OPINION OF ADVOCATE GENERAL

GEELHOED

delivered on 13 March 2003 ( )

Case C-17/01

Finanzamt Sulingen

v

Walter Sudholz

(Reference for a preliminary ruling from the Bundesfinanzhof)

(Validity of Articles 2 and 3 of Council Decision 2000/186/EC of 28 February 2000 authorising the Federal Republic of Germany to apply measures derogating from Articles 6 and 17 of the Sixth 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 – 50% ceiling on the right to deduct VAT on vehicles not used solely for business purposes – Retroactive authorisation of a national tax measure)

I – Procedure

1. By order of 30 November 2000 the Bundesfinanzhof referred for a preliminary ruling three questions concerning the validity of Articles 2 and 3 of Council Decision 2000/186/EC of 28 February 2000 ( ) authorising the Federal Republic of Germany to apply measures derogating from Articles 6 and 17 of the Sixth 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 ( ) (hereinafter: ‘the Sixth Directive’). In response the German Government, the Netherlands Government, the Council and the Commission submitted written observations. At the hearing of the Court on 10 July 2002 the German Government, the Council and the Commission presented their oral arguments. On 24 October 2002 I delivered an opinion in this case.

2. By order of 12 December 2002 the Court (Fifth Chamber) decided to reopen the oral proceedings. The parties to the main proceedings, the Member States, the Council of the European Union and the Commission of the European Communities were invited to submit their observations on the following question: What interpretation should be placed on the second sentence of Article 27(1) of the Sixth Directive. In particular, in what way should the no more than negligible effect of the measure be expressed:

– in general terms (in particular in respect of the Community’s own resources from value added tax) and, if so, in accordance with which criteria;

– and/or

– having regard to individual situations and, if so, in accordance with which criteria?

After the proceedings had been reopened the hearing was held on 30 January 2003. The German Government, the United Kingdom Government, the Council and the Commission set out their positions there.

II – Appraisal

3. As regards the facts underlying the main proceedings and the applicable Community and national law, I would like to refer to my opinion of 24 October 2002.

4. At paragraphs 56 to 59 of the abovementioned opinion, I concluded, on the basis of the case-law of the Court, that the authorisation granted in Article 2 of Decision 2000/186 is invalid since it does not give the taxable person an opportunity to show that there is no tax evasion or avoidance in his case, as the Court specifically requires in its case-law. I also concluded that if the authorisation were also intended to simplify the procedure for charging the tax it would also be contrary to the second sentence of Article 27(1) of the Sixth Directive. At paragraph 60 of my opinion I stated that I regard this provision as a specific case of the principle of proportionality.

5. In this supplementary opinion I will limit myself strictly to the question which the Court posed as regards the interpretation of the second sentence of Article 27(1) of the Sixth Directive, namely: ‘Measures intended to simplify [the procedure for charging the tax], except to a negligible extent, may not affect the amount of tax due at the final consumption stage’.

6. The particular feature of the VAT, as established in the Sixth Directive, is that it is a tax on consumption which, irrespective of the number of preceding transactions, must be strictly proportional to the price of the goods and services supplied up to the final consumption stage. This fiscal neutrality presupposes that the economic operators must be able, in each link of the production chain, to reclaim the VAT due or paid by them in respect of goods or services supplied (or to be supplied) to them. This right to deduction laid down in Article 17(1)(a) of the Sixth Directive is therefore a core element of the VAT system. Any revocation or restriction of this right deprives VAT of the fiscal neutrality which it seeks to establish.

7. It is also in this light that it is necessary to read the second sentence of Article 27(1): ‘[Measures intended to] simplify the procedure for charging the tax, except to a negligible extent, may not affect the amount of tax due at the final consumption stage’.

8. At the hearing the Commission argued convincingly, in my view, that a measure intended to simplify the procedure for charging the tax, which has, or can have, the effect of preventing economic operators in the production chain from recovering a significant proportion of the value added tax paid by them in the previous links of the chain, will lead to an increase in their production costs. Depending on the market conditions, such as the price flexibility of the goods or services to be supplied at the final stage, they will attempt to pass on to the final consumer the greatest possible proportion of the tax still chargeable to them. In such a case there is a more than negligible effect on the amount of tax due at the final consumption stage.

9. Where there is a flat-rate 50% ceiling on the right to deduct VAT due or paid in respect of the previous links in the production chain, a situation arises whereby an indefinite number of taxable persons are structurally not – any longer – able to deduct in full the ‘input tax’ paid by them. This, as it were, systematically opens up the possibility which the second sentence of Article 27(1) of the Sixth Directive precisely sought to avoid, that is to say that the measure will systematically have a more than negligible effect, although possibly differing from case to case, on the amount of tax due at the final consumption stage.

10. The United Kingdom Government countered this argument, stating that an economic analysis of the flat-rate ceiling on the right to deduct input tax at issue can lead to conclusions other than the purely fiscal analysis on which the Commission bases its argument. The possibilities for passing on to the final consumer the non-recoverable proportion of VAT paid in respect of the previous links in the chain will depend on market conditions, such as competition, possible substitutes and price and revenue flexibility. In this connection reference was made to the opinions of Advocates General Mancini and Tesauro in San Giorgo ( ) and Comateb ( ) which concerned the question whether or not, in the case of applications for reimbursement of tax unduly levied, account has to be taken of the extent to which the excess tax can be passed on.

11. Without wishing to cast doubt on the comments of my predecessors – I share their view that in business taxes on goods and services can be passed on in full only in exceptional circumstances – I consider that the United Kingdom Government’s argument is invalid in this context. A flat-rate measure such as that at issue in this case covers a large variety of economic activities which provide a wide range of possible ways of passing on the tax. However, no matter how the possible ways of passing on the tax may differ in a particular case, the systematic effect of the measure is more than negligible on the amount of tax due at the final consumption stage.

12. The Community legislature has considered that such an outcome is unlawful since it is disproportionate in relation to the intended objective of the measure, that is to say to simplify the procedure for charging the tax.

13. I could limit myself to this finding were it not for the fact that the German and United Kingdom Governments and the Council consider that the primary purpose of the second sentence of Article 27(1) of the Sixth Directive stems from the desire of the Community to safeguard revenues from so-called ‘VAT resources’ which are one of the Community’s own resources. In that respect, they refer in particular to the second recital in the preamble to the Sixth Directive which, they claim, refers, in as many words, to the Council Decision on own resources of 21 April 1970. ( ) Therefore, the measures intended to simplify the procedure for charging the tax should be examined primarily in terms of their effects on revenue from VAT charged to the final consumer at the final stage.

14. I do not consider this argument convincing. Firstly, the second recital in the preamble to the Sixth Directive contains no specific reference to the second sentence of Article 27(1). Secondly, having regard to the subject-matter and objective of the Sixth Directive, which seeks primarily to create a uniform basis for the common system of VAT, the second recital relates to the entire body of provisions which make up the uniform basis. If is difficult to derive therefrom an argument for the interpretation of Article 27(1), in particular and certainly not if the relevant simplification procedure may have the effect of increasing the tax due at the final stage in two respects: firstly by the amount which cannot be recovered in the chain and, secondly, by the additional tax which is due at the final consumption stage on the higher final price.

15. Furthermore, even if this argument is tenable it has been completely overtaken by the developments in the composition of own resources. Since the introduction of the 1988 decision on own resources, ( ) which added a ‘fourth own resource’ related to the gross national product (GNP) of the Member States, the significance of VAT own resources to the funding of Community expenditure has diminished considerably both in absolute and relative terms. This trend continued in the 1994 decision on own resources, ( ) which reduced the uniform rate of VAT payments from 1.4% to 1%, and in the 2000 decision on own resources. ( ) The latter decision provides for a gradual reduction in VAT own resources from 1% in 2000, through 0.75% in 2002, to 0.5% in 2004. It also provides that the base to be taken into account may be at most 50% of the GNP of the Member States.

16. Finally, I also note that, according to the case-law of the Court, in the case of tax measures to prevent and combat evasion the principle of proportionality requires that the taxable person be granted an opportunity to furnish proof to the contrary. ( ) In the case of measures intended primarily for the benefit of the national administration it is difficult to maintain that the principle of proportionality does not afford the taxpayer such protection. This possibility prevents the taxable person from losing his right to ‘deduct input tax’ stemming from Article 17(2)(a) of the Sixth Directive. It also contributes to the maintenance of the neutrality in respect of the charging of VAT which is sought by the second sentence of Article 27(1).

III – Conclusion

17. In the light of the foregoing, I conclude that the questions posed by the Court in paragraph 2 of its order of 12 December 2002 may be answered as follows:

– the second sentence of Article 27(1) of Sixth 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 seeks primarily to ensure the neutrality of this tax on consumption at the various stages of the production chain;

– it therefore follows that measures intended to simplify the procedure for charging the tax may not systematically affect the amounts of tax due at the final consumption stage;

– in order also to prevent this, in individual cases the taxable person must demonstrate the extent to which he has claimed the goods and services supplied to him as being for business purposes.