C-120/88 Commission v Italy

Judgment of the Court of 26 February 1991. - Commission of the European Communities v Italian Republic. - VAT - Importation - Non-taxable persons - Deduction of the residual portion of the VAT paid in the Member State of exportation. - Case C-120/88. European Court reports 1991 Page I-00621

Summary Parties Grounds Decision on costs Operative part

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Tax provisions - Domestic taxes - Discrimination - Prohibition - Levying of VAT on goods imported from another Member State by a non-taxable person - Obligation on Member States to adopt measures allowing account to be taken of the residual tax still contained in the value of the imported goods

(EEC Treaty, Art. 95)

A Member State fails to fulfil its obligations under Article 95 of the EEC Treaty if it does not adopt the measures necessary to permit persons not subject to VAT who import into its national territory goods on which VAT has already been charged in another Member State, without the possibility of obtaining a refund of that tax, to deduct from the VAT due on importation the amount of VAT paid in the Member State of exportation which is still contained in the value of the goods at the time of their importation, when the supply of similar goods by non-taxable persons within the national territory is not subject to VAT.

The full and complete application of the prohibition of discrimination laid down in Article 95 cannot be ensured solely by the fact that that provision, being directly effective, may be relied on before national courts, since that is no more than a minimum guarantee and cannot resolve the difficulties, regarding the requirements of legal certainty, created by the retention in domestic legislation of provisions which do not provide for account to be taken of the residual amount of tax.

A defence based on the absence at present of a common system applicable to the imports in question can be of no avail in denying the failure to fulfil obligations. While the establishment of such a system is a matter for the Community legislature, so long as such a system is not established, Article 95 precludes a Member State from applying its own system of VAT to imported products in a manner contrary to the principle of non-discrimination in matters of taxation.

In Case C-120/88,

Commission of the European Communities, represented by Johannes Foens Buhl and Giuliano Marenco, Legal Advisers, acting as Agents, with an address for service in Luxembourg at the office of Guido Berardis, also a member of the Commission' s Legal Department, Wagner Centre, Kirchberg,

applicant,

v

Italian Republic, represented by Professor Luigi Ferrari Bravo, Head of the Department for Contentious Diplomatic Affairs at the Ministry for Foreign Affairs, acting as Agent, assisted by Franco Favara, Avvocato dello Stato, with an address for service in Luxembourg at the Italian Embassy, 5 rue Marie-Adélaïde,

defendant,

APPLICATION for a declaration that the Italian Republic has failed to fulfil its obligations under Article 95 of the EEC Treaty,

THE COURT

composed of: O. Due, President, G. F. Mancini, T. F. O' Higgins and G. C. Rodríguez Iglesias (Presidents of Chambers), C. N. Kakouris, R. Joliet and F. A. Schockweiler, Judges,

Advocate General: M. Darmon

Registrar: D. Louterman, Principal Administrator,

having regard to the Report for the Hearing, as completed following the hearing on 22 February 1990,

after hearing oral argument from the parties at the hearings on 22 February and 18 September 1990,

after hearing the Opinion of the Advocate General delivered at the sitting on 6 November 1990,

gives the following

Judgment

Grounds

1By an application lodged at the Court Registry on 19 April 1988, the Commission of the European Communities brought an action under Article 169 of the EEC Treaty for a declaration that, by not adopting the measures necessary to permit persons not subject to value added tax (VAT) who import into Italy goods on which VAT has already been charged in another Member State, without the possibility of obtaining a refund of that tax, to deduct from the VAT due on importation the amount of VAT paid in the Member State of exportation which is still contained in the value of the goods at the time of their importation, the Italian Republic has failed to fulfil its obligations under Article 95 of the EEC Treaty.

2The Commission claims that the failure by the Italian Republic to adopt measures allowing non-taxable persons to deduct such amounts in accordance with the established case-law of the Court creates an unclear situation at variance with the principle of legal certainty and leads to double taxation in breach of the prohibition of discriminatory taxation, a directly applicable principle laid down in Article 95 of the Treaty, as interpreted by the Court, in so far as the supply within Italy of similar goods by non-taxable persons is not subject to VAT.

3The Italian Republic submits that the principle of the prohibition of double taxation is not sufficient in itself to resolve all the technical fiscal problems involved and that the proposal for a Sixteenth Council Directive on VAT designed to establish a common scheme for certain goods on which value added tax has been finally paid and which are imported by a final consumer in one Member State from another Member State (Official Journal 1986, C 96, p. 5) ought to be adopted without delay in order to allow for the adoption of uniform procedures and rules of application. Furthermore, the uncertainty in which Community citizens are left as regards the extent of their rights is attributable to the Community legislation and cannot be blamed on the Italian Republic.

4Reference is made to the Report for the Hearing for a fuller account of the facts of the case, the procedure and the submissions and arguments of the parties, which are mentioned or discussed hereinafter only in so far as is necessary for the reasoning of the Court.

5It ought to be noted at the outset that, according to the established case-law of the Court, Article 95 of the Treaty lays downs a prohibition of discriminatory taxation of imported goods. That prohibition produces direct effects and creates for individuals personal rights which national courts are bound to protect (see, in particular, paragraph 46 of the judgment in Case 15/81 Gaston Schul Douane Expediteur BV v Inspecteur der Invoerrechten en Accijnzen, Roosendaal [1982] ECR 1409 - the first Gaston Schul case).

6According to equally well-established case-law (see the judgment in Case 47/84 Staatssecretaris van Financiën v Gaston Schul Douane-Expediteur BV [1985] ECR 1491 - Gaston Schul II - and the judgment in Case 299/86 Drexl [1988] ECR 1213), Article 95 must be interpreted as meaning that the VAT charged on the importation of goods supplied by a non-taxable person, where such tax is not charged on the supply by individuals of similar goods within the Member State of importation, must take into account the amount of VAT paid in the Member State of exportation which is still contained in the value of the goods at the time of importation, in such a way that that amount is not included in the taxable amount and is also deducted from the VAT payable on importation.

7It follows that the relevant provisions of Community law do not, contrary to the assertions of the Italian Republic, leave Community citizens in uncertainty as to the scope of their rights with regard to the principle of equal taxation of imported goods.

8It is not disputed that the provisions of national law in question provide for the imposition of VAT on the importation by non-taxable persons of goods on which VAT has already been paid in the Member State of exportation, without allowing the persons concerned to deduct the residual VAT from the amount of VAT payable on importation, even though the supply of similar goods by non-taxable persons within Italy is not subject to VAT.

9Such provisions are incompatible with the prohibition of discriminatory taxation of imported goods since, despite the direct effect of Article 95, they keep non-taxable importers in a state of uncertainty as to their right to rely on that article and may induce officials of national authorities responsible for collecting VAT to refrain from applying the principle that residual VAT is to be deducted.

10The right of non-taxable importers to rely on the directly applicable provisions of Article 95 before national courts is only a minimum guarantee and is not sufficient in itself to ensure the full and complete implementation of the Treaty (see the judgment in Case 168/85 Commission v Italy [1986] ECR 2945, at paragraph 11).

11Furthermore, the principles of legal certainty and the protection of individuals require that, in areas covered by Community law, the Member States' legal rules should be worded unequivocally so as to give the persons concerned a clear and precise understanding of their rights and obligations and to enable national courts to ensure that those rights and obligations are observed (see the judgment in Case 257/86 Commission v Italy [1988] ECR 3249).

12The Italian Republic' s defence submission based on the absence at present of a common system of VAT applicable to the imports in question must be rejected.

13It is sufficient to recall in this regard that, whilst the establishment of a common system of VAT applicable to such operations is a matter for the Community legislature, so long as such a system is not established Article 95 of the Treaty precludes a Member State from applying its system of VAT to imported products in a manner contrary to the principle of non-discrimination in matters of taxation (see the judgement in Gaston Schul I, cited above).

14The implementation of the programme of harmonization of tax legislation pursuant to Article 99 of the Treaty cannot be made into a prerequisite for the application of Article 95, which requires Member States, with immediate effect, to apply their tax legislation in a non-discriminatory manner prior to any harmonization (see the judgment in Case 171/78 Commission v Denmark [1980] ECR 447).

15It follows that the arguments of the Italian Republic cannot be accepted.

16In the light of all the preceding considerations, it must be held that, by not adopting the measures necessary to permit persons not subject to VAT who import into Italy goods on which VAT has already been charged in another Member State, without the possibility of obtaining a refund of that tax, to deduct from the VAT due on importation the amount of VAT paid in the Member State of exportation which is still contained in the value of the goods at the time of their importation, when the supply of similar goods by non-taxable persons within Italy is not subject to VAT, the Italian Republic has failed to fulfil its obligations under Article 95 of the EEC Treaty.

Costs

Costs

17Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs. Since the Italian Republic has failed in its submissions, it must be ordered to pay the costs.

Operative part

On those grounds,

THE COURT

hereby:

(1) Declares that, by not adopting the measures necessary to permit persons not subject to VAT who import into Italy goods on which VAT has already been charged in another Member State, without the possibility of obtaining a refund of that tax, to deduct from the VAT due on importation the amount of VAT paid in the Member State of exportation which is still contained in the value of the goods at the time of their importation, when the supply of similar goods by non-taxable persons within Italy is not subject to VAT, the Italian Republic has failed to fulfil its obligations under Article 95 of the EEC Treaty;

Signatures

(2) Orders the Italian Republic to pay the costs.

OPINION OF MR ADVOCATE GENERAL DARMON delivered on 6 November 1990 * Mr President, Members of the Court,

1The present actions for failure to fulfil obligations, which have been brought against the Kingdom of Spain, the Hellenic Republic and the Italian Republic, seek a declaration from the Court that those Member States have failed to fulfil the obligations imposed on them by Article 95 of the Treaty through their omission to adopt the measures necessary to enable persons not subject to value added tax (hereinafter referred to as VAT), who import goods on which that tax has already been charged in other Member States, to deduct the residual portion of VAT paid in the Member State of exportation, in so far as that amount is still incorporated in the value of the goods at the time of exportation.

2Before I go on to examine whether the States in question have indeed failed to fulfil their obligations, I must for a moment consider the arguments put forward by the Kingdom of Spain which expressly requests the Court to modify the legal principles on which it has decided past case-law 1in the matter and in particular to modify the solution presented in its judgment in Gaston Schul I.

3I do not at this point intend to describe in detail the problem which the Court resolved in that case. Suffice it to recall that

* Original language: French.

the Court there ruled that the imposition of VAT on an item when it is imported by a private individual who is not entitled to remission in the Member State of exportation must make allowance for the residual portion of VAT still incorporated in the value of the item when it is imported, if the supply of similar items within the territory of the Member State of importation is not subject to VAT. Let me also point out that the Court there held that Article 2 of the Sixth Directive, 2which lays down the principle that imported goods shall be subject to VAT, does not infringe Article 95, provided that it is interpreted in the manner advocated by the Court with regard to the need to deduct residual VAT.

4According to the Kingdom of Spain, that principle was of an exceptional and temporary nature and the prospective removal of fiscal frontiers should now give the Court cause to modify, if not to reconsider, that solution, which gives rise to serious practical difficulties. More particularly, it benefits States of exportation, which retain the VAT originally levied, to the detriment of States of importation, whose revenue is unfairly reduced. In addition, such a system is anything but satisfactory, whereas other solutions advocated by the Commission in its proposals for a directive or in its White Paper, or by the Council, which the latter, however, has not yet adopted, provide a satisfactory solution to the problem of avoiding double imposition while at the same time distributing VAT revenue on an equitable basis between Member States. Such is the case with schemes which provide either for full remission on exportation and imposition when the goods in question are imported, or for one single VAT charge (in the State of exportation or in that of consumption) with subsequent payment of compensation between the Member States concerned. In contrast, the system which the Commission proposes would seriously penalize those Member States of the Community with the lowest living standards because the influx of second-hand goods is most marked in such States.

5I would not deny that the arguments which the Kingdom of Spain has presented to the Court are of interest; however, I do not believe that the Court is the appropriate forum in which to discuss such matters. What we have heard are arguments which are primarily of a political order and which illustrate the need for fiscal harmonization in this area, rather than legal arguments which might lead the Court to a reappraisal of principles laid down in its earlier case-law.

6Furthermore, those principles have already refuted in advance the main objections submitted to the Court in the present cases. Thus, while certain Member States maintained, according to the judgment in Gaston Schul I, that

'the establishment of a system ensuring the complete neutrality of internal taxation with regard to intra-Community trade could take place only by strict application of the principle of taxation in the Member State of destination and that would mean full remission of tax on all products at the time of exportation. It is for the political institutions of the Community to adopt such a solution since it involves a political choice', 3

the Court ruled in unequivocal terms that:

'although the establishment of a system of complete neutrality in the field of competition involving full remission of tax on exportation is indeed a matter for the Community legislature, so long as such a system is not established Article 95 of the Treaty prevents an importing Member State from applying its system of value added tax to imported products in a manner contrary to the principles embodied in that aniele'.

7In other words, the absence of VAT harmonization in this area cannot effectively be relied on in order to render nugatory the rights conferred on individuals by Article 95 of the Treaty. Moreover, this reasoning suffices to dispel the arguments in which Greece and Italy relied on the existence of a proposal for a directive, just as it also suffices to undermine the reasoning based on equity between Member States which Spain used in its attempts to persuade the Court in the present cases not to confirm the principle that residual VAT is deductible. Budgetary difficulties with which States may on occasions have to contend cannot have any bearing whatever on their compliance with the absolute and unconditional prohibition against taxing imported goods more heavily than domestic goods.

8Finally, I shall outline very briefly the argument put forward by the Kingdom of Spain to the effect that the Commission failed to take account of other indirect charges levied on goods and that it has thereby given rise to distortions in competition to the detriment of those States which have not introduced such charges. The latter might for that reason be persuaded to adopt those charges, and this would push back even further the prospective removal of fiscal frontiers. In answer to this line of argument, the Commission points out, quite correctly in my opinion, that the situation described by the defendant State could not under any circumstances justify the infringement of Article 95 which would arise under a system of discriminatory taxation. Equally cogent, in my view, are the secondary observations of the Commission to the effect that Member States are entitled, under Community law as it stands at present, to set up specific systems of taxation other than VAT, provided that such charges meet the requirements set out in Article 95 and do not discriminate against imponed products. Finally, it should be noted that the removal of barriers caused by differences between taxation systems, even those which are not discriminatory, comes under Article 99, rather than under Article 95 which seeks to eliminate directly and immediately those fiscal provisions which are discriminatory and protective.

9Consequently, I can do no more than suggest that the Court should reject the contention of the Spanish Government and reaffirm the solution in Gaston Schul I that Member States, if they wish to impose VAT on imported goods, must first deduct the residual portion of that tax still contained in the value of the goods at the time of their importation.

10I would now like to consider the extent to which the defendant Member States have failed to fulfil their obligations under Article 95, as interpreted above.

11There can be no doubt that Member States are under an obligation to ensure that private individuals shall benefit from a deduction in the amount of residual VAT incorporated in the value of the product. In other words, any failure to apply Article 95 as interpreted in the case-law of the Court undoubtedly constitutes a failure to fulfil obligations. However, the Commission's action is not directed against the actual failure to apply that Article — a failure which in any case is not really disputed by Spain, Greece or, as became clear from the hearing, by Italy — but rather against the absence of measures designed to ensure that national legislation complies with Article 95.

12I would first point out that, while the directly applicable provisions of the Treaty do not make it necessary to adopt 'national implementing provisions' 5and while there is no doubt that private individuals may rely on Article 95 before courts and tribunals, those facts relate only to a 'minimum guarantee' which is not adequate in itself to ensure a full and comprehensive application of the Treaty. 6

13Moreover, according to the decided case-law of the Court, 7

'the principles of legal certainty and the protection of individuals require, in areas covered by Community law, that the Member States' legal rules should be worded unequivocally so as to give the persons concerned a clear and precise understanding of their rights and obligations and enable national courts to ensure that those rights and obligations are observed'. 8

14If we apply those principles to the cases in hand, we shall find that the absence of suitable provisions in national law designed to ensure that the residual portion of VAT can be deducted at the time of importation is, to say the very least, incompatible with the requirements of clarity, precision and certainty which have been laid down by the Court. The failure to adopt adequately publicized general measures has two consequences. In the first place, one can only agree with the Commission's view that public servants in the Member States will not implement the principles relating to the deduction of residual VAT unless they have been instructed to do so by their superiors. Secondly, individuals will find themselves in a situation in which the only available text will be that of the national measure providing for taxation at the time of importation, a measure which will have nothing to say on the subject of the deduction of residual VAT, whereas it is precisely such a deduction which guarantees that national legislation complies with Community law. In such circumstances, individuals will be completely uncertain as to whether they may invoke Community law. In that regard, I must also emphasize that the argument based on heightened awareness of Community law by individuals in order to justify rules of national law which infringe directly applicable provisions of the Treaty has already been rejected by the Court.

15I would make one final comment: the Commission, which had initially called in question the absence of laws, regulations or administrative provisions, gives to understand that it will in future be satisfied with administrative instructions which have been sufficiently publicized. Is it possible to reconcile this view with the principles laid down in the Court's own case-law that a national legislative provision which infringes Community law cannot be revoked merely by administrative instructions, but rather requires a similarly mandatory text? If the Court should take the view in the present cases that this requirement should be retained, it would, however, not thereby be dismissing the action. In fact, the Court would then be recording the failure to fulfil obligations within the limits of the action brought by the Commission, while accepting that the Member States have in any case not adopted the necessary measures.

16There is, however, reason to ask whether the situation in the present cases may not be distinguished from that in which national legislation actually conflicts with Community law. National legislation which provides for the imposition of VAT when goods are imported is not at variance with Community law; such legislation complies with Community law provided that it can be interpreted in the manner required under Article 95. What we are concerned with, therefore, is not to remove an infringement, but rather to specify, for certain situations, how VAT is to be calculated in respect of imported goods. It does not appear possible to treat the need to determine the interpretative details of a text, no matter how compelling such a need may be, in the same way as the need to revoke that text if it is at variance with Community law. In other words, the nature of the measures required to ensure respect for the correct application of Community law may vary in the light of the distinction between situations in which there is an infringement stricto sensu of Community law brought about by a legislative provision and situations where the infringement consists only in the fact that the provision has not been interpreted in a an adequate way in which to guarantee the manner consistent with the Treaty. interpretation required under Community law. Such a solution may all the more readily be envisaged if we bear in mind the fact that circulars are the normal medium

17In this case I would be inclined to take through which legislative texts are interthe view that an administrative instruction, preted by administrative authorities, and a medium whose role is of particular if it receives the relevant publicity required de facto to inform individuals, may in fact constitute importance in matters of taxation.

Conclusion

18For the above reasons, I would propose that the Court should grant the application brought by the Commission against the Kingdom of Spain, the Hellenic Republic and the Italian Republic and order those States to pay the costs.

Notes

(1) Judgment in Case 15/81 Gaston Schul v Inspecteur der Invoerrechten en Accijnzen (Gaston Schul I) [1982] ECR 1409; judgment in Case 47/84 Staatssecretaris van Financien v Gaston Schul (Gaston Schul II) [1985) ECR

(149) 1; judgment in Case 39/85 Bergeres-Becque v Service interrégional des douanes [1986] ECR 259 and judgment in Case 299/86 Drexl [1988] ECR1213.

(2) Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value-added tax : uniform basis of assessment (OJ L 145, 1977, p. 1).

(3) Case 15/81, cued above, at paragraph 37.

(4) Ibid., paragraph 38, my emphasis.

(5) Judgment in Case 168/85 Commission v Italy [1986] ECR

(294) 5, at paragraph 11.

(6) Ibid, and judgment in Case 72/85 Commission v Netherlands [1986] ECR 1219.

(7) Judgment in Case 257/86 v [1988] Commission Italy ECR 3249; see also the judgment in Case 143/83 Commissions Denmark[1985] ECR 427.

(8) Case 257/86, cued above, at paragraph 12 9 — See Case 168/85 Commision v Italy, cited above