amending Implementing Decision 2014/797/EU authorising the Republic of Estonia to apply a measure derogating from point (a) of Articles 26(1) and Articles 168 and 168a of Directive 2006/112/EC on the common system of value added tax

EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax ('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.

By letter registered with the Commission on 18 April 2017, Estonia requested an extension of the derogation from Article 168 of the VAT Directive in order to continue to restrict the right to deduct the input VAT on expenditure connected with passenger cars. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 14 June 2017 of the request made by Estonia. By letter dated 15 June 2017, the Commission notified Estonia that it had all the information it considered necessary for appraisal of the request.

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Articles 168 and 168a of the VAT Directive provide 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.

Estonia is currently authorised on the basis of Council Implementing Decision 2014/797/EU to restrict to 50 % the right to deduct VAT on the purchase, leasing, intra-Community acquisition, and importation of certain passenger cars as well as expenditure related thereto. This Decision shall expire on 31 December 2017.

Estonia has requested to prolong the authorisation to limit the initial deduction to a set percentage and in turn to relieve the business from accounting for tax on the private use. Estonia informed the Commission that the grounds for the prolongation of the measure are largely the same as described in the previous request. The application for a derogation is a continuation of the arrangements provided for in the aforementioned Council Decision. In accordance with Article 6 of Council Decision 2014/797/EU, Estonia has also presented a report informing that from the moment of the implementation of the derogation, companies have declared that around 66% of the cars owned by them are used partly for business-related purposes confirming that the derogation is justified.

The measure will apply to all passenger cars with a maximum of eight seats in addition to the driver’s seat, not exceeding 3500 kilograms and which are not used exclusively for business purposes. However, passenger cars which are used for certain specific activities would be 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), and cars used for driving lessons.

The restriction to the right of deduction limit should apply to VAT paid on the purchase, leasing, intra-Community acquisition, and importation of specified passenger cars as well as expenditure related thereto.

According to Estonia, the deduction limit should be set at 50%. The estimated extent of company cars use for private purposes in Estonia is around 60%. However as this is based on indirect evidence and assumptions and thus could be overestimated, the 50% input VAT deduction limit is the most appropriate.

The derogation should be limited in time to 31 December 2020, so that it can be assessed whether the 50% restriction is still a correct reflection of the overall apportionment between business and private use. Any extension request should be accompanied by a report which includes a review of the percentage applied and should be sent to the Commission with that request by 31 March 2020.

•Consistency with existing policy provisions in the policy area

Similar derogations in relation to the right of deduction have been granted to other Member States.

Article 176 of the VAT Directive stipulates that the Council shall determine the expenditure on which the VAT is not deductible. Until such time, it authorises Member States to maintain exclusions which were in place on 1 January 1979. There are therefore a number of 'stand still' provisions restricting the right to deduct in relation to passenger cars.

Notwithstanding previous initiatives to establish rules on which categories of expenditure may be subject to a restriction on the right to deduct, such derogation is appropriate in the awaiting of a harmonisation of these rules at EU level.

2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

•Legal basis