The European Commission has presented a proposal to simplify current Value Added Tax (VAT) compliance obligations to help cross-border traders who supply goods and services to other EU Member States. In particular the proposal would provide for a “one-stop-shop” system whereby a trader could fulfil all his VAT obligations for EU-wide activities in the Member State in which he is established. This system would allow traders to use a single VAT number for all supplies made throughout the EU and to make VAT declarations to a single electronic portal that would then be submitted automatically to the different Member States to which the trader supplies goods or services. The proposal also contains five other simplification measures. Studies including the Commission’s European Tax Survey have demonstrated that VAT obligations are at present extremely burdensome and costly for cross-border activity.

The European Commission welcomed the signature, by the US President of the Bill repealing the illegal FSC/ETI export subsidies, which thus becomes US law. This is the latest act in an effort from the US to comply with several WTO rulings which had found the legislation in question to provide illegal subsidies to US exporters to the tune of $US 4 billion per year. The law, however, provides that FSC/ETI benefits will still be available to US exporters up to the end of 2006 and in some cases for an unlimited period thereafter.

The US law, which applies only as from next year, provides for a 2-year transitional period; during that period FSC/ETI benefits of more than $US 4 billion and $US 3 billion in 2005 and in 2006 respectively will still be available to US exporters. Furthermore, FSC/ETI benefits will continue to be available without any limitations to all exporters who have entered binding contracts before 17 September 2003 under the so-called grandfathering clause, favouring producers of large capital goods which have long delivery times.

The Commission will now propose to the Council to suspend the sanctions currently in place, as from 1 January 2005, date when the US repeal bill will enter into force. The Commission will also go to the WTO dispute settlement system as regards the WTO compliance of the new legislation.

Background:

The WTO found the FSC to constitute an illegal export subsidy under both the Subsidies Agreement and (in relation to agricultural products) the Agriculture Agreement. The US was given until 1 November 2000 to withdraw the FSC scheme.

On 15 November 2000, President Clinton signed the ETI Act, which meant to replace the FSC. The ETI Act, however, did not modify the substance of the export subsidy scheme and as a result the EU challenged it before the WTO. In January 2002, the WTO confirmed that the ETI Act also constituted a prohibited export subsidy and that the US had not, therefore, complied with its previous ruling.

On 7 May 2003 the WTO endorsed the EU request for countermeasures for a level roughly equal to the estimated annual US subsidy (i.e. US$ 4 billion).

The Council Regulation imposing countermeasures was published on 17 December 2003 in OJ L 328 p.3. With the clear objective of obtaining withdrawal of the US measures, it provided for a gradual imposition of countermeasures as from 1 March 2004 at the level of 5%, followed by automatic, monthly increases of 1% up to a ceiling of 17% to be reached in March 2005. The current level is 12%. The targeted products cover a wide variety of sectors (e.g. steel, textiles, paper) with the exception of the civil aircraft sector.

The EU Council on 17 October adopted a regulation laying down implementing measures for the common system of value added tax.

The regulation sets out certain aspects of the basic VAT directive (the “sixth VAT directive”: 77/388/EEC) with the objective of ensuring that application of the VAT system complies more fully with the objective of the internal market, in cases where divergences in application have arisen or may arise which are incompatible with the proper functioning of the internal market.

The new measures, which will come into force in July 2006, aim at ensuring clarification of VAT law, in particular in respect to:
• The place of supply, and therefore taxation, of various types of goods and services;

• Exemption from VAT of certain goods and services;
• The taxable amount for VAT purposes;
• The definition of electronically supplied services;

• Accounting details for simplified arrangements for the application of VAT by non-EU suppliers of electronic services.

The European Commission has decided to bring an action in the Court of Justice against Italy for imposing the Sicilian environmental tax. The Commission considers that this tax, which is essentially levied on natural gas from Algeria, infringes the European Community’s Common Customs Tariff and runs counter to the basic principles governing the common commercial policy and the EU’s international obligations under the Cooperation Agreement with Algeria. The Italian authorities have not replied to the reasoned opinion (the second stage of the infringement proceedings provided for in Article 226 of the EC Treaty) sent to them in July 2004, nor have they brought the Italian legislation on the above tax into line with Community law.

The European Commission has welcomed the approval by the Council of Ministers of a Commission proposal to create a Pan-Euro-Mediterranean zone of cumulation of origin. The new rules will result in the creation of a free trade area between the European Union and 16 trade partners (Algeria, Bulgaria, Egypt, Faeroe Islands, Iceland, Israel, Jordan, Lebanon, Morocco, Norway, Romania, Syria, Switzerland, Tunisia, Turkey, West Bank and Gaza Strip).

Background:

Cumulation of origin is an instrument that allows material to be sourced and manufactured in a number of countries without the finished product losing the benefit of preferential customs tariffs when it enters the EU. The system has been successfully applied since 1997 between the EU and EFTA countries and those of central and eastern Europe and since 1999 with Turkey.

Today’s Council decision opens the way for the extension of this system to those Mediterranean partners that participate in the Euro-Mediterranean Partnership (the Barcelona Process). It will make it possible, for example, for Tunisian garment manufacturers to source fabrics in Turkey and to export the garments with preferential duty rates to the Community. Moreover these garments can be re-exported from the Community to Switzerland or to any other participating country and benefit there from preferential tariff treatment.

The system will be effective among countries that have concluded free trade agreements with the EU and EFTA countries and with each other. The prospect of the entry into force of the scheme constitutes therefore a major incentive for the conclusion of free trade agreements between the Mediterranean countries. The system also harmonises among all participating countries the rules of origin which determine which goods can benefit from the lower rates of customs duty under the preferential trade arrangements. The EU has already signed agreements with all Mediterranean countries concerned and therefore the EU’s participation in the scheme only requires the amendment of the rules of origin attached to these agreements. As a result of the Council’s decision, the EU now formally proposes to the partner countries the adoption of the new rules of origin.