The European Commission is forging ahead with its plans to stamp out tax avoidance by launching infringement proceedings against Italy and the UK for tax breaks given to businesses operating in the yacht and aircraft areas. As highlighted by the Paradise Papers’ 2017 reveal, such schemes can create major distortions of competition.
Specifically, the EU Commission has sent a letter of formal notice to Italy for not levying the correct amount of VAT on the leasing of yachts. It has sent a letter of formal notice to the UK, concerning the Isle of Man’s abusive VAT practices relating to supplies and leasing of aircraft. These infringements follow a first package of proceedings launched earlier this year, against Cyprus, Malta and Greece for their reduced VAT basis for yacht leasing schemes. Since then, these Member States have assured the Commission that they will amend their legislation.
EU VAT rules permit Member States to not tax services if they are used and enjoyed outside the EU. Italy has applied this rule and under its national guidelines, the larger the boat is, the less the lease is estimated to take place in EU waters. This creates favourable tax treatment for luxury yachts who benefit from greatly reduced VAT bills and requirements to account for VAT on income.
Isle of Man
EU legislation provides that VAT incurred on costs related to supplies of aircraft can be deducted. However, any income received for those supplies must be subject to a positive rate of VAT if the aircraft is put to a private use. Only supplies of aircraft used for genuine business purposes can be free of VAT. The Commission believes that the UK has taken a lax approach towards abusive VAT practices in the Isle of Man for the supplies and leasing of aircraft and hence VAT declared on supplies of aircraft has been under declared. This has led to an increased VAT windfall for those aircraft owners making private use of their assets.
Italy and the UK now have two months to provide detailed responses to the arguments put forward by the Commission regarding VAT on yachts and aircraft, respectively. If they do not act within this time-period, the Commission may send a reasoned opinion to their authorities, formally requesting them to comply with EU law.