EXPLANATORY MEMORANDUM

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letters dated 7 September 2018 of the request made by Latvia. By letter dated 10 September 2018, the Commission notified Latvia that it had all the information it considered necessary for appraisal of the request.

By letter registered with the Commission on 20 June 2018, Latvia requested an authorisation to continue to apply a measure derogating from the overall principles governing the right of deduction of input VAT in relation to certain passenger cars. Together with the request for extension, Latvia submitted a report including a review of the percentage foreseen for the limitation of the right of deduction.

Pursuant to Article 395(1) of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (hereafter "the VAT Directive"), the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to apply special measures for derogation from the provisions of that Directive in order to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance.

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Article 168 of the VAT Directive provides that a taxable person is entitled to deduct VAT charged on purchases made for the purpose of taxed transactions. Article 26(1)(a) of the same Directive requires the use of goods forming part of the assets of a business for private purposes to be a supply of services for consideration if the VAT on the goods was eligible for deduction. This system allows for the recovery of initially deducted VAT in relation to the private use.

In the case of passenger cars, this system is difficult to apply, in particular because it is difficult to identify the split between private and business use. Where records are kept, they add an additional burden to both the business and the administration in maintaining and checking them.

By Council Implementing Decision 2013/191/EU Latvia was granted the authorisation to restrict the right of deduction to 80% in relation to certain passenger cars. Latvia considered that this percentage did not correspond to actual circumstances and by Council Implementing Decision (EU) 2015/2429 Latvia was granted the authorisation to restrict the right of deduction to 50%. The latter Decision expires on 31 December 2018 and Latvia requested to prolong it for another limited period of time.

As required by Article 6(2) of Implementing Decision (EU) 2015/2429, Latvia submitted a report including the review of the percentage set for the VAT deduction.

Latvia considers that the applied percentage limit remains appropriate. During the period of application of the special measure Latvia has made full use of the deduction restriction and recognises that it allows administrative burden to be eased for VAT payers and for the tax administration where a passenger vehicle is not solely used for business purposes.

The conditions for the application of the derogation continue to apply. Thus, the special measure applies to all passenger cars with a maximum of eight seats in addition to the driver's seat and under a certain weight that are not used exclusively for business purposes. Passenger cars which are used for certain specific activities are excluded from the restriction on the right to deduct and would be treated under the normal rules: cars purchased for resale, hire or lease; cars used for transportation of passengers (such as taxis) or goods; cars used for driving lessons; cars used for guard or emergency services; cars used as car sales demonstration vehicle.

Given the positive impact of the special measure on the administrative burden of tax payers and of tax authorities, it is proposed to grant the derogating measure for another limited period, until 31 December 2021. Any extension request should be accompanied by a report which includes a review of the percentage applied and should be sent to the Commission by 31 March 2021.