C-338/98 Commission v Netherlands

JUDGMENT OF THE COURT (Fifth Chamber)

8 November 2001 *

In Case C-338/98,

Commission of the European Communities, represented initially by E. Mennens and E. Traversa, and subsequently by E. Traversa and H.M.H. Speyart, acting as Agents, with an address for service in Luxembourg,

applicant,

v

Kingdom of the Netherlands, represented by M.A. Fierstra, C. Wissels and J. van Bakel, acting as Agents,

defendant,

supported by

* Language of the case: Dutch.

United Kingdom of Great Britain and Northern Ireland, represented by M. Ewing, acting as Agent, and N. Pleming QC, with an address for service in Luxembourg,

intervener,

APPLICATION for a declaration that by providing, in breach of Articles 17(2)(a) and 18(1)(a) 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), in the version resulting from Council Directive 95/7/EC of 10 April 1995 amending Directive 77/388 and introducing new simplification measures with regard to value added tax — scope of certain exemptions and practical arrangements for implementing them (OJ 1995 L 102, p. 18), that an employer who is a taxable person for the purposes of value added tax may deduct part of an allowance paid to an employee for business use of a private car, the Kingdom of the Netherlands has failed to fulfil its obligations under the EC Treaty,

THE COURT (Fifth Chamber),

composed of: S. von Bahr, President of the Fourth Chamber, acting for the President of the Fifth Chamber, D.A.O. Edward, A. La Pergola (Rapporteur), M. Wathelet and C.W.A. Timmermans, Judges,

Advocate General: C. Stix-Hackl, Registrar: H.A. Rühl, Principal Administrator, having regard to the Report for the Hearing,

after hearing oral argument from the parties at the hearing on 5 April 2001, at which the Commission was represented by H.M.H. Speyart, the Kingdom of the Netherlands by J. van Bakel and the United Kingdom of Great Britain and Northern Ireland by G. Amodeo, acting as Agent, and N. Pleming,

after hearing the Opinion of the Advocate General at the sitting on 31 May 2001,

gives the following

Judgment

Legal context and the dispute

1By application lodged at the Court Registry on 14 September 1998, the Commission of the European Communities brought an action under Article 169 of the EC Treaty (now Article 226 EC) for a declaration that by providing, in breach of Articles 17(2)(a) and 18(l)(a) 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), in the version resulting from Council Directive 95/7/EC of 10 April 1995 amending Directive 77/388 and introducing new simplification measures with regard to value added tax — scope of certain exemptions and practical arrangements for implementing them (OJ 1995 L 102, p. 18) ('the Sixth Directive'), that an employer who is a taxable person for the purposes of value added tax ('VAT') may deduct part of an allowance paid to an employee for business use of a private car, the Kingdom of the Netherlands has failed to fulfil its obligations under the EC Treaty.

2By order of the President of the Court of 21 April 1999, the United Kingdom of Great Britain and Northern Ireland was granted leave to intervene in support of the form of order sought by the Kingdom of the Netherlands.

Community legislation

3Article 4 of the Sixth Directive states:

'1. "Taxable person" shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.

4 The use of the word "independently" in paragraph 1 shall exclude employed and other persons from the tax in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer's liability.

...'

4Article 5(1) of the Sixth Directive provides that '"supply of goods" shall mean the transfer of the right to dispose of tangible property, as owner'.

5Article 17 of the Sixth Directive is headed Origin and scope of the right to deduct'. Article 17(2)(a) states:

'In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person'.

6Article 18, headed 'Rules governing the exercise of the right to deduct', provides:

'1. To exercise his right of deduction, a taxable person must:

(a) in respect of deductions pursuant to Article 17(2)(a), hold an invoice drawn up in accordance with Article 22(3);

3. Member States shall determine the conditions and procedures whereby a taxable person may be authorised to make a deduction which he has not made in accordance with the provisions of paragraphs 1 and 2.

...'

7Article 22(3)(a) provides:

'Every taxable person shall issue an invoice, or other document serving as invoice, in respect of goods and services which he has supplied or rendered to another taxable person or to a non-taxable legal person....

Every taxable person shall likewise issue an invoice in respect of any payment to account made to him before any supplies of goods referred to in the first subparagraph and in respect of any payment to account made to him by another taxable person or by a non-taxable legal person before the provision of services is completed.'

8Article 22(3)(c) states:

'Member States shall lay down the criteria that shall determine whether a document may be considered an invoice.'

National legislation

9Article 23 of the Uitvoeringsbesluit omzetbelasting (Implementing decree concerning turnover tax) of 12 August 1968 {Staatsblad 1968, No 423), as amended by a decree of 17 December 1997 (Staatsblad 1997, No 761) ('the implementing decree of 12 August 1968') provides:

'Without prejudice to Article 15(2) and (5) of the Law, where an employee uses a car belonging to him in connection with his employer's business and receives an allowance from his employer for that purpose, a percentage of the allowance, fixed by the Minister, may be deducted by the employer in so far as the allowance does not fall within income for income tax purposes.'

10Article 16 of the Uitvoeringsbeschikking omzetbelasting (Implementing order concerning turnover tax) of 30 August 1968 {Nederlandse Staatscourant 1968, No 169), as amended by a ministerial decree of 14 October 1998 {Nederlandse Staatscourant 1998, No 204), sets the fraction of the allowance which the employer may deduct at 12%.

11The Netherlands Government states that that percentage corresponds to the weighted average of VAT included in the various cost components relating to possession and use of a car.

12More specifically, it is apparent from the explanation provided by the Netherlands Government in reply to a question from the Court that, in determining the percentage, regard was had to the fact that the allowance paid by an employer to his employee is deemed to cover simultaneously expenditure by the employee which was subject to VAT, for example on acquisition of the vehicle and the purchase of fuel and maintenance or repair costs, and expenditure which did not give rise to a VAT charge, such as taxes related to possession of the vehicle or insurance premiums.

13The Netherlands authorities estimated that expenditure relating to a vehicle which was not subject to VAT accounted on average for roughly 20% to 21.5% of the total expenditure linked to possession and use of the vehicle. In the case of vehicles with a diesel engine, which constituted some 10% of the total number of vehicles in the Netherlands, that average proportion was, however, higher.

14Since it was considered, on the basis of those premisses, that only 78.5% to 80% of the allowance paid by an employer to his employee was deemed to cover expenditure incurred by the latter which gave rise to a VAT charge at the standard rate of 17.5%, it was calculated that the allowance was accordingly deemed to include an element of VAT previously paid by the employee ranging from 12.08% to 12.28% of the allowance.

15That percentage was rounded down to 12% in particular in order to take account of the specific circumstances of vehicles with a diesel engine.

16In reply to a question from the Court, the Netherlands Government added that, while the permitted deductible percentage was changed from 13% to 12% in 1992, that alteration was caused by the reduction from 18.5% to 17.5% in the standard rate of VAT applied in the Netherlands.

17As regards the amount of the allowance paid to an employee to which the deduction of VAT at the rate of 12% applies, it is apparent from the replies of the Netherlands Government to the questions formulated by the Court and from the hearing that the deduction is allowed by the Netherlands tax authorities where the allowance does not exceed a flat rate of NLG 0.6 per kilometre.

18On the other hand, it follows from the Wet op de loonbelasting 1964 (Law of 1964 relating to tax on earned income) and the provisions implementing that Law that, where the allowance amounts to more than NLG 0.6 per kilometre, it constitutes an element of remuneration to the corresponding extent.

19As regards verification, it follows from various domestic tax provisions that employers are required to keep specific accounts regarding allowances paid to employees in respect of use of their private vehicles for the purposes of the business and that such accounts must indicate in particular the number of kilometres in respect of which the allowance is paid. The supporting documents for establishing that the deduction is allowed are not subject to specific formal requirements, but they must contain information relating to the journeys carried out for business reasons, the places visited by the employee and the distances travelled by him; periodical declarations by the employee are required in that last respect.

Pre-litigation procedure

20By letter of 2 February 1993, the Commission informed the Netherlands Government of its doubts as to the compatibility of Article 23 of the implementing decree of 12 August 1968 with the Sixth Directive, inasmuch as that provision authorises taxable employers to deduct VAT without fulfilling the condition relating to holding an invoice laid down in Article 18(1)(a) of the Sixth Directive.

21By letter of 5 July 1993, the Netherlands Government contended that the deduction in question could not be criticised for purely formal reasons linked to the fact that an invoice issued by one taxable person to another was not held. Referring to the judgment in Case 165/86 Intiem [1988] ECR 1471, the Netherlands Government maintained that it mattered only that the expenditure to which the deduction related was incurred, as here, for the purposes of the taxable employer's business.

22On 10 May 1995 the Commission sent a letter of formal notice to the Kingdom of the Netherlands. While appearing to accept that the expenditure in respect of which the deduction at issue applied was of a business nature and, therefore, that the deduction did not undermine the principle set out in Article 17(2)(a) of the Sixth Directive, the Commission again dwelt on the requirement to hold an invoice laid down in Article 18(1)(a) of that directive. It pointed out that compliance with such a requirement constituted a guarantee of legality and transparency enabling fraud to be combated effectively.

23After the Netherlands Government had repeated its view in a letter of 10 July 1995, the Commission sent it a supplementary letter of formal notice dated 17 October 1996. Stating that it had carried out a more detailed examination of the Netherlands legislation at issue, the Commission developed its line of argument in that letter. It maintained in particular that the right to deduct at issue also infringed Article 17(2)(a) of the Sixth Directive in that the supplies in question were not made in favour of the taxable employer by another taxable person, but to an end consumer, namely the employee. The tax paid by the employee therefore had to remain borne by him, while the allowance paid by the employer to the employee, which did not constitute consideration for a taxable transaction, fell outside the scope of VAT.

24While acknowledging that the Netherlands legislation at issue could appear contrary to the letter of Articles 17(2)(a) and 18(l)(a) of the Sixth Directive, the Netherlands Government contended, in its reply of 16 December 1996, that the legislation was nevertheless consistent with the principles governing VAT and that those principles had to prevail over the text of the Sixth Directive. In particular, the right to deduct at issue related to goods and services linked to a taxable employer's business activity and enabled cumulative taxation undermining the neutrality of the tax to be avoided.

25The Commission sent a reasoned opinion to the Kingdom of the Netherlands on 22 September 1997. It called on the Kingdom of the Netherlands to take the measures necessary to comply with the opinion within two months of notification thereof.

26By letter of 28 November 1997, the Netherlands Government replied to the Commission, essentially confirming its position. It expanded in particular the argument that the Netherlands legislation provides the necessary guarantees in order to prevent any fraudulent use of the flat-rate deduction mechanism at issue.

27Since the Commission found that the Kingdom of the Netherlands had not complied with its reasoned opinion, it decided to bring the present action. The present action

The first complaint, alleging infringement of Article 17(2)(a) of the Sixth Directive

Arguments of the parties

28The Commission submits that a fundamental aspect of the VAT system which has been created is that transactions capable of giving rise to a deduction are carried out between taxable persons, all the taxable transactions together forming an unbreakable chain in that regard. That follows in particular from Article 17(2)(a) of the Sixth Directive, which states that deductible VAT is that due or paid in respect of goods or services supplied — to a taxable person or for his purposes — by another taxable person.

29Given the clear wording of that provision, any derogation from the principle which it lays down can emanate only from the Community legislature. In addition, it is particularly necessary to adhere to the wording of the Sixth Directive in this regard because, first, all tax legislation requires a clearly defined scope and precise rules and, second, to allow a departure from that wording would result in the Community legislation being applied differently in the various Member States.

30The Commission maintains that here the goods and services to which the deduction mechanism set up by Article 23 of the implementing decree of 12 August 1968 relates are not supplied to a taxable employer but to an employee, and that the employee is an end consumer not accountable for VAT who uses the vehicle in addition, if not mainly, for private purposes. To that extent, the part of the allowance paid by the employer which may be deducted under the abovementioned national provision is not tax on a transaction between taxable persons, but a flat-rate allowance intended to cover part of the VAT charged on goods or services supplied to an end consumer.

31The Netherlands Government contends that the right to deduct provided for in Article 23 of the implementing decree of 12 August 1968 is fully consistent with the objectives pursued by the common system of VAT.

32That system is intended to allow every taxable person to be fully relieved of the burden of input tax incurred for the purposes of his business, thereby ensuring that all economic activities, whatever their purpose or results, are taxed in a wholly neutral way (Case 268/83 Rompelman [1985] ECR 655).

33The reimbursement of expenditure incurred by an employee for the purposes of his employer's business clearly constitutes for the employer a cost burden affecting the final price of the products or services which he offers in his activity as a taxable person, so that he must be able to deduct the VAT element contained in that reimbursed expenditure. Not to allow such a deduction would amount to treating economically identical situations in opposite ways by reason of purely formal differences, according to whether the employee uses his own vehicle or his employer's in order to render services in connection with the latter's business, an outcome which is not acceptable having regard to the Court's case-law (see Joined Cases C-308/96 and C-94/97 Madgett and Baldwin [1998] ECR 1-6229). Distortions of competition would inevitably also result.

34According to the Netherlands Government, not to allow the deduction at issue would also give rise to double taxation. Initially, VAT is definitively imposed on the expenditure incurred by the employee in relation to his vehicle. Subsequently, it is charged on the final price of the products or services offered by the taxable employer, the final price having as a component the abovementioned expenditure following its reimbursement by the employer.

35Such a position would undermine the principle of fiscal neutrality, the principle that there should be no double taxation and the principle that only the end consumer should be taxed, all of which are objectives pursued by the Sixth Directive.

36As regards the judgment in Intiem, cited above, in which the Court accepted that VAT was deductible where it was paid by one taxable person to another taxable person with whom he had concluded an agreement under which the latter provided petrol to his employees, the Commission and the Netherlands Government each maintain that it supports their own argument.

37For the Commission, three factors considered decisive by the Court in Intiem are missing in the present case. First, there is no agreement concluded between a taxable employer and another taxable person for the supply of goods to his employees on his behalf or, therefore, a supply in the legal sense to him. Second, the goods concerned by the right to deduct at issue are not intended to be used exclusively for the business of the taxable employer. Third, the taxable employer is not invoiced by a taxable supplier.

38Conversely, the Netherlands Government regards the judgment in Intiem as confirmation that, when interpreting Article 17(2)(a) of the Sixth Directive, it is necessary above all to give priority to economic reality.

39The United Kingdom Government argues that the present case concerns a more general issue, namely a taxable person's right to deduct the VAT element of all expenses incurred by his employees in connection with the economic activity of the undertaking. It refers, by way of example, to accommodation, food or transport costs borne by an employee when on a business trip, or the purchase of a tool by an employee working on a site away from the employer's premises.

40The United Kingdom Government refers in this regard to the widespread practice in that Member State of employers' reimbursing, by payment of an allowance which depends on the distance travelled, the cylinder capacity of the vehicle and the real national average cost of fuel, expenditure on fuel by employees who use their vehicle for the purposes of their employer's business, and then deducting the related VAT.

41A system of that kind is fully justified in view of the fact that it enables the taxable person to avoid checking and retaining a large number of receipts, a burden considered disproportionate to the amounts of tax involved. In addition, a requirement that the fuel be supplied directly to the employer would penalise the smallest undertakings, because they would not be able to make supply arrangements with fuel distributors.

42In conclusion, the United Kingdom Government contends that the only guide should be economic reality: a taxable person applying a reimbursement system in reality acquires fuel through his employees, without the question of ownership of the vehicle having any relevance in that regard.

Grounds

Findings of the Court

43In order to establish whether the national provisions at issue are consistent with Article 17(2)(a) of the Sixth Directive, it should first be recalled that, as the Court has previously held, Article 17(1) and (2) of the Sixth Directive specifies the conditions giving rise to the right to deduct VAT and the extent of that right and that provision does not leave the Member States any discretion as regards its implementation (Case C-62/93 BP Supergas [1995] ECR I-1883, paragraph 35).

44Next, it follows from the wording of Article 17(2)(a) of the Sixth Directive that the right to deduct which that provision confers on a taxable person concerns VAT paid in respect of goods and services supplied to that taxable person by another taxable person.

45Article 4(1) and (4) of the Sixth Directive expressly states that an employee acting for his employer cannot have the status of taxable person.

46It follows from this provision that the fact an employee uses his own vehicle in connection with his employer's business cannot have the effect of transforming the employee into a 'taxable person' within the meaning of the Sixth Directive or, therefore, Article 17(2)(a) thereof, even if the costs linked to such use give rise to reimbursement by the employer.

47Also, under Article 5 of the Sixth Directive, the supply of goods means the transfer of the right to dispose of them as owner. It is clear that use by an employee of his own vehicle in connection with his employer's business cannot constitute a supply, in that sense, to his employer.

48Accordingly, neither the vehicle belonging to the employee nor the fuel consumed by that vehicle can be regarded as 'supplied' to the taxable employer, within the meaning of Article 17(2)(a) of the Sixth Directive, simply because depreciation of the vehicle and fuel costs linked to such use give rise to partial reimbursement by the employer.

49The foregoing considerations thus clearly show that it is impossible to derive from the wording of Article 17(2)(a) of the Sixth Directive a right to deduct VAT in the circumstances referred to in Article 23 of the implementing decree of 12 August 1968.

50Contrary to the submissions of the Netherlands Government, a different conclusion cannot be drawn from the judgment in Intiem, cited above.

51It is apparent from paragraph 14 of that judgment that the Court held in Intiem that it was only as far as possible that the VAT deduction system laid down by the Sixth Directive had to apply in such a way that its scope corresponded to the sphere of the taxable person's business activity.

52It is in fact clear from paragraph 16 of that judgment that, while the Court was able to adopt an interpretation of Article 17(2)(a) of the Sixth Directive which had the effect of confirming that the deduction mechanism at issue in the main proceedings was consistent with that provision, that was so in particular because, in that case, the employer had arranged for goods to be supplied at his expense to his employees and he had consequently received from the supplier invoices charging him VAT in respect of the goods supplied.

53In such circumstances, the conditions for operation of Article 17(2)(a) of the Sixth Directive, and in particular the condition requiring a supply between taxable persons, were clearly satisfied, so that it was in fact possible to apply that provision.

54By contrast, with regard to the deduction mechanism at issue in the present case, it has been explained above that, since the condition requiring a supply between taxable persons is not fulfilled, it does not appear possible to reconcile that mechanism with the wording of Article 17(2)(a) of the Sixth Directive.

55It is true that the solution thus imposed by the wording of Article 17(2)(a) of the Sixth Directive may not appear fully consistent with the purpose of that provision and with certain objectives pursued by the Sixth Directive, such as fiscal neutrality and the avoidance of double taxation.

56The fact remains, however, that, in the absence of intervention by the Community legislature, the system for deduction of VAT which it has created, as defined by the Sixth Directive, does not provide any basis for a right entitling taxable persons to deduct VAT in the circumstances referred to in Article 23 of the implementing decree of 12 August 1968 or enable any detailed rules for the application of such a right to be established (see, by analogy, Case C-165/88 ORO Amsterdam Beheer and Concerto [1989] ECR 4081, paragraphs 16, 22, 23 and 24).

57It is also to be observed in this last respect that the detailed rules for applying the deduction mechanism founded on Article 23 of the implementing decree of 12 August 1968 make the mechanism an imprecise, flat-rate one, so much so that they do not in any way guarantee that the VAT deemed to be contained in the allowance paid by an employer to his employee actually corresponds to VAT paid by the employee in respect of acquisition of the vehicle or of expenditure linked to its use for the purposes of the employer's business.

58First of all, it follows from paragraphs 12 to 15 of this judgment that the method for determining the percentage of the allowance paid to the employee that may be deducted by the employer is based on an approximation of the proportion of the expenditure linked to a vehicle which is not subject to VAT and of the expenditure which is and that the rate thus obtained was rounded down to 12% in order to take account of the particular circumstances of vehicles with a diesel engine.

59Secondly, the imprecise nature of the deductible percentage is also apparent from the fact that, as explained in paragraph 16 of this judgment, that rate was reduced from 1 3% to 12% because the standard rate of VAT applicable in the Netherlands was changed from 18.5% to 17.5%. No account was therefore taken at the time of the fact that the 1 % decrease in the standard rate of VAT had no effect on expenditure linked to the vehicle which is not subject to VAT.

60Finally, it is apparent from paragraphs 17 and 18 of this judgment that the allowance paid to an employee in respect of which the deduction may be made is itself a flat-rate one, since an employer is permitted to deduct 12% of that allowance in so far as it does not exceed NLG 0.6 per kilometre travelled, irrespective of the level of the expenditure, and therefore of the VAT, actually borne by the employee in relation to the purchase and use of his vehicle.

61The foregoing considerations reinforce the conclusion that intervention by the Community legislature would be necessary both in order to allow in principle a right to deduct VAT on the basis of an allowance paid to an employee using his vehicle for the purposes of a taxable employer's business and in order to establish the extent of such a right and the detailed rules for its application.

62The Commission's first complaint must accordingly be held well founded.

The second complaint, alleging infringement of Article 18(1) (a) of the Sixth Directive

Arguments of the parties

63The Commission submits that the implementing decree of 12 August 1968 also infringes Article 18(l)(a) of the Sixth Directive inasmuch as, under that provision, input tax may be deducted only if the taxable person holds an invoice drawn up in accordance with Article 22(3) of that directive, that is to say, in essence, an invoice issued by one taxable person to another taxable person. Where a deduction relates to an allowance paid to an employee intended to cover the costs linked to use of his private vehicle, it is not possible for such an invoice to be held.

64The Netherlands Government contends, first, that the requirement to hold an invoice laid clown by the provisions referred to in the previous paragraph was imposed for evidential purposes and that the Sixth Directive allows other methods of proof, as shown by Article 18(3) which permits Member States to determine the conditions and procedures whereby a taxable person may be authorised to make a deduction which he has not made in accordance with Article 18(1) and (2).

65Secondly, the reference in Article 18(1)(a) of the Sixth Directive to Article 22(3) does not mean that the invoice, assuming it to be indispensable, must be an invoice issued by one taxable person to another taxable person, since Article 22(3)(b), which specifies the information that must appear on an invoice, imposes no such requirement.

66Finally, it is in any event apparent from Article 22(3)(c) of the Sixth Directive that the Member States are entitled to derogate from the requirements of Article 22(3)(a) and provide that documents other than an invoice may be permitted for the purpose of proving that an item of expenditure has actually been incurred for the taxable person's purposes.

67Be that as it may, according to the Kingdom of the Netherlands the objectives and general scheme of the Sixth Directive must prevail over a purely formal requirement such as the holding of an invoice, in particular where it appears that such an invoice cannot be obtained and other means of proof, for example those referred to in paragraph 19 of this judgment, exist and enable fraudulent practices to be prevented.

68The Commission contends that the document referred to in Article 22(3)(c) of the Sixth Directive which may be considered to be an invoice must in any event be delivered by one taxable person to another taxable person, as is clear from Article 22(3)(a). In addition, Article 22(3)(c) requires the Member State to have specified the criteria which such a document must fulfil.

69As to the power conferred on the Member States by Article 18(3) of the Sixth Directive, the Commission considers that it can be exercised only in respect of transactions giving rise to a right to deduct, which is not the case with transactions occurring, as in the present case, between a taxable employer and his non-taxable employee.

70Like the Netherlands Government, the United Kingdom Government submits that Article 18(3) of the Sixth Directive authorises the Member States to lay down special rules to regulate the right to deduct in cases where an invoice cannot be presented.

Findings of the Court

71Article 18 of the Sixth Directive relates solely to the conditions governing exercise of the right to deduct, the actual existence of such a right being dealt within Article 17.

72As is apparent from the consideration of the Commission's first complaint, it is contrary to Article 17(2)(a) of the Sixth Directive for a taxable employer to deduct part of an allowance paid to an employee for business use of a private car.

73To that extent, Article 18(3) of the Sixth Directive, which allows the Member States to determine the conditions and procedures whereby a taxable person may be authorised to make a deduction which he has not made in accordance with the detailed rules prescribed by Article 18(1) and (2), cannot be relied on by a Member State seeking to regulate the conditions governing the exercise of a right to deduct that is not permitted under the Sixth Directive.

74With regard to Article 18(1)(a) and Article 22(3)(a) and (c) of the Sixth Directive, it is apparent from the wording of those provisions that, in order to make the deduction referred to in Article 17(2)(a) of that directive, the taxable person must in principle hold an invoice or a document considered to be an invoice, issued to him by another taxable person.

75The inevitable conclusion is that, in the absence of any supply of goods or services between two taxable persons and, therefore, of any possibility of an invoice or a document considered to be an invoice being delivered by one such taxable person to another, the deduction of VAT authorised under Article 23 of the implementing decree of 12 August 1968 can, by definition, only occur in breach of the requirements laid down for exercise of a right to deduct by Article 18(1)(a) of the Sixth Directive.

76The Commission's second complaint must accordingly be held well founded.

77It follows from all of the foregoing considerations that by providing, in breach of Articles 17(2)(a) and 18(1)(a) of the Sixth Directive, that an employer who is a taxable person for the purposes of VAT may deduct part of an allowance paid to an employee for business use of a private car, the Kingdom of the Netherlands has failed to fulfil its obligations under the Treaty.

Costs

Costs

78Under 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 the Commission has applied for costs and the Kingdom of the Netherlands has been unsuccessful, the latter must be ordered to pay the costs. Furthermore, as provided in Article 69(4) of the Rules of Procedure, Member States and institutions which intervene in proceedings are to bear their own costs.

Operative part

On those grounds,

THE COURT (Fifth Chamber)

hereby:

1. Declares that by providing, in breach of Articles 17(2)(a) and 18(1)(a) 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, in the version resulting from Council Directive 95/7/EC of 10 April 1995 amending Directive 77/388 and introducing new simplification measures with regard to value added tax — scope of certain exemptions and practical arrangements for implementing them, that an employer who is a taxable person for the purposes of value added tax may deduct part of an allowance paid to an employee for business use of a private car, the Kingdom of the Netherlands has failed to fulfil its obligations under the EC Treaty;

2. Orders the Kingdom of the Netherlands to pay the costs;

3. Orders the United Kingdom of Great Britain and Northern Ireland to bear its own costs.

von Bahr Edward La Pergola

Wathelet Timmermans

Delivered in open court in Luxembourg on 8 November 2001.

P. Jann R. Grass

President of the Fifth Chamber Registrar

COMMISSION v MOTHERLANDS

OPINION OF ADVOCATE GENERAL STIX-HACKL delivered on 31 May 2001 1

I — Subject of the proceedings

Introduction

1In the present action, the Commission seeks a declaration that, by providing that an employer who is a taxable person for the purpose of value added tax ('VAT') may deduct part of an allowance paid to an employee for business use of a private vehicle, the Kingdom of the Netherlands has failed to fulfil its obligations under Article 17(2)(a) and Article 18(l)(a) 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 ('the Sixth Directive').

II — Legal framework

A — Community law

2The concept of independence used in the definition of a taxable person in Article 4(4) of the Sixth Directive excludes from the tax, amongst others, persons who are bound to their employer by a contract of employment.

3Article 5(1) of the Sixth Directive defines a supply of goods as the transfer of the right to dispose of tangible property as owner.

4Article 17(2)(a) reads:

'In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person'.

5Article 18(1)(a) provides:

'To exercise his right to deduct, the taxable person must:

(a) in respect of deductions under Article 17(2)(a), hold an invoice, drawn up in accordance with Article 22(3)'.

6Article 18(3) provides:

'Member States shall determine the conditions and procedures whereby a taxable person may be authorised to make a deduction which he has not made in accordance with the provisions of paragraphs 1 and 2.'

7Article 22(3)(a) and (c) read:

'(a) Every taxable person shall issue an invoice, or other document serving as invoice in respect of all goods and services supplied by him to another taxable person, and shall keep a copy thereof.

Every taxable person shall likewise issue an invoice in respect of payments on account made to him by another taxable person before the supply of goods or services is effected or completed.'

'(c) The Member States shall determine the criteria for considering whether a document serves as an invoice.'

B — National law

8Article 23 of the Uitvoeringsbesluit Omzetbelasting of 12 August 1968 ('the Turnover Tax Implementation Regulations 1968') provides:

'Without prejudice to Article 15(2) and (5) of the [Law on Turnover Tax 1968], where an employee uses a car belonging to him in connection with his employer's business and receives an allowance from his employer for that purpose, a percentage of the allowance, fixed by the Minister, may be deducted by the employer in so fai as the allowance does not fall within income for income tax purposes.'

9Article 16 of the Uitvoeringsbeschikking Omzetbelasting of 30 August 1968 ('the Turnover Tax Implementation Order 1968') provides:

'The fraction which an employer is entitled to deduct of the allowance referred to in Article 23 of the [Turnover Tax Implementation Regulations 1968] is 12%, or less if and so far as expenses are not incurred within the Netherlands.'

10According to the submissions of the Netherlands Government, the rate of 12%, which has applied since 1992, corresponds to the average of the VAT included in the various cost components in respect of the possession and use of motor vehicles.

11The Netherlands Government explains that a fixed rate was chosen in order to avoid the practical difficulties involved in calculating exact amounts. Account is taken of fixed costs, for example general depreciation, insurance, motor vehicle tax, garaging and bodywork maintenance, and also of journey costs, namely depreciation related to the use of the vehicle and the costs of fuel, oil, tyres and repairs.

12The Netherlands Government adds that VAT is not levied on some of these cost components, for example on motor vehicle tax and on insurance premiums. The costs that are exempt from VAT make up about 20% to 21.5% of the costs connected with a vehicle. The fraction is somewhat higher in the case of diesel vehicles. If one proceeds on the basis of a proportion amounting to 20%, then, with a general rate of VAT of 17.5% a rate of 12.28% is produced. If one assumes a proportion amounting to 21.5%, a rate of 12.08% is produced. The Netherlands Government explains, finally, that in order to take account of the number of diesel vehicles, which make up 10% of all vehicles, a flat rate of 12% was fixed.

13Under the Wet op de loonbelasting 1964 ('the Law on Income Tax 1964') and its implementing regulations, the allowance is part of an employee's salary in so far as it exceeds NLG 0.60 per kilometre.

14The deduction of VAT in relation to the allowance is verified by means of the accounts of the employer, who is obliged by a series of provisions of general tax law and income tax law to keep separate accounts for the allowance. The supporting documents need not be in any particular form. However, they have to contain information as to the business trips undertaken, the places visited by the employee and the distances travelled (periodic notification by employees).

III — Pre-litigation procedure and procedure before the Court

15The Commission takes the view that the deduction, from the VAT payable by an employer, of part of the allowance paid to employees for use of their motor vehicle for the purposes of the employer's business infringes the Sixth Directive, and it therefore initiated against the Kingdom of the Netherlands the procedure under Article 169 of the EC Treaty (now Article 226 EC) for failure to fulfil obligations. In the light of the response by the Netherlands Government to its letter of formal notice, the Commission sent a supplementary letter of formal notice on 17 October 1996. As the further written response of 16 December 1996 did not dispel the doubts of the Commission, it delivered a reasoned opinion to the Kingdom of the Netherlands on 22 September 1997, calling on it to take the necessary measures within two months. In a letter of 28 November 1997 the Netherlands Government replied that the Netherlands legislation did not infringe the Community provisions relating to VAT and that for that reason the request of the Commission did not need to be met.

16As the Commission adhered to its view, it brought an action against the Kingdom of the Netherlands before the Court by application dated 11 September 1998, registered at the Court Registry on 14 September 1998. By order of 3 May 1999, the President of the Court granted the United Kingdom of Great Britain and Northern Ireland leave to intervene in support of the Kingdom of the Netherlands.

17The Commission claims that the Court should:

1. declare that, by providing, in breach of Article 17(2)(a) and Article 18(1)(a) of the Sixth Directive, that an employer who is a taxable person for the purposes of VAT may deduct part of an allowance paid to an employee for business use of a private motor vehicle, the Kingdom of the Netherlands has failed to fulfil its obligations under the Treaty;

2. order the Kingdom of the Netherlands to pay the costs.

IV — Analysis of the pleas in law raised by the Commission

18While the first plea in law concerns Article 17(2) of the Sixth Directive, and therefore the conditions for existence of the right to deduct input tax, the second plea relates to Article 18(1) of the Sixth Directive and therefore the conditions for exercise of that right.

A — First plea in law: Breach of Article 17(2) (a) of the Sixth Directive

Arguments of the parties and of the intervener

19The Commission proceeds on the basis of the fundamental consideration that the system of input tax deductions in principle applies only to supplies of goods or services by one taxable person to another taxable person. This is also clearly stated in Article 17(2)(a) of the Sixth Directive.

Article 23 of the Turnover Tax Implementation Regulations 1968 is not compatible with that system, because the supplies of goods or services affected by it are made neither for business purposes nor to traders, but are made to a final consumer, namely, the employee as the owner of a vehicle, which he uses also, or even mainly, for private purposes.

The deductible part of the allowance is therefore not tax on a transaction between taxable persons, but corresponds to the VAT on supplies of goods or services to a final consumer.

20The Netherlands Government justifies the availability of a deduction on the basis that the VAT system is meant to give relief to every taxable person in order to ensure that all economic activities, whatever their purpose or results, are taxed in a wholly neutral way. 3

In the present case, the reimbursement of the expenses borne by the employee in respect of the vehicle relates exclusively to transactions which serve the employer and therefore affect the ultimate price of the product or the service. Accordingly, the corresponding portion of the VAT has to be deductible.

If a deduction were not given, there would be double taxation, resulting, first, from the VAT paid by the employee in respect of the vehicle expenses, and second, from the VAT on the ultimate price, which reflects those expenses. This infringes the principle of fiscal neutrality, the prohibition against double taxation and the principle of charging only the final consumer.

21In this connection, the Commission points to the clear and unambiguous wording of Article 17 of the Sixth Directive. In its view, moreover, tax law requires generally that its field of application and other rules be clearly defined, as it would otherwise be applied differently in the Member States.

The Commission also founds its submissions on the judgment in Intiem, 4 in which the Court upheld a trader's ability, provided for by a national provision, to deduct VAT charged to him from the VAT payable by him. In this connection, the Commission refers to three essential differences between the Netherlands legislation at issue and what are, in its opinion, the essential conditions which the Court considered had to be met in order for a national provision relating to deductibility to be compatible with the Sixth Directive. First, there is in the present proceedings no agreement between the taxable employer and another taxable person concerning the supply of goods to the employee at the expense of the taxable employer and for that reason there is also no supply, in the legal sense, to the employer. Second, the supplies are not made to the employee exclusively for business purposes. Third, the goods are not charged directly by the taxable supplier to the taxable employer. On the other hand, the deduction of input tax does not depend on whether the goods are delivered physically to the employer.

22The Netherlands Government, in contrast, regards the judgment in Intiem as confirmation that, in interpreting Article 17(2) of the Sixth Directive, economic reality is to be given priority. What is decisive is that the employees uses his private vehicle for the purposes of the employer's business. Otherwise, economically identical situations would be treated differently, which would run counter to the case-law of the Court and lead to distortions of competition between undertakings.

23On this point, the Commission explains that the situations in the present case and in Intiem are indeed economically similar, but must be distinguished for the purposes of tax law. Moreover, tax law must generally strike a balance between considerations of fairness on the one hand and the functioning of the tax system on the other, and must also include measures to protect against abuses.

24The United Kingdom Government, as intervener in support of the Netherlands Government, points out that the present proceedings concern in a very general way the right of a taxable employer to deduct the VAT element of expenses which are incurred where an employee acts in the course of the employer's business. This concerns, for example, accommodation and subsistence expenses as well as taxi fares incurred in travel required for business purposes or the purchase of a tool by an employee.

According to the United Kingdom Government, economic reality must be the guide: in reality the business obtains the fuel through its employee, who for his part acts on behalf of the business, without the ownership of the vehicle used playing any role.

As regards invoicing the taxable employer directly, the United Kingdom Government describes the practice, widespread in the United Kingdom, whereby employees are granted mileage allowances. This practice is justified because it saves the undertaking from checking and retaining many invoices. Any other solution would lead to a distortion of competition in that it would penalise undertakings which — perhaps because they are small — could not enter into agreements with other taxable persons relating to the supply of fuel.

25The Commission counters this with the argument that in the present case the employees acquire the fuel in their own name and on their own account. The absence of ability or opportunity to enter into supply agreements does not in any way alter the wording of Article 17(2) of the Sixth Directive and the fact that it is infringed by the national legislation at issue.

Finally, the Commission rejects the view of the United Kingdom Government that excluding any reimbursement of expenses means that even fuel which employees use to fill up vehicles that are not suitable at all for private use would have to be treated as supplied to final consumers.

26Generally, the Commission counters the views of the United Kingdom Government and of the Netherlands Government with the final argument that they amount to a contra legem interpretation of Article 17(2) of the Sixth Directive.

Analysis

27In order to decide this question of law, a few of the principles of the VAT system must first be recalled.

28The principle of fiscal neutrality, which has been addressed by all the parties, is to be noted. This principle means, first, that taxation occurs irrespective of the number of steps in the economic process. A second element of this principle is that the tax is to be borne by the final consumer.

29The Netherlands legislation complies with the principle of fiscal neutrality in so far as the employee is not himself entitled to a deduction of input tax, although he initially has to bear the expenses, including the VAT.

30Nor, under the Netherlands system, is there a tax charge within the chain of undertakings.

31The question then arises whether this chain is broken by the activity of the employee and whether, even if it is, a deduction may be allowed.

32In this respect, the Commission rightly draws the — general — conclusion a contrario that 'tax is no longer deductible when the chain of transactions has come to an end'.

33It does indeed end in the situations to which the Netherlands provision applies. The provision applies where an employee, using his vehicle for business purposes, acts in his own name and on his own account, and therefore not in the name and on the account of the employer, that is to say, the taxable person.

34The Netherlands provision might none the less be permissible if it rested on a fiction that the employee in such cases is to be regarded as a trader and if the Sixth Directive also provided for an employee to be deemed to be a trader in such a situation. However, a corresponding provision, such as Article 28a(4) of the Sixth Directive relating to the supply from time to time of a new means of transport, is absent from the Sixth Directive.

35Irrespective of that, the fact that the employee receives the services or goods with the intention of using them at least in part for business purposes, that is to say for the taxable employer, is not decisive either under the Sixth Directive. Admittedly, the VAT system is based on the principle that it is not the third party supplier who is to bear the tax burden but the person whose need is satisfied, that is to say, the final consumer. Yet this — general — principle can be observed only to the extent that it is given effect in Community law. This principle is, however, not fully upheld in Community law, as is shown, for example, by the legal position in respect of so-called occasional traders who are not taxable persons even though they are third party suppliers.

36As regards the submission that there is a risk of double taxation, it is true that the VAT system has the objective of avoiding double taxation, as the Netherlands Government rightly emphasises. However, this does not mean that the Sixth Directive does not in specific cases none the less tolerate double taxation. The VAT that is not deductible then becomes a cost factor.

37In general, the fact that the objective of precluding double taxation has not yet been achieved shows in any event only that the common system of VAT is 'the result of a gradual harmonisation of national legislation' 9 and that this harmonisation 'is still only partial'.

38In order for double taxation to be entirely eliminated, action by the Community legislature is therefore needed — as in other cases. 11Until then, however, Article 17(2)(a) of the Sixth Directive is to be applied in its existing form, that is to say with the possibility of double taxation.

39Community law as currently in force therefore does not allow for a deduction such as that provided for by the Netherlands legislation. For the sake of completeness, however, it must be pointed out that there are tax arrangements that would make a deduction possible, for example acquisition in the name and on the account of the employer.

On that point, the judgment in Intiem, to which much consideration has been given, must be examined and reference made to the three criteria brought out by the Commission, on the basis of which a deduction of tax may be made by the employer as a taxable person.

40If the Netherlands legislation under consideration here is compared with the criteria developed in the case-law, what emerges, however, is the following. First, a deduction of input tax is granted without any need for an agreement between the employer and the taxable supplier. Also, the supplies of goods are not effected on the account of the employer. The documents filed by the Netherlands Government prove moreover that the goods and services supplied to the employee are not used exclusively for business purposes; instead, they serve private purposes too. Nor, finally, is it necessary in order for input tax to be deducted under the Netherlands legislation that the employer receive an invoice by which VAT is charged to him.

41Lastly, it is necessary to rebut the view of the Netherlands Government, based on the judgment in Madgett and Baldwin, that in interpreting Article 17(2) of the Sixth Directive economic reality is to be given precedence over the wording of the provision.

It is true that in that judgment the Court opted for an interpretation that diverged from the wording, but the case concerned the allocation of a taxable person to a particular occupational category and the application of the exception which applied to that category. The present proceedings, however, do not concern the 'formal classification of the trader'; for here there is no doubt that the employees are not taxable businesses.

42It must as a matter of principle further be found that a literal interpretation of Article 17(2)(a) of the Sixth Directive is consistent with an interpretation based on its legislative history. There is no express reference to 'another trader' in either the corresponding provision previously contained in the Second Directive (Article 11) or in the proposal of the Commission for the subsequent Article 17(2) of the Sixth Directive.

43However, as the Court held in Genius Holding, the Council, in drafting Article 17(2)(a) of the Sixth Directive, departed both from the wording of Article 11(1) (a) of the Second Directive and from that of Article 17(2)(a) of the Commission's proposal.

44The Council departed from the Commission's proposal in particular in providing that the goods or services must be supplied or be going to be supplied 'by another taxable person'.

45Finally, it is also apparent from the relevant case-law of the Court that Article 17 of the Sixth Directive cannot be interpreted contrary to its wording.

46It follows from all the foregoing considerations that the Netherlands legislation concerning deduction of part of the allowance infringes Article 17(2) of the Sixth Directive. For that reason, the Commission's first plea in law is well founded.

B — Second plea in law: Breach of Article 18(1)(a) of the Sixth Directive

Arguments of the parties and of the intervener

47According to the Commission, the national legislation is incompatible with Article 18(1)(a) of the Sixth Directive inasmuch as, under that provision, exercise of the right to deduct input tax is conditional upon the possession of an invoice drawn up in accordance with Article 22(3) of the Sixth Directive, that is to say, an invoice which has been issued by one taxable person to another taxable person, a requirement which is not prescribed by the Netherlands rules.

The Commission refers moreover to the danger of abuse which could result from the particular features of those rules.

48The Netherlands Government rejects this allegation, arguing in particular that the maximum limit of the mileage allowance constitutes protection against abuse. It submits, furthermore, that the reference in Article 18(1)(a) of the Sixth Directive to Article 22(3) thereof does not mean that the invoice must be issued by one taxable person to another taxable person. Rather, it is apparent from Article 22(3)(c) that documents other than invoices are permissible in order to prove that an item of expenditure has in fact been incurred for the purposes of the business.

The Netherlands Government further emphasises that the (only) function of the invoice is evidential. The right to a deduction of input tax also exists where there is no invoice. Thus, Article 18(3) of the Sixth Directive authorises the Member States to determine the conditions 'whereby a taxable person may be authorised to make a deduction which he has not made in accordance with the provisions of paragraphs 1 and 2'.

In Netherlands law, there are alternative means of proof available, for example those arising from the accounting provisions applicable to employers. The accounting obligations owed by the taxable person provide a sufficient guarantee against abuses.

Finally, the purpose of the Sixth Directive takes precedence over a provision that creates purely formal requirements, an interpretation which is also supported by the principle of proportionality.

49The United Kingdom Government takes the view that Article 18(3) of the Sixth Directive authorises the Member States to determine the conditions under which a deduction is possible where there is no invoice.

Analysis

50As the Commission rightly submits, breach of Article 17(2)(a) of the Sixth Directive entails a breach of Article 18(1)(a). As there are not two taxable persons involved, but just the employer and his employee, there likewise cannot be an invoice within the meaning of Article 22(3).

51As regards the means of proof, Article 22(3)(c) does admittedly authorise the criteria to be laid down that shall determine whether a document may be considered an invoice. However, this means a document within the meaning of Article 22(3)(a), that is to say, a document which serves as an invoice and is issued by one taxable person in respect of supplies of goods to another taxable person. The Netherlands provision also does not prescribe a document that satisfies these requirements.

52The reliance placed by the Netherlands Government on Article 18(3) of the Sixth Directive is misconceived in so far as this provision concerns exercise of the right to deduct input tax. The way in which such a right is exercised is irrelevant if it has not V — Costs even arisen. The Member States cannot, by determining 'conditions and procedures'

within the meaning of Article 18(3) of the

54Under Article 69(2) of the Rules of Sixth Directive, alter the requirements for Procedure, the unsuccessful party is to pay the existence of the right to deduct input the costs if they have been applied for in the tax.

successful party's pleadings. As the Kingdom of the Netherlands has been unsuccessful, it should be ordered to pay the costs. Under Article 69(4) of the Rules of Procedure, Member States which intervene in the proceedings are to bear their own

53. Thus, the Commission's second plea in

costs. Therefore, the United Kingdom law is also well founded.

should bear its own costs.

VI — Conclusion

55I accordingly propose that the Court should:

(1) declare that by providing, in breach of Article 17(2)(a) and Article 18(1)(a) 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, that an employer who is a taxable person for the purposes of VAT may deduct part of an allowance paid to an employee for business use of a private motor vehicle, the Kingdom of the Netherlands has failed to fulfil its obligations under the Treaty;

(2) order the Kingdom of the Netherlands to pay the costs;

(3) order the United Kingdom of Great Britain and Northern Ireland to bear its own costs.

Notes

(1) Original language: German.

(2) OJ 1977 L 145, p. 1.

(3) Judgment in Case 268/83 Rompelman [1985| ECR 655, paragraph 19.

(5) bitiem (cited in footnote 4), paragraph 14.

(4) Judgment in Case 165/86 Intiem [1988] ECR 1471, 6 — Judgment in Joined Cases C-308/96 and C-94/97 Madgett paragraph 16. and Baldwin [1998] ECR I-6229.

(7) Judgment in Case 89/81 Hong Kong Trade [1982] ECR

(127) 7, paragraph 9.

(8) Judgment in Case C-165/88 OKO Amsterdam Beheer and Concerto |1989] ECR 4081, paragraph 23.

(9) OKO Amsterdam Beheer (cited in footnote 8), paragraph

(10) Ibid., paragraph 21.

(11) See, for example, the insertion of Article 26a (special arrangements applicable to, inter aha, second-hand goods). On the need to avoid double taxation, see the preamble to Council Directive 94/5/EC of 14 February 1994 supplementing the common system of value added tax and amending Directive 77/388/EEC — Special arrangements applicable to second-hand goods, works of art, collectors' items and antiques (OJ 1994 L 60, p. 16).

(12) Cf. OKO Amsterdam Beheer (cited in footnote 8), paragraph 24.

(13) In this regard, see point 21.

(14) Madgett and Baldtuin (cited in footnote 61, paragraph 21.

(15) Judgment in Case C-342/87 Genius Holding [1989] ECR

(422) 7, paragraph 12.

(16) Judgment in Case C-43/96 Commission v France |1998| ECR I-3903, paragraph 16, concerning the interpretation of Article 17(6) oí the Sixth Directive.

(17) With regard to this view of the United Kingdom Government, see point 24.