Directive 77/388/EEC has been replaced with Directive 2006/112/EC.

In accordance with Article 395(2) of Directive 2006/112/EC, the Commission transmitted, by a letter dated 28 February 2007, to the other Member States the request made by Italy. By a letter dated 21 November 2006, the Commission notified Italy that it had all the information that it considered necessary for appraisal of the request.

Article 168 of Directive 2006/112/EC establishes a taxable person's right to deduct VAT charged on supplies of goods and services received by him for use in his taxable transactions. Article 26(1)(a) of the same Directive contains a requirement to account for VAT when a business asset is put to private use.

The private use of vehicles is difficult to identify accurately and even where it is possible, the mechanism for doing so is often burdensome. Under the requested measures, the amount of VAT on expenditure eligible for deduction in respect of vehicles which are not used entirely for business purposes should, with some exceptions, be set at a flat percentage rate. Based on currently available information, the Italian authorities believe that a rate of 40 % is justifiable. At the same time, to avoid double taxation, the requirement of accounting for VAT on the private use of a vehicle should be suspended where it has been subject to this restriction. These measures can be justified by the need to simplify the procedure for charging VAT and to prevent evasion through incorrect record keeping.

These derogating measures should be limited in time to allow for an evaluation of their effectiveness and of the appropriate percentage, since the proposed percentage is based on initial findings on business use.