OPINION OF ADVOCATE GENERAL SIR GORDON SLYNN

DELIVERED ON 16 JUNE 1981

My Lords,

This case has been referred to the Court by the Special Commissioners for Income Tax in London, for a preliminary ruling in accordance with Article 177 of the EEC Treaty and Article 30 of the Treaty establishing a Single Council and a Single Commission of the European Communities (”the Merger Treaty“). The Special Commissioners ask whether certain specified provisions, or any other principle, of Community law should be interpreted as precluding Member States from taxing any part of the expenses and allowances paid from Community funds to Members of the European Parliament. The Special Commissioners mention in addition to those Treaties, the Convention on certain institutions common to the European Communities (particularly Article 28), the Protocol on Privileges and Immunities of the European Communities (particularly Articles 8, 9, 10, 13 and 14) (”the Protocol“), Council Regulation No 260/68 of 29 February 1968 (particularly Article 3 paragraph 2) (”the Regulation“) and the Rules governing the payment of expenses and allowances to Members of the European Parliament (“the Rules”).

Much of the debate has centred on specific provisions of United Kingdom income tax law. It seems to me, however, that the first, indeed the essential, question is whether Community law precludes such allowances from being taxed at all. If it does not, the second question is whether Community law imposes any limitation on the power of a Member State to tax such allowances. Only if there are, does the question arise whether the way in which the United Kingdom taxes, or proposes to tax, such allowances is in conflict with those limitations.

The matter came before the Special Commissioners on an appeal against a decision of one of Her Majesty's Inspectors of Taxes by The Right Honourable Lord Bruce of Donington. Lord Bruce was a Member of the European Parliament designated by the House of Lords from 30 July 1975 until 17 July 1979. He ceased to be a Member when Members were elected by direct universal suffrage. By his decision, the Inspector held that the allowances received by Lord Bruce from the European Parliament, in accordance with the Rules, during the year of assessment 1975/76 constituted emoluments from “an office” held by him, within the meaning of the Income and Corporation Taxes Act 1970 and were therefore liable to tax in the United Kingdom under schedule E (paragraph 1, Case I) to that Act.

As I understand it, the only allowances in dispute here are those relating to travel and subsistence. The Rules provide that Members shall receive subsistence and travel allowances for attending meetings of the Parliament. These are paid at a flat rate, on condition that the Member's name appears on the attendance register. For most of the material period the subsistence allowance was fixed at BFR 3000 per day. The travel allowance was calculated on the distance between, the point of departure and the place of meeting. For this purpose the point of departure was taken to be half-way between the Member's address and the seat of the appropriate national Parliament. On that basis the travel allowance was paid at the rate of BFR 13 for the first 400 km of the journey in each direction and BFR 5 for the rest of the journey, subject to a minimum of BFR 1 500.

Members were not, and are not, required to justify their actual expenditure under this heading to the Parliament; if their expenses were lower than their allowances, they were and are entitled to retain the surplus. During the year of assessment 1975/76, Lord Bruce received subsistence and travel allowances, for attending meetings of the European Parliament, exceeding his actual expenditure on attending those meetings. The amount of the surplus is not in evidence.

It is accepted by Lord Bruce that there is no express provision of Community law which prohibits a Member State from taxing any part of such expenses.

It is, however, contended that such a prohibition is implicit in the Treaties and in the Community legislation. In the first place it is said that the European Parliament is sovereign in the conduct of its own affairs. By Article 142 of the EEC Treaty it is empowered to adopt its own rules of procedure. Under this article expenses may be paid to Members. It is contended that the corollary of sovereignty is that payments made by the Parliament to its own Members in respect of their parliamentary duties cannot be subject to national taxation. Otherwise it would follow that the national authorities, and not the Parliament itself, would have the power to decide what was the proper scope of the duties of Members of Parliament.

Accepting that, by virtue of its sovereignty in respect of its procedure, the Parliament may provide for the payment of allowances to its Members, it does not in my view necessarily follow that the Parliament could equally make a rule that the Member States should not tax such allowances. That would not as I see it be a “rule of procedure”. In any event no such rule was made, and it cannot be said that it necessarily arises from the power to make rules of procedure and to pay expenses. Moreover, the power of a Member State to impose taxes on such allowances does not necessarily involve a decision as to what the duties are. It is perfectly possible to accept the duties defined by the Parliament and to limit the role of the national authority to assessing the quantum of money referable to the expenses incurred in the performance of those duties, and the tax appropriate under national legislation.

Secondly, it is said that Article 28 paragraph 1 of the Merger Treaty provides that the European Communities shall enjoy in the territories of the Member States such privileges and immunities as are necessary for the performance of their tasks under the conditions laid down in the Protocol annexed to that Treaty. Particular reliance is placed on paragraph 1 of Article 8 of the Protocol which provides that “no administrative or other restriction shall be imposed on the free movement of Members of the Assembly travelling to and from the place of meeting of the Assembly”. The mere act of imposing a tax on some part of an allowance does not in my view necessarily impose a restriction on such free movement. It may or it may not. It depends on the effect of the tax. Nor does the mere fact of having to make a tax return, however tedious, amount to such a restriction, as is contended by Lord Bruce. This provision of the Protocol may impose a limitation on the way a Member State may tax. It does not, in my opinion, preclude taxation in limine.

Thirdly, reliance is placed on (a) Article 13 of the Protocol (which provides that officials and other servants of the Communities shall be liable to a tax for the benefit of the Communities, but shall be exempt from national taxes on salaries and wages paid by the Communities) and (b) Article 3 of the Regulation (which provides for tax to be payable on salaries, but which exempts from the basic taxable amount moneys and allowances which represent “compensation for expenses incurred in the performance of official duties”). It is said that it would be an “absurd anomaly” if the allowances of a Member were taxable but those of an official accompanying him were exempt.

Members of the European Parliament clearly cannot be treated as officials or servants of the Communities for the purposes of Article 13 of the Protocol, especially as it was found necessary to apply the same rules expressly to commissioners, members of the Court and others specifically named. In my opinion only those specified in these provisions were intended to be included; Members of Parliament were not included. If there is an anomaly then it is one to be cured by other means than by adopting a construction of the provisions which, in my view, is untenable.

Strong reliance is placed on Case 6/60 Humblet v Belgium [1960] ECR 559. This, it is said, supports the proposition that Members must be treated equally and if different Member States tax on different bases, or do not tax at all, there will be discrimination between Members of Parliament from different Member States. The same case is said to support the proposition that the principle of equality should be preserved between Member States. This principle is violated if some Member States tax and some do not. The former would benefit at the expense of Community funds.

The case relied upon was, however, concerned with the interpretation of a provision expressly exempting from tax the salary of an official. The Court recognized the importance of avoiding discrimination in respect of the real opportunities for access to Community service for nationals of each Member State. The considerations in that case were not identical with those in the present. Nothing that has been said in argument justifies the application of statements from that judgment to a case where there is no express exemption from taxation. The same comment applies to what was said by the Court in the case Sayag v Leduc [1968] ECR 395.

There will be differences in the net proceeds retained by Members if some Member States tax and others do not. There will, however, be differences in any event, depending on actual costs in different countries, just as there will no doubt be differences whilst Member States remunerate and tax Members of the directly-elected Parliament. These do not in my view amount to a discrimination which must lead to the conclusion that no Member States may tax at all.

The Parliament confirmed to the Court that it has been informed of no cases, apart from the present instance, in which a Member State has attempted to impose national taxation on the expenses and allowances that it paid to its Members. It was argued on behalf of Lord Bruce that this practice, extending over a period since 1952, can properly be regarded as evidence of a general principle of law whereby the allowances are free of taxation. I have, however, been unable to find authority for the proposition that the common practice of all but one of the Member States gives rise to a general principle of law, in the absence at least of any evidence showing that the conduct of the Member States was motivated by a sense of obligation. In the present case there is no evidence suggesting that any of the Member States considered itself obliged to refrain from taxing the allowances in question. On the contrary, the Court was told that the French Government has refrained from taxing those allowances, but it strenuously defends the right of Member States to do so.

Then, it was contended that exemption from national taxation is a rule applicable generally to international organizations; and that it would “probably be contrary to international law, if the expense allowances of officials of such organizations were taxable in the United Kingdom”. No judicial or other authority was cited in support of this proposition and I have been unable to discover any. It is, of course, not uncommon for officials of international organizations to be expressly exempted from national taxes on their salaries and allowances where such is considered necessary for the performance of their functions [see Wilfred Jenks, “International Immunities”, 1961, pp. Ill and 121-124; David B. Michaels, “International Privileges and Immunities”, 1971, pp. 25-27, 109 and 159]. It does not seem to me that this rule can be said to have matured into a principle of public international law, applicable, in the absence of an express provision in any treaty or protocol, even to officials, let alone to Members of the European Parliament; for “whereas international immunities in general represent an adaptation of diplomatic immunities, the immunities of Members of the inter-parliamentary assemblies [including the European Parliament] represent an extension of parliamentary immunities adapted to the fact that they are being recognized and exercised internationally”; Jenki, op. cit., p. 92.

Other arguments have been put forward in support of these general propositions on behalf of Lord Bruce. They do not in my opinion establish that Member States are totally excluded from taxing allowances paid to Members of the European Parliament. In reaching this conclusion I have left out of account the Draft Minutes of the Council dated 19 December 1978 which were put before the Court and which recognized that for Members directly elected, both remuneration and taxation were to be left at that stage to the Member States. However, accepting the submission of counsel for Lord Bruce that the present case is a test case not only for Members of the Parliament before direct election, but also thereafter, it seems to me that if it is right to have regard to these minutes at all for present purposes, the position adopted by the Council is consistent with the conclusion to which I have come.

In my opinion, however, there are provisions in the Treaty and the Protocol which necessarily impose limits on the way in which, and the extent to which, a Member State may tax allowances to Members of the Parliament in respect of travelling and subsistence expenses. Article 5 of the Treaty requires, inter alia, that Member States shall abstain from any measure which could jeopardize the attainment of the objectives of the Treaty. Article 8 of the Protocol prevents restrictions being imposed on the free movement of Members of the Parliament travelling to and from the place of meeting. To tax allowances of a Member at such a rate as to reduce the Member's net receipts below the level necessary to cover costs reasonably incurred in performing duties would in my view be in breach of the obligation of the Member State. Otherwise, a system of taxation might prevent or impede a Member from travelling to meetings of the Parliament. Moreover, a Member State's system of taxation should not obstruct the performance of the Member's duties or otherwise impinge on the right of the Parliament to conduct its procedure free from interference. Such a system of taxation should not in my view permit the rejection as an expense of an entire allowance granted by the Parliament in respect of a particular meeting or duty, on the basis that such a meeting or duty was not within the duties of the Member. Such an act would strike at the capacity of the Parliament to govern its own affairs.

On the other hand, contrary to submissions made on behalf of Lord Bruce, the fact that the revenue authorities require expenses incurred to be specified or substantiated by receipts, does not seem to me, so long as reasonably applied, to be an infringement of the Member's rights as recognized by the Treaty and the Protocol.

By the end of the oral procedure, it seems to me that counsel for the United Kingdom Government and for Lord Bruce were not far apart in their approach. The former insisted that the only amount in issue was the surplus left in Lord Bruce's hands after deducting his actual expenses, and accepted that there must be some limitations on the power of the Member State to tax. Those limitations to which he referred, it seems to me, were of the kind which I have indicated above. Counsel for Lord Bruce accepted the possibility that if the revenue authorities were prepared to say that they would accept actual expenses, “the Member States should be free to tax the balance if any”.

If, in the present case, the revenue authorities are only seeking to tax the balance after deducting the actual expenses then I consider that there is no infringement of Community law.

Examples were, however, given during the argument, of the effect of applying strictly the English provision that an expense to be allowable must be “wholly, exclusively and necessarily incurred” in the performance of the duties. Thus, if a Member of the Parliament travelled from his home far from London at a time when the House of Lords was not sitting, he would not be allowed to set off the cost of the fare from his home to London or perhaps the cost of the fare at all. Equally if he stayed in the place where the Parliament was sitting for a few days for some other purpose, strictly the whole of his fare should be disallowed. These results, if in fact reached, would in my view, be capable of constituting an infringement of the Member's right to travel without restriction. So, it seems to me, if the Parliament authorizes first class travel, it is not open to the Member States' revenue authorities to allow only the cost of second class travel as a valid expense if the cost of first class travel was actually incurred. That is a matter for the Parliament to regulate. These, however, are not matters which arise for final decision at this stage.

Accordingly in my view the starting point is actual expenses. I would not, however, exclude absolutely the right of revenue authorities to say that some actual expenses were not reasonably or properly incurred, subject to the points made above. This, however, in view of the finding of the Special Commissioners that the travel and subsistence allowances were not unreasonably high, and the fact that they had not been criticized by the Court of Auditors or its predecessor, seems likely to be a rare event.

Accordingly in my opinion the question posed by the Special Commissioners should be answered on the lines that:

Member States are not precluded absolutely from taxing the allowances paid from Community funds to Members of the European Parliament, but taxes may not be imposed on the amount of expenses reasonably incurred by a Member in performing the duties of his office, or in such a way as to obstruct the Member in the performance of those duties or to impinge upon the Parliament's right to conduct its procedure free from interference.