“Given the objective difficulties of accurately tracking the movements of vessels in international waters and in EU territorial waters…presumptive percentages can be used on a flat-rate basis according to the type of propulsion of the pleasure craft (motor or sail) and the length of the craft”.
That precept appeared several times in the “Nautica & Fisco”, the collaborative guide of the Italian Revenue Agency and UCINA Confindustria Nautica, the leading boating industry body in Italy. Published annually since 2013, Nautica & Fisco was expressing a policy which the Italian authorities published consistently until 2017.
The policy endorsed the flat-rate approach to calculating the taxable amount of VAT for charters if a yacht exited the territorial waters of the EU during the charter. According to a supporting schedule also published by the Italian Revenue Agency, the larger the yacht the less the charter was estimated to take place in EU waters. That brought a heady feeling during which the Italian industry adopted the practice whereby Italian VAT applied to only 30% of the charter fee for a yacht over 24 metres in length. The “lumpsum” which reduced the standard Italian VAT rate of 22% to a mere 6.6% was born. The method powered charter activity in Italy, especially in the five-year period to October 2020. It was never questioned or challenged.
What, then, to make of the news that the Italian Tax Police has this year been claiming back VAT, interest and penalties from several yacht owners for charters carried out in Italy between 2018 and 2020?
First, while promoting the lumpsum method the Italian authorities did reserve their right to verify its application based on facts. To that extent, a yacht that made a convenient dash to international waters, or which performed “voyages to nowhere” just to save VAT would fail. The authorities will likely use the “abuse” principles of the law against the yacht owner, and that yacht owner would have little protection against the tax assessments being raised.
Second is the yacht owner who followed the letter and spirit of the administrative measures as promoted by the Italian authorities. This yacht owner reduced his lumpsum taxable base by cruising for an objective period outside the EU during the charter. If he challenges the assessments, he will be protected by the legitimate expectation doctrine of EU law which applies in Italy. This is the doctrine which holds that “those who act in good faith on the basis of the law as it is or seems to be should not be frustrated in their expectations”.
By their policy the Italian authorities had established VAT rules according to which the amount on which VAT is applied could be substantially reduced. The authorities clearly induced yacht owners to take this course of action when chartering. Therefore, they must not renege on the expectations created, as doing so would cause the yacht owners to suffer financial loss.
Violation of the legitimate expectation of taxpayers is especially relevant because on 25 July 2019 the European Commission, in its capacity as ‘guardian of the treaties’, had issued “infringement proceedings” against Italy. At the same time as demanding that Italy ends its “illegal system of exemptions for fuel used to power chartered yachts in EU waters”, the Commission chastised Italy for not levying the correct amount of VAT on the leasing of yachts. EU VAT rules allow tax exemptions for services when the effective use and enjoyment of the product is outside the EU, explained the Commission. “However, the rules do not allow for a general flat-rate reduction without proof of where the service is actually used.” The Commission stated that tax breaks of this type can lead to major distortions of competition in the EU and warned that if Italy did not end them, then the Commission would bring the case before the Court of Justice of the EU.
That warning had the intended effect. Italy ended its generalised exemption on fuel for chartered yachts. Italy also abandoned the lumpsum basis of calculating VAT on the charter of yachts within the EU, replacing it with a new law in 2020 which stipulated that any reduction of the taxable amount must hence be determined proportionately and solely on the effective proven use of the yacht outside the EU.
With the new law, Italy closed its chapter on the lumpsum method of assessing VAT on Italian charters. But not quite, it seems, as the tax assessments have been landing against some of those who in good faith practised what Italy preached. A bitter aftertaste lingers.
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