EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of Council 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 12 April 2019, Italy requested an extension of the derogation from Articles 168 and 26(1)(a) of the VAT Directive that it currently applies. In particular, Italy asks for an authorisation to continue to derogate from Article 168 by limiting to 40% the right to deduct input VAT charged on expenditure related to motorised road vehicles not wholly used for business purposes. In addition, Italy requests an authorisation to continue to derogate from Article 26(1)(a) by exempting from VAT the use for private purposes of vehicles included in the assets of a taxable person’s business, where such vehicles are subject to a restriction of the right to deduct.

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 13 May 2019 on the request made by Italy. By letter dated 14 May 2019, the Commission notified Italy that it had all the information it considered necessary for the appraisal of the request.

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 of goods or services used for the purposes of taxed transactions in the Member State where such transactions take place. Article 26(1)(a) of the same directive stipulates that the use for private purposes of goods forming part of the assets of a business shall be considered as a supply of services for consideration if the VAT on such goods was eligible for deduction. In the case of motorised road vehicles forming part of the assets of a business, the application of the above provisions encounters a number of practical difficulties, in particular because it is not easy to distinguish between private and business use of those vehicles. In cases where records about the use of such vehicles are kept, they add an additional burden to both businesses and administrations in terms of maintaining and controlling them. Moreover, the application of those provisions may increase the risk of VAT abuse or fraud attempts, notably through a possible underreporting of the private use of such vehicles. Italy is currently authorised to derogate from Article 168 of the VAT Directive by limiting to 40% the right to deduct VAT on the purchase of a vehicle, including contracts of assembly and the like, manufacture, intra-Community acquisition, importation, leasing or hire, modification, repair or maintenance, and expenditure on supplies or services performed in relation to vehicles and their use, including lubricants and fuel, provided that the vehicle in question is not used exclusively for business purposes. The derogation covers all motor vehicles but agricultural or forestry tractors, normally used for carrying persons or goods by road and having a total maximum weight lower than 3.5 tonnes and fewer than nine seats, including the driver’s seat. In contrast, it does not cover expenditure relating entirely to the taxable person’s business. This would be the case with vehicles that belong to the taxable person’s stock-in-trade in the exercise of their activity, and vehicles used as taxis, as well as vehicles used for instruction by driving schools, and those used for hire or leasing or by sales representatives. Likewise, Italy is authorised to derogate from Article 26(1)(a) of the VAT Directive by exempting from VAT the use for private purposes of vehicles forming part of the assets of a taxable person’s business where those vehicles are covered by the above derogation. The authorisation for the derogating measures mentioned above was first granted by the Council by means of Decision 2007/441/EC of 18 June 2007 until 31 December 2010. Subsequently, the derogating measures were prolonged three times following Italy’s request: Council Implementing Decision 2010/748/EU of 29 November 2010 extended them for the period 1 January 2011 until 31 December 2013; Council Implementing Decision 2013/679/EU of 15 November 2013 for the period 1 January 2014 until 31 December 2016; last, Council Implementing Decision 2016/1982/EU of 8 November 2016 for the period 1 January 2017 until 31 December 2019. The present request from Italy to prolong further the derogation until 31 December 2022 is based on the same grounds as those presented in the previous requests. The request is accompanied by a report including a review of the percentage limitation applied on the right of deduction, as required by Article 6 of Decision 2007/441/EC. The information provided by Italy demonstrates that the current rate of 40% is still appropriate because it corresponds to the current circumstances of the Italian economy with regard to the ratio of business and private use of the motorised road vehicles concerned. According to Italy’s report, the Italian economy is dominated by microenterprises, which represent 99% of Italian firms and amount to some 5.2 million taxable persons. This is revealing about the difficulty for the authorities to verify the private and business use of motorised vehicles owned by such microenterprises. The predominance of microenterprises also justifies the adoption of simplification measures to ensure compliance with tax obligations.

Italy reports that those microenterprises have minimal turnover and in most cases only one employee, thus it can be assumed that the vehicles concerned are used for private purposes to a significant extent. It is estimated that the average rate of private use by Italian taxable persons of corporate vehicles subject to the derogation is around 60%. This is explained by the preponderance of microenterprises, which own most of the corporate vehicles circulating in Italy. Moreover, larger firms (with a turnover of above EUR 5 million) represent only 1% of the total, and allocate most of their corporate vehicles to employees or directors as a fringe benefit. In this regard, it is recalled that the payment of the tax on these fringe benefits falls to the employee (or director) who enjoys that benefit and who therefore lawfully uses the company car for personal and family purposes throughout the year. According to Italy, non-business use of vehicles of larger companies also amounts to more than 50%.