Explanatory Memorandum to COM(2021)631 - Amendment of Implementing Decision (EU) 2018/1994 authorising Croatia to derogate from point (a) of Article 26(1) and Article 168 of the VAT Directive - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2021)631 - Amendment of Implementing Decision (EU) 2018/1994 authorising Croatia to derogate from point (a) of Article 26(1) and ... |
|---|---|
| source | COM(2021)631  |
| date | 13-10-2021 |
Pursuant to Article 395 i of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax 1 ('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 31 March 2021, Croatia requested an extension of the derogation from Article 26 i, point (a), and Article 168 of the VAT Directive in order to continue to restrict the right to deduct the input VAT on the purchase and lease of passenger cars, including the purchase of all goods and services supplied in relation thereto. Together with the request for extension, Croatia 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 letter dated 22 April 2021 of the request made by Croatia. By letter dated 23 April 2021, the Commission notified Croatia that it had all the information it considered necessary for 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 the VAT charged on purchases made for the purpose of taxed transactions. Article 168a i of the VAT Directive provides that the VAT on expenditure related to immovable property forming part of the business assets of a taxable person and used both for business and non-business purposes shall be deductible only to the proportion of the property’s use for purposes of the taxable person’s business. Pursuant to Article 168a(2) of the VAT Directive Member States may also apply this rule in relation to expenditure related to other goods forming part of the business assets as they specify. 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 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.
Croatia is currently authorised on the basis of Council Implementing Decision 2018/1994/EU 2 to restrict to 50 % the right of deduction of VAT paid on the purchase and leasing of specified passenger cars, including the purchase of all goods and services supplied in relation thereto, when those 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 this measure are motor vehicles intended for the transport of persons with a maximum of eight seats in addition to the driver’s seat. If passenger cars are used for certain specific activities, they are excluded from the restriction to the right to deduct and are treated under the normal rules. This applies to vehicles used for the training of drivers, vehicle testing, repair services, an economic activity involving the transport of passengers and goods, the transport of deceased or rent, as well as to vehicles purchased for the purpose of resale. Council Implementing Decision 2018/1994/EU is valid until 31 December 2021.
The present request by Croatia to prolong further the special measure is based on the same grounds as those presented in the previous request. 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(3) of Council Implementing Decision 2018/1994/EU. Croatia considers that the conditions for the application of the special measure continue to apply and that the currently applied 50 % input VAT deduction limit continues to be the most appropriate.
Croatia explained that, based on data provided by both taxable persons and tax administrations, passenger cars forming part of business assets keep being used for private purposes at an average of 50 %. In this regard, Croatia submitted two surveys carried out in the beginning of 2021 on the use of passenger cars used for business and private use, indicating that setting the percentage of the right to deduction of input tax at 50 % still appears realistic.
Given the positive impact of the special measure on the administrative burden of taxpayers and tax authorities alike, it is proposed to authorise the extension of the current derogation measure. The authorisation should be valid for another limited period, i.e. until 31 December 2024, in order to allow for a review of the necessity and effectiveness of the derogating measure and the apportionment rate between business and non-business use it is based on. 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.
Since Croatia, under Article 168a(2) of the VAT Directive, opted to apply Article 168a i of the VAT Directive to other economic goods forming part of the business assets than immovable property, a reference to Article 168a of that Directive should, for reasons of completeness, be included in the title and Article 1 of Council Implementing Decision 2018/1994/EU.
• 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 3 , Hungary 4 , Latvia 5 , Poland 6 , Italy 7 and Romania 8 ).
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 9 , 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 proposal falls under the exclusive competence of the European Union. 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 in a specific sector.
• 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 Croatia 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. It has, therefore, a potential positive impact for both businesses and the tax administration. The solution has been identified by Croatia as a suitable measure and is comparable to other past and present derogations.
4. BUDGETARY IMPLICATIONS
The derogating measures will only have a negligible effect on the overall amount of tax revenue collected at the stage of final consumption and will have no adversely impact on the Union’s own resources accruing from VAT.
5. OTHER ELEMENTS
The proposal is limited in time and includes a sunset clause set at 31 December 2024.
In case Croatia 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.