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Exploring the legal and economic background against which the European VAT system is functioning helps to understand the role and features thereof. The scrutiny in this chapter includes a brief survey of the relevant rules of primary Community law,17 namely the static and the dynamics of the VAT legislation as laid down in the Treaty of Rome.18
In 1957 six European countries founded the European Economic Community.19 Their aim was to secure peaceful co-operation through economic integration.20 By signing the Treaty of Rome (hereinafter referred to as: `the Treaty'), the Founding Members committed themselves to "promote...a harmonious, balanced and sustainable development of economic activities" and "...a high degree of competitiveness..."21 The Member States undertook to achieve these goals by establishing a common marketplace. According to the Treaty the common market "shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured."22
For the purposes of creating a common market the Treaty specifies the obligations of the Community, fulfillment of which is essential for carrying out this project.23 These obligations include the harmonization of Member State laws when necessary for the establishment and functioning of the common market.24 Harmonization of laws happens by means of secondary legislation passed by the institutions of the Community. With regard to each field where approximation of national laws is required, the Treaty accurately delineates the competencies of the Community institutions. Each competency specifies the form of legislation and the role and powers of each Community institution participating in the procedure.
In order to understand the rather complex process of legislation within the Community in general, and in the area of taxation in particular some remarks seem necessary with respect to the institutions involved. According to the `separation of powers'25 within the Community the initiator of legislative action is mainly the Commission.26 The fact that it comprises of independent Commissioners, i.e. officials not directly representing the interests of each Member State, makes the Commission the most efficient spokesman of Community interests.27 The decisive power principally lies with the Council.28 This organ of the Community, consisting of the respective representatives of the Member States is horizontally segmented in correspondence to the sectors of Community policy.29 For the purposes of this essay, the most important sectoral Council is the so-called ECOFIN Council, comprising of the Ministers of Finance and Economic Affairs of each Member State. The Parliament is elected directly by the nationals of the Member States, therefore it is regarded as the `democratic' institution of the Community. It plays a varying, but predominantly secondary role in the legislative process.30 Though not a participant in the legislative process, the role of the European Court of Justice (hereinafter referred to as: `the ECJ') with respect to Community law should me mentioned. By issuing `preliminary rulings' to highlight the correct interpretation of Community legislation for the judicial bodies of the Member States, the ECJ secures the coherence of the Community law.31
One of the most important and at the same time the most sensitive field of harmonization is taxation. To understand the complexity of this issue the general role of the tax system among state affairs should be examined shortly.
Taxation is an activity exercised by the states under the aegis of fiscal sovereignty since ancient times.32 It has two major roles: one is to raise the revenues of the government to cover necessary expenditures and the other is to stimulate and regulate the national economy.33 In fulfillment of these tasks, governments determine the types, rates and other features of taxes within the tax system. In practice the operation of national tax systems often resulted in the protection of national markets against foreign products in pursuance of the goals of national economic and fiscal policy.34
In the age of trade liberalization the fiscal autonomy of national governments generally suffers some curtailment. Since the introduction of the GATT35 in 1947 the requirement of national treatment of foreign products in the importing market is one of the fundamental principles of international trade. The purposes of the high level economic and political integration the European Community seeks to achieve necessitates a trade policy limiting the fiscal autonomy of the Member States beyond the requirement of non-discrimination. Even without protectionist intentions the existence of significant differences between tax regimes of the Member States has the potential to hinder the creation of the internal market. This fact has been acknowledged by the Commission in its White Paper on Completing the Internal Market,36 where fiscal barriers, such as the differences in the VAT rates were denounced as one type of the main obstacles to achieving the common market objective.
Recognizing the major role of taxation in the integration process, the Founding Members of the Community devoted a separate chapter to tax provisions in the Treaty. Articles 90 to 92 of Chapter 2 stipulate the general prohibition on discriminatory taxation and other types of protectionist measures. Article 93 establishes the competence of the Community to harmonize the national indirect tax regimes. The reason for emphasizing indirect taxes lies in the fact that these taxes, including VAT, are levied on products and therefore have an immediate effect on the international flow of goods and services.37
The rules providing for the competence of the Community in the field of indirect tax harmonization reveal the unease of Member States when allowing intervention with their fiscal powers.38 The decision-making power is vested exclusively in the Council. On proposal from the Commission, the Council should pass legislation with unanimous vote. The requirement of unanimity, by allowing a veto power for each Member State, places Member State interests in the forefront and slows down the legislative process.39 Legislation should proceed in compliance with the so-called consultation procedure. This procedure provides for consultation by the Council of the Parliament and the Economic and Social Committee, but without the obligation to take account of their opinion.
Article 93 also stipulates that legislation should be passed in the form of directives. Directives bind the Member States with regard to the result set forth therein, but leave autonomy for them to choose the means of harmonization.40 As the result of approximating their laws, the tax regimes of the Member States are becoming compatible with each other, though they still fall under the sovereign power of each state. The determination of VAT rates and exempt supplies, for example, largely depend on the Member States. For the success of the integration process it is crucial that despite the differences in their laws national tax authorities interpret and apply the provisions of the directives homogeneously. The ECJ, as mentioned previously, has an outstanding role in the achievement of this objective.
Before discussing the most important VAT Directives in detail, the next chapter aims at introducing the abstract characteristics of the value added tax.
When writing about the VAT and its exceptional conquest of the globe,41 it is almost natural to cite the famous sentence of Alan Tait that "the VAT maybe thought of as the Mata Hari of the tax world - many are tempted, many succumb, some tremble on the brink, while others leave only to return, eventually the attraction appears irresistible."42 With this characterization of the VAT in mind it is hard not to wonder what the reasons are for this success.
The VAT has three distinctive features, which designate its role within the family of taxes. It is an indirect, multi-stage consumption tax.
As simple as it seems, the law of VAT gets quite complicated when it comes to inter-national trade. In case of cross-border transactions more tax jurisdictions are concerned with the taxation of the sale. To designate the country of taxation there is a need for special, so-called `place-of-supply' rules.55 These rules, by resolving potential conflicts between the jurisdictions pursue the goal of avoiding double-taxation or accidental non-taxation.56 The literature takes account of various principles guiding the arrangement of the place-of-supply rules.57 In practice, taxation of the traded goods and services may occur either in the exporting or in the importing country.
The most common way of determining the place-of-supply rules is based on the destination principle.58 According to this principle the exporter receives a tax rebate in the amount of the VAT levied on the goods and services that are being exported.59 This practice is referred to as zero-rating. Zero-rating is a special type of exemption under which the exporter charges a rate of 0% on the tax base and retains the right to claim back his input-credits.60 As the outcome of the destination principle the international trade in goods and services is based on net-of-tax prices61 therefore the effects of the differences between national tax rates is neutralized. Eventually, the destination country taxes the imported product - usually only upon resale - by applying its own rate.
The administration of the border tax adjustments under the destination principle requires close cooperation from the tax administrations of the countries involved in the transaction. To avoid double- or non-taxation it is necessary to keep track of the cross-border movement of physical goods.62 This is only possible through the checking of the documentation of the merchandise at the border. As a result, there is a need for border controls.
As opposed to the destination principle, the origin principle assigns taxing jurisdiction to the exporting country.63 The destination country charges no tax. Under this solution importers in each country compare the tax-inclusive prices of domestic and foreign goods.64 There are no border tax adjustments under this scheme, consequently there is no need for border controls. Application of this principle is not common, since it directs all revenues from the VAT imposed on international trade to the country of origin. As seen above, this practice conflicts the ambition of the VAT to tax consumption at the place of consumption.
How to choose between these principles? This question and weighing of pros and cons of both principles have been following through the history of the European VAT. As the next chapter will illustrate, the choice is more complex than simply keeping the ideal functioning of the VAT regime in mind.
After giving an overview of the common market and the value added tax system in abstract, this chapter is the place to examine the results of the practical interplay between the two. Without the intention of giving a comprehensive survey on the historical development and results of the European VAT system, the chapter aims at highlighting some details important from the viewpoint of further discussion. As intra-Community trade is inherently of cross-border nature the way Community legislation has been trying to solve the appropriate allocation of taxing jurisdiction is scrutinized with special emphasis.
Harmonization in this field started in 1960, by setting up the Fiscal and Financial Committee to study how indirect tax regimes of the Member States could be approximated in the interest of the common market.65 The First VAT Directive66 has come to existence upon the recommendations of this body.67 The First and Second Directives, representing the first phase of VAT harmonization permitted the Member States a wide-ranging discretion in several questions.68 Consequently, by the end of this first phase a patchwork of different and separate national laws had come to existence instead of a single European VAT system.
A process of further harmonization was triggered by a Council Decision in 1970.69 Until that year the Community budget was financed by the contributions of the Member States. In 1970 the Council passed a Decision to change this scheme by creating own resources for the Community. The `own resources decision' provided that from 1975 the Community budget should comprise, inter alia, of a certain percentage of the Member States' VAT revenue. This share was determined as 1 percent of the VAT base.70 To secure equality between Member States and to prevent the erosion of Community resources strict delineation of the base of assessment became crucial.
The Sixth Directive aimed at the more precise definition of certain areas necessary for achieving closer harmonization of national VAT systems.71 This Directive, passed in 1977, is the most comprehensive one in the series of VAT directives and provides the grounds for further harmonization. Though it was amended on a lot of occasions72 the present form of the Community VAT system has been tailored after its provisions. The following summary confines itself to the rules of the consolidated Sixth Directive relevant for the purposes of this paper:
The European VAT applies to the supply of goods and services effected for consideration within the territory of the country by a taxable person.73 It is apparent upon this definition that the Directive pursues the goal of applying the VAT in as general a manner as possible. It intends to implement the principle of territoriality in assigning taxing jurisdiction.74 It is also important to note that the VAT does not apply to transactions between unregistered persons or to free supplies.
The definition of taxable person is not relevant for the discussion in this paper. Rather, further analysis will be concerned with the obligations of taxable persons themselves and of Member States with regard to them.75
Taxable persons are obliged to report the commencement of and any change in their taxable activity. They should keep sufficient accounts of their finances and issue an invoice when supplying to another taxable person. Taxable persons are required to submit their return at the end of each taxing period and pay the VAT due.
Member States should take measures necessary to identify taxable persons by means of an individual registration number. Verification of the taxable status bears outstanding importance in cases of cross-border supplies to businesses, where the Sixth Directive assigns tax liability to the business recipient of certain services under the so-called `reverse charge' method.76 To be able to disregard further VAT obligations, the supplier should be certain about the taxable status of its customer.
Identification of registered business with regard to intra-Community transactions are facilitated by the VAT Information Exchange System77 (hereinafter referred to as: `the VIES'). According to Article 6 of the Regulation governing the VIES, the competent authority of each Member State shall ensure upon request that persons involved in the intra-Community supply of goods or services obtain confirmation of the validity of the VAT registration number of any specified person.
Taxable transactions include the supply of goods and the supply of services. Supply of goods is defined as the transfer of a right to dispose of tangible property as owner78. Supply of services means any other transaction not constituting a supply of goods.79 By means of this catchall definition the Directive intends to ensure that intangible supplies do not escape taxation.80 The rationale behind this distinction lies in the fact that place-of-supply rules, as seen immediately below, differ with regard to the two categories.
Detailed analysis of the relevant place-of-supply rules of the Sixth Directive will be given in part III of this essay. Here some general comments seem necessary in connection with these rules.
The task of place-of-supply rules is to assign taxing jurisdiction in cross-border trade, as briefly mentioned in the previous chapter. The Sixth Directive chose to solve this task through the implementation of a dual place-of-supply regime. The place of taxation with respect to goods is determined upon the physical location of the goods concerned regardless of where the parties reside.81 In case of services such physical location does not exist. In lack of tangibility location of services is only possible through the application of fictious place-of-supply rules. Therefore, in case of services the relevant information when assigning the taxing country is the location of the supplier or the recipient.82 For purposes of administrative feasibility place-of supply rules for services may further differ in accordance with the type of service.83
As shortly mentioned earlier, the Community faces a serious dilemma when trying to choose among the principles underlying the place-of-supply rules. Both the destination and the origin principles have their pros and cons when considered within the special context of the internal market.
The precise and expeditious border tax adjustments of the destination principle satisfy the requirement that intra-Community competition should not be distorted and the free flow of goods and services should not be hindered through the application of indirect taxes.84 It also satisfies the general requirement of VAT of allocating the tax into the country of consumption. The serious drawback of this principle is its essential co-existence with border controls. These border controls, by necessitating the presence of the same infrastructure at the borders as would be in place were the Community not a customs union, are incompatible with the idea of a true European common market described in the Treaty of Rome.85
The most appealing feature of the origin principle is evidently the lack of need for border tax adjustments. The weaknesses of this principle, though, seem to be outweighing this virtue. The inability of the origin principle to concentrate the VAT revenue to the country where consumption takes place conflicts the general requirements of a consumption-based taxation scheme, as seen earlier. With respect to the interests of the Community, dislocation of VAT revenues among Member States would distort competition within the common market.86 These serious shortcomings could only be overcome by the parallel operation of a clearing system.87 Under such system the country of consumption would receive the VAT revenue collected by the country of origin.
Abolishing the tax-frontiers has been the ultimate goal of the Community from the outset of the harmonization process.88 Accomplishment of this goal only seems possible through the application of the origin principle. Despite this fact place-of-supply rules have been guided predominantly by the destination principle since the adoption of the First Directive. The fragmentation of the internal market following from the operation of border controls has indeed been acknowledged by the Commission in its White Paper89 issued in 1985. This document proposed a so-called `definitive system' of VAT built on the origin principle and the parallel operation of a clearing-house. Fearing to lose fiscal sovereignty the Members have yet been unwilling to take the measures necessary for the introduction of a clearing-house.90 The continuous efforts taken by the Commission in its subsequent series of proposals91 during the last decades to reconcile the conflicting interests of the internal market and the Member States resembles a fight with windmills.
At present place-of-supply rules are based on a transitory solution. This `interim system' was introduced by a Council Decision, which, as the first step toward the implementation of the origin principle, terminated border controls from 1993.92 According to this regime sales to consumers have become subject to the origin principle, while the destination principle remained effective for sales to business customers. This system was supposed to be in force until 1996, but the Community is behind schedule in implementing the `definitive system.'
Following the `own resources decision' of the Council, the Sixth Directive homogenized the base of VAT throughout the Community.93
Determination of VAT rates is one of the most sensitive areas of Community VAT, largely contributing to the formation of a stalemate between the clashing interests of the Community, the Member States and the ideal VAT system. The broad autonomy of Member States in setting the VAT rates leads to the fragmentation of the internal market.94 It also results in the untenable complication of the VAT system.95 At the same time it is the most important reflection of retained fiscal sovereignty.
According to the Sixth Directive the standard national rate of VAT may not be less than 15% at present.96 Apart from the standard rate Member States may apply either one or two reduced rates in line of their social and cultural policy.97
As mentioned earlier, the Directive draws a distinction between exemption and zero-rating. `Genuine' exemption releases the exempt entity from all obligations under the VAT regime and at the same time denies granting the right of deduction. Member States may exempt certain activities on grounds of public interest or complexity of taxation.98 Under the scheme of zero-rating the Directive allows for the deduction of input credits despite the exemption from paying the tax.99 Administrative obligations are retained for the purposes of ensuring a continuous audit-trail.100 Zero-rating occurs in case of supplies leaving the territory of the Community and on grounds of social and cultural policy, but in a much stricter sense than exemption.101
Among the special schemes of the Directive, the regime governing small businesses should be briefly mentioned for the purposes of this paper.102 The rules of this special scheme enable businesses below the specified amount of annual turnover103 to supply goods and services exempt from VAT. The rationale behind this special treatment lies in the fact that compliance with VAT regulations means a disproportionately greater burden for small undertakings due to their low assets.104
After reviewing the concepts and operation of the European VAT within the traditional trade environment the next part of this essay aims to show the deficiencies in its handling electronic transactions.
17 The term `primary Community law' indicates the document establishing the European Community, i.e. the Treaty of Rome, and every other agreement between the Member States amending the Treaty. These sources provide for the legal basis of further, secondary legislation by Community institutions. See Tamás Kende, Európai Közjog és Politika [European Law and Politics] 278 (Osiris Budapest ed., 1995) [hereinafter: "Kende, European Law and Politics"]
18 See supra note 3.
19 See supra note 3.
20 Josephine Shaw, European Union Law in Weiler, Introduction, see supra note 3, at 45 of Unit I.
21 Article 2 of the Treaty of Rome, see supra note 3.
22 Section (2) of Article 14 of the Treaty of Rome, see supra note 3. The terms `common market' and `internal market' will be used in this essay in an interchangeable manner.
23 Article 3 of the Treaty of Rome, see supra note 3.
24 Subsection (h) section (1) of Article 3 of the Treaty of Rome, see supra note 3.
25 Assignment of legislative and executive powers among the institutions of the Community does not follow the pattern of the classical constitutional separation of powers adopted by modern, democratic states. See Josephine Shaw, European Union Law in Weiler, Introduction, see supra note 3, at 74 of Unit I; Paul Craig & Grainne De Burca, EU Law 49-95 (Oxford University Press, 1998) [hereinafter: "Craig & De Burca."]
26 Article 211 of the Treaty of Rome, see supra note 3.
27 Josephine Shaw, European Union Law in Weiler, Introduction, see supra note 3, at 76-82 of Unit I.
28 Article 202 of the Treaty of Rome, see supra note 3.
29 Kende, European Law and Politics, 184, see supra note 17.
30 Article 192 of the Treaty of Rome, see supra note 3.
31 Article 234 of the Treaty of Rome, see supra note 3.
32 See Thomson J. Purcell: An Analysis of the Formation of the Federal Income Tax Policy, Creighton Law Review 1984/85 (1985), available at WL 18 CRLR 653.
33 See id;
Trebilcock & Howse, supra note 15, at 112-135; Jackson, World
Trading System, supra note 15, at 213-229.
34 See id.
35 See Trebilcock & Howse, supra note 15, at 112-135; Jackson, World Trading System, supra note 15, at 213-229.
36 Completing the Internal Market: White Paper from the Commission to the European Council, June 28-29, 1985 [COM (85) 310] [hereinafter: "the White Paper"]
37 See supra note 9; Craig & De Burca, supra note 25, at 549.
38 Article 93 of the Treaty of Rome, see supra note 3.
39 See Communication from the Commission of the European Communities [COM (2000) 114 final] March 14, 2000. This document formed the part of the Commission's contribution to the Intergovernmental Conference on institutional reforms held during year 2000. Among other things, it proposed to extend qualified majority voting in a limited field of taxation proposals for the purposes of creating a more efficient and speedy legislation process. The Intergovernmental Conference has decided to retain unanimity for all Treaty provisions relating to taxation. See Treaty of Nice Amending the Treaty on European Union, the Treaties Establishing the European Communities and Certain Related Acts, February 2001, Official Journal 2001/C 80/1.
40 Article 249 of the Treaty of Rome, see supra note 3; Craig & De Burca, supra note 25, at 105-110.
41 22 out of the 24 member countries of the OECD apply VAT on transactions. See James M. Bickley, Value-Added Tax as a New Revenue Source, The Congressional Research Service Issue Brief, July 10, 2000, http://www.crie.org/nle/econ-67.html [hereinafter: "Bickley, Value-Added Tax"]; Alain Schenk & Oliver Oldman, Value Added Tax, 26 (Transnational Publishers ed., 2000) [hereinafter: "Schenk & Oldman, Value Added Tax"]
42 Alain A. Tait, Value Added Tax, 3 (International Monetary Fund ed., Washington, D.C., 1988) [hereinafter: "Tait, Value Added Tax"]
43 Schenk & Oldman, Value Added Tax, see supra note 41, at 12.
44 See id.
45 The VAT is often referred to as a `regressive' tax, since by collecting the same amount of tax from every customer, it represents a larger portion of the income of a low-income family than of a high-income household. See e.g. Schenk & Oldman, Value Added Tax, see supra note 41, at 9; Tait, Value Added Tax, see supra note 42, at 58-59. Taxing Consumption, OECD (1988) [hereinafter; "OECD"] at 124. Some commentators, however, believe that VAT might be made sensitive to social concerns, see John Kenneth Galbraith, The Affluent Society, 238 (Houghton Mifflin Co. ed, 1984).
46 Tait, Value Added Tax, see supra note 42, at 21-24; Bickley, Value-Added Tax, see supra note 41.
47 Shenk & Oldman, Value Added Tax, see supra note 41, at 9, 28; Tait, Value Added Tax, see supra note 42, at 39-80
48 Governments usually grant preferential VAT treatment to necessities (such as food, clothing, etc.), to merit goods (such as cultural activities, non-profit organizations, etc.) and to so-called hard-to-tax supplies (financial services, auctioneers, etc.) See id.; Terra & Kajus, Value Added Tax in the EC, see supra note 9, at 13-14.
49 Schenk & Oldman, Value Added Tax, see supra note 42, at 29.
50 Alain Schenk, The Pethora of Consumption Tax Proposals: Putting the Value Added Tax, Flat Tax, Retail Sales Tax and USA Tax into Perspective, 33 San Diego L. Rev. 1281, 1305-1309 (1996)
51 Unless the tax paid by the business can be reclaimed the value previously taxed and the previously paid tax itself are again subjected to tax in the next stage of sale. This practice leads to serious price distortions or to the vertical integration of businesses to avoid accumulation of tax through several stages of sale. See Schenk & Oldman, Value Added Tax, supra note 41, at 4-5; OECD, see supra note 45, at 77.
52 See id, at 7-12.
53 Richard A. Musgrave & Peggy B. Musgrave, Public Finance in Theory and Practice (3rd edition 1976) (1973) at 187; Ben Terra, The Place of Supply in European VAT (Kluwer Law International ed, 1998) [hereinafter: "Ben Terra, The Place of Supply in European VAT"] at 6.
54 Schenk & Oldman, Value Added Tax, see supra note 41, at 260.
55 Schenk & Oldman, Value Added Tax, see supra note 41, at 269-272; Ben Terra, The Place of Supply in European VAT, see supra note 53; Tait, Value Added Tax, see supra note 42, at 371-373.
56 Ben Terra, The Place of Supply in European VAT, see supra note 53 at 2; This object of the place-of-supply rules has also been acknowledged by the ECJ, see Case 168/84 Berkholz v Finanzamt Hamburg-Mitte-Altstadt [1985] ECR 2251, recital 14 [hereinafter: "the Berkholz-case"], and Case C-327/94 Dudda v Finanzamt Bergisch Gladbach [1996] ECR I-4595, recital 20 [hereinafter: "the Dudda-case."]
57 Ben Terra, The Place of Supply in European VAT, see supra note 53, at 3-7; Schenk & Oldman, Value Added Tax, see supra note 41, at 260-264.
58 The popularity of the destination principle is partly owing to its incorporation into the GATT within the framework of the WTO, see supra note 35. Article III of the GATT forbids discriminatory treatment of imported products, but allows the levying of a charge equivalent to that applying to domestic products. Article XVI forbids export-subsidies by taxation, but allows the refund of the indirect taxes actually charged. By these permissive rules the GATT gives the opportunity to its members (140 countries at present) to apply the destination principle that, as seen in the following, coexists with tax-refunds on exports and taxation on imports. See Ben Terra, The Place of Supply in the European VAT, see supra note 53, at 5.
59 Schenk & Oldman, Value Added Tax, see supra note 41, at 260.
60 See id, at 227.
61 OECD, see supra note 45 at 114; Ben Terra, The Place of Supply in European VAT, see supra note 53, at 5; Haufler, Commodity Tax, supra note 9, at 7-11.
62 Schenk & Oldman, Value Added Tax, see supra note 41, at 262.
63 Ben Terra, The Place of Supply in European VAT, see supra note 53, at 5; Schenk & Oldman, Value Added Tax, see supra note 41, at 262-263.
64 See id. note 61
65 By setting up this committee, commonly referred to as the `Neumark Committee' after its chairman Professor Fitz Neumark, the Commission fulfilled its duties under Article 99 of the original Treaty of Rome, which required the Commission to consider "how the legislation of the various Member States concerning turnover taxes...can be harmonized in the interest of the common market." See Report of the Fiscal and Financial Committee in The EEC Reports on Tax Harmonization (International Bureau of Fiscal Documentation, 1963) [hereinafter: "the Neumark Report"] cited in Schenk & Oldman, Value Added Tax, supra note 41, at 437; Terra & Kajus, Value Added Tax in the EC, supra note 9, at 3; Alan Buckett, VAT in the European Community, 7 (Butterworths ed., 1992) [hereinafter: "Buckett, VAT in the European Community.]
66 See First Council Directive on the harmonization of legislation of Member States concerning turnover taxes (67/227/EEC) OJ 071 14/04/1967 p.1301
67 It became clear from the report that cumulative turnover taxes existing at that time should be abolished, therefore the First VAT Directive instructed the Member States to replace their indirect taxes by the "common system of VAT" described therein. See Recital 4 of the First Council Directive, supra note 66; The Neumark Report, supra note 65, cited in Schenk & Oldman, Value Added Tax, supra note 41, at 437.
68 See Terra & Kajus, Value Added Tax in the EC, supra note 9, at 6.
69 See supra note 8.
70 This 1 percent of the tax base may be regarded as an additional European levy besides the national rates. However, since it is added to the national rates, it is not noticeable to the citizens. See Terra & Kajus, Value Added Tax in the EC, supra note 9, at 6.
71 Sixth Council Directive on the harmonization of the laws of the Member States relating to turnover taxes (77/388/EEC) OJ L145 13/06/1977 p. 1.
72 The full list of amendatory legislation is available at http://europa.eu.int/eur-lex/en/lif/reg/en_register_093010.html
73 Article 2 of the Sixth Directive, see supra note 71.
74 According to the principle of territoriality only transactions taking place on national territory are subject to tax. As to its relation to the previously detailed origin and destination principles, the territoriality principle underlies both of these principles. As seen previously, the task of the origin and destination principles is to choose the taxing country from those, on the territories of which the transaction occurred. See Terra & Kajus, Value Added Tax in the EC, supra note 9, at 3-4.
75 Article 28h of the Sixth Directive, see supra note 71.
76 The rationale behind the reverse charge or self-assessment system is the wish to ensure taxation at destination. However, application of reverse charge is merely viable in case of business recipients, who have the sufficient means to fulfill such obligation and are motivated for compliance by the right to deduct the input credits. Final consumers lack both, moreover the lack of audit-trail would render enforcement impossible. See Working Paper - 1998, supra note 5, at 12; Consumption Tax Aspects of Electronic Commerce, A Report from Working Party No. 9 on Consumption Taxes to the Committee on Fiscal Affairs, OECD, 15 (2001) [hereinafter: "Consumption TAG Report"]; Jenkins, VAT and Electronic Commerce, supra note 5 at 4.
77 The VIES was established by Council Regulation on administrative cooperation in the field of indirect taxation (EEC) No 218/92 [hereinafter; "the VIES Regulation"] OJ L024 01/02/1992 p. 0001. It is a common system for the exchange of information on intra-Community transactions for tax purposes. It has been set up for the supplementation of the Sixth Directive after the introduction of Council Directive amending the Sixth Directive with a view to the abolition of fiscal frontiers (91/680/EEC) OJ L376 31/12/1991 p. 1. Elimination of border controls necessitated closer cooperation between national tax administrations. See Recital 3 of the VIES Regulation.
78 Article 5 of the Sixth Directive, see supra note 71.
79 Article 6 of the Sixth Directive, see supra note 71.
80 Schenk & Oldman, Value Added Tax, see supra note 41, at 139; Tait, Value Added Tax, see supra note 42, at 387.
81 Article 8 of the Sixth Directive, see supra note 71.
82 Article 9 of the Sixth Directive, see supra note 71.
83 Detailed analysis of Article 9 is provided by chapter 3 of part III of this essay.
84 See Articles 2 and 14 of the Treaty of Rome, supra note 3; Preamble of the First Directive, supra note 66; Tait, Value Added Tax, supra note 42, at 158; OECD, supra note 45, at 114-115; Haufler, Commodity Tax, supra note 9, at 7-11.
85 Tait, Value Added Tax, see supra note 42, at 158.
86
Application of the origin principle results in a VAT burden on imported
products. The country of import therefore should grant an input credit to the
importer to avoid tax cascading. This, however, would mean that the importing
country did not only miss the revenue from tax but suffered a positive loss by
granting the input. In case of not granting input credit to the importer,
imported products will become more expensive following from the tax cascading.
See Schenk & Tait, Value Added Tax, supra note 41, at
437-444.
87 See infra chapters 2 and 3 of part IV of this essay, with special regard to notes 325-327 and 360-363.
88 See Neumark Report, supra note 65, cited in Schenk & Oldman, Value Added Tax, supra note 41, at 437; Terra & Kajus, Value Added Tax in the EC, supra note 9, at 4.
89 See supra note 36, at Part III.
90 Introduction of the clearing-house is impossible if there are significant tax and consequent price differences between the Member States. Agreement on the way of determining the shares of the Member States from the VAT revenue would also be essential. See Terra & Kajus, Value Added Tax in the EC, supra note 9, at 24, 29.
91 For the review of the Proposals put forward by the Commission in this matter see Terra & Kajus, Value Added Tax in the EC, supra note 9, at 26-27.
92 Council Directive amending the Sixth Directive with a view to the abolition of fiscal frontiers (91/680/EEC) OJ L376 31/12/1991 p. 1. Oldman p437.
93 Terra & Kajus, Value Added Tax in the EC, see supra note 9, at 9.
94 See White Paper, supra note 36, at Part III.
95 See, e.g., Tait, Value Added Tax, supra note 42, at 42. The author demonstrates that for the operation of the simplest practical VAT system (one positive rate, a zero rate and some exemptions) requires at least 9 pieces of information from the taxpayer. See also Shenk & Oldman, Value Added Tax, supra note 41, at 9, 28.
96 Article 12 of the Sixth Directive, see supra note 71.
97 Annex H of the Sixth Directive, see supra note 71.
98 Title X of the Sixth Directive, see supra note 71.
99 In order to determine whether a supply is exempted or zero-rated, Title X on exemptions and Title XI on deductions of the Sixth Directive should be read together. See supra note 71.
100 Article 28h of the Sixth Directive, see supra note 71.
101 Titles X and XI of the Sixth Directive, see supra note 71; Schenk & Oldman, Value Added Tax, see supra note 41, at 223.
102 Article 24 of the Sixth Directive, see supra note 71.
103 EUR 5000 at present, see subsection (a) section 2 of Article 24 of the Sixth Directive, supra note 71.
104 Schenk & Oldman, Value Added Tax, see supra note 41, at 118-120; Tait, Value Added Tax, see supra note 42, at 108-141; OECD, see supra note 45, at 147-160.