or permitting calculation of the amount of tax due, or comply with the formalities established by each Member State.

Persons liable to pay the tax

Under the internal system, VAT may be payable, depending on the case, by:

• taxable persons established abroad who carry out taxable transactions. Where the taxable transaction is effected by a taxable person established abroad, Member States may adopt arrangements whereby tax is payable by someone other than the taxable person residing abroad. Inter alia a tax representative or other person for whom the taxable transaction is carried out may be designated as that other person. The Member States may also provide that someone other than the taxable person is to be held jointly and severally liable for payment of the tax;
• persons to whom services are supplied and carried out by a taxable person resident abroad. However, Member States may require that the supplier of services be held jointly and severally liable for payment of the tax;
• any person who mentions the VAT on an invoice or other document serving as invoice.

On importation, VAT may be payable by the person or persons designated or accepted as being liable by the Member States into which the goods are imported.

The Directive also imposes obligations on these persons liable to pay VAT, both under the internal system and on importation. For instance, all taxable persons must state when their activities as taxable persons commence, change or cease. Every taxable person must keep accounts in sufficient detail to permit application of the value added tax and inspection by the tax authority. These obligations allow VAT to be properly applied.

Special schemes

There are special schemes for:

• small businesses;
• farmers (common flat-rate scheme);
• second-hand goods, works of art, collectors’ items and antiques;
• gold;
• labour-intensive services;
• travel agents.

Under certain conditions Member States may introduce derogations in order to simplify the collection of VAT or prevent certain forms of tax evasion and avoidance.

On 25 June 1997 the Commission proposed setting-up of an Advisory Committee on VAT.

Directive 77/388/EEC has been amended many times. The most recent amendments are.

• Council Directive 2000/17/CE amends Directive 77/388/EEC on the common system of VAT (transitional provisions) authorising the Republic of Austria to apply a reduced rate of VAT to the letting of immovable property for residential use, provided that the rate is not lower than 10%, and the Portuguese Republic to apply a reduced rate to restaurant services, provided that the rate is not lower than 12%.
• Directive 2000/65/EC amends Directive 77/388/EEC as regards the determination of the person liable for payment of VAT. The rules for determining the person liable were a problem for small operators active in several Member States, who might be forced to appoint a tax representative in Community countries other than their home country in which they were supplying goods or services. Given the new legislation on administrative cooperation, which provides for mutual assistance between the Member States, and the need to simplify the common VAT system, the amended Article 21 now makes it optional for taxable persons not established in a country to appoint a tax representative there.
• Council Directive 2001/115/EC amends Directive 77/388/EEC with a view to simplifying, modernising and harmonising the conditions laid down for invoicing in respect of value added tax. It aims to harmonise the conditions laid down for invoicing, in particular by drawing up a list of compulsory entries and by establishing a common legal and technical framework for electronic invoicing. It is also intended to make it possible to benefit from the development of new technologies.
• Directive 2002/38/EC amends the Sixth VAT Directive. It concerns subjecting to VAT certain services supplied by electronic means to non-taxable persons established within the EU by operators outside the EU. A special scheme will be put in place and the country of consumption must ensure that the operators fulfil their obligations. The services concerned include the supply of music, films and games, images, texts, information, software and website hosting.
• Directive 2003/92/EC amends the rules for applying VAT to supplies of gas and electricity in order to facilitate the operation of the internal market. In particular, it is intended to eliminate current problems of double-taxation, non-taxation and distortion of competition between traders. Although the previous rules worked well in a national context, they are no longer suited to the market liberalisation and increasing cross-border supplies of gas and electricity. The new rules therefore provide for: the levying of VAT in the State of supply or consumption of gas and electricity; a compulsory reverse charge mechanism which no longer requires VAT registration when purchasers and suppliers are not established in the same Member State; taxation of the costs of access to and use of distribution networks in the State of establishment of the purchaser.
• Directive 2004/7/EC amends the procedures whereby Member States can introduce measures derogating from the Sixth VAT Directive. It aims to simplify and modernise the procedure by which a Member State may be authorised by the Council, under Articles 27 and 30 of the Sixth VAT Directive, to introduce into its legislation special measures derogating from the provisions of the Directive, either in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance, or in the context of an agreement with a non-member country or an international organisation. For reasons of transparency and legal certainty, the Directive removes the possibility of tacit approval of derogation. Every derogation authorised must now be the subject of an explicit decision adopted by the Council on a proposal from the Commission. It also provides that when a Member State has submitted a request for derogation the Commission informs the requesting State that once it has all the necessary information to evaluate the request it will present to the Council within three months of the Member State’s submission of that information either a proposal for authorisation or a communication setting out its objections. To ensure more uniform application of the common VAT rules, the Directive aims to grant the Council powers of execution enabling it to adopt, on the basis of a Commission proposal, measures guaranteeing the application of those rules.
• Directive 2004/15/EC amends Article 289(6) of the Sixth VAT Directive to extend for two years the authorisation to apply a reduced rate of VAT to labour-intensive services.
• Directive 2004/66/EC amends Directive 77/388/EEC to take account of the accession of 10 new Member States on 1 May 2004.
• Directive 2005/92/EC aims to extend the period of application of the minimum standard rate of VAT (i.e. 15%) for the five years from 1 January 2006 to 31 December 2010.
• Directive 2006/69/EC amends the Sixth VAT Directive to provide Member States with the option of quickly adopting legally sound measures in order to counter avoidance and evasion in certain specific and targeted areas.

References

Act	Entry into force	Deadline for transposition in the Member States	Official Journal
Directive 77/388/EEC	01.01.1978	01.01.1978	OJ L 145 of 13.06.1977

Amending act(s)	Entry into force	Deadline for transposition in the Member States	Official Journal
Directive 80/368/EEC	22.03.1988	22.03.1988	OJ L 90 of 03.04.1980
Regulation (EEC/Euratom) 3308/80	–	–	OJ L 345 of 20.12.1980
Directive 84/386/EEC	01.07.1985	01.07.1985	OJ L 208 of 03.08.1984
Directive 89/465/EEC	24.07.1989	01.01.1990 01.01.1991 01.01.1992 01.01.1993 01.01.1994	OJ L 226 of 03.08.1989
Directive 91/680/EEC	01.01.1993	01.01.1993	OJ L 376 of 31.12.1991
Directive 92/77/EEC	01.01.1993	01.01.1993	OJ L 316 of 31.10.1992
Directive 92/111/EEC	01.01.1993	01.01.1993	OJ L 390 of 31.12.1992
Directive 94/4/EC	1.4.1994, except for derogations	–	OJ L 365 of 31.12.1994
Directive 94/5/EC	01.01.1995	01.01.1995	OJ L 60 of 03.03.1994
Directive 94/76/EC	01.01.1995	01.01.1995	OJ L 365 of 31.12.1994
Directive 95/7/EC	01.01.1996, except for derogations	–	OJ L 102 of 05.05.1995
Directive 96/42/EC	29.07.1996	–	OJ L 170 of 09.07.1996
Directive 98/80/EC	17.10.1998	01.01.2000	OJ L 281 of 17.10.1998.
Directive 1999/49/EC	02.06.1999	31.12.1998	OJ L 139 of 02.06.1999.
Directive 1999/59/EC	26.06.1999	01.01.2000	OJ L 162 of 26.06.1999.
Directive 1999/85/EC	28.10.1999	31.12.2002	OJ L 277 of 28.10.1999.
Directive 2000/17/EC	05.04.2000	–	OJ L 10 of 05.04.2000.
Directive 2000/65/EC	21.10.2000	31.12.2001	OJ L 269 of 21.10.2000.
Directive 2001/4/EC	27.01.2001	–	OJ L 22 of 24.01.2001.
Directive 2001/115/EC	07.02.2002	01.01.2004	OJ L 15 of 17.01.2002.
Directive 2002/38/EC	15.05.2002	–	OJ L 128 of 15.05.2002.
Directive 2002/93/EC	07.12.2002	–	OJ L 260 of 11.10.2003.
Directive 2003/92/EC	11.10.2003	01.01.2005	OJ L 260 of 11.10.2003.
Directive 2004/7/EC	19.02.2004	–	OJ L 27 of 30.01.2004.
Directive 2004/15/EC	10.02.2004	01.01.2004	OJ L 10 of 21.02.2004.
Directive 2004/66/EC	01.05.2004	01.05.2004	OJ L 168 of 01.05.2004.
Directive 2005/92/EC	28.12.2005	01.01.2006	OJ L 345 of 28.12.2005
Directive 2006/18EC	22.02.2006	–	OJ L 51 of 22.02.2006
Directive 2006/69/EC	12.08.2006	–	OJ L 221 of 12.08.2006
Directive 2006/98/EC	1.1.2007	–	OJ L 363 of 20.12.2006

Related Acts

SIMPLIFICATION OF OBLIGATIONS AND REFUNDS

Proposal of 29 October 2004 for a Council Directive amending Directive 77/388/EEC with a view to simplifying value added tax obligations; proposal of 29 October 2004 for a Council Directive laying down detailed rules for the refund of value added tax, provided for in Directive 77/388/EEC, to taxable persons not established in the territory of the country but established in another Member State [COM(2004) 728/1 and /2 – OJ C 24, 29 January 2005]

With a view to simplifying the measures aimed at easing the burden of VAT compliance on taxable persons who have no establishment in the Member State where they are carrying out activities, the Commission proposes six concrete measures via three separate legislative amendments: introduction of the one-stop scheme for non-established taxable persons; introduction of a one-stop scheme to modernise the refund procedure; harmonisation of the scope of the goods and services for which Member States may apply restrictions to the right to deduct; extension of the use of the reverse charge mechanism for certain business-to-business (B2B) transactions carried out by non-established taxable persons; review of the special scheme for small traders; and simplification of the distance selling arrangements.
Consultation procedure (CNS/2004/0261)

PLACE OF APPLICATION OF VAT FOR SUPPLIES OF SERVICES:

Council Regulation No 1777/2005 of 17 October 2005 laying down implementing measures for Directive 77/388/EEC on the common system of value added tax [Official Journal L 288 of 29.10.2005].

This Regulation aims to clarify interpretation and application of common VAT rules. It clarifies key aspects of the Sixth VAT Directive, to wit taxable persons, the place of supply of certain services and rules applicable to electronically supplied services. The objective is to ensure more uniform application of the rules and improve the functioning of the internal market.

Proposal of 23 December 2003 for a Council Directive amending Directive 77/388/EEC as regards the place of supply of services [COM(2003) 822 – Official Journal C 96 of 21.04.2004].

For supplies of services between VAT taxable persons (“business to business”), the Commission proposes applying VAT in the country where the purchaser is established (i.e. the place of consumption) rather than in the supplying country. The modified proposal particularly targets the VAT rules applicable to the supply of certain services to private individuals. The proposed changes are intended to eliminate distortions of competition, both between EU businesses and between EU and third country businesses, which remotely supply services to private individuals. The modified proposal also reduces the administrative burden on businesses as regards VAT by harmonising the rules that are currently applicable to services supplied to businesses and those that are supplied to private individuals.
Consultation procedure ()

ADMINISTRATIVE COOPERATION AND MUTUAL ASSISTANCE IN THE FIELD OF INDIRECT TAXATION:

Proposal of 29 October 2004 for a Council Regulation amending Regulation (EC) No 1798/2003 as regards the introduction of administrative cooperation arrangements in the context of the one-stop scheme and the refund procedure for value added tax [COM(2004) 728/3 – OJ C 24 of 29.1.2005]

The European Commission is proposing a Regulation to simplify current Value Added Tax (VAT) compliance obligations to help cross-border traders who supply goods and services to other EU Member States. In particular the proposal would provide for a “one-stop-shop” system whereby a trader could fulfil all his VAT obligations for EU-wide activities in the Member State in which he is established. This system would allow traders to use a single VAT number for all supplies made throughout the EU and to make VAT declarations to a single electronic portal that would then be submitted automatically to the different Member States to which the trader supplies goods or services. The proposal also contains five other simplification measures.
Consultation procedure (CNS/2004/0262)

Council Directive 2003/93/EC of 7 October 2003 amending Directive 77/799/EEC concerning mutual assistance by the authorities of the Member States in the field of direct and indirect taxation [Official Journal L 264 of 15.10.2003]

This amendment allows Member States to exchange information on certain taxes on insurance premiums and to combat VAT fraud.

Council Regulation (EC) No 1798/2003 of 7 October 2003 on administrative cooperation in the field of value added tax [Official Journal L 264 of 15.10.2003]

Regulation (EC) No 1798/2003 enhances cooperation between Member States’ tax administrations for the purpose of combating VAT fraud by removing remaining obstacles to the exchange of information. It has three main objectives:

• to establish clear and binding rules on the exchange of information,
• to provide for direct contacts between national departments combating fraud, and
• to increase the exchange of information.

SPECIAL SCHEMES

Proposal of 5 May 2003 for a Council Directive amending Directive 77/388/EEC as regards value added tax on services provided in the postal sector [COM(2003) 234 – Official Journal C 76 of 25.03.2004]

The Commission, aiming to eliminate distortions of competition in public postal services, which are increasingly performed by private businesses, proposes to amend the rules on value-added tax (VAT) applicable to such services by subjecting them to taxation at a standard rate. To minimise the impact of this change on the prices paid by end consumers, the Commission provides for the possibility of a reduced rate of VAT on letters and other addressed items weighing 2 kg or less.
The proposal has three key elements:

• removal of the exemption for public postal services and postage stamps;
• amended place-of-supply-rules to ensure only one VAT rate for most private post;
• an option for a reduced rate.

Consultation procedure ()

Proposal of 8 February 2002 for a Council Directive amending Directive 77/388/EEC as regards value added tax on services provided in the postal sector [COM(2002) 64 final – Official Journal C 126 E of 28.5.2002]

This Directive proposal is aimed at extending the scope of the special scheme for travel agents to all supplies of travel packages.
Consultation procedure (CNS/2002/0041)