2.2.1 The early beginnings of EU VAT

In 1957, the European Community was founded and the Treaty of Rome was signed by all joining Member States, which at the time were France, Italy, Germany, The Netherlands, Belgium and Luxembourg.1 According to the preamble to the Treaty of Rome, the Member States affirm as the essential objective of their efforts the constant improvement of the living and working conditions of their peoples, and recognise that the removal of existing obstacles calls for concerted action in order to guarantee steady expansion, balanced trade and fair competition.

In order to guarantee balanced trade and fair competition, the Treaty of Rome, (in Part Three, Title I, “Common Rules”) includes Tax Provisions (Chapter 2, page 80). The Articles included in this chapter concern the national tax rules and regulations and the harmonisation of national legislations. Article 99 reads as follows:

“The Commission shall consider how the legislation of the various Member States concerning turnover taxes, excise duties and other forms of indirect taxation, including countervailing measures applicable to trade between Member States, can be harmonised in the interest of the common market.

The Commission shall submit proposals to the Council, which shall act unanimously without prejudice to the provisions of Articles 100 and 101.”

Before the EEC Commission drafted a proposal-Directive based on its mandate provided for in Article 99, it gathered advice from one of the three working groups it had appointed. Working group I, charged with the task of researching the possibilities of harmonising turnover taxes in the EEC Commission, appointed three subgroups (A, B and C) for this purpose. Their studies resulted in a report (the ABC-report).2 In the general introduction to the ABC-report, the EEC Commission mentions four principal disadvantages of the diversity of turnover tax legislation:

The EEC Commission also commissioned a study by the Fiscal and Financial Committee, which it had appointed in 1960 to study the extent to which the tax systems of the Member States conflicted with the establishment of a common market. This study resulted in the ‘Neumark-report’,4 called after its Chairman and General Reporter, Prof. Dr. Dr. h.c. Dr. h.c. Fritz Neumark.

Even though the ABC-report does not come to any (clear) conclusion, one can read in it that a tax on the added value is considered most suitable to function as a common system of taxation in the EEC. The Neumark-report positively recommends this system. The recommendation to adopt the value added tax is by some seen as a rather audacious one, since the tax only existed in one of the Member States (France).5 The Commission however, in a draft Directive,6 in 1962 proposed this system as the common system for the EEC.

The Commission recognises as an essential prerequisite for the aim of the Treaty, which is to create an economic union based on vigorous competition and having the characteristics of an internal market, that the turnover tax legislation of Member States should not distort competition nor hinder the free circulation of goods and services in the Common Market.7 It is in the interest of the Common Market to harmonize turnover tax in order to eliminate as far as possible all distortions in the terms of competition, both nationally and at Union level. For this purpose, multi-stage, cumulative taxation should be abolished, as this is not a system that is neutral in its effects on competition. Also, the legislation in the Member States permitted the application of countervailing charges to imports and drawbacks on exports, thus maintaining tax frontiers between Member States. The Commission considered it is evident that harmonization must therefore culminate in the abolition of multi-stage, cumulative tax systems and the adoption by all Member States of a common system of added-value tax.