authorising the Republic of Poland to continue to apply a measure derogating from Articles 26(1)(a) and 168 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 (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.

By letter registered with the Commission on 8 February 2016, Poland has 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 tax on expenditure connected with certain motor vehicles. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 6 June 2016 of the request made by Poland. By letter dated 8 June 2016, the Commission notified Poland that it had all the information necessary to consider the request.

1.CONTEXT 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 motor vehicles, this system can be difficult to apply for a number of reasons, notably because it is difficult to identify accurately the split between business and non-business use. Where records are kept, they add an additional burden to both the business and the administration in maintaining and checking them. The number of vehicles concerned means that even small-scale individual evasion has the capacity to grow into significant sums.

The percentage restriction requested is 50%. This is based on Poland's own assessment and, under the terms of the proposal, would be reviewed upon any request by Poland for extension beyond 2019.

Poland is currently authorised on the basis of Council Implementing Decision 2013/805/EU to restrict to 50 % the right to deduct VAT on the purchase, intra-Community acquisition, import, hire or lease or other agreements of similar nature concerning certain motor vehicles other than passenger cars, up to a maximum of PLN 6 000. That Decision shall expire on 31 December 2016.

Poland informs that the grounds for this application for a derogation have not changed and are similar to those described in the previous request. The application for a derogation is a continuation of the arrangements provided for in the aforementioned Council Decision.

The restriction would apply only to motor vehicles which are not used exclusively for business purposes and to expenditure related to those vehicles.

This derogation also involves partially restricting the right to deduct to 50% of input tax on purchases of fuel for the motor vehicles caught by the derogation and on other operating expenditure, including the repair and maintenance of those vehicles, and on the expenditure on supplies or services provided in connection with those vehicles and their use, including expenditure for alterations or assembly of parts in those vehicles (with the exception of expenditure for alterations or assembly of parts in those vehicles which are used exclusively for business purposes, for example, assembly of a taximeter).

Poland indicates that motor vehicles caught by this derogation can, by virtue of their design, also easily be used for non-business purposes.

Certain types of motor vehicles are excluded from that restriction and would therefore be subject to the normal rules, namely any vehicle with more than 9 seats (including the driver's) and with a total maximum weight of more than 3500 kilograms. This mainly restricts the field of application to passenger cars, vans, pick-ups and motorbikes. The derogation would also not affect vehicles exclusively intended for resale or to be made available for use for consideration under a hire, rental or leasing contract or other contracts of similar nature or vehicles designed for the carriage of at least ten persons including the driver.

Poland has requested that it is allowed to continue to limit until 31 December 2019 the initial deduction to a set percentage and in turn relieve businesses from accounting for VAT on the private use. This derogation removes the need to keep detailed private mileage records for each car and to account for the VAT on the private use. The derogation is therefore essentially to be considered as a simplification measure. This has the benefit of simplifying the system for all concerned and ensuring that a percentage of the tax, which might have otherwise been evaded, is collected.

On the basis of the information provided by Poland, it appears that the average business use of mixed-use company cars is still around 50%. The requested extension therefore appears to be justified. Derogations are normally granted for a limited time as to allow an assessment whether the special measure is appropriate and effective. Any extension should therefore be limited in time in order to assess whether the conditions, on which the derogation is based, would still be valid.

It is therefore proposed that the request will be granted until 31 December 2019 and to request Poland to present a report by 1 April 2019 including a review of the percentage restriction applied in case a further extension would be envisaged beyond 2019.

The derogation would not, except to a negligible extent, affect the overall amount of the tax revenue of the Member State collected at the stage of the final consumption.

•Consistency with existing policy provisions in the policy area