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Chapter 10 - Taxation
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December 2004

Background

The EU acquis in this chapter mainly covers indirect taxation, in particular the Value Added Tax (VAT) and excise duties regimes, while on direct taxation the acquis is limited to legislation on corporate taxation.

VAT was introduced in the European Economic Community in 1970 by the first and second VAT directives and was intended to replace the production and consumption taxes that had hitherto been applied by the Member States. The decision taken in 1970 to allocate a proportion of VAT revenue calculated on a unified basis to finance the Community budget (part of the Community 's 'own resources') paved the way for harmonisation of VAT. The sixth VAT directive (77/388/EEC) ensured that the tax was applied to the same transactions in all Member States, so that they formed a common basis for funding the Community, and introduced a common assessment basis. The sixth directive, currently in force, represents the main body of law in the area of VAT, laying down all Community definitions and principles. These include the application of a non-cumulative general tax on consumption, which is levied on all stages of production and distribution of goods and services. This implies an equal tax treatment of domestic and non-domestic (import) transactions. Furthermore, the tax is based upon the neutrality principle whereby the tax applied to goods and services is exactly proportional to the price, whatever the number of transactions which take place in the production and distribution process before the stage at which the tax is finally charged. While laying down the major principles of VAT, the legislation leaves a number of options to Member States.

In the field of excise duties the acquis contains harmonised legislation as regards mineral oils, tobacco products and alcoholic beverages. Community legislation establishes the structure of the duty that should be charged, together with a system of minimum rates for each product group. Under the Community excise legislation, goods are subject to duty when they are produced within the Community or imported from a third country. However, the duty is payable only to the Member State in which the goods are consumed, and at the rates applicable in that Member State. The cornerstone of the excise system for movement of harmonised excisable goods between Member States is the tax warehouse, where goods subject to excise duty can be produced and stored under suspension of the duty. As a result of the introduction of the single market, all fiscal controls at the Community's internal frontiers were abolished by 1 January 1993.

The Community legislation in the area of administrative co-operation and mutual assistance provides tools to circumvent tax evasion and tax avoidance extending across the frontiers of Member States. It allows Member States to gather information about tax subjects from other Member States by exchange of information both automatically and on request. Finally, the acquis in the area of direct taxation mainly concerns some aspects of corporation taxes and capital duty. The measures in the field of corporation tax aim at facilitating administrative co-operation between national tax authorities and at removing obstacles to cross-border activities between enterprises. The Code of Conduct for business taxation represents a political commitment by Member States to tackle potentially harmful tax measures. Member States are committed to not introducing new tax measures which are harmful within the meaning of the Code and to examine their existing laws and practices with regard to the principles of the Code and to amend them where necessary as soon as possible.

A strong and well-equipped administration is required for the application and enforcement of the taxation acquis.

On the whole, candidate countries have an indirect taxation regime close to the EU's, although on a number of technical specific issues (e.g. exemptions, rate levels, tax refunds, etc.) they are not yet completely aligned with the acquis. Most negotiating countries have provided the Conference with a timetable for full alignment, on both VAT and excise duties. This requires careful monitoring. In their negotiating positions, most candidate countries have declared that they accept and will apply the principles of the Code of Conduct for business taxation. The Commission is in the process of analysing the relevant legislation in candidate countries, with a view to identifying potentially harmful practices not in line with the Code of Conduct.

All candidate countries requested transitional measures and a limited number of derogations, mostly in the field of VAT and excises. One country put forward a request for a transitional arrangement in the field of direct taxation. The level of rates was certainly the most sensitive issue for candidate countries during negotiations. The VAT rates they apply may differ from the levels requested by the acquis, and in most cases excise duty rates are considerably lower than in the EU. Governments fear the economic and social implications of significantly raising rates -and hence prices- of socially sensitive goods by accession. Therefore, all candidate countries requested transitional periods on specific goods or services, aiming at stretching over a longer period of time the rate adjustment and at reducing its economic and social impact.

In considering whether transitional measures could be accepted, the EU took into consideration the need to safeguard the proper functioning of the internal market in the field of taxation, as well as the political, economic and social implications for the candidate countries. As a result, some transitional periods limited in time could be accepted, insofar as the impact on competition or on the internal market was considered to be limited, and a social need for candidate countries was clearly demonstrated.

State of play

Chapter 10 has been opened with all countries. It was finally closed with Hungary, the Czech Republic, Slovenia, Cyprus, Estonia, Latvia, Lithuania, Malta, Poland and Slovakia in December 2002.
It has also been closed with Bulgaria and with Romania in December 2004.

Compliance with the acquis

The latest assessment of each candidate country’s compliance with the acquis under this chapter heading, can be found in the 2004 Regular Reports and in the Comprehensive Monitoring Reports, available at:
http://ec.europa.eu/enlargement/archives/key_documents/reports_2004_en.htm.

Country by country

Bulgaria 

  • Chapter opened: July 2001
  • Status: closed in December 2004 (provisionally closed in May 2002)
  • Transitional arrangements:
    • · Turnover threshold to exempt SMEs from VAT set at about € 25 000
    • VAT exemption for international passenger transport
    • Special excise regime for fruit growers' distillation for personal consumption
    • Lower excise duty rates on cigarettes until 31 December 2009.

Cyprus (New Member State)

  • Chapter opened: November 1999
  • Status: Closed December 2002 (provisionally closed in April 2002)
  • Transitional arrangements:
    • Turnover threshold for to exempt SMEs from VAT set at € 15 600.
    • Zero VAT rate on foodstuffs, until 31 December 2007
    • Zero VAT rate on pharmaceuticals until 31 December 2007
    • Reduced VAT rate on restaurants until 31 December 2007
    • VAT exemption on building land
    • VAT exemption on international passenger transport

Czech Republic (New Member State)

  • Chapter opened: November 1999
  • Status: Closed December 2002 (provisionally closed in December 2001)
  • Transitional arrangements:
    • Turnover threshold to exempt SMEs from VAT set at
      € 35 000
    • Reduced VAT rate on heating until 31 December 2007
    • Reduced VAT rate on construction until 31 December 2007
    • Lower excise duty rates on cigarettes until until 31 December 2007
    • Special excise regime for fruit growers’ distillation for personal consumption
    • VAT exemption on international passenger transport

Estonia (New Member State)

  • Chapter opened: November 1999
  • Status: Closed December 2002 (provisionally closed June 2002)
  • Transitional arrangements:
    • Reduced VAT rate on heating until 31 December 2007
    • Turnover threshold to exempt SMEs from VAT set at € 16 000
    • Lower excise duty rates on cigarettes until 31 December 2009
    • Full alignment to the parent-subsidiary directive until 31 December 2008
    • VAT exemption on international passenger transport

Hungary (New Member State)

  • Chapter opened: November 1999
  • Status: Closed December 2002 (provisionally closed in June 2001)
  • Transitional arrangements:
    • Reduced VAT rate on heating until 31 December 2007
    • Turnover threshold to exempt SMEs from VAT set at € 35 000
    • Reduced VAT rate on electricity, gas for one year after accession
    • Reduced VAT rate on restaurants until 31 December 2007.
    • VAT exemption on international passenger transport
    • Special excise regime for fruit growers' distillation for personal consumption.
    • Lower excise duty rate on cigarettes until 31 December 2008

Latvia (New Member State)

  • Chapter opened: May 2001
  • Status: Closed December 2002 (provisionally closed in June 2002)
  • Transitional arrangements:
    • Turnover threshold to exempt SMEs from VAT set at € 17 200
    • Lower excise duty rates on cigarettes until 31 December 2009
    • VAT exemption on international passenger transport
    • VAT exemption on royalties
    • Reduced VAT rate on heating until 31 December 2004

Lithuania (New Member State)

  • Chapter opened: May 2001
  • Status: Closed December 2002 (provisionally closed in March 2002)
  • Transitional arrangements:
    • Turnover threshold to exempt SMEs from VAT set at € 29 000
    • Lower excise duty rates on cigarettes until 31 December 2009
    • VAT exemption on international passenger transport

Malta (New Member State)

  • Chapter opened: June 2001
  • Status: Closed December 2002
  • Transitional arrangements:
    • Zero VAT rate on foodstuff until 31 December 2009
    • Zero VAT rate on pharmaceuticals until 31 December 2009
    • VAT exemption on water
    • VAT exemption on new buildings and building land
    • VAT exemption on inland passenger transport and domestic inter-island sea passenger transport
    • Turnover threshold to exempt SMEs from VAT set at € 37 000 (for enterprises for which the economic activity consists mainly in the supply of goods), 24 300, (for enterprises for which the economic activity consists mainly in the supply of services with a low value added), and 14 600 (all other cases)

Poland (New Member State)

  • Chapter opened: November 1999
  • Status: Closed December 2002 (provisionally closed in March 2002)
  • Transitional arrangements:
    • Zero VAT rate on books until 31 December 2007
    • Reduced VAT rates on restaurants until 31 December 2007
    • Turnover threshold to exempt SMEs from VAT set at € 10 000
    • Lower excise duty rate on cigarettes until 31 December 2008
    • Reduce excise duties on ecological fuels until one year after accession
    • Reduced VAT rate on construction until 31 December 2007
    • Super-reduced VAT rate on agriculture inputs, excluding machinery until 30 April 2008
    • Super-reduced VAT rate on foodstuffs until 30 April 2008
    • VAT exemption on international passenger transport

Romania

  • Chapter opened: October 2001
  • Status: closed in December 2004 (provisionally closed in June 2003)
  • Transitional arrangements:
    • Turnover threshold to exempt SMEs from VAT set at about € 35 000
    • VAT exemption for international passenger transport
    • Special excise regime for fruit growers' distillation for personal consumption
    • Lower excise duty rates on cigarettes until 31 December 2009

Slovakia (New Member State)

  • Chapter opened: June 2001
  • Status:Closed December 2002 (provisionally closed in March 2002)
  • Transitional arrangements:
    • Reduced VAT rate on heating until 31 December 2008
    • Reduced VAT rate on construction until 31 December 2007
    • Reduced VAT rate on electricity, gas until one year after accession
    • Turnover threshold to exempt SMEs from VAT set at € 35 000
    • Lower excise duty rates on cigarettes until 31 December 2008
    • Special excise regime for fruit growers' distillation for personal consumption
    • VAT exemption on international passenger transport

Slovenia (New Member State)

  • Chapter opened: November 1999
  • Status: Closed December 2002 (provisionally closed in December 2001)
  • Transitional arrangements:
    • Reduced VAT rates on construction until 31 December 2007
    • Reduced VAT rates on restaurants until 31 December 2007
    • Turnover threshold to exempt SMEs from VAT set at € 25 000
    • VAT exemption on international passenger transport
- updated: 17/12/2004
 
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