Proposal for a Council Decision authorising the Italian Republic to apply measures derogating from Articles 26(1)(a) and 168 of Directive 2006/112/EC on the common system of value added tax (Only the Italian version is authentic)
Date: 2007-05-07
Institutions: European Commission
Subjects: Italy, VAT, basis of tax assessment, derogation from EU law, motor vehicle, tax relief

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 7.5.2007 
COM(2007) 238 final 

Proposal for a 

COUNCIL DECISION 

authorising the Italian Republic to apply measures derogating from Articles 26(1)(a) 
and 168 of Directive 2006/112/EC on the common system of value added tax  

(Only the Italian version is authentic) 

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

1)  CONTEXT OF THE PROPOSAL 

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•  Grounds for and objectives of the proposal 

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

By letter registered with the Secretariat-General of the Commission, Italy requested an 
authorisation  to  introduce  measures  derogating  from  Articles  26(1)(a)  and  168  of 
Directive  2006/112/EC.  In  accordance  with  Article  395(2)  of  Directive  2006/112/EC 
the  Commission  informed  the  other  Member  States  of  the  request  by  Italy  on  28th 
February  2007.  The  Commission  notified  Italy  on  21  November  2006  that  it  had 
received all the information that it considered necessary for appraisal of the request. 

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•  General context 

Article  168  of  Directive  2006/112/EC  provides  that  a  taxable  person  is  entitled  to 
deduct  the  VAT  charged  on  purchases  made  for  the  purpose  of  taxable  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 a consideration if 
the VAT on the goods was eligible for deduction. This system allows for the recovery 
of  VAT  on  the  initial  purchase  of  assets  which  are  used  both  in  the  business  and 
privately, but in order to ensure that final consumption is taxed, the private use is then 
treated as a supply of services, with the associated VAT being unrecoverable by non 
taxable persons. 

In the case of motor vehicles this system is difficult to apply for a number of reasons 
but principally 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.  The  number  of  vehicles  concerned 
means that even small scale individual evasion has the capacity to grow into significant 
sums. 

As an alternative to the system set out in the Directive, the Italian tax authorities have 
requested  that  they  are  allowed  simply  to  restrict  a  set  percentage  of  the  initial 
deduction and in turn relieve the business from accounting for tax on the private use. 
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. 

The percentage restriction requested is 60%. This is based on Italy's own research and, 
under  the  terms  of  the  proposal,  would  be  reviewed  after  two  years  along  with  the 
working of the derogation. 

The  new  system  will  apply  to  all  businesses  in  which  the  vehicles  are  not  used 
exclusively for business. The simplification benefit of a single flat rate would be lost if 
businesses  were  able  to  opt  out  of  the  system.  However,  certain  vehicles  would  be 

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excluded  from  the  restriction  on  the  right  to  deduct  and  would  therefore  be  treated 
under the normal rules. As a first step, any vehicle with more than 9 seats (including 
the  driver's)  and  over  a  certain  weight,  would  be  excluded.  This  restricts  the  field  of 
application  to,  in  the  main,  cars,  vans,  pick  ups,  motorbikes  and  mopeds.  In  addition 
even if they fall within the scope of application and regardless of whether there is any 
private  use,  the  following  are  excluded  from  the  restriction:  vehicles  belonging  to 
businesses whose trading activity was buying and selling vehicles; vehicles bought for 
lease or hire; taxis, vehicles used for instruction by driving schools and vehicles used 
by sales representatives. 

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•  Existing provisions in the area of the proposal 

Other derogations exist, or have existed, which limit the right to deduct VAT relating 
to vehicles. Currently the UK has a derogation allowing for a restriction to 50% of the 
right of a taxable hirer or lessee to deduct input tax on charges for the hire or lease of 
passenger  cars  for  use  by  a  business  where  the  car  is  also  used  for  private  purposes. 
Authority  is  also  provided  for  the  UK  to  not  treat  the  private  use  of  such  cars  as 
supplies for consideration. 

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. 

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•  Consistency with other policies and objectives of the Union 

Not applicable. 

2)  CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

•  Consultation of interested parties 

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Not relevant. 

•  Collection and use of expertise 

There was no need for external expertise. 

•  Impact assessment 

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The  proposal  is  designed  to  counter  VAT  evasion  and  to  simplify  the  procedure  for 
charging tax and has, therefore, a potential positive impact. 

The  solution  has  been  identified  by  Italy  as  a  suitable  measure  and  is  comparable  to 
other  past  and  present  derogations.  The  requested  measure  is  likewise  similar  in 
approach to the Commission's proposal found in COM(2004) 728, which contains rules 
on which forms of expenditure may be subject to a restriction on the right to deduct.  

3)  LEGAL ELEMENTS OF THE PROPOSAL 

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305 

•  Summary of the proposed action 

Authorisation  for  Italy  to  apply  a  measure  derogating  from  Article  168  of  Directive 
2006/112/EC  so  as  to  restrict  the  right  of  a  taxable  person  to  deduct  VAT  on 
expenditure related to motorised road vehicles when the vehicle is not used exclusively 
for business purposes. Where the right to  deduct has been limited, a derogation from 
Article 26(1)(a) will relieve the taxable person from accounting for tax on the private 
use of the vehicle. The measure is restricted to vehicles under a certain seating capacity 
and  under  a  certain  weight,  and  provision  is  made  for  a  limited  number  of  specified 
exceptions from the rule. 

The restriction is set at a flat rate of 60% and the rate and necessity for the derogating 
measure  are  to  be  reviewed  and  reported  on  by  Italy  after  2  years  experience  of 
operating the derogation. The Decision will expire on the earlier of the date specified in 
the  Decision  or  the  date  on  which  Community  rules  come  into  force  governing 
restrictions on the right to deduct in this area. 

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•  Legal basis 

Article  395(1)  of  Council  Directive  2006/112/EC  of  28  November  2006  on  the 
Common system of value added tax. 

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•  Subsidiarity principle 

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The proposal falls under the exclusive competence of the Community. The subsidiarity 
principle therefore does not apply. 

•  Proportionality principle 

The proposal complies with the proportionality principle for the following reason(s): 

This Decision concerns an authorisation granted to a Member State on its own request 
and does not constitute any obligation. 

Given the limited scope of the derogation, the special measure is proportionate to the 
aim pursued. 

•  Choice of instruments 

Proposed instruments: other. 

Other means would not be adequate for the following reason(s). 

Under Article 395 of Council Directive 2006/112/EC on the common system of value 
added tax, derogation from the common VAT Rules is only possible on the authority of 
the  Council  acting  unanimously  on  a  proposal  from  the  Commission.  A  Council 
Decision  is  the  only  suitable  instrument  since  it  can  be  addressed  to  an  individual 
Member State. 

4)  BUDGETARY IMPLICATION 

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409 

The proposal has no implication for the Community budget. 

5)  ADDITIONAL INFORMATION 

•  Review/revision/sunset clause 

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The proposal includes a review clause. 

The proposal includes a sunset clause. 

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Proposal for a 

COUNCIL DECISION 

authorising the Italian Republic to apply measures derogating from Articles 26(1)(a) and 
168 of Directive 2006/112/EC on the common system of value added tax  

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community 

Having  regard  to  Council  Directive  2006/112/EC  of  28  November  2006  on  the  common 
system of value added tax1, and in particular Article 395(1) thereof,  

Having regard to the proposal from the Commission2, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

In  a  letter  dated  9th  October  2006  and  registered  in  the  Commission's  Secretariat-
General  on  11th  October  2006  Italy  sought  authorisation  to  introduce  measures 
derogating from the provisions of Directive 77/388/EEC (now Directive 2006/112/EC) 
which  govern  a  taxable  person's  right  to  deduct  VAT  paid  on  purchases  and  those 
which require tax to be accounted for on business assets used for private purposes 

In  accordance  with  Article  395(2)  of  Directive  2006/112/EC,  the  Commission 
informed  the other  Member States  of the request made by Italy in a letter dated 28th 
February  2007.  In  a  letter  dated  21st  November  2006,  the  Commission  notified  Italy 
that it had all the information that it considered necessary for appraisal of the request 

Article  168  of  Directive  2006/112/EC  establishes  a  taxable  person's  right  to  deduct 
VAT charged on supplies of goods and services received by him for use in his taxable 
transactions. Article 26(1)(a) of the same Directive contains a requirement to account 
for VAT when a business asset is put to private use 

The  private  usage  of  vehicles  is  difficult  to  identify  accurately  and  even  where  it  is 
possible,  the  mechanism  for  doing  so  is  often  burdensome.  Under  the  requested 
measures, the amount of VAT on expenditure eligible for deduction on vehicles which 
are not used entirely for business purposes should, with some exceptions, be set at a 
flat  percentage  rate.  Based  on  currently  available  information,  the  Italian  authorities 
believe that a rate of 40% is justifiable. At the same time, to avoid double taxation, the 
requirement  for  accounting  for  VAT  on  the  private  use  of  a  vehicle  should  be 

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OJ L 347 11.12.2006, p.1. 
OJ C , , p. . 

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suspended where it has been subject to this restriction. These measures can be justified 
by  the  need  to  simplify  the  procedure  for  charging  VAT  and  to  prevent  evasion 
through incorrect record keeping 

(5) 

(6) 

These derogating measures should be limited in time to allow for an evaluation of its 
effectiveness and of the appropriate percentage, since the proposed percentage is based 
on initial findings on business use.  

On  29th  October  2004  the  Commission  presented  a  proposal  for  a  Council  Directive 
amending  Directive  77/388/EEC,  now  2006/112/EC,  as  regards  the  right  to  deduct 
VAT3.  The  derogating  measure  should  end  at  the  entry  into  force  of  the  proposed 
Directive if earlier than the date specified in the Decision, 

HAS ADOPTED THIS DECISION:  

Article 1 

By way of derogation from Article 168 of Directive 2006/112/EC, Italy is hereby authorised 
to  limit  to  40%  the  right  to  deduct  the  VAT  charged  on  expenditure  on  motorised  road 
vehicles not wholly used for business purposes. 

Article 2 

By way of derogation from Article 26(1)(a) of Directive 2006/112/EC, Italy is also required 
not to treat as supplies of services for consideration, the use for private purposes of vehicles 
included in the assets of a taxable person's business, where that vehicle has been subject to a 
restriction of the right to deduct under this Decision. 

Article 3 

Expenditure  relating  to  vehicles  is  excluded  from  the  restriction  on  the  right  to  deduct  as 
authorised by this Decision where the vehicle falls into any of the following categories:  

(1) 

the  vehicle  forms  part  of  the  taxable  person's  stock-in-trade  in  the  exercise  of  his 
activity;  

(2) 

the vehicle is used as a taxi;  

(3) 

the vehicle is used for instruction by a driving school;  

(4) 

the vehicle is used for hire or leasing;  

(5) 

the vehicle is used by sales representatives.  

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OJ C 24 29.1.2005, p.10. COM(2004) 728 

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Article 4 

The related expenditure shall cover 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 the use thereof, including lubricants and fuel.  

Article 5 

Articles  1  and  2  shall  apply  to  all  motorised  vehicles,  other  than  agricultural  or  forestry 
tractors,  which  are  normally  used  for  carrying  persons  or  goods  by  road,  with  a  maximum 
authorised  mass  not  exceeding  3,500  Kilograms  and  having  not  more  that  eight  seats  in 
addition to the driver's seat.  

Article 6 

An  assessment  covering  the  first  two  years  of  the  application  of  this  Decision,  including  a 
review of the percentage  restriction applied, shall be submitted to the Commission after the 
second anniversary of this Decision, and in any case by 31 December 2009.  

Article 7 

This Decision shall expire on the date of entry into force of Community rules determining the 
expenditure relating to motorised road vehicles that is not to be eligible for a full deduction of 
value added tax, but on 31 December 2010 at the latest. 

Article 8 

This Decision is addressed to the Italian Republic. 

Done at Brussels,  

For the Council 
The President 

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