Explanatory Memorandum to COM(2021)606 - Amendment of Implementing Decision (EU) 2015/2429 authorising Latvia to derogate from point (a) of Article 26(1) and Articles 168 and 168a of the VAT Directive - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2021)606 - Amendment of Implementing Decision (EU) 2015/2429 authorising Latvia to derogate from point (a) of Article 26(1) and ... |
|---|---|
| source | COM(2021)606  |
| date | 05-10-2021 |
Pursuant to Article 395 i of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive 1 ’), the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to apply special measures derogating from the provisions of this Directive, in order to simplify the procedure for charging VAT or to prevent certain forms of tax evasion or avoidance.
By letter registered with the Commission on 21 April 2021, Latvia requested an authorisation to continue to apply a measure derogating from the overall principles governing the right of deduction of input VAT in relation to expenditure on certain passenger cars not wholly used for business purposes. Together with the request for extension, Latvia submitted a report including a review of the percentage foreseen for the limitation of the right of deduction.
In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letters dated 10 June 2021 of the request made by Latvia. The Commission notified Latvia by letter dated 14 June 2021 that it had all the information necessary to consider 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. Point (a) of paragraph 1 of Article 26 of that Directive contains a requirement to account for VAT when goods forming part of the assets of a business are put to use for private purposes of the taxable person or for that of his staff or, more generally, for purposes other than those of his business, where the VAT on such goods was wholly or partly deductible. 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.
Pursuant to Article 395 of the VAT Directive, Member States may apply measures derogating from the provisions of the VAT Directive to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance if they have been authorised by the Council.
Latvia is currently authorised on the basis of Council Implementing Decision (EU) 2015/2429 2 to limit to 50% the right of deduction of VAT paid on the purchase, leasing, intra-Community acquisition and importation of specified passenger cars, and expenditure related to the maintenance, repair and fuel for such cars, when those passenger cars are not wholly used for business purposes. The special measure also relieves taxable persons from having to treat the non-business use of such passenger cars as a supply of services. Passenger cars covered by the special measure are those with a maximum authorised weight not exceeding 3 500 kilograms and having not more than eight seats in addition to the driver's seat. Passenger cars which are used for certain specific activities are 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) or goods; cars used for driving lessons; cars used for guard or emergency services; cars used as car sales demonstration vehicle. The validity of Council Implementing Decision (EU) 2015/2429 was extended by Council Implementing Decision (EU) 2018/1921 3 until 31 December 2021.
The present request by Latvia to prolong further the special measure 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(2) of Council Implementing Decision (EU) 2015/2429. Latvia considers that the conditions for the application of the special measure continue to apply and that the applied 50% limit remains appropriate.
Latvia confirms that the special measure allows administrative burden to be eased for taxpayers and for the tax administration and limits the evasion of VAT through incorrect record keeping of journeys made in connection with business activities and incorrectly completed VAT returns. According to the data submitted by Latvia, in 2019 microenterprises and SMEs accounted for almost 99.7% of the economically active enterprises which complicates the task of the tax authorities when verifying the business and private use of passenger cars. As of 1 January 2021 the total number of registered traders in Latvia with one or two passenger cars was 21 739 or 82% of all registered traders who registered passenger cars. Since microenterprises and SMEs make up 99.7% of all operators, Latvia maintains that most of the passenger cars are used for private purposes. According to the data provided, in 2020 87.6% of all passenger cars belonging to registered traders were used not just for business but also for private purposes.
Given the positive impact of the special measure on the administrative burden of taxpayers and of tax authorities, it is proposed to grant the measure for another limited period, until 31 December 2024. Any extension request should be accompanied by a report which includes a review of the percentage applied and should be sent to the Commission by 31 March 2024.
• 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 (Estonia 4 , Hungary 5 , Croatia 6 , Poland 7 , Italy 8 and Romania 9 ).
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 VAT 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 10 , 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)
Considering the provision of the VAT Directive on which the proposal is based, the subsidiarity principle does not apply.
• Proportionality
The Decision concerns an authorisation granted to a Member State upon 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, i.e. to simplify the procedure for collecting the tax and to prevent certain forms of tax evasion or avoidance. In particular, given the potential for businesses to under declare their liability and the burdensome check of mileage data for tax authorities, the 50% restriction would simplify the VAT collection and would prevent tax evasion inter alia through incorrect record keeping and incorrectly completed VAT returns.
• Choice of the instrument
Proposed instrument: Council Implementing Decision.
Under Article 395 of the VAT Directive, a derogation from the common VAT provisions is only possible upon authorisation of the Council acting unanimously on a proposal from the Commission. A Council Implementing Decision is the most suitable instrument since it can be addressed to an individual Member State.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Stakeholder consultations
This proposal is based on a request made by Latvia and concerns only this Member State.
There was no need for external expertise.
• Impact assessment
The proposal is designed to simplify the procedure for charging tax by removing the need for taxable persons to keep records on the private use of specified passenger cars, and, at the same time, prevent VAT evasion through incorrect record keeping. The proposed measure has, therefore, a potential positive impact for both businesses and tax administrations. The solution has been identified by Latvia as a suitable measure and is comparable to other past and present derogations.
4. BUDGETARY IMPLICATIONS
The proposal will not adversely affect the Union's own resources from VAT.
5. OTHER ELEMENTS
The proposal is limited in time and includes a sunset clause set at 31 December 2024.
In case Latvia would consider another extension of the special measure beyond 2024, a report including a review of the percentage limit should be submitted to the Commission together with the extension request no later than 31 March 2024.