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Speech to the Congress of the Confederation Fiscale SPEECH TO THE CONGRESS OF THE CONFEDERATION FISCALE EUROPEENNE BY CHRISTOPHER TUGENDHAT, VICE-PRESIDENT OF THE COMMISSION OF TYE EUROPEAN COMMUNITIES, AT AACHEN, ON 30 SEPT~~B~R 1982. THE STATE OF TAX HARMONIZATION IN THE EUROPEAN COMMUNITY Introduction May I first thank the Confederation for inviting me to address its members on the occasion of the 1982 Congress in Aachen. The Commission values these invitations as providing an opportunity to list our achievements, explain our policies and to elicit an informal response from eminent members of the European taxation profession. The Last two years since your Rome Congress have been difficult ones. Our economies are still struggling to break out of recession and there is no disguising that the outlook remains sombre. Many old problems in the Community are still causing d~fficutty and the admission of a tenth member, Greece, has also brought new ones of adjustment. These ~ifficulties are inev~t~b~y reflected in the survey I· am about to present on the current state of tax harmonization. While there has been some modest progress in the VAT field, there has been no move~ent on excise duties and direct taxes. Let us look at VAT, excise duties and direct taxes in turn, starting w~th va~ue added tax. - 2 - VALUE ADDED TAX / Two years ago, my predecessor ~ Commissioner responsible for taxation, Mr. Burke, gave you a general outline of the directives harmonizing the basis of assess- ment of value added tax in the European Community, of the directives designed to prevent double taxation of individuals and of the directives providing for mutual assistance between Member States .• Let me bring you up todate on developments in these areas and on the rulings given by the Court of Justice in cases relating to VAT. The Sixth Directive on VAT providing for a uniform basis of assessment - a necessary part of the own resources system for financing the Community budget - came into operation in 1980. VAT is now collected in all Member States ~xcept for Greece, which will not introduce VAT until 1984) on a common basis of assessment. The Community can take up to 1% of the sums so collected as own resources. The amount taken in 1982 was 0.925%. This is expected to finance 55% of the Community budget for this year. The harmonization envisaged by the Council in the own resources decision of 21 April 1970 has thus beco~e a reality. Work on directives stemming from the Sixth Direct~ve has continued during the past two years. 1 Th e E1911t. ~ h o·1rect1ve · ( ) , w.h. 1c h 1ntro· d uce d h armon1ze· d arrangements for the refund of VAT to taxable persons not established in the territory of the country, has now entered into force in all nine r0~hnr States applying VAT, !taly having introduced the necnssary provisions on 20 May t~is year. (1) Eighth Council D~ect~ve of 6 Dec.1979,0J No L 331,27.12.79. - 3 - The Eighth Directive, which covers only taxable persons established within the Co~munity, is to be followed up by the Thirteenth Directive, which will harmonize the refund arrange­ ments for taxable persons established outside the Community. The proposal Lays down the principle that VAT charged on the goods and services purchased by taxable persons established outside the Community should be refunded, so as to eliminate the considerable disadvantages caused by current deflections of trade resulting from differences in Member States' attitudes to non-Community countries; however, the proposal does not impose uniform rules as to refund arrangements, given the wide variety of tax systems in non-Community countries. The proposal has been adopted by the Commission and was presented to the Council on 19 July of this year. The Commission proposal to the Council regarding exemption from VAT on the final importation of certain goods pursuant to Article 14C1)(d) of the Sixth Directive has made progress in Council. Let me remind you briefly that the aim of the proposal is to harmonize the sco~~ and detailed rules governing the ex~mptions provided for in :~at Article. The proposal covers a wide variety of goods, ranging from personal effects imported by individuals and students to goods imported for research or test purposes or upon transfer of an activity. The proposal has been the subject of difficult discussions and, on the ~?sis of a compromise put forward by the Presidency, it may be expected that the Council will adopt the proposal before the end of the year. - 4 - The proposal for a Directive harmonizing the VAT and excise duty procedures applicable to the stores of ships, aircraft and international trains seeks to lay down imple­ menting arrangements and to define more precisely the scope of the procedures. As yet, the proposal has not been adopted by the Council. The Seventh Directive relates as you know to the VAT system to be applied to second-hand goods, works of art, antiques and collectors' items. After a break of two years the Danish Presidency of the Council has recently reactivated discussion of this proposal and it is hoped that progress will be made on the basis of a compromise solution. The Commission has indicated that it is flexible in regard to some of the details of the proposal and, in particular on the limit of 4/Sths proposed for deduction of input tax for certain second­ # hand goods (notably cars). So far I have covered recent developments related to the harmonization of the basis of assessment of VAT. Let me now turn to the program~e for simplifying formalities and procedures in intra-Community trade. In the first place the Commission has proposed measures designed to simplify formalities for firms, specifically a scheme for deferred payment of the tax payable on importation and measures to improve the application of VAT to small firms. - 5 - The proposal relating to deferred payment of the tax payable on importation by taxable persons is designed to remove obstacles to intra-Community trade. The Commission's proposal would allow VAT on imports to be entered on periodic tax returns, a system which already exists in four Member States thereby eliminating the need to make immediate payment at the frontiers and allowing for set-offs of reimbursements. Formalities would be substantially simplified For example formalities at importation would be cut to a minimum: the taxable person would calculate the tax due, on his own responsibility, and declare it on his next overall tax return; - customs-related formalities would consist solely of the Lodging of the relevant import documents <e.g. # Community transit procedure). The cost of the formalities would undoubtedly be reduced, and tax treatment of imported goods would become more nearly comparable to that applied to domestic goods. The arrangements. wouLd be obligatory for goods coming from other Member States, but would be optional for goods coming directly from a third country. Next the Commission pLans to propose measures designed to improve the applicat;on of VAT to small firms. - 6 - The most frequent criticism made by small firms is not of the VAT system itself, but rather of the complexity of the paperwork involved. The VAT machinery entails a burden of accounting, invoicing, and tax return procedures which small firms were not in a position to bear when VAT was introduced in 1970. Initially, therefore, provision was made for exemptions, granted up to a given turnover ceiling, and for flat-rate taxation schemes. Article 24 of the Sixth Directive (special scheme for small undertakings) ·gave Member States a fairly free hand in deciding on the schemes applicable to its own small firms and on eligibility. Because there is no strictly defined Community ·scheme for small firms, the schemes operated by the different Member States are fairly diverse. This has not eliminated the practical complexities of VAT administration, which are disproportion- ately demanding for small firms, as a result mainly of restrictions on the right to deduct VAT payable on certain purchases, the many different rates applied and of the myriad tax return requirements. In view of this situation and the criticisms that· have been made, the Commission is considering putting forward a proposal to harmonize the schemes for small undertakings, advocating a uniform exe~ption ceiLing, probably of 10.000 ECU <which is roughly equivalent to DM 24.000, FF:60.000 or £6.500). - 7 - With a view to further simplifying VAT arrangements for small firms, the Commission is also planning to propose a simplified taxation scheme which could be adopted by all the Member States. Under this scheme, the formalities for small firms would be simplified as follows : 1) the chargeable event and VAT accounting would be simplified and based on payments and receipts, these being practical cash flow concepts that are immediately intelligible to small businesses and tradesmen (any reference to "supply" would be abandoned) ; 2) the VAT imputation mechanism would be simplified by standardizing most of the exceptions to the principle of deductibility and the operation of the rule of a time lag in deductions.and possibly, in the case of certain homogeneous activities, by providing for a flat-rate deduction for determining input VAT; 3) simpler payment procedure with payments on account and settlement at the end of the year; 4) simpler VAT return, which would be annual and harmonized with the direct tax return to be made by small firms. The Commission wil~ formulate its approach on thi.s matter in the near future. Of course, the ultiMate simplification would be the alignment and then standardization of the VAT rates applied in all the Member States.
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