Official Journal of the European Union

C 195/54

Opinion of the European Economic and Social Committee on the Amended proposal for a Council Directive amending Directive 77/388/EEC as regards the place of supply of services

(COM(2005) 334 final — 2003/0329 (CNS))

(2006/C 195/13)

On 14 October 2005, the European Commission decided to consult the European Economic and Social Committee, under Article 250 of the Treaty establishing the European Community, on the

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 28 April 2006. The rapporteur was Mr Metzler.

At its 427th plenary session, held on 17 and 18 May 2006 (meeting of 17 May), the European Economic and Social Committee adopted the following opinion by 143 votes to 0 with 4 abstentions.

Summary and recommendations

The Committee welcomes the initiative as a step in the right direction. The proposal under review aims to make some particularly controversial VAT rules concerning the place of supply of services simpler and more transparent. The Committee welcomes this initiative on the sixth VAT directive; it is a step in the right direction towards implementation of the Lisbon process and achievement of the objectives set out in the Internal Market Directive. In order to function effectively, European civil society needs an effective and competitive economy. Comparable rules must be applied if this key objective is to be achieved. The amended proposal is welcome in that it seeks to avoid distortions of competition, by extending taxation at the place where services are supplied. As explained below, this requires the requisite accompanying mechanisms to be established in parallel, to enable small and medium enterprises to participate in intra-Community trade without having to deal with excessive extra red tape. A case in point is the establishment of an effective one-stop shop system.

In its opinion of 28 April 2004, the EESC has already mentioned the vulnerability of VAT to tax evasion and recommended the development of an alternative system capable of ensuring more effective tax collection. The same opinion criticised the unequal treatment of individuals/consumers arising from the deficiencies of the current VAT system. These deficiencies should be quickly dealt with.

Distortions of competition should be eliminated as soon as possible. An example of distortion arises if a company can only offer its services on the market at an advantageous price by evading VAT at an intermediary stage, thus securing an unjustified competitive advantage. The Committee would therefore remind the competent institutions that there is a need for them to act.

Linguistic confusion can spell the end of joint action and common markets. Agreement on definitions is a precondition for the application of harmonised laws. The EESC would therefore call for efforts to overcome confusion in the establishment of basic concepts. The concept of ‘immovable property’ mentioned in Article 9a of the amended proposal is a good example of how the ECJ is trying to remedy confusion arising from divergent definitions in the various Member States. In doing so, it assumes that distinct concepts under Community law are fundamental to the sixth VAT directive (cf. the concept of ‘letting of immovable property’, Mayerhofer, C-315700, judgment of 16 January 2003).

This also means that legal acts which have been acknowledged as necessary must be implemented without delay, in order to give legislators a chance to transpose them into national VAT legislation as soon as possible. However, it may be doubted whether implementation of the directive in question can be achieved on 1 July 2006.

Explanatory statement

1.   Introduction

In the Lisbon conclusions, the EU resolved inter alia to become the most competitive economy in the world over the next few years. For this to happen, the European Union and the Member States comprising it need to have coherent, coordinated and competitive fiscal legislation in place. VAT is closely harmonised by the 6th EC directive in particular; however, barriers and obstacles to intra-Community trade still exist, as the EESC has already pointed out in its opinion of 28 April 2004 on Rules/place of supply of services (ECO/128) concerning the draft Directive of 23 December 2003.

The proposal to amend the sixth VAT directive ties in with the proposal for a directive of 23 December 2003 and includes a coherent revision of the rules determining the place of taxation for services to businesses (B2B) and to private clients (B2C).

2.   Historical background


Since the first and second EC directives of 11 April 1967, the Community has set itself the goal of dismantling fiscal barriers between Member States. A unified place of taxation is needed to make this vision come true. The country of origin principle which the Directive aims to apply would result in taxation in the country of establishment of all taxable activities conducted by economic operators in that country and within the framework of the European Community. According to this principle, goods delivered from, say, France to another Member State would be subject to taxation at French VAT rates. The same would apply to services provided from France.


However, to avoid distortions of competition, the country of origin principle would require VAT rates in individual Member States to be aligned. Above all, an internal clearing system would be needed, given that value added tax represents a significant proportion of tax revenue in Member States and of EU funding.


With this in mind, the EU has decided not to apply the country of origin principle, or at least not during a lengthy transition period.


However, the European Commission has taken various measures to boost trade between individual Member States, to remove bureaucratic obstacles and to reduce or if possible entirely avoid distortions of competition, in particular those arising from differing taxation rates. In the past, the Council in particular has contributed to the retention of divergent systems. The EESC continues to support the Commission in all its efforts to align these systems and to promote the Internal Market.

3.   The purpose and objective of the new legislation

In general, the place of supply of services determines where VAT is applied. Given that basic VAT rates within the EU range from 15 to 25 %, there is considerable scope for distortion of competition in the areas which the amended proposal would regulate, both between companies/VAT payers within the EU and also vis-à-vis companies from third countries. ECJ case law is increasingly tending to proscribe distortions of competition through other VAT procedures; this also applies to competition between taxable enterprises and public sector agents. For example, in its judgment of 13 October 2005 on Case C-200/04 (Heidelberg Tax Office vs. iSt internationale Sprach- und Studienreisen GmbH), the ECJ ruled that in the case in question any additional conditions for the application of Article 26 of the sixth EC directive would clearly result in unlawful discrimination between economic operators, thus inevitably causing a distortion of competition between the economic operators concerned and impairing consistency in the application of the directive.

4.   Amended proposal of 20 July 2005 for a Council Regulation

4.1   General remark

One of the above-mentioned measures is reflected in the amended proposal of 20 July 2005 for a Council Regulation (COM 334/2005 final). This amended proposal was preceded by the 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 final -2003/0329(CNS)).

The European Economic and Social Committee commented on this proposal for a Directive on 28 April 2004. In this opinion, the EESC emphasised that the new rules fell far short of achieving the Commission's general goal of simplification. The Committee stressed that scope for differing interpretations of the rules by Member States and for independent decisions by tax authorities should be limited as far as possible. Above all, in view of the problems which had already arisen, it felt that VIES was insufficient as a monitoring system.

4.2   Consultation document

In the meantime, several consultations have been held on the place of supply of services. A general conclusion of these consultations was that the rules on the place of supply of services needed to be reviewed, as the existing rules were seen as problematic. At the same time, it was generally acknowledged that any changes in this area should comply with requirements for monitoring by tax authorities and the tax obligations of businesses, while also reflecting the principle that value added tax should flow to the Member State in which services are used. A point that was repeatedly emphasised by those taking part in consultations was the need for workable rules, which would not be too costly to apply and which would not impede intra-Community trade.

4.3   General rules in the amended proposal


A strict distinction needs to be drawn between business-to-business services (services provided to taxable persons (1)) and business-to-consumer services (services provided to non-taxable persons (2)). The proposal in question clearly differentiates between treatment of these two eventualities.


In the case of services to taxable persons, the general rule should be that the place of supply of services depends on the place where the client is established, rather than the service provider.


The document under review proposes to maintain the place of establishment of the service provider as the general rule, in the case of services provided to non-taxable persons. The reason for this decision is that taxation of services provided to non-taxable persons in other EU Member States would result in an excessive administrative burden on enterprises providing the services, such as a requirement to register as a VAT payer in the countries concerned.


In the absence of a mechanism enabling tax to be collected in the Member States of consumption without creating undue administrative complications, it is unrealistic to tax all supplies to non-taxable persons at the place of consumption.


However, some exceptions to this general rule are necessary.

5.   Gist of the proposal for a directive (amendments)

5.1   Exceptions to the general rule

Although there has been a lot of support from those concerned by this subject within the EU for the proposed changes in the place of taxation for services, there have also been various calls for continued validity of the country of origin principle and retention of the existing general provisions.

5.2   Details of the new proposals

The remarks briefly outline only the changes which would result from the proposed directive:

5.2.1   Article 6 — Services

It is proposed to insert a sixth paragraph, which stipulates that services rendered between establishments shall not be treated under the directive as supplies.

5.2.2   Article 9d — Specific services to taxable persons

Paragraph 2 has been reinserted and defines the place of supply for restaurant and catering services provided to taxable persons on board ships, aircraft or trains during a passenger transport service as the place of departure of the transport service.

The concern shared by the EESC for greater clarity has thus been taken into account.

Paragraph 3 has been amended to define long-term hiring or leasing as an arrangement governed by an agreement providing for continuous possession or use of the movable tangible property throughout a continuous period of more than thirty days. This provision should rule out disputes (for example car hire by taxable persons for immediate use).

5.2.3   Article 9f — Specific services to non-taxable persons

Paragraph 1(c) has been amended to exempt the distance-learning services referred to in point (d) of Article 9g(1), which are the subject of a separate provision.

In paragraph 1(d), restaurant and catering services have been included to ensure that they are taxed at the place where they are actually carried out.

In paragraph 2, the place of supply of restaurant and catering services on board ships, aircraft or trains during a passenger transport service has been notionally defined as the place of departure of the transport service. This amendment was made in response to a proposal which came up during the consultation process.

In the case of long-term hire, i.e. for longer than 30 days, the place of supply of a means of transport to non-taxable persons is defined as the place where the customer is established, has his permanent address or usually resides.

In the case of short-term hire (e.g. hire of a car for a few days), the place of supply is the place where the means of transport is put at the disposal of the non-taxable person. This provision was also welcomed by the majority of respondents to the consultation process.

5.2.4   Article 9g — Services which can be supplied at a distance to non-taxable persons

This article has been completely overhauled. The services listed in Article 9g(1) are supplied in the place where the client is established, has his permanent address or usually resides.

During consultation there was an overwhelmingly negative response to this provision due to the introduction of excessive red tape arising from compliance with VAT obligations. For this reason, introduction of one-stop shop arrangements were seen as a precondition for this provision.

The EESC calls for a clearer definition of the services to be subsumed under this article.

5.2.5   Article 9h — Services supplied by an intermediary to non-taxable persons

The amendment makes it clear that the place of supply of services is determined by the place in which the principal transaction is carried out according to the provisions of Articles 9a to 9g and 9i.

5.2.6   Article 9i — Services to non-taxable persons outside the Community

The changes here follow on from the deletions in Article 9g, as mentioned earlier.

5.2.7   Article 9j — Avoidance of double taxation

The rules for determining the place of supply of e-commerce, telecommunication and broadcasting services provided by a supplier established outside the EU will remain unchanged in future. The place of supply will therefore remain the Member State in which a non-taxable client is established or the Member State in which the service is actually used.

As the relevant provisions are now covered by Articles 9 g and 9h, former points (h), (j) and (l) are deleted.

5.2.8   Article 22(6)(b) in the version set out in Article 28h — Extension of the recapitulative statement

The proposed amendment to the text of this article envisages extending the recapitulative statement submitted by each taxable person identified for value added tax purposes to certain transactions arising from the provision of services. This applies to other services provided to consignees identified for value added tax purposes in the transactions referred to in the fifth subparagraph and to the taxable customers supplied with services under the conditions provided for in Article 9(1).

5.2.9   Technical changes

Other amendments are mainly technical changes; we would therefore refer to point 2.12 of the proposal's explanatory memorandum.

6.   Own proposals and observations

6.1   Place of supply of services for the provision of services to taxable persons


The Committee welcomes the planned extension of the reverse-charge procedure to company level and thus to the exchange of services between taxable persons.


However, this is dependent on the persons concerned being able to carry out all aspects of the reverse-charge procedure without any problems. Difficulties could arise if the service provider delegates the evaluation of turnover or of VAT details, the place of supply, taxation obligations and tax rates, or the possibility of tax exemption to the recipient of services, without giving the latter the option of assessing this information reliably.


Companies should not be burdened with extra recording and reporting requirements. There is no doubt that businesses within the EU should be enabled to reliably determine whether a taxable person or company established in another EU country is obliged to apply the reverse-charge mechanism to the relevant transaction. Excessive liability of the company providing services in the event of a subsequent failure to reverse VAT charges would undermine the system as a whole and lead to resistance from those affected by it.

6.2   Services provided to non-taxable persons


If services are provided by a company/taxable person to non-taxable persons, the reverse-charge procedure is excluded a priori. This mean that in the event of taxation being applied at the place where services are used, a company from another EU country would have to register as a VAT payer in the country where services are provided and to comply with VAT obligations there. To avoid red tape in this situation and thus minimise obstacles to intra-Community trade, unbureaucratic rules are needed.


Any obligation to register as a VAT payer would result in significant extra red tape, additional costs and, in doubtful cases, to reluctance on the part of the taxable company to provide the service. Far from opening up the single market and creating a level playing field for companies in all Member States of the EU, this would significantly disadvantage EU companies established in other countries in comparison to domestic service providers. This can hardly be in the interests of dismantling barriers to trade. Therefore, extending taxation at the place where services are used to non-taxable persons is only a viable option if the proposed one-stop shop system operates smoothly and rapidly. Only then could companies be expected to provide taxable services, possibly in all 25 Member States, in the absence of the reverse-charge option. Otherwise there is a danger of the opposite effect, with small and medium enterprises being excluded from the single market.

7.   Refund procedure for input VAT


The same applies to simplification of VAT obligations arising from the input VAT refund procedure. As is well known, problems connected with input VAT refunds mean that, particularly when the sums in question are relatively small, companies need to decide whether it is ‘worth’ submitting a claim to a foreign tax office or whether giving up any entitlement to a refund is a much more advantageous option. However, this is in de facto contradiction with the principle of the deductibility of input VAT which underlies the sixth VAT directive.

In this connection, the Committee feels that efforts in some Member States to apply VAT at uniform rates across the board are severely in need of improvement.


For this reason, it must be ensured that the Commission's proposals concerning the introduction of a one-stop shop system are implemented and monitored for effectiveness.

Brussels, 17 May 2006.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND

(1)  In this context, a taxable person is a business which has to pay VAT on the services which it provides, and can usually offset VAT on inputs against the VAT payable on its own activity.

(2)  A non-taxable person is a non-business person, usually a private individual/end user who is not required to file a VAT tax return.