61964C0045
OPINION OF MR ADVOCATE-GENERAL GAND
DELIVERED ON 19 OCTOBER 1965 (
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)
Mr President,
Members of the Court,
The proceedings brought by the EEC Commission against the Italian Republic under Article 169 of the Treaty of Rome are the culmination of a long dispute between the parties over the conformity with Article 96 of the Treaty of the repayment of customs duties and of certain indirect taxation on the export of products of the engineering industry.
Let me recall the facts so far as is necessary in order to consider the pleas of inadmissibility raised by the Italian Government against the application of the Commission as well as the arguments expounded by the parties.
The Italian Law No 103 of 10 March 1955, extended until 31 December 1963 by the Law of 18 March 1958, provided for the repayment of export ‘of the customs duty and other similar duties’ imposed on iron and steel products used in the processing of products of the engineering industry.
It is neither disputable nor seriously disputed that the repayment also concerned certain indirect taxes imposed on raw materials or semi-finished products. Furthermore, the amount of the repayment was fixed at a single rate for each particular tariff heading: so many lire per kilo. Repayment was thus at a flat rate.
Various complaints made to the Commission questioned the conformity of such a system with Article 96 of the Treaty which provides: ‘Where products are exported to the territory of any Member State, any repayment of internal taxation shall not exceed the internal taxation imposed on them whether directly or indirectly’. From 1961, therefore, the Commission made several requests for information from the Italian Government. On 1 February 1962 the Italian Government informed the Commission that in view of the reduction in customs duties between Member States it had decided to reduce by 35 % the amount of the repayments on products exported to the other countries of the Community and that it was prepared to begin immediately to determine that part of the repayment which concerned taxes other than turnover tax (I.G.E.) and to agree on a timetable for the gradual abolition of that element. Notes were exchanged without result. Then on 3 May 1963 the Italian Government sent to the Commission a document setting out the taxes affected by repayment and calculating as an example the effect of those taxes on the cost price of certain products or groups of products. This document confirmed the view held by the Commission that the system contravened the Treaty and it began proceedings under Article 169. While justifying its basic position, the Italian Government, when invited to submit its observations, indicated that a new law was in preparation to replace Law No 103 which was to expire at the end of the year.
Thus, by issuing on 11 December 1963 the reasoned opinion in which it invited the Italian Republic to terminate by 31 December at the latest those repayments which were considered incompatible with Article 96, the Commission emphasized that it was obliged to oppose the continuance of the alleged infraction, in particular by the adoption of new legislative provisions having similar effect.
Because the Commission considered this to be the effect of Law No 639 of 5 July 1964, which took effect retroactively from 1 January 1964, it brought the matter before you on 13 October 1964. The new Law, more generous on certain points than its predecessor, provides for the repayment, still according to a single rate for each tariff heading, of the customs duties and internal indirect taxation other than turnover tax; but, continuing the development already begun, it provides that in the case of products exported to Member States there shall be a gradual reduction of up to 80 % in the amount of repayment as from 1 January 1966. The Commission considers that no substantial difference exists between this system and that established by the preceding Law which gave rise to the reasoned opinion; nor is there any break in continuity since the new Law takes effect retroactively on the expiry of the preceding one. The Commission therefore asks you to rule that this system is contrary to Article 96 of the Treaty, first, since it involves the repayment of certain duties, such as registration, stamp and mortgage duties, charges on licences and permits issued by the State and taxes on motor vehicles and advertising which, according to it, do not fall within the provisions of the said Article and, secondly, because under this system the amount of the tax to be repaid is determined according to a flat rate method, involving the fixing of an average rate per product or group of products, which again that Article does not permit.
I — Admissibility
The Italian Republic claims that this application is inadmissible on two grounds, both of which are based on the infringement of the formal requirements of Article 169 of the Treaty, which provides:
«If the Commission considers that a Member State has failed -to fulfil an obligation under this Treaty, it shall deliver a reasoned opinion on the matter after giving the State concerned the opportunity to submit its observations.
'If the State concerned does not comply with the opinion within the period laid down by the Commission, the latter may bring the matter before the Court of Justice.»
1.
In the first place, it is claimed, the subject-matter of the administrative stage and that of the stage before you were not the same, since the former concerned Law No 103 of 10 March 1955 and the latter Law No 639 of 5 July 1964. The latter has not been the subject of a reasoned opinion by the Commission.
It is quite clear, however, that in its reasoned opinion of 11 December 1963 the Commission denounced — whether rightly or wrongly is a question which concerns the substance of the case and not its admissibility — an identical infringement of Article 96 of the Treaty, on which it has relied from the beginning of these lengthy proceedings. It complained that the Italian Government was repaying duties imposed on the undertaking rather than on the product and was applying a flat rate system which did not ensure that the amount repaid was equivalent to the actual tax burden; furthermore, the Commission disputed whether the reductions which had already been introduced under the Law of 10 March 1955 were such as to remedy the alleged illegality of the system.
It is also clear that, although the Law of 5 July 1964 is not merely an extension of the preceding Law (in which case no problem would arise), it is identical in substance: the products which benefit from repayment are the same — the rates laid down for the repayments are the same, although the range of charges expressly referred to in the two measures is different. Finally, although the reductions in the repayment are greater, they do not constitute a new feature as regards the previous system which was already familiar with them. The only difference between the factual situation existing when the reasoned opinion was given and that when this action was brought before you was a reduction of 10 % in the amount of the repayments on products exported to Member States.
For the Italian Government, the administrative stage provided for in Article 169 is of legal importance from the point of view both of the procedure and of the actual subject-matter and the Commission could not, when this stage concerned a situation created by a legislative measure, refer it directly to the Court since it resulted from a new Law which involves fundamental changes as regards the earlier one. This argument is certainly correct in law, it seems to me, however, that here no fundamental change was made, either in the measures or in the practice which the Commission considered to be contrary to the Treaty. I might add that the procedure under Article 169 would lose much of its force if a Member State could, after the expiry of the period allowed for the termination of an alledged infringement of the Treaty, reestablish the same situation by means of a subsequent legislative provision, or even maintain that situation, as here, by making the new legislative provision retroactive. I suggest therefore that you reject this first objection.
2.
The defendant raises a second objection to the admissibility of the application, based on the amendments to the argument put forward by the Commission during the administrative procedure. After stating that certain duties could not give rise to repayment under Article 96 because they amounted to direct taxes, the Commission then maintained that they could not benefit from any repayment since their effect on production costs could not be calculated precisely. The defendant Government had thus been deprived of the opportunity to submit its observations, as required by the first paragraph of Article 169, on the very grounds of the reasoned opinion.
This objection does not appear to prevent your considering the case. The letter which begins the procedure constitutes a preliminary measure by which the Member State is informed of the alleged act or omission and of the Community rules which, in the opinion of the Commission, were infringed by that State; its only purpose is to open a dialogue. The observations submitted by the Member State may weaken the view of the Commission or may confirm it, or may lead that institution to specify or amend the reasons upon which its original view was based. It is only then that the reasoned opinion is delivered setting out the definitive position of the institution on which your judgment will be based. But this preliminary procedure must not be enclosed in a rigid framework as the defendant would like. In your judgment in Case 7/61 you held to be sufficient a reasoned opinion which contained ‘a coherent statement of the reasons which led the Commission to believe that the State in question has failed to fulfil an obligation under the Treaty’ (Rec. 1961, p. 654). It is sufficient to refer to the reasoned opinion which appears in the file of the present application to see that this is the case here. It is on the basis of that opinion, therefore, that I shall now examine the much more delicate problem of the substance of the application.
II — Substance
1.
I must first set out the legal and factual situation existing at 31 December 1963, on the expiry of the formal notice sent by the Commission, and at 13 October 1964, when the Commission brought the matter before you. For this purpose I shall rely on the various documents exchanged between the parties during the administrative stage and the written procedure including, in particular, document No 16 from the Italian Government containing a method of calculating the effect of the taxation on the products of the engineering industry. To these factors I shall add some details given at the hearing in reply to the questions which you put to the parties.
Two points appear to be settled:
(a)
As regards the taxes taken into account in calculating the repayment. In accordance with the practice under Law No 103, Law No 639 of 5 July 1964 provides for the repayment not only of customs duties but also of internal indirect taxation other than the I.G.E. (turnover tax). The Italian Government has admitted from the beginning of the dispute that the repayment comprised various taxes, in particular taxes on manufacture and consumption, imposed by the Treasury and affecting the products of the engineering industry (letter of 20 February 1961 — document No 3). More precisely, the repayment is extended to registration, stamp and mortgage duties, charges on licences and permits issued by the State and on motor vehicles and advertising. With regard to the latter duties and charges, the Commission considers that as in essence they are imposed on the undertaking and production as a whole—and not on the exported product—they cannot be considered for the repayment provided for in Article 96.
(b)
As regards the method of calculating the repayments, we know that it combines two elements: the table annex to Law No 639 (or the decree provided for in Law No 103) fixes a single rate per product or group of products, which varies from 15 to 800 lire per kilogramme, as the case may be. But for exports to other Member States, the aggregate amount of the repayment is reduced by a percentage increasing from 55 % on 1 July 1963 to 60 % on 1 January 1964 and from 65 % on 1 July 1964 to 80 % as from 1 January 1966.
It is thus a flat rate scheme, on the bases of which document No 16 and the four Tables contained therein give certain information. As one is unable to determine the exact effect of the taxes actually imposed on the products in question, one proceeds ‘by sample’. Having chosen a representative undertaking, one calculates, first, the taxes paid directly by it as shown in its accounts by relating them to the amount of production for the period under consideration: secondly, by means of another complicated method, one determines for the same undertaking the taxes paid indirectly as a result of their incorporation into the price of the materials and products purchased for use in the manufacture of the representative products, the suppliers to the engineering industry being for this purpose classified in various categories. Finally, one determines, the total effect of the taxes by relating it to the price and weight of the product of the engineering industry in question. Although this method has been given as an example, it is the only way of justifying the calculation and rate adopted for the repayments allowed on the various products.
it must be noted here mat Table 1 expressly mentions the various taxes which the Commission claims to exclude from repayment. At the hearing the Judge-Rapporteur asked what, from the point of view of the repayment, were the respective positions of two companies producing the same product, only one of which takes out a mortgage or makes use of advertising and bears the charges involved in such transactions. You will remember the reply given by counsel for the Italian Government: ‘The result is exactly the same’.
2.
Is such a system, which I think I have described as precisely as the state of the file permits, in accordance with Article 96 or not? This Article must be replaced in the context of Chapter II, ‘Tax Provisions’. It is the exact counterpart of the preceding Article which limits the power of a State to impose internal taxation on the products of other Member States. In both cases it is a question of preventing by means of taxes a discriminatory and preferential treatment of national undertakings. Again we must note—what is at least a tendency — that the Chapter and in particular the Article with which we are concerned emphasizes the products more than the undertakings.
The first question in the action is: on which taxes may repayments be made under Article 96. The defendant claims that it refers to all indirect taxation of any kind and bases its opinion on the wording of Article 98, which subjects to a less strict system the repayment of ‘charges other than turnover taxes, excise duties and other forms of indirect taxation’. If one looks both at the wording and the subject-matter of Article 96 this argument is inconclusive: by referring to taxation imposed directly or indirectly on exported products it refers to taxes imposed on either the finished product or the raw materials and the semi-finished products involved in the earlier stages of manufacture. It is clear that, despite the fact that they have the character of indirect taxes, this does not apply to registration, stamp and mortgage duties, charges on permits and licences issued by the State and on motor vehicles and advertising which affect the undertaking rather than the products as such during the process of manufacture. Their effect varies according to the characteristics of the undertaking and not according to the products concerned. This being so, I do not see how the principle in Article 96, according to which repayment is limited to the amount of the taxation actually imposed, could be observed. I consider therefore that the taxes which I have listed are not among those envisaged by Article 96.
The other aspect of the action concerns the method of calculation adopted to determine the repayment and here, contrary to the apparent belief of the defendant at one time, the criticism concerns the taxation as a whole, including that which, it is not disputed, could in principle give rise to repayment. The repayment is fixed at a flat rate for each product or group of products at so many lire per kilogramme. The Commission considers that the practice of flat-rate repayments based on average rates contravenes the provisions of Article 96, in that inevitably the amount of certain repayments exceeds that of the actual tax burden. The applicant adds that it is unimportant that the other repayments are not the maximum obtainable under that Article; this factor would not compensate for the illegality of the procedure.
To this the defendant objects that other provisions of the Treaty, in particular Article 97, provide for flat rate systems which are perfectly compatible with Community objectives and that, since Article 96 itself does not lay down that repayments must be made according to a given procedure, all procedures are permitted, including the flat rate system.
This is a very doubtful argument. Article 97 is the only one which in tax matters authorizes the fixing of average rates ‘provided that there is no infringement of the principles laid down in Article 95 and 96’. Moreover, the Article only applies to States which levy a turnover tax calculated on a cumulative multi-stage tax system and they must take into account the peculiarities of that system. Certain writers have maintained, however, that as the Treaty merely establishes rules of a general nature without being concerned with
the manner of their implementation average rates could be employed for all other taxation covered by the rule governing the imposition of taxation in the consuming country. I consider such an interpretation to be dangerous in view of the wording of Article 96, since in certain cases the flat rate system necessarily leads to repayments which exceed the taxation actually imposed. The strongest argument in favour of this method is in fact its simplicity if not, as the defendant has elsewhere maintained, the fact that it avoids the need to make an ‘ex post’ assessment of its effect, an operation which is not only difficult but also uncertain. This is possible, but I do not see how such a system can be justified on legal grounds. I consider therefore that in principle recourse to the flat rate system constitutes an infringement of Article 96 of the Treaty.
So far I have not considered the provision of the decree of 18 January 1962 and of the Law of 5 July 1964 which, in order to take into account the reduction in customs duties between the Member States, makes increasing reductions in the aggregate amount of the repayment. This is perhaps the most difficult point in the case.
The Italian Government maintains that Article 96 refers to a specific situation and not to a requirement of form. The only limit on the repayments authorized by it is that they should not exceed the taxes imposed directly or indirectly. It matters little that in the past repayments were improperly allowed on certain taxation, since the necessary result of the reduction in the aggregate amount of the repayment which ex hypothesi concerns not only the customs component but the tax component of the latter is to absorb that fraction which concerns the taxation in dispute. Even supposing that this had been repaid in the past, it was no longer being repaid when the reasoned opinion was delivered and at that time there could be no infraction. In any case, and the defendant has emphasized this point several times, the Commission is obliged to prove that, in spite of the reductions, the repayments are greater than those authorized by the Treaty. Their limitation for reasons of budgetary policy is an internal problem which does not concern the Commission. The latter can only take note of the result, verifying, if necessary, that it does not exceed that allowed by the Treaty.
I consider there to be no completely satisfactory answer to this point. It is not impossible that, as the defendant maintains, that part of the repayments which relates to the taxation in dispute is in fact ‘absorbed’ by the successive reductions, but how can that be proved and on whom does the burden of proof fall? And even assuming that it is accepted is this fact sufficient to set aside any infringement of Article 96? I repeat that neither the repayment of the charges which I have listed nor recourse to a flat rate system is justified by the various provisions; it seems indisputable that on these two points the practice adopted by the defendant constituted a breach of Article 96 to which the Commission was entitled to call attention. The least which can be said is that, when the Commission started discussions, the Italian Government only replied to its requests for explanation with great reticence. In particular, the only figures given—those in document No 16—tended to confirm the incompatibility with the Treaty of the method of repayment used and of certain of its constant factors. It is of course for the Commission to establish that the use of a given method by a Member State constitutes a breach of the latter's obligations; but I do not believe that this could be required of the institution in the case of an arithmetical operation when the State concerned has failed to provide necessary figures which it alone possesses. I consider this to be the case here, where the original defect which vitiated the practice is said to have disappeared as a result of limitations put on the repayment; it is possible, but the fact cannot be established one way or the other except on the basis of detailed figures supplied by the defendant and, logically, evidence should be produced to show that in no case and on no product did the repayment at the date in question exceed the taxation imposed and repayable under Article 96.
Thus two solutions are possible, although I mention one of them in order to reject it. You may consider that, although clear as to the law, you are not clear as to the facts and you will then invite the defendant State to furnish detailed figures which support its case, in the light of which you will make a decision on the application.
Or, and this is the solution I propose, you will consider that by applying a flat rate system of repayments concerning in particular certain taxes not included in the scope of Article 96, and as it is impossible to establish that the reductions in the rate of repayment made when the application was brought removed the defects which vitiated this system, the Italian Republic has failed in one of its obligations under the Treaty.
I am therefore of the opinion that judgment should be given as suggested above and that the costs should be borne by the Government of the Italian Republic.
(
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