VALUE ADDED TAX COMMITTEE (ARTICLE 398 OF DIRECTIVE 2006/112/EC) WORKING PAPER NO 840

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1 EUROPEAN COMMISSION DIRECTORATE-GENERAL TAXATION AND CUSTOMS UNION Indirect Taxation and Tax administration Value added tax taxud.c.1(2015) EN Brussels, 10 February 2015 VALUE ADDED TAX COMMITTEE (ARTICLE 398 OF DIRECTIVE 2006/112/EC) WORKING PAPER NO 840 QUESTION CONCERNING THE APPLICATION OF EU VAT PROVISIONS ORIGIN: REFERENCE: SUBJECT: Italy Article 148(a), (c) and (d) Vessels used for navigation on the high seas Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel Belgium Tel.:

2 1. INTRODUCTION The Italian authorities have asked the opinion of the VAT Committee on whether to fulfil the condition of "navigation on the high seas" required for exemption to apply under Article 148(a), (c) and (d) of the VAT Directive 1, an objective criterion based on the characteristics of the vessel could be used, or, conversely, it is necessary to determine that the vessel is effectively used for that navigation on the high seas. In case the VAT Committee considers that only vessels which are effectively used for navigation on the high seas could benefit from the exemption laid down in Article 148 of the VAT Directive, the Italian authorities would like to know what treatment should be conferred on vessels that are used partly inside and partly outside territorial waters and which proof of the real use of the vessels would be acceptable in order for the exemption to apply. A translation of the text of the question is annexed to this document. 2. SUBJECT MATTER Article 148 of the VAT Directive exempts the following transactions: "(a) the supply of goods for the fuelling and provisioning of vessels used for navigation on the high seas and carrying passengers for reward or used for the purpose of commercial, industrial or fishing activities, or for rescue or assistance at sea, or for inshore fishing, with the exception, in the case of vessels used for inshore fishing, of ships' provisions; ( ) (c) (d) the supply, modification, repair, maintenance, chartering and hiring of the vessels referred to in point (a), and the supply, hiring, repair and maintenance of equipment, including fishing equipment, incorporated or used therein; the supply of services other than those referred to in point (c), to meet the direct needs of the vessels referred to in point (a) or of their cargoes;". For these exemptions to apply it is first necessary to determine which vessels have to comply with the condition "used for navigation on the high seas". We must also clarify what is meant by navigation on the high seas. Further, we will analyse which criteria should be used to verify whether a vessel is used for navigation on the high seas, and what happens when a vessel is used both inside and outside the territorial waters. 1 Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ L 347, , p. 1). 2/15

3 3. THE COMMISSION SERVICES OPINION The VAT Committee has recently discussed the scope of the exemptions laid down in Article 148 of the VAT Directive. In its 98 th meeting 2, against the background of the ruling in case A Oy 3, the scope of these exemptions was analysed in relation to aircraft, discussions that led to guidelines on the subject. Later, in its 100 th meeting 4, it was discussed whether the conclusions reached with regard to aircraft were equally applicable to vessels or whether, due to the different nature of the vessel market compared to the aircraft market, some adjustments were required. In that context, some Member States raised further questions as to the scope of the exemption in Article 148(a) of the VAT Directive, in particular regarding the conditions for exemption to be applied when vessels are used for rescue or assistance at sea and, with regard to vessels used on the high seas, what can be qualified as commercial activities. When addressing the issue raised by the Italian delegation, the Commission services considered it necessary to cover those questions as well, given that they are linked to the previous discussions held in the VAT Committee and, if left unanswered, could leave doubts about the scope of the VAT exemptions in Article 148(a), (c) and (d) of the VAT Directive Does the condition "used for navigation on the high seas" apply to all vessels mentioned in Article 148(a) of the VAT Directive? As a first step it is necessary to establish which vessels need to fulfil the condition of "use for navigation on the high seas" Vessels in general Article 148 of the VAT Directive has its precedent in Article 15 of the Sixth Directive 5. That Article granted a VAT exemption to certain transactions regarding vessels: "(a) used for navigation on the high seas and carrying passengers for reward or used for the purpose of commercial, industrial or fishing activities; (b) used for rescue or assistance at sea, or for inshore fishing, with the exception, for the latter, of ships' provisions;". Those are exactly the same vessels to which Article 148(a) of the VAT Directive refers. As stated in the third recital of the preamble to the VAT Directive, the recast of the structure of the Sixth Directive was done in order to ensure that the provisions were presented in a clear and rational manner and amendments to the wording were not, in principle, intended to bring about material changes in existing legislation Working paper No 758. CJEU, judgment of 19 July 2012 in case C-33/11, A Oy. Working paper No 788. Sixth Council Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes Common system of value added tax: uniform basis of assessment (OJ L 145, , p. 1). 3/15

4 Therefore, to interpret what is meant with Article 148 of the VAT Directive it is necessary to consider the wording used in Article 15 of the Sixth Directive. In Article 15 of the Sixth Directive the condition of use for navigation on the high seas was required in relation to vessels in point (a), that is to say vessels carrying passengers for reward or used for the purpose of commercial, industrial or fishing activities. However, that condition was not included in point (b) which referred to vessels used for rescue or assistance at sea or for inshore fishing. The situation remains identical in Article 148 of the VAT Directive. Thus, the condition of use for navigation on the high seas is not required to be met, obviously, regarding vessels used for inshore fishing, neither for vessels used for rescue or assistance at sea. Nevertheless, the condition of use for navigation on the high seas is required both for vessels carrying passengers for reward and for vessels used for the purpose of commercial, industrial or fishing activities. It stems from the structure of Article 148 of the VAT Directive itself that vessels used for the purpose of commercial, industrial or fishing activities have to fulfil the condition of navigation on the high seas. If vessels used for the purpose of fishing activities, one of the activities mentioned, did not have to fulfil that condition, the mention that vessels used for inshore fishing qualify for exemption would have been superfluous. It would have been enough to mention the exclusion of the exemption for their provisions. This view has been confirmed, regarding the Sixth Directive, by the Court of Justice of the European Union (CJEU) in the Elmeka case 6, where it is stated that "Applying the criterion of use on the high seas does not enable exemption to be given for sea-going vessels used for the purpose of commercial, industrial or fishing activities unless those activities take place on the high seas. If this provision were not to be understood as referring only to vessels used on the high seas, then Article 15(4)(b), which provides for such an exemption for vessels used for inshore fishing, would be superfluous The answer to the first question must therefore be that Article 15(4)(a) of the Sixth Directive, to which Article 15(5) refers, applies not only to vessels used on the high seas for the carriage of passengers for reward, but also to vessels used on the high seas for the purpose of commercial, industrial or fishing activity". The same criterion was used by the CJEU regarding Article 148 of the VAT Directive in case C-197/12 Commission vs France 7, where the CJEU ruled that by not making the exemption in respect of vessels used for commercial activities subject to the condition of use for navigation on the high seas, France had failed to fulfil its obligations under Article 148(a), (c) and (d) of the VAT Directive. The CJEU did not refer to industrial vessels as for those vessels the French VAT Law did provide for the condition of use for navigation on the high seas. Therefore, to benefit from the exemption in Article 148 of the VAT Directive, the condition "used for navigation on the high seas" has to be met by both vessels carrying passengers for reward and vessels used for the purpose of commercial and industrial 6 7 CJEU, judgment of 14 September 2006 in joined cases C-181/04 to C-183/04, Elmeka, paragraphs 14 and 16. CJEU, judgment of 21 March 2013 in case C-197/12, Commission vs France. 4/15

5 activities but not by vessels used for rescue or assistance or vessels used for inshore fishing Vessels used for commercial activities With regard to the vessels for which the condition of navigation on the high seas applies, it is also necessary to clarify whether vessels used for "commercial activities" only covers those directly used for the supply of services for consideration, as the rulings of the CJEU in Helmholz 8 and Haltergemeinschaft 9 seem to suggest or, conversely, it also includes vessels used for activities that cannot be qualified directly as a supply of services for consideration, as is the case with vessels used to transport goods worldwide for the internal use of a company. The rulings in question related to the interpretation of Article 14(1)(b) of Council Directive 2003/96/EC 10. As the CJEU stated in Helmholz, "it should be noted that the provisions of Directive 2003/96 concerning exemptions must receive an autonomous interpretation, based on the wording and on the objectives pursued by that directive". Therefore, the conclusions reached in this case could not be taken to be of direct application to the VAT Directive. Article 14(1)(b) of Directive 2003/96/EC provides for an exemption on energy products supplied for use as fuel for the purpose of air navigation other than in private pleasureflying, clarifying that for the purposes of that Directive private pleasure-flying shall mean the use of the aircraft for other than commercial purposes and in particular other than for the carriage of passengers or goods or for the supply of services for consideration or for the purposes of public authorities. Therefore, the wording of Article 14(1)(b) focuses specifically as regards the concept of commercial purposes on the carriage of passengers or goods or the supply of services for consideration. That is the reason why the CJEU excluded from the scope of commercial purposes aircraft used to transport members of the staff, as those travels were not directly used for the supply, by that company, of air services for consideration. However, the wording of Article 148(a) of the VAT Directive is different. Therefore, the conclusions reached by the CJEU regarding Helmholz and Haltergemeinschaft cannot be applied directly to the interpretation of the concept of "commercial activities" included in that provision. Thus, the Commission services are of the view that a vessel used internally by a company to transport persons or goods for the purpose of commercial or industrial activities carried out by that company can benefit from the exemptions provided for in Article 148(a), (c) and (d) of the VAT Directive, whenever that vessel is used for navigation on the high seas. A different interpretation would run counter to the principle of neutrality, as vessels used for the same purpose would then receive a different treatment depending on whether they CJEU, judgment of 1 December 2011 in case C-79/10, Helmholz. CJEU, judgment of 21 December 2011 in case C-250/10, Haltergemeinschaft. Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity (OJ L 283, , p. 51). 5/15

6 are used by a company to supply that service for consideration to other companies or internally for the same purpose What is covered by the concept of high seas? Once determined which vessels have to fulfil the condition of "use for navigation on the high seas", a second step would be to determine what we understand to be "high seas". The VAT Directive does not provide for a definition as to what we should understand to be high seas. It should be clear, however, that the concept of high seas does not encompass inland waterways. Besides that, we can find a definition, applicable in International Law, in the United Nations Convention on the Law of the Sea, signed at Montego Bay on 10 December 1982 (Convention of Montego Bay) 11. Part VII of this Convention refers to the High Seas, and in the General Provisions of that part it is included what it is understood by high seas, stating in Article 86 that "The provisions of this Part apply to all parts of the sea that are not included in the exclusive economic zone, in the territorial sea or in the internal waters of a State, or in the archipelagic waters of an archipelagic State". The territorial sea is defined in Article 3 of the same Convention by saying that "Every State has the right to establish the breadth of its territorial sea up to a limit not exceeding 12 nautical miles, measured from baselines determined in accordance with this Convention". Regarding the exclusive economic zone, its extension is regulated by the Convention, notably Article 57 where it is stated that "The exclusive economic zone shall not extend beyond 200 nautical miles from the baselines from which the breadth of the territorial sea is measured". Therefore, as the high seas are defined by the Convention of Montego Bay as being the sea which is included neither in the exclusive economic zone nor in the territorial sea, this could mean that in that respect the high seas would be the sea areas beyond the limit of 200 nautical miles to the extent that Member States have made use of their rights under that Convention 12. The application of the Convention of Montego Bay provisions on the exclusive economic zones was analysed by the CJEU in case C-111/05 Aktiebolaget NN 13 concerning the VAT treatment of the laying of an undersea cable. In that regard, the CJEU stated that the sovereignty of the coastal State over the exclusive economic zone and the continental shelf is merely functional and, as such, is limited to the right to exercise the activities of exploration and exploitation laid down in Articles 56 and 77 of the Convention Countries could decide to limit use of the exclusive economic zone but, for the purposes of this paper, the assumption will be that the 200 nautical miles are used to the full. CJEU, judgment of 29 March 2007 in case C-111/05, Aktiebolaget NN, see in particular paragraphs /15

7 In the light of this, given that the laying of an undersea cable did not fall under the exclusive activities listed in the Convention, the CJEU reached the conclusion that such an activity would fall outside the scope of EU VAT. Thus, if we were to take the concept of high seas as set out by the Convention of Montego Bay and take into account the functional sovereignty of coastal Member States over the exclusive economic zones, then the application of Article 148(a), (c) and (d) of the VAT Directive would imply in practice that only vessels affected to intercontinental navigation could benefit from the said exemptions. Moreover, the CJEU has repeatedly stated that "exemptions are independent concepts of Community law which must be placed in the general context of the common system of VAT 14 ". As stated in point 3.1 of this Working paper, Article 148(a), (c) and (d) of the VAT Directive which has its precedent in Article 15 paragraphs 4, 5 and 8 of the Sixth Directive, remains unchanged in its substance. At the time when the Sixth Directive entered into force, the International Law of the Sea was governed by four conventions of Geneva, signed in 1958 and entering into force between 1962 and The Convention on the High Seas 15, one of those four conventions, defined in its Article 1 the high seas as "all parts of the sea that are not included in the territorial sea or in the internal waters of a State". Even though the limits of the territorial sea were not defined in the Convention on the Territorial Sea and Contiguous Zone 16, another of those four conventions, we can infer from the works of the Commission of International Law and the provisions of the convention itself that the maximum breadth of the territorial sea was the 12 nautical mile limit. The Convention of Montego Bay which replaced those previous conventions only became part of the acquis communautaire by Council Decision 98/392/EC of 23 March Therefore, at the moment when the Sixth Directive was negotiated and entered into force, the concept of high seas under the then International Law of the Sea encompassed any part of the sea lying beyond the 12 nautical mile limit, so in terms of navigation on the high seas that was most likely the intended demarcation. It could be argued that the subsequent changes to the concept of high seas brought about by the Convention of Montego Bay did not affect the concept as used to delimit the exemptions in Article 15 paragraphs 4, 5 and 8 of the Sixth Directive. The argument would be that this concept, in words of the CJEU, is an independent concept of EU VAT law, which must be seen as static and therefore should remain attached to the 12 nautical mile limit See for example CJEU, judgment of 14 September 2006 in joined cases C-181/04 to C-183/04, Elmeka, paragraph Council Decision 98/392/EC of 23 March 1998 concerning the conclusion by the European Community of the United Nations Convention of 10 December 1982 on the Law of the Sea and the Agreement of 28 July 1994 relating to the implementation of Part XI thereof (OJ L 179, , p. 1). 7/15

8 If that were not to be the case, the scope of the VAT exemptions would be limited to intercontinental navigation, virtually excluding from the exemption all vessels navigating within the EU. Against this background, we would conclude that even though the Convention of Montego Bay defines high seas as being the parts of the sea beyond the 200 nautical mile limit, the concept of high seas for the purpose of the exemptions in Article 148(a), (c) and (d) of the VAT Directive must be taken to refer to the parts of the sea beyond the territorial sea of each Member State, that is to say the parts of the sea beyond the 12 nautical mile limit, measured from baselines defined according to the International Law of the Sea. We would finally like to point out that the fact that the exclusive economic zone is considered to be "high seas" for the purpose of the exemptions provided for in Article 148 of the VAT Directive, does not affect the conclusions reached in Working paper No , which remain unaltered and will be developed in a further analysis to be presented to the VAT Committee What does it take to determine whether a vessel is used for navigation on the high seas? The final step in the process is to determine whether a vessel is actually used for navigation on the high seas Possible criteria to use For the purpose of determining the use of a vessel, we could use objective criteria based on the physical features of the vessel, such as the length or the tonnage of the vessel, or criteria based on the effective use of the vessel. In that regard, it is necessary to note that in case C-197/12 the CJEU stated that, even though France had included in its legislation the requirement of navigation on the high seas, the conditions to be met in order for the exemptions provided for in Article 148(a), (c) and (d) of the VAT Directive to apply implied that it was possible for vessels that were not effectively used for navigation on the high seas to benefit from those exemptions. It continued by saying that, even though Member States should lay down conditions for the purpose of ensuring the correct and straightforward application of the exemptions and to prevent any possible evasion, avoidance or abuse, these conditions could not change the content of those exemptions. Finally, it stated that the provisions laid down by a Member State should provide enough safeguards to guarantee that the exemptions were not applied in situations which were not foreseen. An objective criterion alone does not in itself provide those safeguards, as it is possible for a vessel to be used for navigation inside territorial waters of one Member State or even used for other purposes different from sailing, as is the case with vessels used for accommodation by renowned seaside resorts, notwithstanding complying with the limits set regarding the length or the tonnage of such a vessel. Therefore, criteria different from the objective ones have to be established by Member States to verify that vessels benefiting from the exemptions in Article 148(a), (c) and (d) of the VAT Directive are effectively used for navigation on the high seas. 18 Discussed at the 100 th meeting of the VAT Committee. 8/15

9 That does not imply that objective criteria cannot be used in this regard. This kind of criterion could be useful as a negative condition, excluding from the scope of the exemption vessels which do not meet certain minimum standards that would otherwise allow them to be used for navigation on the high seas. The use of an objective criterion to exclude from the scope of the exemption vessels that do not meet certain conditions would facilitate Member States in ensuring the correct and straightforward application of the exemption and preventing evasion, avoidance or abuse, as required under Article 131 of the VAT Directive. Before examining which other criteria would be suitable to determine whether a vessel is effectively used for navigation on the high seas, one aspect that should also be taken into account is that the criteria used in the case of aircraft cannot be used for vessels, as the conditions and scope of the exemption are different. In the case of aircraft, and according to Article 148(e) of the VAT Directive, the airline that uses the aircraft is the one that has to be operating chiefly on international routes, so the conditions have to be met by the airline and not the aircraft. Therefore, an aircraft could be used for domestic flights within one Member State and still benefit from the exemptions in Article 148 of the VAT Directive, as long as the airline using it fulfills the conditions to be considered an airline operating for reward chiefly on international routes. In the case of vessels, on the contrary, it is the vessel itself that has to comply with the condition of being used for navigation on the high seas. Therefore, in this case the means of control regarding the fulfillment of the conditions to benefit from the exemptions in Article 148 of the VAT Directive should be addressed to the vessel and not to the owner of the vessel. A second aspect that should be considered is that it is impossible for a vessel to be used hundred per cent of the time on the high seas, as part of the navigation has to be made, at least, on the territorial waters close to the harbours from which the vessel has its departure and arrival. Therefore, for the exemption to apply to the individual vessel, it is not necessary for that vessel to be used all the time for navigation on the high seas, but only that that navigation represents its predominant use. If that is the case, the vessel could be said to qualify for exemption. We then need to examine what criteria could be used to determine whether a vessel qualifies for the exemptions in Article 148 of the VAT Directive, taking into account its effective use. Once we conclude that a vessel qualifies for the exemption, the way that the VAT exemptions are applied would be analysed in point of this Working paper. One criterion that could be used to determine whether a vessel can be said to have been effectively used for navigation on the high seas is to calculate the ratio between miles navigated on the high seas, which will be the numerator of said ratio, and the total number of miles navigated by the vessel, which will be the denominator. Another criterion could be a ratio between the journeys during which the vessel has been used on the high seas and the total number of journeys made by the vessel. Both criteria present each their advantages and inconveniences. 9/15

10 The ratio between miles navigated on the high seas and total number of miles navigated by a vessel measures in a better way where the vessel has been used, compared to the criterion of a ratio between journeys. However, it could be the case that a vessel is primarily used for coastal navigation but makes two or three times a year an intercontinental travel. That would imply that the ratio exceeds a proportion of, for instance, fifty per cent. Nevertheless, its predominant use has been for coastal navigation rather than navigation on the high seas. Applying a ratio between journeys across the high seas and the total number of journeys could help avoiding that problem. However, it creates others. If the only condition is that the vessel makes part of the journey on the high seas, it could be that vessels deviate from their normal routes just to reach the high seas, navigate a few miles on them and then benefit from the VAT exemption, even though for that journey it was not necessary to navigate on the high seas. In the view of the Commission services, to verify that a vessel is effectively used for navigation on the high seas, it could be advisable to use a combination of the two criteria. That is to say that both the proportion of miles travelled on the high seas and the number of journeys where the vessel has sailed through the high seas should exceed a certain percentage fixed by the authorities of the Member State. We would then avoid the inconveniences abovementioned while keeping the advantages of both criteria. However, the use of a combination of both criteria would imply huge burdens for both tax administrations and operators and it could be seen as sufficient, subject to the modalities, to apply one of the two abovementioned methods to determine that a vessel has been used for navigation on the high seas, notwithstanding the weaknesses stressed. If a Member State decides to use only one of those criteria, the ratio required to benefit from the exemptions in Article 148 of the VAT Directive should be set at a level that guarantees that navigation on the high seas constitutes the predominant use of the vessel, a level that should be especially high if the method chosen is the ratio between journeys, to compensate for the possibility that it could be that many of those journeys barely reach the high seas. It should be noted that the result of the abovementioned ratios would never amount to the vessel being used for navigation on the high seas hundred per cent of the time. As previously said, part of the navigation has to take place necessarily inside territorial waters. However, the fact that the result of the ratio is not hundred per cent cannot lead to the conclusion that the exemption can only be applied proportionally or partially. These criteria can only be used to determine whether or not a vessel qualifies for the exemption. Once the vessel qualifies, the exemption is applied as explained in point of this Working paper. In any case, it seems necessary to agree and for Member States to apply these criteria uniformly, in order to avoid cases of unfair competition that could arise if a Member State would apply lower standards than neighbouring Member States. 10/15

11 Mixed use of the vessel and means of proof The Italian authorities have also questioned how to apply the exemption in cases where the vessel is used partly inside and partly outside territorial waters. The wording of Article 148(a) of the VAT Directive refers to vessels used for navigation on the high seas, without further precision. It does not include a reference, as Article 148(e) does, to "airlines operating for reward chiefly on international routes". As previously stated, the exemption for aircraft focuses on the activity of the user taking into account all his activities, so the same regime is applied to all of his aircraft, when used for commercial activities. However, in the case of vessels, the exemption focuses on the activity of each vessel, so the user might need to apply different regimes for his vessels depending on the way they are used, benefiting from the exemption only in regard to those that are used on the high seas for the purposes mentioned in Article 148(a) of the VAT Directive. However, no reference is made in the VAT Directive as to whether the vessel has to be used chiefly or exclusively on the high seas, neither to how to apply the VAT exemption when the vessel is not exclusively used for navigation on the high seas. Even when a vessel is used for a journey that takes place on the high seas, part of that journey will necessarily take place on the territorial waters close to the harbours of departure and of arrival, making the requirement of exclusive use on the high seas impossible. That would imply that if only the proportion of the navigation done by the vessel on the high seas could benefit from the exemption, in all cases the exemptions provided for in Article 148(a), (c) and (d) of the VAT Directive would then be partial exemptions. If that were to be the case, the user of the vessel would need to communicate to the supplier the proportion of the navigation that is carried out on the high seas, and the supplier should charge VAT on the proportion of the invoice corresponding to the navigation in territorial waters. That situation does not seem to comply with the correct and straightforward application of the exemptions required by Article 131 of the VAT Directive. In addition, it would put EU vessels that perform navigation on the high seas at a competitive disadvantage with vessels from third countries that perform the same navigation. For those reasons, the Commission services are of the view that when a vessel is seen as effectively used for navigation on the high seas, according to the conditions laid down by each Member State in line with those proposed in this Working paper, the VAT exemption would in respect of that vessel apply to all supplies included in Article 148(a), (c) and (d) of the VAT Directive in its entirety. Therefore, exemptions in Article 148(a), (c) and (d) of the VAT Directive cannot be applied as partial exemptions. Once the vessel qualifies for these exemptions, they have to be applied to the full amount of the supplies included in Article 148(a), (c) and (d) of the VAT Directive. 11/15

12 Finally, regarding the means of proof that a Member State could use to determine whether a vessel is effectively used for navigation on the high seas, it is up to the Member State to decide what means (administrative, contractual, technological or others) are best suited for that purpose. In the case of acquisition of vessels, as this use cannot be verified yet, it is the intended use of the vessel that has to be established, in order to see whether it is susceptible to fulfill the condition of navigation on the high seas. In that case other means of proof, as the current activities of the owner, could also be taken into account Conclusions Only vessels carrying passengers for reward or used for the purpose of commercial and industrial activities have to be used for navigation on the high seas to benefit from the exemptions in Article 148(a), (c) and (d) of the VAT Directive. Vessels used for fishing activities also have to be used for navigation on the high seas if they are to benefit from the VAT exemption on ships' provisions. The concept of high seas for the purpose of the VAT Directive could be considered covering any part of the sea outside the territorial waters of any country that is beyond the 12 nautical mile limit, measured from baselines defined according to the International Law of the Sea. The fulfilment of the condition of navigation on the high seas cannot depend only on objective criteria, such as the length or the tonnage of the vessels. However, these criteria could be used to exclude from the scope of the exemption vessels that in any case do not meet the conditions required for exemption to apply. It is necessary for measures to be put in place to verify that vessels are effectively used on the high seas as that is a condition for the exemptions in Article 148(a), (c) and (d) of the VAT Directive to apply. For that purpose it should be considered to make use of the ratio between miles navigated on the high seas and total miles navigated or the ratio between journeys made on the high seas and total number of journeys made. Once a vessel is effectively used on the high seas, the VAT exemptions included in Article 148(a), (c) and (d) of the VAT Directive apply to all transactions in respect of that vessel in its entirety. 4. DELEGATIONS' OPINION Delegations are invited to express their views on this matter raised by the Italian authorities and the observations made by the Commission services. * * * 12/15

13 ANNEX Question from Italy The Italian tax authorities wish to put a question from the Italian Revenue Agency to the VAT Committee concerning the interpretation of Community VAT provisions. The question has two parts, to be considered in sequence, since the answer to the first part affects the second. 1. Vessels used for navigation on the high seas 1.1. Question Article 8 of Law No 217 of 15 December 2011, (Community Affairs Law 2010) made important changes to the provisions on VAT, adapting national law to Community law and the interpretative principles of the Court of Justice. In particular, Article 8(2)(e)(4), with reference to the tax exemption scheme for operations in the air and maritime sector, amends, with effect from 17 January 2012, Article 8-bis of Presidential Decree No 633 of 1972, by inserting in point (a), with reference to vessels used for the purposes of commercial or fishing activities, the condition that such vessels must be used for navigation on the high seas. The previous wording of Article 8-bis did not include the requirement that the vessels be for navigation on the high seas, and the EU Commission had therefore initiated an infringement procedure (No 2008/4219) against Italy, on the grounds that the Italian legislation was not in line with Community legislation. Following the above amendment to the legislation, the tax exemption scheme is thus applicable, in the case of vessels for use in commercial or fishing activities, only to vessels used for navigation on the high seas. Moreover, in line with Article 148 of Directive 2006/112/EC, Article 8-bis provides that the tax exemption scheme applies not only to supplies of ships with the required characteristics, but also to supplies of goods (power plants and their components, their spare parts, ship stores and provisions, etc.) and certain services (use of dry docks for construction, maintenance, repair, modification, assembly, outfitting, furnishing, chartering and hiring), on condition that these services are supplied to vessels covered by the exemption scheme. Traders in the sector are reporting objective difficulties in classifying the vessel at the time of its supply or of supplies of the goods and services listed in Article 8-bis of Presidential Decree No 633 of 1972, since in most cases they lack the necessary tools to determine whether (and to what extent) the vessel will be used for navigation on the high seas. The VAT Committee's opinion is therefore requested on the criteria to be applied to determine whether vessels are legally classifiable as vessels used for navigation on the high seas for the purposes of determining the applicability of the tax exemption scheme referred to in point (a) of the first paragraph of Article 8-bis of Presidential Decree No 633 of /15

14 One might, for example adopt an interpretation, based on an 'objective criterion', confining the tax exemption to vessels 'approved' for navigation on the high seas. This would link the tax exemption scheme to characteristics of the vessel (structure and safety features necessary to navigate at a specific distance from the coast), which would be shown by the certification issued by the competent authorities (the RINA [Italian Naval and Aeronautic Register] or Harbour Master's Office); the supplier would not then have to check whether the vessel was really for use on the high seas; Alternatively, the provision could be interpreted as meaning that the exemption scheme was applicable solely to vessels 'really' operating outside territorial waters Proposed Solution We believe that the first of the proposed interpretations should be adopted, whereby the exemption scheme is applicable to vessels 'approved' for navigation on the high seas, precluding the need to suppliers to make individual checks on the actual use of the vessel, since this approach would certainly be simpler to apply and would guarantee the objectivity of the exemption provision. The second interpretation, focusing on the 'real' use of the vessel, would in our opinion introduce an excessively restrictive criterion which might penalise the Italian State in terms of competition if the other Member States did not adopt the same criterion, and could also create significant difficulties at the level of application, since it would be necessary, in order to apply the VAT rules correctly, to check the route actually taken by a vessel on each occasion. This would have to be checked not only by the tax administration as part of its auditing duties but also by the suppliers of the goods and services listed in Article 8-bis of Presidential Decree No 633 of Vessels used both inside and outside territorial waters 2.1. Question If the VAT Committee considers that the second criterion referred to above (confining VAT exemption to vessels 'really' operating outside territorial waters) would give the Italian provision a meaning more compliant with Community law, we would like to know: (a) what the criteria are for applying the exemption scheme when a vessel is used partly inside and partly outside territorial waters; (b) what proof of the the real use of the vessel must suppliers of the goods and services listed in Article 8-bis of Presidential Decree No 633 of 1972 obtain from their customers for the purposes of applying the tax exemption scheme. A possible answer to question (a) might be that the exemption scheme should be confined exclusively to the proportion of the consideration for the transaction eligible for exemption that relates to the use of the vessel outside territorial waters. If it is not possible to check the real use of the vessel, one might establish a flat-rate percentage for use of the vessel outside Community territorial waters based on the vessel's technical characteristics. Alternatively one might decide to apply the exemption scheme exclusively to transactions relating to vessels conducting their commercial (or fishing) activities chiefly outside 14/15

15 territorial waters. For the purposes of determining the chief location of activities, the ratio of the consideration for the commercial activities conducted outside territorial waters to the consideration for the activities conducted inside commercial waters could be relevant Proposed Solution With regard to question (a), we note that the second criterion considered here is in line with the criterion of chief operating routes adopted in Directive 2006/112/EC (Article 148(e)) for the exemption of international air transport. We therefore consider that this criterion could be applied, by means of interpretation, to the vessels used partly within and partly outside territorial waters. As regards question (b), on the other hand, we consider that, for the purposes of correctly applying the VAT exemption scheme, suppliers of the goods and services listed in Article 8-bis of Presidential Decree No 633 of 1972 should require the client to supply a statement (the truth of which would have to be verified by applying standard professional diligence) to the effect that the vessel to which the exempt transaction relates is 'really' used on the high seas. 15/15