C-132/06 Commission v Italy

Parties Grounds Operative part

In Case C‑132/06,

ACTION under Article 226 EC for failure to fulfil obligations, brought on 7 March 2006,

Commission of the European Communities, represented by E. Traversa and M. Afonso, acting as Agents,

applicant,

v

Italian Republic, represented by I.M. Braguglia, acting as Agent, and G. De Bellis, avvocato dello Stato,

defendant,

THE COURT (Grand Chamber),

composed of V. Skouris, President, P. Jann, C.W.A. Timmermans, A. Rosas, K. Lenaerts, G. Arestis and U. Lõhmus, Presidents of Chambers, E. Juhász, A. Borg Barthet (Rapporteur), M. Ilešič, J. Malenovský, J. Klučka and E. Levits, Judges,

Advocate General: E. Sharpston,

Registrar: M. Ferreira, Principal Administrator,

having regard to the written procedure and further to the hearing on 12 September 2007,

after hearing the Opinion of the Advocate General at the sitting on 25 October 2007,

gives the following

Judgment

Legal context and the dispute

1By its action, the Commission of the European Communities seeks a declaration from the Court that, by explicitly providing in Articles 8 and 9 of Law No 289 of 27 December 2002 relating to the provisions for drawing up the annual and pluriannual budget of the State (Finance Law for 2003) (legge n. 289, disposizioni per la formazione del bilancio annuale e pluriennale dello Stato (legge finanziaria 2003)) (Ordinary Supplement No 240/L to GURI No 305 of 31 December 2002) (‘Law No 289/2002’) for a general waiver of verification of taxable transactions effected in a series of tax years, the Italian Republic has failed to fulfil its obligations under Articles 2 and 22 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1) (‘the Sixth Directive’), and Article 10 EC.

Legal context

Community law

2Article 10 EC provides:

‘Member States shall take all appropriate measures, whether general or particular, to ensure fulfilment of the obligations arising out of this Treaty or resulting from action taken by the institutions of the Community. They shall facilitate the achievement of the Community’s tasks.

They shall abstain from any measure which could jeopardise the attainment of the objectives of this Treaty.’

3The second recital in the preamble to the Sixth Directive reads as follows:

‘… the budget of the Communities shall, irrespective of other revenue, be financed entirely from the Communities’ own resources; … these resources are to include those accruing from value added tax [‘VAT’] and obtained by applying a common rate of tax on a basis of assessment determined in a uniform manner according to Community rules’.

4The fourth recital in the preamble to that directive is worded as follows:

‘… account should be taken of the objective of abolishing the imposition of tax on the importation and the remission of tax on exportation in trade between Member States; … it should be ensured that the common system of turnover taxes is non-discriminatory as regards the origin of goods and services, so that a common market permitting fair competition and resembling a real internal market may ultimately be achieved’.

5The 14th recital in the preamble to that directive reads as follows:

‘… the obligations of taxpayers must be harmonised as far as possible so as to ensure the necessary safeguards for the collection of taxes in a uniform manner in all the Member States; … taxpayers should, in particular, make a periodic aggregate return of their transactions, relating to both inputs and outputs where this appears necessary for establishing and monitoring the basis of assessment of own resources’.

6Under Article 2 of the Sixth Directive, both the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such and the importation of goods are to be subject to VAT.

7Article 22 of the Sixth Directive provides:

‘...

4. Every taxable person shall submit a return within an interval to be determined by each Member State. ...

...

5. Every taxable person shall pay the net amount of the [VAT] when submitting the return. The Member States may, however, fix a different date for the payment of the amount or may demand an interim payment.

...

8. … Member States may impose other obligations which they deem necessary for the correct levying and collection of the tax and for the prevention of fraud.

...’

National law

8Articles 8 and 9 of Law No 289/2002, which govern the ‘Supplementary return in respect of past years’ and the ‘Automatic settlement in respect of past years’, respectively, relate both to VAT and to other taxes and compulsory levies.

Article 8 of Law No 289/2002

9Article 8 of Law No 289/2002 essentially allows taxable persons to submit a supplementary VAT return in order to correct returns which have already been filed in respect of tax periods falling between 1998 and 2001. Under Article 8(3), the supplementary return must be accompanied by payment of the additional VAT due before 16 April 2003, the amount of which is calculated by ‘applying the provisions in force during each of the tax periods’. That return is valid only if it shows additional sums due of at least EUR 300 for each tax year. Payments may be made in two equal instalments if they exceed EUR 3 000 for individuals or EUR 6 000 for legal persons.

10Article 8(4) of Law No 289/2002 provides for the possibility of filing a supplementary VAT return under a confidential procedure. However, that option is not available if the taxable person has not filed any returns for the tax years in question.

11Under Article 8(6) of Law No 289/2002, the effect of submitting a supplementary VAT return is that, in respect of amounts equivalent to the additional VAT due under that return increased by 100% – in other words, a VAT amount due which is double that declared by the taxable person – fiscal administrative penalties lapse, criminal penalties may no longer be applied to the taxable person concerned for certain offences under tax law or ordinary law, and no more tax verifications may be carried out.

12Article 8(9) of Law No 289/2002 allows taxpayers who have used the confidential procedure under Article 8(4) of that law to be exempted from all verification save that of the consistency of their supplementary returns.

13Article 8(10) of Law No 289/2002 provides, however, that the benefit of Article 8 is not to be available to the following:

– taxable persons who, on the date of entry into force of Law No 289/2002, had already been served with a formal report finding an infringement, a correction notice or a notice to attend adversarial proceedings;

– taxable persons in respect of whom criminal proceedings had already been brought for the offences referred to in Article 8(6)(c) of Law No 289/2002 and of which they had been formally informed before the date on which they filed the supplementary VAT return.

14Under Article 8(12) of Law No 289/2002, submission of a supplementary VAT return cannot constitute information of a criminal offence.

Article 9 of Law No 289/2002

15Article 9 of Law No 289/2002 concerns ‘Automatic settlement in respect of past years’. According to Bulletin No 12/2003 of 21 February 2003 of the Agenzia delle Entrate – Direzione centrale normativa e contenzioso (Revenue Authority – Directorate-General for Legislation and Legal Affairs), the point of the return for the purposes of automatic settlement, provided for in Article 9 of Law No 289/2002, as opposed to the supplementary VAT return provided for under Article 8 thereof, is not to declare additional taxable amounts, but rather to provide the information needed to determine the amounts which have to be paid in order to obtain the tax amnesty.

16Although the tax periods covered by the automatic settlement are the same as those under Article 8 of Law No 289/2002, the return submitted under Article 9 of that law must, by contrast, relate to ‘all tax periods, failing which it will be null and void’ (Article 9(1) of the law).

17Under Article 9(2)(b) of Law No 289/2002, the automatic settlement for the purposes of VAT involves, for each of the tax periods, payment in the aggregate of (i) ‘an amount equal to 2% of the VAT on supplies of goods or services carried out by the taxable person, in respect of which the VAT has become chargeable during the tax period’ and (ii) an amount equal to 2% of the VAT on supplies of goods or services ‘deducted during the same period’. That percentage is fixed at 1.5% for input or output tax which exceeds EUR 200 000 and 1% for amounts over EUR 300 000. Where application of Article 9(2)(b) of Law No 289/2000 entails payment of a sum in excess of EUR 11 600 000, the portion exceeding that figure is reduced by 80%. Article 9(6) of that law, however, sets a minimum figure for each year’s payments of EUR 500 where turnover does not exceed EUR 50 000; EUR 600 where turnover is between EUR 50 000 and EUR 180 000; and EUR 700 where turnover exceeds EUR 180 000.

18For each tax year in respect of which no returns have been submitted at all, Article 9(8) of Law No 289/2002 requires a flat-rate payment of EUR 1 500 for natural persons, and EUR 3 000 for companies and associations.

19Under Article 9(10)(b) and (c) of Law No 289/2002, the effect of the automatic settlement procedure for VAT purposes is that, for the taxable person concerned, fiscal administrative penalties lapse, criminal penalties may no longer be applied for certain related offences under tax law or non-tax law and no more tax verifications may be carried out.

20Under Article 9(14) of Law No 289/2002, automatic settlement is not available to the following:

– taxable persons who, on the date of entry into force of Law No 289/2002, had already been served with a formal report finding an infringement, a correction notice or a notice to attend adversarial proceedings;

– taxable persons in respect of whom criminal proceedings had already been brought for the offences referred to in Article 9(10)(c) of Law No 289/2002 and of which they had been formally informed before the date on which they filed the supplementary VAT return;

– taxable persons who failed to submit returns in respect of every tax referred to in Article 9(2) and every tax period referred to in Article 9(1).

Pre-litigation procedure

21On the view that Articles 8 and 9 of Law No 289/2002 are incompatible with Articles 2 and 22 of the Sixth Directive and with Articles 10 EC and 249 EC, the Commission, pursuant to the procedure provided for in Article 226 EC, sent a letter of formal notice, dated 16 December 2003, to the Italian Republic. By letter of 30 March 2004, that Member State denied the incompatibility alleged by the Commission. Not satisfied with the response from the Italian Republic, the Commission sent that Member State a reasoned opinion by letter of 18 October 2004, calling upon it to comply with that opinion within two months of receipt thereof. In its reply of 31 January 2005 to that reasoned opinion, the Italian Republic again denied that there was such an incompatibility. It was in those circumstances that the Commission decided to bring the present action.

The action

Arguments of the parties

22The Commission claims that, by explicitly providing in Articles 8 and 9 of Law No 289/2002 for a general waiver of verification of taxable transactions effected in a series of tax years, the Italian Republic has failed to fulfil its obligations under Articles 2 and 22 of the Sixth Directive and Article 10 EC.

23The Commission states that Articles 2 and 22 of the Sixth Directive and Article 10 EC impose a twofold obligation on Member States, in that they are required to adopt not only all the national legislation necessary to give effect to the Sixth Directive, but also all the administrative measures necessary to ensure that persons liable to pay VAT comply with the obligations arising under that directive, in particular with the obligation to pay in a timely manner the VAT payable following a taxable transaction.

24According to the Commission, Articles 8 and 9 of Law No 289/2002 derogate from the general legislation governing VAT and transposing the Community VAT directives into Italian law. The Commission considers that such derogation is contrary to Articles 2 and 22 of the Sixth Directive.

25Regarding the obligation imposed on Member States by Article 2 of the Sixth Directive to make all supplies of goods and services subject to VAT, it is inconceivable, according to the Commission, that a Member State may unilaterally release itself from the obligation to make certain categories of taxable transactions subject to VAT, either by introducing tax exemptions not provided for by the Community legislature, or by excluding from the scope of the Sixth Directive taxable transactions which ought properly to be covered by it.

26As regards the obligations referred to in Article 22 of the Sixth Directive, the Commission maintains that, as those obligations are framed in unequivocal and imperative terms, Member States may exempt taxable persons from one or other of those obligations only if a specific provision in Article 22 expressly empowers them to derogate from those obligations. According to the Commission, Article 22(8) of that directive is intended to ensure that the national tax authorities possess the necessary means of enforcement through controls, whilst making taxable persons subject to the obligations arising from those enforcement requirements, and to place Member States under an obligation to ensure ‘the correct levying and collection of the tax’ through an effective strategy of verification and combating tax evasion. According to the Commission, Article 22 of the Sixth Directive does not confer on the Member States a measure of discretion enabling them to exempt all taxable persons from their obligation to keep accounts, to issue invoices and to submit VAT returns.

27The Commission acknowledges that when Member States check the accuracy of VAT returns and the related payments made by taxable persons, they enjoy a measure of discretion enabling them to adjust their controls according to the human resources and technical means at their disposal for that purpose. However, the Commission argues that Articles 8 and 9 of Law No 289/2002 go above and beyond the discretion granted to Member States by the Community legislature, in that the Italian Republic has introduced a general, indiscriminate and prior renunciation of the right of verification and enforcement through controls in the matter of VAT.

28On the view that there is no link whatsoever between the tax debt calculated in accordance with the ordinary VAT rules and the amounts to be paid by the taxable persons wishing to take advantage of the amnesty arrangements provided for in Articles 8 and 9, respectively, of Law No 289/2002, the Commission maintains that the provisions laid down in those articles are liable seriously to disrupt the proper functioning of the common system of VAT, to distort the principle of fiscal neutrality inherent in that system and to infringe the obligation to ensure that VAT is collected in a uniform manner in all the Member States.

29The Italian Republic, which recognises that the Community rules on VAT require Member States to apply VAT to all taxable persons and to carry out checks as a result of that obligation, maintains that the mechanism provided for in Articles 8 and 9 of Law No 289/2002 does not affect either taxpayers’ obligations or the components of VAT. Rather, it comes into play in the area of enforcement and recovery of VAT, where Member States enjoy some margin of discretion.

30The Italian Republic takes the view that the logical conclusion of the Commission’s plea, which aims to classify the mechanism provided for in Articles 8 and 9 of Law No 289/2002 as a ‘general, indiscriminate and prior renunciation of the right of verification and enforcement through controls in the matter of VAT’, would be that Member States would be generally precluded from making use of conciliation or dispute settlement mechanisms in order to avoid litigation and ensure immediate revenue through negotiated tax reductions.

31The Italian Republic argues in particular that its tax authorities are unable to carry out controls of all taxpayers; thus the scheme provided for in Articles 8 and 9 of Law No 289/2002 enables it to collect immediately a not insignificant portion of the VAT and to focus its enforcement efforts on those taxpayers who have not availed themselves of the amnesty procedure at issue.

32The Italian Republic also argues that the fact that the VAT amounts collected have, in its view, been considerably higher than those which could have been collected under the ordinary verification and controls procedure shows that the obligations under the Sixth Directive have been discharged: an allegation of non-compliance with those obligations cannot be sustained solely on the ground that those amounts were recovered in the form of payments made voluntarily by taxpayers rather than in response to a compulsory demand from the tax authorities.

33The Italian Republic states that the purpose of Article 8 of Law No 289/2002 is to enable taxpayers who are not yet known to the tax authorities as tax evaders to regularise their position, provided that they declare voluntarily the taxable amounts involved in the evasion and pay a sum equal to at least 50% of the VAT evaded (or at least two thirds thereof in the case of a withholding tax). The payment made has the effect of preventing the tax authorities from carrying out controls in respect of amounts which do not exceed by at least 100% the amounts declared on the supplementary return (or by at least 50% in the case of additional withholding tax).

34Relying on Article 8(10) of Law No 289/2002, the provisions of which are referred to in paragraph 13 of the present judgment, the Italian Republic maintains that taxable persons already known to be tax evaders may not avail themselves of the arrangements provided for in Article 8.

35The Italian Republic states, in respect of Article 9 of Law No 289/2002, that the application of that provision is refused in the two situations specified in Article 8(10) of that law – as explained in paragraph 13 of the present judgment – and, pursuant to Article 9(14) of that law, where the person concerned has failed to submit returns in respect of every tax referred to in Article 9(2) and every tax period referred to in Article 9(1).

36The Italian Republic states that the reference in Article 9(14) of Law No 289/2002 to ‘every tax referred to in Article 9(2)’ has always been interpreted to the effect that the taxes referred to in Article 9(2)(a) of that law, on the one hand, and the VAT referred to in Article 9(2)(b), on the other, fall to be considered separately. Thus, it has been accepted that the automatic settlement provided for in Article 9 will not be available where there has been a failure to file a VAT return for all of the years concerned, even if, in respect of those years, returns have been filed for other types of tax. The Italian Republic adds that, under Article 9(9) of Law No 289/2002, the tax authorities may at any time recover the VAT due on the basis of the information in the VAT return and that, in any event, a tax verification may be carried out whenever it is necessary to verify the right (or the lack of any such right) to a VAT refund on the basis of that return.

Grounds

Findings of the Court

37It follows from Articles 2 and 22 of the Sixth Directive, and from Article 10 EC, that every Member State is under an obligation to take all legislative and administrative measures appropriate for ensuring collection of all the VAT due on its territory. In that regard, Member States are required to check taxable persons’ returns, accounts and other relevant documents, and to calculate and collect the tax due.

38Under the common system of VAT, Member States are required to ensure compliance with the obligations to which taxable persons are subject and they enjoy in that respect a certain measure of latitude, inter alia, as to how they use the means at their disposal.

39That latitude is nevertheless limited by the obligation to ensure effective collection of the Community’s own resources and not to create significant differences in the manner in which taxable persons are treated, either within a Member State or throughout the Member States. The Court has held that the Sixth Directive must be interpreted in accordance with the principle of fiscal neutrality inherent in the common system of VAT, according to which economic operators carrying out the same transactions must not be treated differently in relation to the levying of VAT (Case C-382/02 Cimber Air [2004] ECR I-8379, paragraph 24). Any action by Member States concerning VAT collection must comply with that principle.

40Under Article 8 of Law No 289/2002, taxable persons who have not complied with their obligations in respect of the tax periods falling between 1998 and 2001 – in certain cases, only one year before the adoption of that law – may completely escape verification, as well as any applicable penalties, up to double the amount of the VAT as it appears from the supplementary VAT return. The Italian authorities no longer have any legal basis for verifying the taxable transactions carried out during the four years preceding the adoption of that law, subject, however, to the limits (in terms of the amounts) laid down in Article 8(6) of that law. That waiver is in principle applicable where the taxable person declares and pays the amount he should have paid initially. However, since verification may be carried out only in respect of amounts higher than double the amounts declared by the taxable person in the supplementary VAT return, Law No 289/2002 is likely to provide taxable persons with a powerful incentive to declare only part of the tax debt actually due. It follows that the taxable persons availing themselves of that article will escape once and for all their obligations to declare and to pay the amount of VAT normally payable for the tax periods falling between 1998 and 2001.

41The VAT amount due under Article 9 of Law No 289/2002 bears even less resemblance to the amount that the taxable person should have paid. Under that article, a taxable person who has not filed a return for the tax periods falling between 1998 and 2001 will be able to escape any controls as well as any fiscal administrative or criminal penalties by paying an amount equivalent to 2% of the VAT due on supplies of goods or services carried out by that person, plus 2% of the VAT deducted during the same period. That percentage is fixed at 1.5% for input or output VAT in excess of EUR 200 000 and 1% for amounts over EUR 300 000. Where the amount due under Article 9 exceeds a certain level, the surplus portion is reduced by 80%. The amounts to be paid may not be less than EUR 500.

42It follows that Article 9 of Law No 289/2002 enables taxable persons who have not complied with their VAT obligations for the tax periods falling between 1998 and 2001 to escape once and for all those obligations – as well as the penalties for non-compliance with those obligations – by paying a lump sum in lieu of an amount proportionate to the turnover achieved. Those lump sums are disproportionate in relation to the amount the taxable person should have paid on the basis of the turnover generated by the transactions that he carried out but did not declare.

43By replacing, shortly after the expiry of the deadlines fixed for the payment of the VAT amounts normally payable, the obligations under Articles 2 and 22 of the Sixth Directive for the parties concerned with other obligations which do not require the payment of those amounts, Articles 8 and 9 of Law No 289/2002 render those articles of the Sixth Directive – which form nevertheless the basis for the common system of VAT and are thus an intrinsic part of the very structure of that tax – meaningless. The effect of the considerable imbalance between the amounts actually due and the amounts paid by taxable persons wishing to take advantage of the tax amnesty in question is tantamount to a tax exemption.

44It follows that Law No 289/2002 seriously disrupts the proper functioning of the common system of VAT. Its provisions distort the principle of fiscal neutrality by introducing significant variations in the treatment of taxable persons in Italy. For the same reason, those provisions infringe the obligation to ensure that VAT is collected in a uniform manner in all the Member States.

45Since, as is stated in the fourth recital in the preamble to the Sixth Directive, the purpose of the principle of fiscal neutrality is to enable the achievement of a common market permitting fair competition, the very functioning of the common market is compromised by the Italian legislation because, in Italy, it is realistic for taxable persons to hope not to be required to pay a large portion of their tax debt.

46It should be pointed out in that context that the prevention of tax evasion is an objective recognised and encouraged by the Sixth Directive (see Case C-255/02 Halifax and Others [2006] I-1609, paragraph 71, and Case C-162/07 Ampliscientifica and Amplifin [2008] ECR I-0000, paragraph 29). Thus, Article 22(8) of the Sixth Directive calls on Member States to impose, where appropriate, additional obligations to prevent tax evasion.

47It is clear that the Italian legislation has the opposite effect in that taxable persons who are guilty of tax evasion are placed in a more favourable position by Law No 289/2002.

48The Italian Republic maintains that the true impact of the tax amnesty at issue is minimised because of the cases in which persons are barred from the benefit of those arrangements. It argues, inter alia, that taxable persons who have not filed any VAT returns for the tax years concerned, as well as those who have not complied with their VAT obligations and in respect of whom proceedings have already been closed in favour of the tax authorities, may not avail themselves of the amnesty.

49The figures provided by the Italian Republic in its statement in defence, however – according to which almost 15% of taxable persons, that is to say, approximately 800 000 of them, applied for the tax amnesty in 2001 – highlight the breadth of a measure which cannot be regarded as being of limited scope, notwithstanding the debarment situations emphasised by the Italian Republic.

50Since debarment applies only in very limited sets of circumstances, it is clear that the Commission is correct in classifying the disputed tax amnesty as a general and indiscriminate renunciation of the tax authorities’ right of verification and recovery.

51The Italian Republic contends that Law No 289/2002 enables the public purse to recover part of the VAT not initially declared immediately and without having to engage in lengthy legal proceedings.

52However, by introducing an amnesty measure very shortly after the expiry of the deadlines by which taxable persons should have paid VAT and by requiring payment of an amount which is paltry as compared with the VAT actually due, the measure in question enables the taxable persons concerned to escape once and for all their VAT obligations, despite the fact that the national tax authorities would have been able to detect at least some of those taxable persons during the four years preceding the date after which recovery of the tax normally payable would be time-barred. In so doing, Law No 289/2002 undermines the responsibility incumbent on each Member State to ensure the correct levying and collection of the tax.

53Consequently, it is appropriate to consider the Commission’s action as well founded and to declare that, by providing in Articles 8 and 9 of Law No 289/2002 for a general and indiscriminate waiver of verification of taxable transactions effected in a series of tax years, the Italian Republic has failed to fulfil its obligations under Articles 2 and 22 of the Sixth Directive, and Article 10 EC.

Costs

Costs

54Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party’s pleadings. As the Commission has applied for costs against the Italian Republic and the Italian Republic has been unsuccessful, the latter must be ordered to pay the costs.

Operative part

On those grounds, the Court (Grand Chamber) hereby:

1. Declares that, by providing in Articles 8 and 9 of Law No 289 of 27 December 2002 relating to the provisions for drawing up the annual and pluriannual budget of the State (Finance Law for 2003) (legge n. 289, disposizioni per la formazione del bilancio annuale e pluriennale dello Stato (legge finanziaria 2003)) for a general and indiscriminate waiver of verification of taxable transactions effected in a series of tax years, the Italian Republic has failed to fulfil its obligations under Articles 2 and 22 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, and Article 10 EC;

Signatures

2. Orders the Italian Republic to pay the costs.

Opinion of the Advocate-General

1The Commission seeks a declaration that, by explicitly providing for a general waiver of verification of taxable transactions effected in a series of tax years, Italy has failed to fulfil its obligations under the Sixth VAT Directive (2) and Article 10 EC.

2The national provisions in question set up a tax amnesty under which, if certain declarations are made and certain sums are paid immediately, failures to account for amounts of various taxes during the tax years 1998 (or in some cases 1997) to 2001 will not be pursued or subjected to scrutiny. (3)

3The Commission submits that, in so far as it concerns VAT, the amnesty is contrary to the provisions of Article 2 of the Sixth Directive, which require transactions to be taxed, and Article 22, which impose various obligations as to declaration and payment of VAT.

4Italy contends that the effect of the amnesty is not a general and indiscriminate renunciation of all verification, that only a limited proportion of persons liable for VAT have had recourse to it, that it has been extremely productive in terms of tax recovered, and that it has thus been a judicious use of limited resources, falling within the latitude necessarily accorded to Member States.

Community provisions

5Article 10 EC imposes a general obligation on Member States to ‘take all appropriate measures, whether general or particular, to ensure fulfilment of the obligations arising out of this Treaty or resulting from action taken by the institutions of the Community’, to ‘facilitate the achievement of the Community’s tasks’ and to ‘abstain from any measure which could jeopardise the attainment of the objectives of this Treaty’.

6Article 2 of the Sixth Directive states:

‘The following shall be subject to value added tax:

1. the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;

2. the importation of goods.’ (4)

7The original Article 22 of the Sixth Directive was replaced by one of the so-called ‘transitional arrangements’ in Title XVI, and the applicable text is to be found in Article 28h. It is entitled ‘Obligations under the internal system’, and is the longest article in the directive. (5)

8. In relation to the alleged failure to fulfil obligations in the present case, the Commission initially cites three of its provisions, from paragraphs 4, 5 and 8:

‘4. (a) Every taxable person shall submit a return by a deadline to be determined by Member States. …

…

5. Every taxable person shall pay the net amount of the value added tax when submitting the regular return. …

…

8Member States may impose other obligations which they deem necessary for the correct collection of the tax and for the prevention of evasion …’ (6)

9The Commission then draws attention to a number of further obligations imposed on taxable persons by Article 22:

– to declare every commencement, modification and cessation of activity as a taxable person (paragraph 1(a) (7) );

– to keep accounts in sufficient detail for VAT to be applied and inspected by the tax authority (paragraph 2(a) (8) );

– to submit a recapitulative statement of intra-Community transactions (paragraph 6(b) (9) ).

10The Commission finally refers to other provisions of Article 22 which impose obligations on the Member States:

– to identify taxable persons by means of an individual number (paragraph 1(c), (d) and (e) (10) );

– to take the necessary measures to ensure that persons other than taxable persons who are liable for payment of the tax comply with all the obligations as to declaration and payment set out for taxable persons (paragraphs 7, 10 and 11 (11) ).

National provisions

11The Commission takes issue with Articles 8 and 9 of the Italian Finance Law for 2003. (12) Those provisions allow taxable persons who have not submitted full returns to submit supplementary returns and to make a payment absolving them from further tax liability in respect of the period concerned, namely the tax years 1998 (or in some circumstances 1997) to 2001 inclusive. They cover a range of taxes, but the Commission’s action concerns only VAT, and the following summary of the relevant provisions is confined to the situation as regards that tax.

Article 8

12Article 8 allows returns which should have been made before 31 October 2002 to be ‘completed’. There are two variants of the procedure, governed respectively by paragraphs 3 and 4.

13Under Article 8(3), completion involves presentation of a supplementary return for each of the tax years concerned and payment of the additional sums due pursuant to the provisions in force in each tax year. In certain circumstances where the purchaser is himself liable for input tax but fails to declare it, it concerns only such VAT as could not have been deducted. The supplementary return is valid only if it shows additional sums due of at least EUR 300 for each tax year. Payments may be made in two equal instalments if they exceed EUR 3 000 for individuals or EUR 6 000 for others.

14Article 8(4) is not available if the taxable person has filed no returns for any of the tax years in question. Those to whom it is available may submit returns and make payments via certain approved bodies. The amounts due may be paid by monthly instalments, but with additional interest. The procedure is confidential in that the specific amounts due are not linked to individual taxable persons.

15Under Article 8(6), when the procedure in Article 8(3) or (4) has been followed, then, up to the limit of double the VAT due under the supplementary return, (a) neither the taxable person nor any person jointly liable will be subject to any verification, (b) any tax penalties which might have been imposed lapse and (c) certain procedures in respect of tax evasion can no longer be initiated (though criminal proceedings already brought are not extinguished). Article 8(6bis) confirms that tax verifications may none the less be carried out in respect of sums due in excess of the amount specified in Article 8(6).

16Article 8(9) allows those who have used the confidential procedure under Article 8(4) to escape any verification other than that of the consistency of their supplementary declarations.

17Article 8(10) excludes the application of the whole article in cases where, when the law came into effect, (a) a reassessment had already been issued, or (b) criminal proceedings for evasion had already been brought, in respect of a particular tax year. However, in some cases, it is possible to comply with a previous reassessment and to use the Article 8 procedure in respect of other periods.

18Under Article 8(12), submission of the supplementary return cannot constitute information of a criminal offence.

Article 9

19Article 9 concerns ‘automatic settlement’ in respect of past years. (13) Taxable persons requesting such settlement must submit returns for all the tax years in respect of which they should have been submitted by 31 October 2002.

20By virtue of Article 9(2)(b), automatic settlement involves payment, in respect of each tax year, of a sum equal to 2% of the VAT on the taxable person’s outputs and 2% of the input VAT deducted during that year. That percentage falls to 1.5% for output tax or input tax which exceeds EUR 200 000 and 1% for amounts over EUR 300 000 and, where application of the provision entails payment of a sum in excess of EUR 11 600 000, the portion exceeding that figure is reduced by 80%. Article 9(6) however sets a minimum figure for each year’s payments of EUR 500 where turnover does not exceed EUR 50 000, EUR 600 where turnover is between EUR 50 000 and EUR 180 000, and EUR 700 where turnover exceeds EUR 180 000.

21For individual years in respect of which no returns have been submitted at all, Article 9(8) requires a flat-rate payment of EUR 1 500 for natural persons, and EUR 3 000 for companies and associations, in respect of each tax year.

22Under Article 9(9), automatic settlement precludes further deductions or reimbursements not previously claimed by the taxable person. It does not however preclude certain checks, in particular those relating to consistency between declarations made and sums paid and to earlier claims for reimbursement of VAT.

23Article 9(10) mirrors Article 8(6). When the Article 9 procedure has been followed, then (a) neither the taxable person nor any person jointly liable will be subject to any tax verification, (b) any tax penalties which might have been imposed lapse and (c) certain procedures in respect of tax evasion can no longer be initiated (though criminal proceedings already brought are not extinguished). In contrast to Article 8(6), however, those immunities are not subject to any upper limit based on the amount of additional VAT now paid or declared.

24Article 9(12) allows payment in two equal instalments where the amount payable exceeds EUR 3 000 for individuals or EUR 6 000 for others.

25Article 9(13) mirrors Article 8(9). Those who have used the confidential procedure may escape any verification other than that of the consistency of their supplementary declarations.

26Article 9(14) mirrors Article 8(10). It excludes the application of the whole article in cases where, when the law came into effect, (a) a reassessment had already been issued, or (b) criminal proceedings for evasion had already been brought, in respect of a particular tax year. However, it adds a further exclusion in cases where (c) the taxable person failed to submit any return for any of the tax years covered.

27Article 9(15) limits the exclusions in Article 9(14)(a) and (b) to the tax years to which they apply. It states that there is to be no automatic settlement on the basis of data which do not correspond to those in the return submitted. Finally, it rules out any reimbursement of sums already paid, which are to be considered advances on tax due.

Pre-litigation procedure

28Considering that Articles 8 and 9 of the 2003 Finance Law were incompatible with Articles 2 and 22 of the Sixth Directive, the Commission sent Italy a letter of formal notice pursuant to Article 226 EC on 19 December 2003. Italy replied on 30 March 2004, denying any incompatibility. Unsatisfied, the Commission sent a reasoned opinion on 13 October 2004, enjoining Italy to comply wi thin two months. Italy replied on 31 January 2005, still denying any incompatibility. The Commission brought the present action on 8 March 2006.

Declaration sought

29The Commission asks the Court to declare that, by explicitly providing in Articles 8 and 9 of Law No 289 of 27 December 2002 (Finance Law for 2003) for a general waiver of verification operations on taxable transactions effected in the course of a series of tax years, the Italian Republic has failed to fulfil its obligations under Articles 2 and 22 of the Sixth Directive in conjunction with Article 10 of the EC Treaty. It also asks for an order that Italy pay the costs of the proceedings.

30Italy contends that the application should be dismissed and the Commission ordered to pay the costs.

Assessment

Admissibility

31Italy submits that the Commission introduced a new complaint in the reasoned opinion, relating to breach of the principle of VAT neutrality and distortion of competition as a result of the contested provisions. The Commission replies that it was merely recalling, in response to Italy’s arguments, the Court’s case-law on the matter, which is relevant when assessing an alleged infringement of Articles 2 and 22 of the Sixth Directive.

32Since the Commission does not seek a declaration that the Italian provisions specifically infringe the principle of neutrality or distort competition, its position seems reasonable. I am therefore of the view that there is no obstacle to the admissibility of the action.

Substance

33There are a number of interlinked issues disputed between the parties in this case, which I propose to deal with under the following headings: (i) the nature and extent of the obligations imposed on the Member States by Articles 2 and 22 of the Sixth Directive, with particular regard to the supervision and enforcement of compliance by taxable persons; (ii) the practical effect of the disputed amnesty provisions, viewed in the light of those obligations; (iii) the significance in that regard of the various limitations on the amnesty provisions; and (iv) the relative effectiveness of the amnesty provisions, in particular in terms of use of resources compared with amounts recovered, the latitude available to the Member States in the administration of VAT, and the extent to which the amnesty provisions fall within that latitude.

34Although it would be possible – and interesting – to explore a number of other more general issues relating to the legality and/or desirability of VAT amnesties, some of which have been touched upon in the course of the proceedings, I do not feel that it would be helpful for the Court to address those general issues in any great detail in order to decide whether the particular provisions to which the Commission objects are in compliance with the Sixth Directive. I shall confine my analysis therefore essentially to those aspects which are relevant to the declaration sought, referring to the broader issues only as background considerations.

Obligations imposed by the Sixth Directive

35I agree with the Commission’s presentation of the obligations imposed by the Sixth Directive both on individual taxable persons and on the Member States. Indeed, Italy appears also to accept the essentials of that presentation, although it maintains that the details of enforcement and collection are matters for the Member States. The Commission’s position may be summarised and restated as follows.

36From the preamble to the Sixth Directive it is clear that the Communities’ own resources ‘include those accruing from VAT and obtained by applying a common rate of tax on a basis of assessment determined in a uniform manner according to Community rules’; (14) that ‘it should be ensured that the common system of turnover taxes is non-discriminatory as regards the origin of goods and services, so that a common market permitting fair competition and resembling a real internal market may ultimately be achieved’; (15) and that ‘the obligations of taxpayers must be harmonised as far as possible so as to ensure the necessary safeguards for the collection of taxes in a uniform manner in all the Member States’. (16)

37The Court has moreover held that the Sixth Directive must be interpreted in compliance with the principle of fiscal neutrality inherent in the common system of VAT, (17) in accordance with which economic operators carrying out the same transactions may not be treated differently in relation to the levying of VAT. (18)

38The specific obligations imposed by Article 22 of the Sixth Directive are designed to ensure that national authorities have at their disposal all necessary information to ensure that VAT is levied and collected under the supervision of the tax authorities. (19) Those obligations are the corollary of the requirement in Article 2 that (in the absence of a specific exemption) all transactions within its scope must be taxed. That requirement is a general rule from which no Member State may derogate unilaterally. (20) Although under Article 27 of the Sixth Directive (21) a Member State may seek authorisation from the Council to derogate from the provisions of the directive ‘in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance’, any such simplification is subject to the proviso that it ‘may not affect the overall amount of the tax revenue of the Member State’ (and it is common ground that, in any event, Italy did not seek authorisation in the present instance).

39Each Member State is thus under an obligation to take all legislative and administrative steps to ensure that VAT is collected in full in its territory in the same way as in other Member States. Although the obligation is not explicitly set out in the Sixth Directive, it is a necessary inference from the whole of that measure, from Article 10 EC and from the Court’s case-law. (22) And, whilst harmonisation is not total and certain administrative aspects are of necessity left to the competence of the Member States, the obligations under Article 22 of the Sixth Directive do imply detailed harmonisation at the legislative level.

40Pursuant to that harmonisation, Member States are responsible for verifying tax returns, accounts and other relevant documents, and for calculating and collecting the tax due. They have a certain latitude as to how most effectively and most equitably to deploy the resources at their disposal when applying the tax, at least on a case-by-case basis, but that latitude is limited in any event by the need to ensure that

– the Community’s own resources are collected efficiently, and

– there are no significant variations in the treatment of taxable persons either within a single Member State or between Member States.

41Italy does not deny that Member States are required to oversee and verify, to the extent of their available resources, compliance with the VAT rules by taxable persons. It denies however that the disputed provisions overstep the bounds of the legitimate latitude accorded to them in the exercise of those functions.

42Consequently, it is necessary first to examine the practical effects of those provisions.

Effects of the disputed provisions

43The Commission submits that the contested provisions replace the normal legal relationships surrounding VAT liability with new relationships which definitively extinguish that liability, substituting for it a different obligation to pay amounts quite unrelated to those which should have been assessed and accounted for under the normal VAT rules. It describes the amnesty as a ‘general, indiscriminate and prior’ renunciation of the right of verification and reassessment, whereas under the directive any amnesty arrangement with taxable persons should be decided on a case-by-case basis. Furthermore, there is serious disruption of the principle of VAT neutrality and of equality of treatment as between taxable persons.

44It has to be acknowledged that the provisions are complex, and the parties have in the course of the proceedings disagreed over their practical effects. However, in the light of their answers to requests from the Court for more precise information, I believe those effects may be summarised as follows.

45If a taxable person has filed no VAT returns at all for any of the tax years in question, he cannot benefit from the amnesty under Articles 8(4) or 9. However, he may benefit from the amnesty provisions in either Article 8 or Article 9 if he has (a) filed (complete or incomplete) returns for any of the tax years in question but none for other years, or (b) filed returns for all of the tax years in question, but some or all of those returns are incomplete or inaccurate.

46When, in respect of a particular tax year, a taxable person files a supplementary return under the Article 8 procedure, showing a greater amount of taxable added value (difference between taxed inputs and taxable outputs) than that originally declared, then (a) he must pay an amount equal to the VAT due on the additional amount (subject to a minimum of EUR 300) and (b) he gains immunity from any further reassessment of his output tax for that year, up to a limit of twice the amount of the additional VAT now paid.

47The Article 9 procedure leads to different results depending on whether a return had originally been filed or not, and on the amount of input VAT deducted. However, a payment must be made in respect of each of the years concerned (whether a return was filed for that year or not, and whether any such return was accurate or not), and no further deductions are possible. For years in respect of which a return was filed, the payment is equal to between 1 and 2% of the input VAT initially deducted plus between 1 and 2% of output VAT initially declared for the year, (23) subject to a minimum of EUR 500, 600 or 700, depending on the amount of turnover concerned. For each year in respect of which no returns were originally filed, a flat-rate sum of EUR 1 500 for individuals, and EUR 3 000 for companies, is payable, regardless of the actual amount of under-declaration or non-declaration.

48On that basis, a taxable person using the procedure under Article 8 will pay an amount equal to the full VAT due on his previously undeclared, but now declared, added value – but only in respect of years for which he has not submitted a full, accurate return. However, he is thereby protected from any further reassessment in respect of amounts due up to double that amount. It therefore seems unlikely, in practice, that he will declare more than half of his previously undeclared added value. The tax authorities will then recover up to half the tax actually due while renouncing any possibility of recovering the other half.

49A taxable person using the Article 9 procedure must make a payment in respect of each year during the period concerned, whether an accurate return was originally made for that year or not. If a return (accurate or inaccurate) was made, then the payment is a small proportion (up to 2%) of the amount of input and output tax initially declared; if no return was made, it is a flat-rate sum of EUR 1 500 or EUR 3 000, regardless of the amount of VAT left undeclared. In either case, the taxable person gains immunity from further reassessment.

50Where a taxable person has a choice between the two procedures (and wishes to make use of one or other of them), it is reasonable to assume that he will opt for that which costs him less. Where the degree of under-declaration or non-declaration has been limited (and thus perhaps more likely to be due to honest error), the Article 8 procedure appears advantageous, providing immunity from further investigation in exchange for payment of half the amount of VAT due. Where it has been more extensive (and thus perhaps more likely to be due to intentional fraud), the Article 9 procedure will provide immunity in exchange for payment of an amount equivalent to a smaller (and in extreme cases, vanishingly small (24) ) proportion of the tax due but not accounted for.

51The Commission stresses that under Article 9 any taxable person may eliminate any risk of verification or reassessment in respect of a series of tax years, in exchange for a payment quite unrelated to the amount of VAT normally due at the rate of 20%. The amnesty under Article 8 also protects the taxable person from further verification or reassessment, albeit in exchange for a higher payment. Such a wholesale renunciation by the tax authorities of their powers of verification seriously distorts, in the Commission’s view, the neutrality of the common VAT system. Different taxable persons are subjected to very different treatment in respect of comparable transactions, which in turn undermines fair competition.

52Again, I can only agree with the Commission that a legislative arrangement under which honest and assiduous traders account for VAT in full whereas fraudulent or negligent traders can escape any further scrutiny in exchange for a payment of at most half, and possibly very much less, of the VAT actually due is not in compliance with the obligations imposed on Member States by, in particular, Articles 2 and 22 of the Sixth Directive. More specifically, the arrangements under Article 9 of the Italian Finance Law for 2003 completely disregard the detailed provisions of Article 22 of the Sixth Directive cited by the Commission (25) in that they do not involve a declaration of transactions actually effected and in that the sums payable are not linked in any way to the tax which should have been accounted for on those transactions. And, as the Commission rightly points out, the amnesty is quite indiscriminate in that it makes no distinction between occasional and regular underdeclaration, between small sums and large, or between negligence and fraud.

53However, the main thrust of Italy’s defence is that the amnesty is of limited availability and is an effective measure, falling within the latitude available to the Member States, for ensuring recovery of sums which would otherwise be lost to the tax authorities. It is therefore necessary to examine those aspects before reaching a final conclusion.

Limitations on the amnesty provisions

54The Commission describes the contested amnesty as a general and indiscriminate renunciation of the right of verification and reassessment, whereas the Italian Government draws attention to a number of limitations on the availability of the amnesty provisions. Those limitations are, in its view, significant and mean that the amnesty cannot be described as general or indiscriminate.

55First the amnesty is not available to taxable persons who did not initially submit any VAT returns at all for any of the tax years concerned. (26) That situation, the Commission replies, is by its nature purely marginal.

56One may indeed hope that such a situation is uncommon, and Italy has not taken issue with its description as ‘marginal’. In practice, businesses of any appreciable size may well, even if they wish to defraud the tax authorities, submit sufficiently plausible returns to avoid attracting attention. By contrast, however, a complete absence of declaration may be more common among smaller operators who hope to escape detection in any event, or who feel that evasion is justified by some sort of moral de minimis rule. (27) In addition, it is probable that many illegal activities will not be declared at all for VAT purposes, even where in principle they are subject to the tax. (28)

57I am thus not convinced that the exclusion is marginal in overall terms. As regards the visible economy, it is no doubt marginal, simply because anyone visibly carrying on taxable business will feel the need to declare at least enough of that business to ward off uncomfortable scrutiny and, having done so, will not be excluded from the amnesty. But such reasoning does not hold true for the invisible, or underground, economy, which has been estimated at over 26% of GDP in Italy. (29)

58On the other hand, a (theoretically) taxable person who aspires to escape altogether the notice of the tax authorities is perhaps less likely to seek the protection of an amnesty than one who is already known to those authorities but has hidden something from them. He is also less likely to be audited by them, particularly if their resources are limited, as is argued by the Italian Government.

59On balance, therefore, it seems to me unlikely that the exclusion of taxable persons who have failed to submit any return at all for any of the tax years concerned will have a significant effect on the numbers benefiting or seeking to benefit from the amnesty.

60Second, the Italian Government argues that the amnesty is not available where irregularities have already been brought to light. (30) The Commission counters that the exclusion is not complete – in some cases another settlement procedure under Articles 15 and 16 of Law No 289/2002 may be used in order to terminate reassessment proceedings and reopen the possibility of recourse to the amnesty – but the Italian Government rejoins that the arrangement in question concerns only those for whom such proceedings were still open to challenge.

61It appears from the text of Articles 15 and 16 provided by Italy in its rejoinder that reassessment proceedings which have not yet reached the stage of a definitive order or ruling may be terminated by the payment of a sum of at least EUR 150 and up to 50% of the amount of tax claimed, and from Articles 8(10) and 9(14) that, once such payment has been made within the relevant time-limit, the taxable person may have recourse to the amnesty under either Article 8 or Article 9.

62Consequently, the exclusion invoked by the Italian Government is of limited scope. It is only natural that a tax amnesty seeking to elicit voluntary contributions in lieu of tax which would normally have been due, but which is perceived as difficult to collect by other means, should not extend to reopening, to the benefit of the taxable person, procedures which have already been concluded in the tax authorities’ favour. However, taxable persons subject to a pending procedure may benefit from the amnesty, by paying a portion of the sum in issue in that procedure in addition to the sum required under the amnesty procedure. The amnesty will still be attractive for them if it means they can gain immunity by paying a lesser amount overall than that which they would have been likely to pay had the procedure been concluded to their detriment. However, the corollary is that the tax authorities will recover a lesser sum than could have been otherwise recovered, while renouncing any further verification.

63Third, the Italian Government points out that (31) the amount paid under the amnesty may be verified against the figures in the returns made and that, where claims for reimbursement have already been made, recourse to the amnesty procedure does not preclude any verification of the validity of those claims.

64As the Commission rightly points out, the first of those verifications is purely formal and wholly dependent on the accuracy of the returns made – which is itself excluded from verification by the amnesty procedure.

65The second type of verification concerns claims for reimbursement of VAT, that is to say, situations where input tax exceeds output tax so that the difference between the two is in favour of the taxable person rather than the tax authorities. The Italian Government asserts that in such cases, regardless of the amnesty, the verification can extend to the supplier who issued the invoices showing the input VAT and who must in any event account for the tax by virtue of having issued the invoice. (32)

66It seems to me that this exclusion from immunity from verification is again likely to be marginal. A trader who has claimed a VAT reimbursement to which he was not entitled will have done so either with or without the collusion of his suppliers in providing him with invoices showing an amount of input VAT not in fact accounted for to the authorities. If there has been such collusion, it may be wondered whether he will wish to take advantage of the amnesty at all unless detection seems already imminent, since he is in possession of documents entitling him prima facie to the reimbursement and recourse to the amnesty would necessarily involve denouncing his associate(s) in fraud. In cases of ‘missing trader’ fraud (where one or more traders vanish without accounting for VAT to the authorities), investigation of the suppliers will by definition be fruitless. And if there has been no collusion, it is less likely that irregularities will be revealed upstream on verification.

67Overall, the limitations on the scope of the amnesty invoked by the Italian Government, although not entirely illusory, do not appear substantial.

Effectiveness of recovery and latitude available to Member States

68It is common ground that, under the VAT system as currently harmonised, Member States are responsible for overseeing compliance by taxable persons, for verifying returns, accounts and all other relevant documents, and for calculating and collecting the tax due. Nor is it disputed that they have a certain latitude in that regard, as to how most effectively to deploy the resources at their disposal.

69Italy submits that the disputed provisions encourage spontaneous declaration of previously undeclared amounts by some taxable persons, thereby freeing resources to audit the unrepentant and providing overall a greater return than could otherwise have been achieved. That falls within the bounds of the latitude which the Commission itself recognises that the Member States enjoy in determining how to deploy resources in order best to ensure compliance and enforcement.

70The Italian Government specifies that a total of 162 000 taxable persons took advantage of the Article 8 amnesty and 750 000 of the Article 9 amnesty. The latter figure represents 13.37% of the 5 309 654 taxable persons registered in Italy in 2001. (33) In 2003, the total recovered (EUR 1 938 million) amounted to some 1.9% of total VAT (EUR 101 890 million) collected in that year. By contrast, the amounts of VAT recovered following conventional verifications in the years 1999 to 2002 were much lower, varying between EUR 140 million and EUR 357 million and totalling only EUR 1 049 million over the four-year period. (34) Those figures demonstrate, in Italy’s view, how unfounded the action is.

71The Commission retorts that the figures show rather that far too many taxable persons have taken advantage of the amnesty for far too limited a result. The benefits (increased and more efficient recovery) allegedly brought by the amnesty are illusory (the proportion recovered is tiny and the only real effect is to preclude verification by the tax authorities) and in any event quite irrelevant given the binding nature of the requirements of Articles 2 and 22 of the Sixth Directive.

72Italy rejoins that the disputed provisions encourage spontaneous declaration; that resources can thus be redirected to auditing taxable persons who do not take advantage of the provisions; that for such persons Article 10 of the 2003 Finance Law extended the possible verification period by two years; and that the amounts recovered were appreciably higher than they would otherwise have been. The advantages are thus real and cannot be considered irrelevant. Moreover, (a) the amnesty concerns cases in which the failure to submit a return had not been detected and might never have been detected, (b) under Article 9 the taxable person must make a payment in respect of every tax year in the series even if only one is concerned by the original failure, (c) the tax, though less than the amount theoretically due, is recovered immediately rather than after a lengthy investigation and recovery procedure.

73The Commission’s objection to VAT amnesties does not appear to be absolute, but it is vehement with regard to the form taken by the disputed provisions.

74It may be helpful, therefore, to consider briefly the phenomenon in general. Tax amnesties commonly involve immunity from criminal penalties, from fines and from (some or all) interest payments – and the Commission explicitly accepts that, as regards VAT, such matters fall within the competence of the Member States, unfettered by Community law. Equally commonly, however, amnesties require payment in full of amounts due and do not entail exemption from verification. The aim is generally to encourage voluntary payment by granting immunity from punishment (the threat of which is intended to encourage initial compliance but may also discourage delayed compliance if the price of repentance is too high) while not going so far as to make it more advantageous to evade and then repent than to make an accurate and honest initial declaration, and to bring errant taxpayers back into the fold for the future.

75The literature (35) suggests that, in order to be effective, tax amnesties inter alia should be one-off (or repetition will induce taxpayers to adapt their tactics in anticipation of future amnesties), should involve payment of at least what was due and generally some interest (or evasion will be perceived as rewarded) and should be accompanied by at least a credible announcement of enhanced auditing (or the trade-off between declaration and detection will not seem advantageous).

76The disputed amnesty does not appear to display any of those features. It has indeed been extended for subsequent years, (36) possibly creating an expectation of future amnesties and thus decreasing the likelihood of compliance. And there is evidence that Italy has made abundant use of tax amnesties in the past. (37) Indeed, it has been stated that they are so regular that the expectation of future amnesties has become a factor in the low national level of tax compliance. (38) Even if, as Italy stated at the hearing, VAT receipts have in fact increased in subsequent years, no evidence has been put forward to establish either any specific link with the amnesty (rather than with any of the many other possible explanations) or any durable effect.

77Italy claims that the amounts collected total nearly 2% of annual VAT income. If the VAT gap (the difference between the amount theoretically collectable and the amount actually collected) can be estimated at 35 to 40% in Italy, (39) that means that the amount actually collected is in the region of 3 to 4% of the amount theoretically due but never declared. (40)

78It is true that no tax authority can ever hope to catch all tax fraud and it would not be for the Court to advise Italy on how best to deploy its resources even if it had the necessary expertise to do so. None the less, it seems to me that a method which apparently brings in some 3 to 4% of uncollected tax (and thus leaves the uncollected amount at least 95% intact, with at least a proportion of that definitively irrecoverable) is not obviously an efficient use of resources.

Overall analysis

79It cannot be seriously maintained that the methods of raising revenue embodied in Articles 8 and 9 of Italy’s 2003 Finance Law are in any way consistent with the rules for levying VAT which are imposed on the Member States by the Sixth Directive. Nothing in that directive allows a Member State to charge VAT at half its standard rate (which is the practical result of Article 8). (41) Still less does it authorise the levying of an amount equivalent to 2% of declared input tax plus 2% of declared output tax in lieu of a totally undetermined amount of VAT which should have been declared but was not. Finally, although VAT is a ‘self-assessed’ tax, it is clear that Member States are required to verify and enforce compliance, and are not authorised to abdicate that responsibility in respect of whole swathes of taxable economic activity.

80The disputed amnesty provisions apply in theory to the whole of Italy’s undeclared taxable trade, which is consistently estimated by economists as representing a sizeable portion of the country’s GNP – perhaps between 25 and 40%. In practice, they have been resorted to, according to the Italian Government’s figures, by over 17% of taxable persons. (42) Their effect is thus far from insignificant, and constitutes a serious encroachment on the proper application of VAT in accordance with the harmonising rules of the Sixth Directive.

81Nor does it appear credible to defend them on grounds of an efficient use of resources. On the contrary, as common sense and economic analysis demonstrate, they are liable to lead to diminished VAT compliance in (at least) the medium and long term because they reward non-compliance over compliance and, viewed in historical context, hold out plausible hope of similar treatment in future.

82The declaration sought by the Commission should therefore be granted.

Costs

83Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party’s pleadings. Since I am of the view that the Commission’s application should be granted and since it has asked for costs, it follows that Italy should be ordered to pay the costs of the proceedings.

Conclusion

Conclusion

84I am consequently of the opinion that the Court should

– declare that, by explicitly providing in Articles 8 and 9 of Law No 289 of 27 December 2002 (Finance Law for 2003) for a general waiver of verification operations on taxable transactions effected in the course of a series of tax years, the Italian Republic has failed to fulfil its obligations under Articles 2 and 22 of the Sixth Directive in conjunction with Article 10 of the EC Treaty;

– order the Italian Republic to pay the costs.

(1) .

(2) – Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1, amended on numerous occasions). On 1 January 2007, the Sixth Directive was repealed and replaced by Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1).

(3) – The amnesty in issue has been extended to subsequent years, and the Commission has brought a further action (Case C-174/07) concerning that extension, which is currently pending.

(4) – Those provisions are now in Article 2(1)(a) and (d) of Directive 2006/112.

(5) – It is replaced by, in particular, Articles 213 to 271 of Directive 2006/112.

(6) – Provisions now to be found in, respectively, Articles 252(1), 206 and 273 of Directive 2006/112.

(7) – Article 213(1) of Directive 2006/112.

(8) – Although the Commission gives paragraph 3 as the source; now Article 242 of Directive 2006/112.

(9) – Article 262 et seq. of Directive 2006/112.

(10) – Articles 214 to 216 of Directive 2006/112.

(11) – Articles 207, 209, 210, 256 to 258 and 267 of Directive 2006/112.

(12) – Legge 289/2002, GURI 31 December 2002, as amended.

(13) – The arrangement is referred to as a ‘ condono tombale ’ (‘graveyard amnesty’), presumably because tax debts are ‘dead and buried’.

(14) – Second recital; recital 8 in the preamble to Directive 2006/112.

(15) – Fourth recital; not in the preamble to Directive 2006/112.

(16) – 14 th recital; recital 45 in the preamble to Directive 2006/112.

(17) – See, for example, Case C-280/04 Jyske Finans [2005] ECR I-10683, paragraph 36.

(18) – Case C-382/02 Cimber Air [2004] ECR I-8379, paragraph 24.

(19) – See, for example, Case C-85/95 Reisdorf [1996] ECR I-6257, paragraph 24; Case C-141/96 Langhorst [1997] ECR I-5073, paragraphs 17 and 28.

(20) – See, for example, Case 203/87 Commission v Italy [1989] ECR 371, paragraph 10.

(21) – Article 395 of Directive 2006/112.

(22) – Both Italy and the Commission have cited Case C-128/05 Commission v Austria [2006] ECR I-9265, in which the Court found that Austria was in breach of its obligations by excluding certain international transport operators entirely from VAT obligations. See also Case C-228/05 Stradasfalti [2006] ECR I-8391, especially at paragraph 66; in that case, the Court stressed that Italy could not unilaterally impose on taxable persons a derogation from the right to deduct.

(23) – The percentage falls even lower for amounts payable in excess of EUR 11 600 000, which are reduced by 80% – thus to 0.2% of the input and/or output tax initially declared.

(24) – The Commission cites the case of a taxable person having failed to submit any declaration in a given tax year, in which he should have accounted for EUR 600 000. Under the Article 9 procedure, the maximum payable in order to benefit from complete immunity is EUR 3 000 – a definitive loss for the tax authorities of EUR 597 000. I would add that the proportion lost might be even more exorbitant, since the provision explicitly envisages payments in excess of EUR 11 600 000.

(25) – See points 8 to 10 above.

(26) – Articles 8(4) and 9(14)(c).

(27) – In contrast with the situation in some other Member States, Italy has no VAT registration threshold, so that even the smallest businesses are required to account for tax.

(28) – See, for example, Joined Cases C-439/04 and C-440/04 Kittel and Recolta Recycling [2006] ECR I-6161, paragraph 50, and the case-law cited there.

(29) – See, for example, the European Employment Observatory Review, Autumn 2004, in particular at pp. 77 and 106 to 110.

(30) – Articles 8(10) and 9(14).

(31) – Under Article 9(9), in particular as interpreted by a judgment of the Constitutional Court of 27 July 2005.

(32) – Article 54bis of Presidential Decree No 633/72; cf. Article 21(1)(d) (in Article 28g) of the Sixth Directive, Article 203 of Directive 2006/112.

(33) – That appears to be a miscalculation. 750 000 is 14.125% of 5 309 654. The 162 000 for Article 8 amount to 3.05% of the total number of taxable persons.

(34) – Comparing those figures with those for the total VAT collected in the same four years, as provided by the Italian Government, I calculate that the tax recovered following verifications amounted to between 0.18% and 0.38% of the total collected in a given year, or 0.3% of the total for the four-year period.

(35) – For example, Stella, Peter, ‘An economic analysis of tax amnesties’, IMF Working Paper 89/42, 1989; Boise, Craig M., ‘Breaking open offshore piggybanks: Deferral and the utility of amnesty’, George Mason Law Review 2007, p. 667, esp. at p. 693 et seq.

(36) – See footnote 3 above.

(37) – A 1998 United States Congress paper states that ‘Italy has conducted more than a dozen tax amnesties, an average recently of about one every two years’. An article cited by the Commission in its application ( Il condono fiscale tra genesi politica e limiti costituzionali , De Mita, Diritto e pratica tributaria, 2004, Parte I, p. 1449) states that the 2003 amnesty was the 58th since 1900.

(38) – Is One More Tax Amnesty Really That Bad? Some Empirical Evidence from the Italian 1991 VAT Amnesty , M. Marè and C. Salleo, 59th IIPF Congress, Prague, August, 2003. See also Gradual Recovery in Euroland, Kai Carstensen, Klaus-Jürgen Gern, Christophe Kamps, Joachim Scheide, Kiel Discussion Papers 405: ‘… in the first half of 2003 Italy raised additional revenue equivalent to approximately 0.8% of GDP in connection with a large-scale tax amnesty. In the short run, Italy was able to prevent exceeding the threshold of the Stability and Growth Pact thanks to this one-off measure. In the medium run, however, the probability of exceeding the 3% threshold increases. As experience shows, frequent tax amnesties – in Italy it was the third amnesty in 20 years – weaken tax honesty. In consequence, tax revenue is lower in the medium run and in the long run than what it would have been without the amnesty.’

(39) – IMF Working Paper 07/31 VAT fraud and evasion: what do we know and what can be done Michael Keen and Stephen Smith, February 2007, at p. 19.

(40) – That is to say, 2% of the 60 to 65% collected is (roughly) between 3 and 4% of the 35 to 40% not collected.

(41) – And it may be noted that half of Italy’s standard rate of 20% is 10%, which is lower than the minimum standard rate of 15% authorised by Article 12(3)(a) of the Sixth Directive.

(42) – According to the Commission at the hearing, the number of those who took advantage of the amnesty significantly exceeds the total number of taxable persons in a medium-sized Member State such as Belgium.