C-16/84 Commission v Netherlands

JUDGMENT OF THE COURT 10 July 1985 *

In Case 16/84

Commission of European represented by its Legal Adviser, D.R the Communities, Gilmour, acting as Agent, assisted by H.J. Bronkhorst, Advocate at the Hoge Raad der Nederlanden, with an address for service in Luxembourg at the office of G. Kremlis, a member of its Legal Department, Jean Monnet Building, Kirchberg,

applicant, v

Kingdom of the Netherlands, represented by A. Bos, Legal Adviser at the Ministry of Foreign Affairs, acting as Agent, with an address for service in Luxembourg at its Embassy, 5 rue Spoo,

defendant, APPLICATION for a declaration that, by failing to adopt within the prescribed period the laws, regulations or administrative provisions needed to comply with Article 11 of the Sixth Council Directive (No 77/3 8 8/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 (Official Journal 1977, L 145, p. 1), the Kingdom of the Netherlands has failed to fulfil its obligations under the EEC Treaty,

THE COURT

composed of Lord Mackenzie Stuart, President, G. Bosco and O. Due (Presidents of Chambers), T. Koopmans, U. Everling, K. Bahlmann, Y. Galmot, R. Joliet and T.F. O'Higgins, Judges,

Advocate General: M. Darmon Registrar: P. Heim

after hearing the Opinion of the Advocate General delivered at the sitting on 28 March 1985,

gives the following

* Language of the Case: Dutch.

JUDGMENT

(The account of the facts and issues which is contained in the complete text of the judgment is not reproduced)

Decision

By an application lodged at the Court Registry on 18 January 1984 the Commission of the European Communities brought an action under Article 169 of the EEC Treaty for a declaration that, by failing to adopt within the prescribed period the laws, regulations or administrative provisions needed to comply with Article 11 of the Sixth Council Directive (No 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 (hereinafter referred to as 'the Sixth Directive'), the Kingdom of the Netherlands has failed to fulfil its obligations under the Treaty.

In particular, the Commission complains that the Kingdom of the Netherlands has retained Article 8 (3) of the Wet op de Omzetbelasting 1968 [Netherlands Law on Turnover Tax of 1968], which concerns the taxable amount in the case of the supply of movable goods where goods of the same kind are traded in and provides that, subject to certain conditions, the value of the trade-in is not included in the consideration payable by the purchaser.

The Commission considers that that provision is contrary to Article 11 A (1) (a) of the Sixth Directive, which provides that the taxable amount is to be everything which constitutes the consideration which has been or is to be obtained from the purchaser or a third party for the goods or services supplied.

It should be remembered that the reintroduction of second-hand goods into commercial circulation has already been the subject of several Community proposals. Thus the Proposal for a Sixth Directive (Official Journal 1973, C 80, p. 1) contained a provision which was intended to reduce the tax on second-hand goods in order to avoid penalizing certain branches of trade. As that provision was not adopted by the Council, Article 32 of the Sixth Directive provided that before 31 December 1977 the Council, acting unanimously on a proposal from the Commission, was to adopt a Community taxation system to be applied to inter alia used goods and that until that Community system became applicable, Member States applying a special system to such items at the time when the Sixth Directive came into force could retain that system. On 11 January 1978 the Commission submitted to the Council a Proposal for a Seventh Directive (Official Journal 1978, C 26, p. 2) providing for a common system of value-added tax to be applied to used goods, but that proposal has not yet been acted upon.

5 Having received the letter dated 23 February 1981 in which the Commission requested the Kingdom of the Netherlands to submit its observations, the Netherlands Government stated in a letter dated 4 June 1981 that the contested provision constituted a special system applicable to second-hand goods which could be retained by virtue of Article 32 of the Sixth Directive. However, the Government stated that it was prepared to consider changes in order to bring the Netherlands system into line with the common systems set out in the Proposal for a Seventh Directive.

6 In its reasoned opinion dated 11 January 1983 the Commission denied that Article 32 of the Sixth Directive authorized the application of a special system to the sale of new goods paid for partly by means of a trade-in of second-hand goods. As to the possibility of amending the Netherlands system, referred to in the letter from the Netherlands Government, the Commission stated that it 'could not permit the cessation of an existing infringement of the Treaty to be made subject to additional conditions concerning a problem which, albeit connected, is none the less different'.

7 On 24 February 1983 the Netherlands Minister for Finance sent a letter to a Commission official who was at that time a member of the private office of the Netherlands Commissioner. In that letter the Minister attempted inter alia to show, by means of worked examples, that in practice the Netherlands system gave rise to the same results as the systems provided for in the Proposal for a Seventh Directive; in addition, the Minister repeated that the Netherlands Government was prepared to bring its system even further into line with those systems; lastly, he informed the addressee of the letter that, as a result of an interview with an official of the Commission department concerned, the Netherlands position was once again being examined by the Commission and that, pending such examination, the time-limit of two months provided for in the reasoned opinion for the necessary measures to be adopted was suspended. It is agreed that that letter reached the Commission department concerned but was never answered.

Admissibility

8 Referring to the above-mentioned letter of 24 February 1983, the Netherlands Government contends that as a result of interviews with Commission officials it was justified in believing that the time-limit of two months fixed in the reasoned opinion was to be suspended until the Commission had completed its examination of the worked examples which had been submitted. It questions whether, under those circumstances, the condition laid down in Article 169, to the effect that an application to the Court may be made only if the State concerned does not comply with the opinion within the period laid down by the Commission, was fulfilled.

9 The Commission replies that its officials gave no undertaking that the time-limit in question would be suspended and in any case they had no authority to do so. According to the Commission, the letter from the Netherlands Minister for Finance, which was not officially addressed to it and did not raise any new factor, did not require any reply.

10 On that point it must be noted that in fact the Commission contributed to the misunderstanding by failing to reply to the letter dated 24 February 1983 which indicated clearly that the Netherlands Government considered that the time-limit fixed in the reasoned opinion had been suspended. Nevertheless, however regrettable such an omission may be, it does not in itself suffice to vitiate the procedure under Article 169. That article expressly provides that the Commission is to lay down the period within which the reasoned opinion must be complied with, and it is therefore for the Commission to decide whether or not to grant a request from a Member State for the time-limit to be suspended. It follows that the Government of a Member State is not justified in believing, merely on the basis of interviews with Commission officials or the Commission's failure to reply to letters sent to it, that the time-limit laid down in the reasoned opinion is suspended. Moreover, the Netherlands Government has neither shown nor even alleged that its misunderstanding on that point has in any way restricted its ability to defend itself against the application.

11 The application must therefore be regarded as admissible.

Substance

12 The Commission claims that the value of goods accepted as part-payment by the supplier of other goods is part of the consideration obtained by the supplier from the purchaser for the goods supplied. According to Article 11 of the Sixth Directive, that value therefore forms part of the taxable amount for the goods supplied. In the Commission's opinion, Article 32 refers to special systems applicable to second-hand goods and certainly does not permit any derogation from the rules relating to the taxable amount for new goods. Furthermore, none of the proposals made by the Commission with a view to establishing a common system for the taxation of second-hand goods permits a derogation of that kind. Unlike those proposals, the Netherlands system does not benefit the ultimate purchaser of the second-hand goods so much as the purchaser of the new goods, who is thereby directly accorded a reduction in VAT.

1 3 According to the Netherlands Government, the purpose of the system at present in force in the Netherlands is precisely that referred to by Article 32 of the Sixth Directive and by the proposals submitted to the Council by the Commission. In its view, it has demonstrated by means of worked examples that the application of that system in practice leads to exactly the same results as the systems proposed by the Commission. The Commission's action is in reality based solely on a formalistic interpretation of Article 11 of the Sixth Directive. If it were to succeed, the Kingdom of the Netherland would be compelled to abolish all special rules for the taxation of second-hand goods, which would be contrary to the aims of Article 32 and of the proposals which the Commission itself has submitted. As regards the trade in motor cars, in particular, the number of direct supplies between consumers would then increase, to the detriment of professional traders.

1 4 In order to resolve this divergence of views, it is necessary first to examine more closely the difficulties ensuing from the VAT system established by the general rules set out in the Community directives for the market in second-hand goods and the various measures which have been proposed or implemented in order to overcome them.

is By virtue of Article 2 of the First Council Directive, No 67/227/EEC of 11 April 1967 (Official Journal, English Special Edition 1967, p. 14), the principle of the common system of value-added tax consists in the application to goods and services up to and including the retail stage of a general tax on consumption which is exactly proportional to the price of the goods and services, irrespective of the number of transactions which take place in the production and distribution process before the stage at which tax is charged. However, VAT is chargeable on each transaction only after deduction of the amount of VAT borne directly by the cost of the various price components. As regards goods, the chargeable event is the supply of goods for valuable consideration by a taxable person acting as such and only taxable persons are authorized to deduct from the VAT for which they are liable the tax already charged on the goods at a previous stage.

i6 It follows that the goods are in fact taxed at each stage of production and distribution only on the basis of the value added at that stage. After reaching the final consumer who is not a taxable person, the goods remain burdened with an amount of VAT proportional to the price paid by that consumer to his supplier.

i7 If the consumer subsequently supplies the goods to another non-taxable consumer, no tax is charged or deducted in respect of that transaction. If the consumer supplies the goods to a taxable trader, such supply does not give rise to a charge to tax either, but where the goods are resold by the taxable person an amount of VAT proportional to the resale price is charged, without the taxable person being entitled to any deduction of the VAT which the goods have already borne.

is Second-hand goods which are reintroduced into commercial circulation are therefore taxed once again, whereas second-hand goods which pass directly from one consumer to another remain burdened solely by the tax imposed on the occasion of the first sale to a non-taxable consumer. Especially where the rate of VAT is high, that difference in treatment distorts competition between direct sales from one consumer to another and transactions passing through ordinary commercial channels, and thus places at a disadvantage branches of trade in which a large number of transactions involve second-hand goods, such as the motor-car trade in particular.

19 Article 32 of the Sixth Directive provides that the Council will at a later stage adopt a common system to prevent such distortion in competition and, pending the implementation of such a common system, authorizes the retention of existing national systems having the same objective.

20 For its part, the Commission has acted upon Article 32 of the Sixth Directive by submitting to the Council its Proposal for a Seventh Directive which sets out two methods of achieving the desired result. As regards second-hand goods in general, the proposal provides that where the supply is effected by a taxable person wishing to resell goods which he acquired from a non-taxable person, the taxable amount is to be a fixed proportion of the resale price which is deemed to correspond to the value added by the taxable person wishing to resell. In relation to certain secondhand goods which play an important part in trade, in particular motor cars, the proposal puts forward a scheme which is more specific as to the results to be achieved. Under that system, when a taxable person resells such goods he is entitled to deduct an amount of VAT calculated on the basis of the price at which the goods were acquired from a non-taxable person. The two schemes proposed thus have one feature in common, namely that it is at the time of resale that the residual part of the VAT borne by the second-hand goods is taken into account.

21 Under the Netherlands system, account is taken of that residual part at an earlier stage, when the second-hand goods are acquired by the taxable person by means of a trade-in. That system only gives the appearance of resulting in a reduction of the taxable amount for the new goods. The reduction is exactly proportional to the price paid by the taxable person for the second-hand goods which he buys from the non-taxable person and in fact offsets the residual part of the VAT which the second-hand goods have already borne. As the goods have already benefited from a remission of tax on the occasion of their acquisition by the taxable person wishing to resell, tax may be charged in the normal manner when the goods are resold without distorting competition with direct sales between consumers.

22 It is immaterial that, strictly speaking, that arrangement directly benefits the purchaser of the new goods, who is also the seller of the second-hand goods, whereas in the schemes proposed by the Commission the reduction of tax on the occasion of resale directly benefits the non-taxable purchaser of the second-hand goods. As has been shown by the worked examples submitted to the Court by the Netherlands Government, the prices agreed between the parties to the two transactions involving such goods tend to be adjusted according to the system applied so as to lead generally to the same result both for the three parties to the transactions and for the Exchequer; the only differences concern the time at which the second-hand goods benefit from remission of the residual part of VAT and the break-down of the prices. Similarly, all three systems examined re-establish neutrality of competition between direct sales from one consumer to another and transactions through commercial channels.

23 It is in the light of those considerations that it must be decided whether, as the Commission maintains, the Netherlands system constitutes a derogation from Article 11 of the Sixth Directive which cannot be justified under Article 32 of that directive. The examination set out above shows that that system is not designed to exempt from tax part of the consideration obtained by the taxable person wishing to resell for the supply of new goods, nor does it have such an effect. On the contrary, the object and effect of the Netherlands system is to offset the residual part of the VAT already borne by the second-hand goods traded in, so that on resale those goods may be subject to the general system of VAT. It follows that the Netherlands system is in principle covered, both as regards its object and its effects, by Article 32 of the Sixth Directive and that it does not infringe Article 11 of the directive.

24 The Commission has set out other complaints against the Netherlands system. It claims that the system does not concern all purchases of used goods by a taxable person from a non-taxable person by way of a trade-in; it extends in principle, if not in practice, to the part-exchange of new goods and leads to a loss of VAT and hence to a reduction in the Community's own resources if the goods are resold at a price lower than the acquisition price.

25 It is not necessary to examine those complaints in the framework of this action. It was precisely on those points that the Netherlands Government stated during the pre-litigation procedure that it was prepared to consider adjustments to the system, a possibility which the Commission categorically rejected. The Commission is therefore not entitled to rely upon those aspects of the Netherlands rules in these proceedings. As regards the argument raised by the Commission for the first time in reply to a question put by the Court, to the effect that Article 32 of the Sixth Directive prohibits any amendment of existing national systems, it must be stated that that cannot apply to adjustments whose sole objective is to ensure that a national system entirely conforms to that article, without in any way affecting the principles of the system as it has been applied by the Member State in question since the date of the entry into force of the Sixth Directive.

26 It follows that the Commission's application must be dismissed in its entirety.

Costs

Costs

27 Under Article 69 (2) of the Rules of Procedure the unsuccessful party is to be ordered to pay the costs. As the applicant has failed in its submissions, it must be ordered to pay the costs.

Operative part

On those grounds,

THE COURT

hereby:

(1) Dismisses the application;

(2) Orders the Commission to pay the costs.

Mackenzie Stuart Bosco Due Koopmans

Everling Bahlmann Galmot Joliét O'Higgins

Delivered in open court in Luxembourg on 10 July 1985.

P. Heim A. J. Mackenzie Stuart Registrar President

OPINION OF MR ADVOCATE GENERAL DARMON

delivered on 28 March 1985 ( *1 )

Mr President,

Members of the Court,

1By the present actions the Commission is seeking declarations that the Netherlands and Ireland have failed to fulfil their obligations under the Sixth Council Directive 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 (Official Journal, L 145 of 13 June 1977, p. 1). The Commission complains that after the entry into force of that directive they retained unaltered a tax system, applicable to transactions involving the sale of new goods where secondhand goods of the same kind are accepted in part exchange, whose effect is to reduce by an amount equal to the value of the goods accepted in part exchange the amount by reference to which VAT is charged on the sale of the new goods.

The contested national provisions are as follows :

Article 8 (3) of the Netherlands Law of 28 June 1968 on turnover tax provides that:

‘... where movable goods are sold in exchange for goods of the same kind, the value of the goods taken in part exchange shall not be included in the price’.

Section 10 (2) of the Irish Value Added Tax Act, 1972, as amended in 1978, reads as follows:

‘... the amount on which tax is chargeable shall be the total amount of money which might reasonably be expected to be charged if the consideration consisted entirely of an amount of money equal to the open market price: ... Provided that in computing the amount on which tax is chargeable as aforesaid a deduction may be made for the open market price of secondhand movable goods given in exchange or part exchange for goods, whether new or secondhand, of the same kind.’

2Those two provisions thus have the same tax effect, namely to reduce the amount on which VAT is payable in respect of the sale of the new goods by the value of the goods taken in part exchange by the taxable person.

The Netherlands tax system makes no distinction according to whether the goods taken in part exchange have been used or are new. That was also originally the position in Ireland, but the amendment made to the legislation in 1978, that is to say before the delayed entry into force of the Sixth Directive on 1 January 1979, as provided for in the Ninth Council Directive, No 78/583 (Official Journal, L 194 of 19 July 1978, p. 16), restricted the scope of Article 10 (2) so that it applied only where secondhand goods were accepted in part exchange for new or secondhand goods. The Irish legislature thus took the steps which it considered necessary as a result of the adoption of the Sixth Directive, which applies only to transactions between taxable persons relating to new goods and not to the sale by a taxable person of secondhand goods taken in part exchange from a private individual for other secondhand goods or new goods.

3In relation to secondhand goods, the first paragraph of Article 32 of the Sixth Directive provides for the adoption by the Council of a ‘taxation system to be applied to used goods, works of art, antiques and collectors' items’. The basic elements and principles of such a system were the subject of proposals made by the Commission both in the course of the adoption of the Sixth Directive itself (Proposal for a Sixth Directive, Doc. COM(73)950 final of 20 June 1973) and subsequently with a view to the adoption of the system referred to in that article (Proposal for a Seventh Directive, submitted to the Council on 11 January 1978, Official Journal, C 26 of 26 February 1978, p. 2). Since the Council did not set up that system by the date provided for, namely 31 December 1977, the matter is still governed, transitionally, by the second paragraph of Article 32, which provides :

‘Until this Community system becomes applicable, Member States applying a special system to these items at the time this directive comes into force may retain that system.’

That provision allows, on a transitional basis pending complete harmonization in the sphere of VAT, derogation from the common system established by the Sixth Directive, that is to say the coexistence of radically different systems in the Member States, such as:

Taxation of the sale by a taxable person of secondhand goods bought from a private person without the possibility of tax deduction (double taxation);

Special system for secondhand goods allowing, according to different methods, double taxation to be avoided.

I should point out that the Commission's complaint does not relate to transactions concerned solely with secondhand goods but to transactions in which a taxable person selling new goods accepts secondhand goods in part exchange. Since both tax systems and both the actions brought have the same object, I can consider them together.

In the light of all those preliminary considerations, it may be said that the central issue in this case is whether the second paragraph of Article 32 applies to a tax system concerning transactions of a mixed character in the sense that they involve both new and secondhand goods.

4Before considering the substance of the case, it is necessary to deal with the submission put forward by the Netherlands in Case 16/84 that the Commission's action is inadmissible.

The Netherlands Government points out that, following the reasoned opinion delivered by the Commission and within the period of two months prescribed in that opinion, it had submitted to the Commission various examples of calculations intended to show that the system in force in the Netherlands arrived at the same result as the methods for calculating VAT on the sale of secondhand goods formulated by the Commission, in particular in its Proposal for a Seventh Directive. It clearly emerged from the meeting which the Netherlands officials had on this matter with officials of the Commission that the time-limit laid down in the reasoned opinion was to be suspended to allow time for the information submitted to be examined. In not keeping that promise and in not drawing the attention of the Netherlands to the risk of a misunderstanding, the Commission frustrated the legitimate expectations of the Netherlands Government, which could not be reproached for failing to comply with an opinion when it had reason to believe that the time-limit which the opinion laid down had been suspended.

That submission cannot be accepted. Article 169 of the EEC Treaty provides that Member States must comply with reasoned opinions ‘within the period laid down by the Commission’, which has a discretion in the matter. Consequently, the Netherlands Government should have requested an extension of the period laid down from the Commission itself, in whose discretion it is, as the Court has expressly recognized, ‘to decide whether such a request from a Member State is to be granted’ (Case 28/81, Commission v Italy, [1981] ECR 2577, at para. 6 on p. 2582). Any other solution, in particular one based on possible verbal undertakings given by officials of the Commission, must be left out of account by reason of the legal uncertainty which it would create.

The action for failure to fulfil obligations brought by the Commission against the Netherlands must therefore be declared admissible. I therefore come to the substance of the case.

5According to the Commission, in providing that the taxable amount for new goods is to be arrived at after deducting the value of secondhand goods taken in part exchange, the aforesaid national provisions conflict with the definition contained in Article 11 A of the Sixth Directive, which is as follows:

The taxable amount shall be:

in respect of supplies of goods... everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser ... for such supplies’.

The Commission points out that in the case of the transaction under consideration the secondhand goods represent nothing other than a form of payment in kind partially covering the total purchase price of the new goods. The payment in kind and the payment of the balance in cash together constitute the consideration for the supply of the new goods. Under the aforesaid provisions of Article 11, it is therefore necessary to regard that consideration as the amount on which VAT should be charged in respect of the new goods.

According to the Commission, the reduction of the taxable amount has two consequences. In the first place, it reduces the basis on which the percentage of VAT funding the Community's own resources is chargeable and hence leads to a corresponding reduction in those resources. In the second place, it redistributes the tax burden between the purchaser of the new goods, who pays only part of the VAT thereon, and the purchaser of the goods taken in part exchange, who must pay the amount of the VAT which the purchaser of the new goods escapes. That redistribution thus operates to the detriment of the purchaser of the secondhand goods.

The Commission adds that it is not possible to justify the taxation system on the basis of Article 32 of the Sixth Directive because, although the transaction in question also involves secondhand goods, it mainly concerns, as is clearly apparent from the contested measures, the sale of new goods, and the trade-in of the secondhand goods is only ancillary thereto and intended to encourage the purchaser to proceed with the purchase. It is therefore not possible to compare the contested taxation system with those contemplated by the Commission in its Proposals for Sixth and Seventh Directives.

6In contrast to the Commission, the Member States concerned maintain that there is no need to inquire whether the system of deduction provided for by their legislation is compatible with the aforementioned provisions of Article 11 of the Sixth Directive.

They consider that Article 32 of the Sixth Directive authorizes the retention of national systems relating to secondhand goods and applying when the Sixth Directive entered into force even if they do not accord with the other provisions of the directive. The taxation treatment of transactions relating to secondhand goods accepted in part exchange for new goods constitutes ‘a special system’ within the meaning of the second paragraph of Article 32.

The two Member States reject as formalistic the Commission's argument that the scope of Article 32 is restricted to transactions involving secondhand goods to the exclusion of mixed transactions involving both secondhand and new goods. In addition they consider that the mixed nature of the transaction is of no consequence, since the taxation system criticized by the Commission pursues the same objective and achieves the same result as the Commission's proposals. Thus the compatibility of the contested systems depends not on a strictly literal interpretation of Article 32 but on the reasons for the establishment of a special system for secondhand goods, the necessity of which was recognized by the Community legislature.

It is apparent from the statements of reasons in the Proposals for Sixth and Seventh Directives that the objective of such a system is to prevent secondhand goods which have already borne VAT when first marketed from being subject, on resale by a taxable person, to VAT partially based on the VAT previously paid. To that end the Commission contemplated various methods, in particular in its Proposal for a Seventh Directive, all of which were intended to allow deduction of that part of the VAT still included in the goods on their resale.

According to the two Member States, although the system of deduction established by the Netherlands and Irish legislation was not contemplated by the Commission in its proposals, it pursues the same objective and leads to a result in all respects identical to that obtained by means of the various methods put forward by the Commission. In addition the method adopted by the two Member States has no effect upon the Community's own resources or on the respective tax burdens of the purchasers in question.

Finally, the States emphasize the paradoxical consequences of repealing the contested national systems if the Commission's argument were to be accepted. The result would be to abolish two systems which substantially fall within the objectives announced by the Commission itself without its being possible to provide for their replacement, since Article 32 authorizes only the retention of existing systems. Consequently, the result would be that secondhand goods taken in part-exchange for new goods would be subject on resale to double taxation until the Community legislature adopted the Seventh Directive.

7In view of the complexity of the arguments put forward by the parties, I shall endeavour, by repeating certain points, to define more precisely the issues raised in this case.

It is clear that, as Community law stands at present, the special taxation system for transactions relating to secondhand goods provided for in the first paragraph of Article 32 has yet to be established. Consequently, as a transitional measure, the special systems existing in the Member States on the entry into force of the Sixth Directive remain applicable.

As I have said, comparative law shows that the taxation treatment accorded by the Member States to secondhand goods consists either in applying to them the normal system for other goods, that is to say taxing secondhand goods on their resale without allowing any deduction of the residual tax, or in allowing such a deduction. Thus the second paragraph of Article 32 introduces an exception to all the principles governing the Community system of value added tax established by the Sixth Directive. It may be inferred from that that, where a Member State has a national system for secondhand goods, the only restriction in the absence of applicable Community rules is that there should be no interference with the system applicable to new goods which the Member States are required to adopt in implementation of the Sixth Directive.

The problem in this case is that the contested provisions apply to mixed transactions. In the Commission's view, the failure to fulfil obligations lies in the fact that the taxation system which the contested measures laid down reduces the taxable basis of the new goods, whereas in the view of the Member States the system of deduction does not affect the taxation of the new goods and is simply designed to eliminate the residual VAT still incorporated in the secondhand goods.

8The need for special taxation treatment of secondhand goods arises from the special nature of the sales history of such goods. To describe the different stages thereof I shall take the case of a secondhand vehicle sold by its owner to a garage on the purchase of a new vehicle.

VAT has already been charged on the secondhand vehicle when it was sold as new by a taxable person to a private individual. When after using it for a certain time the individual decides to sell it to a garage, the so-called ‘residual’ part of the ‘original’ VAT remains incorporated in the value of the goods, as the Court emphasized in its judgment in Case 15/81 (Schul v Inspecteur der Invoerrechten en Accijnzen [1982] ECR 1409).

It is of little consequence in that respect that the garage could seek to recover the residual tax either by negotiating a reduction in the value attributed to the secondhand vehicle or by increasing the resale price of the secondhand vehicle by the amount of the residual tax. Such practices may sometimes get round difficulties arising from the residual VAT, but cannot under any circumstances eliminate it.

If the garage were unable to eliminate the residual tax, it would remain as a necessary part of the amount on which VAT was charged in respect of the secondhand vehicle, which the garage would intend to reintroduce into commercial circulation after renovating it if necessary. That position would involve, from a tax point of view, two equally unfortunate results:

In the first place, it would mean double taxation of the secondhand vehicle in so far as the VAT chargeable on resale would be partly based on the residual VAT.

Secondly, as a consequence of such double taxation, individual owners of secondhand goods would be discouraged from dealing with the trade since the Sixth Directive does not subject transactions between private persons to VAT.

They are the two reasons put forward by the Commission in its statement of reasons for its Proposals for Sixth and Seventh Directives which in its view make it necessary to set up a special tax system for secondhand goods. Consequently, to decide whether the national provisions in question are compatible it is necessary to see whether their result is to avoid double taxation. Thus to measure the real effect of the system of deduction in force in the two Member States it seems necessary to compare it with the taxation methods contemplated by the Commission in its Proposal for a Seventh Directive and in particular with the so-called ‘tax on tax’ and ‘base on base’ methods when they are applied to the kind of transactions in question, that is to say the case of a secondhand vehicle accepted in part exchange for a new vehicle and subsequently resold by the garage.

9I must therefore undertake a comparative analysis of those three methods and compare them further with the situation which would result from a straightforward application of the Sixth Directive in the absence of a special system within the meaning of Article 32.

One observation is called for. On the very day of the hearing the Commission produced three tables supposedly describing three possible variations of the system which is applied in Ireland and could be applied in the Netherlands.

Since this is an action for a declaration that a taxation system which exists in positive law is incompatible with Community law, the Commission must describe how the system actually operates and not set out hypothetical variants.

In view of the belated production of that document, the two Member States were authorized to submit observations thereon after the hearing and they stated that none of the cases contemplated by the Commission corresponded to the real position in their countries.

I am thus led to consider the national systems as described by the defendants and observe that Ireland illustrated the way in which those systems operate with examples of calculations during the written procedure. I shall compare those systems (fourth method), on the one hand, with the system which would result from the application of the Sixth. Directive in the absence of a special system for secondhand goods within the meaning of Article 32 (first method) and, on the other, with the methods contemplated by the Commission in its Proposal for a Seventh Directive (second and third methods).

In so doing I shall adopt the hypothetical circumstances assumed by the parties for the purposes of the argument, namely:

Assumed rate of VAT: 10%;

Secondhand vehicle traded in to a garage for IRL 5500, which includes residual VAT of IRL 500;

The vehicle is traded in as part payment for a new vehicle with a gross value (including tax) of IRL 11000, of which 10% (that is to say IRL 1000) represents VAT;

Subsequently sold after renovation at a profit of IRL 600.

First method: Application of the Sixth Directive in the absence of a special system within the meaning of Article 32

Here the taxable amount is the gross value at which the vehicle is traded in (including the residual VAT) plus the profit. It is thus 10% of (5500 + 600 = ) 6100, which amounts to IRL 610.

Consequently:

The sale price including tax of the secondhand vehicle will be 6100 + 610 = IRL 6 710.

The total amount of VAT paid to the State will be 1000 + 610 = IRL 1 610.

This example clearly illustrates how in the absence of special provisions there would be double taxation, which the Commission rightly attempts to eliminate in its Proposal for a Seventh Directive, and how there is a real risk that in order to escape double taxation private persons whose transactions with other private persons are exempt from VAT would be induced to bypass ordinary commercial channels.

Second method: The ‘tax on tax’ method of deduction contemplated by the Commission in its Proposal for a Seventh Directive

Under this method the garage:

First deducts the residual VAT from the gross purchase price of the vehicle traded in, that is to say 5500 — 500 = IRL 5 000.

It then deducts that residual VAT from the VAT payable on the net resale price of the vehicle, that is to say 10% of (5000 + 600 =) 5600, which equals 560. The VAT payable on the resale will thus be 560 — 500 = IRL 60.

The VAT payable to the State for the transactions as a whole (sale of the new vehicle and resale of the secondhand vehicle) amounts to 1000 + 60 = IRL 1 060.

The resale price of the secondhand vehicle will be IRL 6160 and will be made up as follows:

Purchase price after deduction of the residual VAT IRL 5000

Profit IRL 600

VAT on resale IRL 560.

Third method:‘Base on base’ method contemplated by the Commission in its Proposal for a Seventh Directive

Here account is taken of the difference between:

On the one hand, the resale price of the vehicle, including the residual VAT, that is to say 5500 + 600 = IRL 6 100;

On the other, the trade-in price including the residual VAT, that is to say IRL 5 500.

The difference, IRL600, constitutes the dealer's profit margin and the basis for the calculation of the VAT payable, which amounts to 10% of 600, that is to say IRL 60.

Here too the total amount of VAT received by the State amounts to IRL 1 060.

The resale price of the secondhand vehicle amounts, as in the previous case, to IRL 6160, but is made up as follows:

Purchase price inclusive of the residual VAT IRL 5500

Profit IRL 600

VAT on resale IRL 60.

Fourth method: System in force in the Netherlands and in Ireland

The method followed in the two Member States consists of two successive operations.

On the sale of the new vehicle and trade in of the secondhand vehicle the VAT which the garage will actually have to pay to the State is calculated by reference to a taxable amount which represents the difference between the sale price of the new vehicle exclusive of tax and the allowance on the trade-in exclusive of tax (in other words, after deduction of the residual VAT), that is to say 10% of (10000 — 5000 =) 5000, which equals IRL 500.

On the resale of the secondhand vehicle the taxable amount is the aforesaid net value of the trade-in plus the profit, that is to say5000 + 600 = 5600, giving VAT of IRL 560 and a resale price of IRL6 160.

The total VAT received by the State is 500 + 560, which again amounts to IRL 1 060.

10Thus, compared with the two systems recommended by the Commission, the method applied by the two Member States affects neither the sale price of the new vehicle (IRL 11000) nor the resale price of the secondhand vehicle (IRL 6160) nor, therefore, the distribution of the tax burden between the purchaser of the new vehicle and the purchaser of the secondhand vehicle nor, finally, the total amount of VAT (IRL 1060) collected for the State by the taxable person. It is therefore completely neutral.

Like the other two methods, and in contrast to the position which would result from the application of the Sixth Directive in the absence of a special system within the meaning of Article 32, it avoids any double charge to VAT on the resale of the secondhand vehicle.

In the light of the foregoing the system applied in the two Member States may be regarded as a ‘special system’ for secondhand goods within the meaning of the second paragraph of Article 32 of the Sixth Directive since, although applicable to mix transactions, it affects neither the price nor the tax burden of the new goods. The fact that the system is neutral and that Article 32 may therefore be applied means that it is excluded from the scope of Article 11.

Since the exception is provided for by the directive itself it is not necessary to consider its effect — in any event unproven — on the Community's own resources. Article 32 may permit the retention of any special system for secondhand goods, even if it affects the Community's own resources either by increasing them (double taxation) or reducing them (complete exemption).

11In view of all those considerations my opinion is:

That the action brought by the Commission should be dismissed; and

That the Commission should be ordered to pay the costs.

Method

Transaction

I.

Trade-in

1.

Purchase price of secondhand vehicle including residual VAT

2.

Residual VAT on the secondhand vehicle

3.

Sale price of the new vehicle excluding VAT

4.

Sale price of the new vehicle including VAT

5.

VAT paid by the taxable person (garage)

II.

Re-sale of the secondhand vehicle

1.

Deduction of residual VAT

2.

VAT paid by the taxable person (garage)

3.

Re-sale price

( *1 ) Translated from the French.