Explanatory Memorandum to COM(2018)599 - Authorisation of Hungary to derogate from point (a) of Articles 26(1) and Articles 168 and 168a of the VAT Directive - Main contents
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| dossier | COM(2018)599 - Authorisation of Hungary to derogate from point (a) of Articles 26(1) and Articles 168 and 168a of the VAT Directive. |
|---|---|
| source | COM(2018)599  |
| date | 20-08-2018 |
Pursuant to Article 395(1) 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 derogating 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 6 February 2018, Hungary requested to derogate from Articles 26(1)(a), 168 and 168a of the VAT Directive and to restrict the right of deduction of VAT on the leasing of passenger cars in Hungary. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 8 June 2018 of the request made by Hungary. By letter dated 11 June 2018, the Commission notified Hungary 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
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. 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.
Taxable persons in Hungary may currently deduct VAT on the leasing of passenger cars to the extent that the passenger car is used for the taxable person's taxable economic activity. Taxable persons must thus be able to prove the extent to which they use their passenger cars for business purposes.
Hungary submits that this system is difficult to apply. Keeping journey logs imposes a heavy burden on taxable persons in maintaining such logs and on the tax administration for checking them. According to Hungary it is often difficult to determine and document the private and professional use in case the employee keeps the vehicle after work and on days off. Inspections have shown that often journey logs kept by taxable persons are incorrect and difficult to verify.
Hungary therefore requests, based on Article 395 of the VAT Directive, to introduce a measure derogating from Articles 26(1)(a), 168 and 168a of the VAT Directive limiting the right of deduction on the leasing of passenger cars to a set percentage. In turn businesses will be relieved from accounting for tax on the private use. This has the benefit of simplifying the system for all concerned and prevents, at the same time, tax evasion or avoidance because of incorrect record keeping.
The restriction to the right of deduction should apply to the VAT paid on the leasing of passenger cars which are used not exclusively for business purposes. Passenger cars covered by the measure will be motor vehicles principally designed for the transportation of maximum 9 persons with a gross vehicle weight not exceeding 5 tons. Vehicles designed for transport of goods, vehicles serving special purposes (i.e. crane truck, fire engine, truck-mixer), vehicles designed for the transport of 10 or more than 10 persons, tractors and trailers would be excluded from the restriction to the right of deduction of VAT and would be treated under the normal rules.
Based on estimations of the private use of company cars, Hungary submits that the average private use should be around 40-60%. According to Hungary, the deduction limit should therefore be set at 50%.
Taxable persons wishing to derogate from the 50% deduction limit and to deduct VAT to the proportion of actual business use will be allowed to do so provided they dispose of detailed evidence on the business use of leased passenger cars.
The derogation should apply from 1 January 2019 and should be limited in time to 31 December 2021, so that it can be assessed whether the 50% restriction is 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 2021.
• 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 2 , 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 tax collection 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 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 Hungary 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 simplify the procedure for charging tax and to counter VAT evasion and has, therefore, a potential positive impact for both businesses and administrations. The solution has been identified by Hungary 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 2021.
In case Hungary would consider another extension of the derogating measure beyond 2021, 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 2021.