Tuesday, April 12, 2005

Avoidance and VAT (II)

Almost in simultaneous with the ECJ cases reported below, the European Commission issued a Directive Proposal on 16 March 2005 to amend the Sixth VAT Directive, which authorizes Member States to introduce special measures in order to simplify the procedure for charging the tax and to prevent certain types of tax evasion or avoidance.
Currently, EU Member States wishing to derogate from the Sixth VAT Directive so as to simplify the procedures for charging VAT or prevent certain types of tax evasion or avoidance may be so authorized (under Art. 27) by the European Council, acting unanimously on a proposal from the Commission. This route to introduce legislation can be seen as too cumbersome and too lengthy. Taking into account the large number of derogations currently in force (more than 140), the Commission decided to undertake a rationalization exercise, which involves repelling previously approved derogations and making certain individual derogations available to all Member States through an amendment to the Sixth VAT Directive.
Proposed Directive:
The Commission proposes to provide Member States with the option of adopting legally sound measures in order to counter avoidance and evasion in certain specific and targeted areas.
§ VAT Group and Transfers of going concerns. In both the area of "grouping" in Article 4(4) of the Sixth Directive and in "transfers of going concerns" (Article 5(8)) the proposal allows for Member States to take steps to ensure that the operation of the rules does not allow an unfair result which would unjustifiably benefit or prejudice those concerned.
§ Investment Gold. Several Member States already apply a special measure on the basis of Article 27 to counter an arrangement which avoids the payment of VAT on untaxed investment gold used as a raw material for making consumer goods. It is now proposed to provide within the Sixth VAT Directive the means for all Member States to apply this measure.
§ Valuation of supplies. The Commission proposes to introduce a new paragraph (6) to Article 11(A) that provides an optional rule that enables Member States to revalue certain supplies. This measure aims to combat avoidance where a taxable supply is made at a low value to a purchaser who is not able to deduct all his VAT and thus the lower amount of tax represents a real and lasting loss to tax revenues. In parallel, the rule in relation to overvalued supplies is aimed at businesses who do not have full right of deduction, and who inflate their taxable supplies to a fully taxable business connected to them.
§ Capital items. The Commission proposes by amending Article 20(4) to clarify that adjustment of deductions relating to capital items under Article 20 of the Sixth Directive may apply equally to services - provided that they are of a capital nature and are treated as such.
§ Reverse charge. The Commission proposes to extend the use of an optional reverse charge mechanism for certain supplies of services in tax avoidance prone areas like for example construction and building activities and waste disposal activities.


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