Committee Reports::Report No. 03 - VAT Uniform Basis of Assessment::01 May, 1974::Report


1. The Joint Committee wishes to submit this interim report to both Houses of the Oireachtas on the undermentioned proposal which was submitted to the Council by the Commission on 29 June, 1973:—

Proposal for a Sixth Council Directive on the harmonisation of legislation of Member States concerning turnover taxes—common system of value-added tax: uniform basis of assessment.

COM (73) 950—20.6.731

2. Before commenting on the proposal itself the Joint Committee is of opinion that a brief outline of secondary legislation concerning indirect taxation in the member countries may be of assistance in connection with its later comments on the proposal itself.

3. Since 1967 five Directives have been adopted by the Council of Ministers in regard to the system of value-added tax (VAT). The first two viz. 227/672 and 228/672 are the basic ones—the former enunciating the philosophy of the common system to be adopted within the Communities and the latter the broad outlines of its implementation. The Third, Fourth and Fifth Directives were in the main ephemeral and dealt principally with the individual cases of Belgium and particularly Italy who were the last of the original member countries to adopt this particular system of taxation.

The two Directives of 1967 permitted of the existence of numerous and significant differences between the systems adopted by individual Member States, particularly in regard to rates of tax and exempted activities and special schemes for small traders and farmers. While not harmonising rates of tax the Directives maintained competitive neutrality by freeing exports from the tax and by applying to imports the same rate of tax as those which applied domestically.

4. On entering the European Communities Ireland accepted the provisions of the 1967 Directives, but, under the Treaty of Accession was allowed a year’s grace so that their provisions did not become binding until 1 January, 1974. VAT had already been introduced into this country under the Value-Added Tax Act, 1972, and certain modifications of the rates of tax, including the extension of the area of application of the zero rate, contained in the 1972 Act were effected in the Finance Act, 1973. These provisions conform in all fundamental respects with the Directives. However, Article 17 of the Second Directive places certain restrictions, as from 1 January, 1974 in the way of any further extension of the zero rate.

5. The present proposed Sixth Directive is in the Commission’s view necessary for two reasons—

(1) the full implementation of the Council Decision of 21 April, 19703 regarding the financing of the Community Budget with the Communities’ own resources, and

(2) to serve as a further rung in the ladder to the attainment of Economic Monetary Union.

(1) Financing of Community Budget from own resources

At present the Communities’ Budget is financed by

(a) levies on imported agricultural products,

(b) customs duties, and

(c) contributions by Member States based on GNP.

In the case of the new Member States the above methods of financing are subject to certain transitional reductions and ceilings. Under the Council Decision of 21 April, 1970 the contribution at (c) will be replaced not earlier than 1975 by the revenue produced by a rate of value-added tax of not exceeding 1% applied to a Community-wide basis of assessment. To ensure equity in this contribution a set of rules was considered essential to determine precisely the area of application of the tax; to ensure that it was identical Under each national law, particularly in regard to such matters as exemptions; the method of calculating the taxable amount; and the provision for special schemes.

(2) Progression to Economic Monetary Union

The commitment to a common VAT system was reinforced by a Resolution of the Council of 22 March, 1971 which, inter alia, declared that in the field of taxation the interpenetration of economies must be achieved while ensuring the maintenance of an appropriate balance by the adoption of Community rules on the uniform basis of assessment. One of the ultimate aims of Economic Monetary Union (EMU) is to abolish the controls on and barriers to the free movement, within the Community, of persons, goods, services, capital and in particular, to do away with the border tax adjustments affecting imports and exports between Member States. This of necessity involves the harmonisation of the different systems of VAT now in operation.

6. The Draft Directive does not set out the rates of tax to be applied. It is intended that this will be the final stage in the process of harmonisation and will be the subject of a further proposal from the Commission. What it does is to provide for the harmonisation of the basis of taxation to be adopted by setting out in great detail regulations for a uniform basis of assessment to tax. Included are provisions defining the area of the application of the tax, the exemptions to be allowed, the method and timing of assessment, collection of tax, special schemes for specific groups and the establishment of a VAT Committee responsible for the satisfactory operation of the system.

7. The adoption by the Council of the draft Directive in its present form would seem to the Joint Committee to raise the question of the extent to which the following provisions in our own taxation code would require to be adapted:

(a) zero rating of items other than exports and the continuation of the present two-tier system of the 36-75% rate;

(b) the special provisions for agriculture and the level of exemption applicable to small traders;

(c) certain exemptions (e.g. passenger transport, legal profession); and

(d) the period allowed for making returns.

The Joint Committee notes from the transitional provisions contained in Article 28 that the Member States which exercised the right conferred on them by Article 17 of the Second Directive 228/67 to apply zero rates to certain items may maintain such reliefs until such date as shall be fixed by the Council on a proposal from the Commission and that such date shall not be later than that on which the charging of tax on imports and the remitting of tax on exports on trade between Member States are abolished.

The Joint Committee further note from paragraphs 2 and 3 of Article 4 of the Council Decision of 21 April, 1970 that the new method of financing the Community Budget by way of the maximum 1% VAT contribution cannot come into operation until the harmonised VAT system has been applied in at least three Member States. It is of opinion that, in the light of these considerations, the proposed operative date of 1 January, 1975 is not likely to be met and consequently does not consider it necessary to make any further comment on the draft Directive at this stage. It proposes to keep the matter under review and to report again to the Houses when the situation appears to so warrant it.


Chairman of the Joint Committee.

1st May, 1974.

1. O.J. C.80, 5/10/73.

2. O.J. 71, 14/4/67.

3. O.J. 1-.94, 28/4/70