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 30 March 2016, the Italian Republic requested authorisation to continue to apply a derogation measure concerning the right of deduction of VAT borne on certain types of means of transport. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 22 June 2016 of the request made by the Italian Republic. By letter dated 23 June 2016, the Commission notified the Italian Republic that it had all the information necessary to consider the request.

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Article 168 and 168a of the VAT Directive provides that a taxable person is entitled to deduct the VAT charged on purchases made for the purposes of his taxed transactions. At the same time, Article 26(1)(a) of the VAT Directive stipulates that the use of goods, forming part of the assets of a business, for private purposes is to be considered as a supply of services for consideration if the VAT on these goods was wholly or partly deductible. As a result, the system ensures that final consumption is taxed when the corresponding input VAT was initially deducted.

In relation to motor vehicles, it is sometimes difficult and burdensome for the taxable persons to identify and register the split between business and private use and for the tax administration to verify the effective division of use. This would be the case even if Italy would make use of the option provided for in Article 168a(2) of the VAT Directive to limit the deduction on expenditure related to company cars to the proportion of the taxable person's effective business use. In addition, because of the number of mixed use vehicles, tax evasion could become considerable.

In order to simplify VAT collection and to combat tax evasion, the Italian Republic requested and obtained in 2007 from the Council an individual derogation allowing it to restrict, in a compulsory way, until 31 December 2010, the right of deduction to 40% in relation to motorised road vehicles (other than agricultural or forestry tractors, normally used for carrying persons or goods by road with a maximum authorised mass not exceeding 3 500 kilograms and having not more than eight seats in addition to the driver's seat). However, it should be pointed out that certain categories of vehicles were specifically excluded from this restriction, such as vehicles forming part of stock-in-trade, for instruction by driving schools, used for hire or leasing, used by sales representatives and taxis. At the same time, businesses would be relieved from accounting from tax on the private use. This decision was extended by Council Decision 2010/748/EU up to 31 December 2013 and by Council implementing Decision 2013/679/EU up to 31 December 2016.

In accordance with Article 6 of the above-mentioned Decision, the Italian Republic has presented a report covering the application of the Decision which includes a review of the percentage restriction.

It appears from information provided by the Italian Republic in that report that, in particular given the very high number of small enterprises in the Italian Republic (99% or 5,2 million taxable persons are to be considered as micro-entities, essentially consisting of individuals or with only one employee), the limitation to 40% would still correspond to the actual circumstances and therefore be appropriate.

However, any extension should be limited in time in order to assess whether the conditions on which the derogation is based would still be valid. Therefore, it is proposed to extend the derogation until the end of 2019 and to request the Italian Republic to present a new report if a new extension request is envisaged beyond that end date.

•Consistency with existing policy provisions in the policy area

Article 176 of Directive 2006/112/EC 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 motor vehicles.

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

Article 395 of the VAT Directive.

•Subsidiarity (for non-exclusive competence)