Explanatory Memorandum to COM(2005)136 - Amendment of Directive 77/388/EEC on the common system of VAT, with regard to the length of time during which the minimum standard rate is to be applied - Main contents
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| dossier | COM(2005)136 - Amendment of Directive 77/388/EEC on the common system of VAT, with regard to the length of time during which the minimum ... |
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| source | COM(2005)136  |
| date | 14-04-2005 |
2. This provision is based on Article 93 of the EC Treaty, which requires the Council to adopt provisions for the harmonisation of legislation concerning turnover taxes to the extent that such harmonisation is necessary to ensure the establishment and functioning of the internal market. For this purpose it has always been considered essential to set the standard rate.
3. With a view to the establishment of the internal market in January 1993, the Commission presented proposals aimed at setting up a definitive system of tax harmonisation. As regards rates, the Commission initially proposed a harmonised tax structure with two rates of VAT and harmonisation, within a band, of the rates applied by the Member States.
4. However, when it became clear that it would be impossible to adopt the Commission's proposals before 1 January 1993, the Council decided to adopt a transitional system. With regard to rates, it adopted Directive 92/77/EEC i, approximating rates.
5. That Directive, introducing a system of minimum rates, stipulated that from 1 January 1993 to 31 December 1996 the standard rate could not be set at less than 15%. This provision has been extended three times and applies to 31 December 2005.
6. To maintain the degree of harmonisation of rates already achieved, the Commission has twice presented proposals providing for a standard rate band with a minimum rate of 15% and a maximum rate of 25%.[3] The band was derived from the rates applied in practice in the Member States, where the standard rates had always varied between 15% and 25%.
7. In both cases the proposals to approximate rates were amended by the Council i which kept only the principle of the minimum rate, referring to a 15% minimum rate comparable to the system introduced by the 1992 Directive.
8. In 2000 the Commission, with a view to improving the working of the internal market in the short term, adopted a phased strategy i geared to four main objectives: the simplification and modernisation of existing rules, more uniform application of current arrangements and a new system of administrative cooperation. The priorities of the VAT strategy were reviewed and updated in 2003.[6]
9. The strategy was adopted because the Member States’ reservations meant there was little prospect in the near future of significant progress towards a common system of VAT based on taxation in the Member State of origin. Its main objective was to give new momentum in the Council towards concrete and essential improvements to the existing tax system in the near future, without, however, calling into question an ultimate shift to the principle of taxation in the Member State of origin as a long-term Community goal.
10. During this period, however, it was important to prevent growing divergence in the standard rates of VAT applied by the Member States from leading to structural imbalances in the EU and distortions of competition in certain sectors of activity. The Commission therefore adopted a proposal extending the application of a 15% minimum standard rate to 31 December 2005 without proposing a band. The Council adopted this proposal without amendment on 19 January 2001.
11. The accession of the ten new Member States on 1 May 2004 did not alter the situation regarding the standard rate. That rate continues to range from 15% to 25% in the 25 Member States. Two Member States (Cyprus and Luxembourg) apply a 15% rate and three a 25% rate (Denmark, Hungary and Sweden).
12. In these circumstances, it therefore appears appropriate to maintain temporarily the principle of a minimum standard rate of 15%, and to propose that the legislation in force be extended.
13. Since the application of this rate under Article 12(3)(a) of Directive 77/388/EEC, expires on 31 December 2005, the object of this proposal is to enable the Council to extend the period of application of the minimum standard rate. The minimum level for the standard rate is therefore set at 15% for the five years from 1 January 2006 to 31 December 2010.
Notes on the Articles
Article 1
The first paragraph proposes that the current minimum standard rate of VAT in the various Member States, set at 15%, be extended from 1 January 2006 to 31 December 2010.
Paragraph 2 sets 31 December 2010 as the expiry date for the minimum level proposed for the standard rate. This provision will be subject to revision, given that the Council, acting on a proposal to be submitted by the Commission not later than 31 December 2010, must decide what the standard rate is to be after that date.
Articles 2 to 4
These Articles provide for the entry into force of the Directive.