Many businesses make some supplies that are VAT exempt and the input tax relating to these supplies cannot be deducted in the VAT return. If a business is making both exempt and taxable supplies the input tax relating to the exempt supplies cannot be deducted and a basis must be found for apportioning the total expenses between those on which input tax can be deducted and those in connection with which no input tax deduction is possible.

On 16 July 2015 the Commissione Tributaria Regionale di Roma referred a case concerning this issue to the European Court of Justice (ECJ) for a preliminary ruling. In the case of Mercedes Benz Italia SpA v Agenzia delle Entrate Direzione Provinciale Roma 3 a question on the issue of apportionment was put to the ECJ.

The question was whether for the purpose of the right of deduction the national provisions and practice of the tax authority requiring reference to be made to the composition of turnover (including identification of incidental transactions) but not providing for a calculation method based on both the composition and actual destination of the acquisitions that objectively reflects the actual share of the expenditure attributable to each of the activities engaged in by the taxpayer (taxed and untaxed), are incompatible with an interpretation of articles 168, 173, 174 and 175 of the EU VAT Directive (2006/112) which is guided by principles of proportionality, effectiveness and neutrality as set out in Community law.

The Articles of the VAT Directive referred to in the request for preliminary ruling are section 168 concerning the right to deduction of input tax and Articles 173 to 175 concerning the proportional deduction.