Explanatory Memorandum to COM(2020)331 - Amendment of Implementing Decision 2012/232/EU authorising Romania to derogate from Article 26(1)(a) and Article 168 of the VAT Directive - Main contents
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| dossier | COM(2020)331 - Amendment of Implementing Decision 2012/232/EU authorising Romania to derogate from Article 26(1)(a) and Article 168 of the ... |
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| source | COM(2020)331  |
| date | 23-07-2020 |
Pursuant to Article 395(1) 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 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 13 March 2020, Romania requested an extension of the derogation from Article 168 of the VAT Directive in order to continue to restrict the right to deduct the input VAT on expenditure connected with motor vehicles. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 2 April 2020 of the request made by Romania. By letter dated 3 April 2020, the Commission notified Romania 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
Articles 168 VAT Directive provides that a taxable person is entitled to deduct VAT charged on purchases made for the purpose of taxed 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 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.
Romania is currently authorised on the basis of Council Implementing Decision 2012/232/EU 2 to restrict to 50 % the right to deduct VAT on the purchase, intra-Community acquisition, importation, hire or leasing of motorised road vehicles as well as expenditure related thereto. Some categories of vehicles were specifically excluded from this restriction, such as vehicles used exclusively for emergency, security or courier services, vehicles used by agents and taxis, vehicles used for instruction by driving schools, used for hire or leasing or used as commodities for trading purposes. At the same time, businesses are relieved from accounting from tax on the private use. Council Implementing Decision 2015/156/EU 3 authorised Romania to continue to apply until 31 December 2017 the special measure. The period of validity of this decision was extended by Council Implementing Decision (EU) 2017/2012 of 7 November 2017 4 until 31 December 2020.
Romania has requested to prolong the authorisation to limit the initial deduction to a set percentage and in turn to relieve the business from accounting for tax on the private use. Romania informed the Commission that the grounds for the prolongation of the measure are largely the same as described in the initial request. In accordance with Article 4(2) of Council Decision 2012/232/EU Romania has presented a report on the deduction limit applied by Romania. Romania submits that the measure fulfilled its role and that if the measure were not prolonged, the tax evasion recorded in this area before the introduction of the measure would most probably re-appear. According to the data submitted, the share of small enterprises in Romania is high: 99.7% of all the enterprises active in the industrial sector, the construction sector or the services sector in 2017 were small or medium-sized enterprises; and active enterprises with up to nine employees accounted for 89.4% of all economic and social operators active in those four sectors. Romania argues that, in practice, a car owned by such enterprises is often used both for business activities and for personal purposes.
It also appears from the information provided by Romania that the limitation of 50% still reflects the overall business and private use of vehicles by taxable persons in Romania and that this limit therefore should still be regarded as appropriate.
The derogation should be limited in time to 31 December 2023, so that it can be assessed whether the 50% restriction is still a correct reflection of the overall apportionment between business and private use. Any extension request should be accompanied by a report which includes a review of the percentage applied and should be sent to the Commission with that request by 31 March 2023.
• 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.
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 VAT 5 , 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 Union. The subsidiarity principle therefore 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 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 Council Directive 2006/112/EC, derogation from the common VAT rules 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 Romania and concerns only this Member State.
• Collection and use of expertise
There was no need for external expertise.
• Impact assessment
The proposal is designed to counter VAT evasion and to simplify the procedure for charging tax and has, therefore, a potential positive impact for both businesses and administrations. The solution has been identified by Romania as a suitable measure and is comparable to other past and present derogations.
4. BUDGETARY IMPLICATIONS
The proposal will have no negative implication for the EU budget.
5. OTHER ELEMENTS
The proposal includes a sunset clause; an automatic time limit which is set at 31 December 2023.
In case Romania would consider another extension of the derogating measure beyond 2023, 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 2023.