C-404/99 Commission v France

JUDGMENT OF THE COURT (Fifth Chamber)

29 March 2001 *

In Case C-404/99,

Commission of the European Communities, represented by E. Traversa, acting as Agent, assisted by N. Coutrelis, avocat, with an address for service in Luxembourg,

applicant,

v

French Republic, represented by K. Rispal-Bellanger and S. Seam, acting as Agents, with an address for service in Luxembourg,

defendant,

APPLICATION for a declaration that, by authorising, under certain conditions, the exclusion from the taxable amount for the purposes of value added tax of the 'service charges' claimed by certain taxable persons, the French Republic has

* Language of the case: French.

failed to fulfil its obligations under Articles 2(1) and 11A(1)(a) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1),

THE COURT (Fifth Chamber),

composed of: A. La Pergola, President of the Chamber, M. Wathelet (Rapporteur), D.A.O. Edward, P. Jann and L. Sevón, Judges,

Advocate General: J. Mischo,

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 26 October 2000,

after hearing the Opinion of the Advocate General at the sitting on 23 November 2000, gives the following

Judgment

Legal context and the dispute

1By application lodged at the Court Registry on 22 October 1999, the Commission of the European Communities brought an action under Article 226 EC for a declaration that, by authorising, under certain conditions, the exclusion from the taxable amount for the purposes of value added tax ('VAT') of the 'service charges' claimed by certain taxable persons, the French Republic has failed to fulfil its obligations under Articles 2(1) and 11A(1)(a) of the 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, hereinafter 'the Sixth Directive').

The Community rules

2Article 2(1) of the Sixth Directive provides:

'The following shall be subject to value added tax:

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

3 Article 11A(1)(a) and (3) of that directive provides:

'1. The taxable amount shall be:

(a) in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies;

3The taxable amount shall not include:

(a) price reductions by way of discount for early payment;

(b) price discounts and rebates allowed to the customer and accounted for at the time of the supply;

(c) the amounts received by a taxable person from his purchaser or customer as repayment for expenses paid out in the name and for the account of the latter and which are entered in his books in a suspense account. The taxable person must furnish proof of the actual amount of this expenditure and may not deduct any tax which may have been charged on these transactions.'

The national rules and administrative practice

4The provisions of Community law cited in paragraphs 2 and 3 of this judgment were transposed into French law by Articles 266(1)(a) and 267-I of the Code Général des Impôts (General Tax Code, hereinafter 'the Code').

5Article 266(1)(a) of the Code provides:

'The taxable amount shall be:

(a) in respect of supplies of goods and services and intra-Community acquisitions, all sums, assets, goods or services received or receivable by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies.'

6According to Article 267-1 of the Code:

'The taxable amount shall include:

1. Taxes, duties, levies and charges of any kind, excluding the value added tax itself;

2. Expenses incidental to supplies of goods or services, such as commissions, interest, packing, transport and insurance costs charged to customers.'

7The present infringement proceedings concern the system for levying VAT on tips or service charges, that is to say, compulsory price supplements which are included in the total price charged to the customer and which are generally borne by the customer by way of remuneration for the 'service' provided in certain establishments (hereinafter referred to as a 'service charge'). A service charge is to be distinguished from gratuities or voluntary tips paid by the customer spontaneously and directly to employees of the establishment in question as a token of his satisfaction, over and above the service charge itself.

8Under French law, the taxable amount for VAT purposes is in principle composed, as regards supplies of services, of the total price paid by the customer in consideration of the services rendered to him, including service charges. The following indication to that effect appears in a text featuring in the Bulletin Officiel de la Direction Générale des Impôts (Official Bulletin of the Directorate-General for Taxation) (BOGDI 3 B-4-76) which is reproduced in the 'basic documentation' dated 20 June 1995 (DB 3 B-1123, No 31) and published by the Directorate-General for Taxation, and on which taxpayers may rely for the purposes of ascertaining their tax liabilities:

'according to the fixed policy of the administration, price supplements charged by way of a tip to customers of commercial undertakings [hotels, restaurants, cafés, brasseries, bars, tea-rooms, hairdressing establishments, clinics, hydropathic establishments, transport and removal undertakings, rest and retirement homes, casinos and undertakings making home deliveries of any type of product] constitute part of the price on which value added tax is to be levied'.

9However, the abovementioned 'basic documentation' states that, according to an administrative concession applied since 1923 by the French administrative authorities and confirmed by an administrative instruction of 31 December 1976 (DB 3 B-1123, No 32, hereinafter 'the 1976 instruction'), service charges may be excluded from the amount of the turnover tax paid by an employer, that tax having been replaced in France by VAT. Four conditions must be fulfilled in order for the concession to apply:

— the customer must have been informed in advance of the existence and percentage of a levy in the nature of a service charge which is added to the price 'excluding service';

— the amount thus levied must be shared out in full between the staff members having direct contact with the customers;

— that payment to the staff must be accounted for by the keeping of a special register initialled in the margin by each recipient or, at the very least, by a staff representative;

— the employer must show on the annual wages statement the amount of the remuneration of that kind actually received by the members of his staff.

The pre-litigation procedure

10The Commission took the view that the exemption from VAT resulting, with respect to service charges, from the administrative concession confirmed by the 1976 instruction was contrary to Articles 2(1) and HA(l)(a) of the Sixth Directive, and therefore communicated its complaints in that regard to the French Government by letter of 15 April 1998, requesting it to submit its observations within two months from receipt of that letter.

11On 17 November 1998 the Commission, having received no reply, issued a reasoned opinion calling upon the French Government to take the requisite measures to comply with that opinion within two months from the date of its notification.

12No response was sent to the Commission by the French Government following the despatch of that reasoned opinion. In those circumstances, the Commission considered that the conditions for bringing proceedings before the Court under the second paragraph of Article 226 EC were satisfied, and therefore decided to bring the present action against the French Republic.

Grounds

Substance

Arguments of the parties

13The Commission claims in its application that, although Articles 266(1)(a) and 267-1 of the Code correctly transpose Articles 2(1) and HA(1)(a) of the Sixth Directive, that is not the case as regards the administrative concession confirmed by the 1976 instruction, which preserves a system of exemption from VAT that is contrary to Community law.

14In that regard, the Commission argues, first, that, according to settled case-law (see Case C-16/93 Tolsma [1994] ECR I-753, paragraph 13, and the cases cited therein), the taxable amount in respect of a supply of services is everything received by way of consideration for the service provided, and the taxable amount as defined in Article HA(1)(a) of the Sixth Directive consists of the consideration actually received.

15In the Commission's view, a service charge undeniably forms an integral part of the total price paid by the customer for the service rendered by the supplier. It is therefore that total price, including the service charge, which constitutes 'the consideration actually received' on which VAT is payable in accordance with the abovementioned case-law.

16The Commission states that its application is solely concerned with service charges, which are paid on a compulsory basis by the customer and the amount of which is determined in advance, and not with tips paid spontaneously and without compulsion by the customer to a given employee. In its view, the latter type of tip, which is purely optional, is comparable to a donation given by a passer-by to a barrel-organ player, in that it likewise involves a payment which is entirely voluntary and uncertain, the amount of which is practically impossible to determine and which, according to the judgment in Tolsma (paragraph 19), is not liable to VAT.

17Next, the Commission observes that Article 11A(3) is the only provision in the Sixth Directive allowing sums to be excluded from the taxable amount for VAT purposes. However, the administrative concession confirmed by the 1976 instruction, which derogates from the rules laid down by Articles 2(1) and 11A(l)(a) of the Sixth Directive, does not fall within any of the situations covered by Article 11A(3) of that directive. Consequently, the French tax authorities should not under any circumstances allow service providers to exclude from their taxable amount for VAT purposes sums corresponding to a service charge.

18Lastly, the Commission maintains that application of the administrative concession confirmed by the 1976 instruction violates the principle of neutrality inherent in the common system of VAT. According to the Commission, that neutrality, which is designed to promote competition (Case 126/78 Nederlandse Spoorwegen [1979] ECR 2041, paragraph 7), is based on the premiss that, within each country, similar goods or services should bear the same tax burden.

19The Commission argues that the principle of fiscal neutrality precludes economic operators carrying on the same activities from being treated differently as far as the levying of VAT is concerned (Case C-216/97 Gregg [1999] ECR I-4947, paragraph 20).

20In its view, the system of exemption from VAT resulting from application of the administrative concession confirmed by the 1976 instruction constitutes a distortion of competition between suppliers who impose a service charge. Thus, an absolutely identical service offered by two competing suppliers will be taxed differently if only one of them is in a position to fulfil the conditions imposed by the authorities for exclusion of that service charge from the taxable amount for VAT purposes.

21According to the Commission, that distortion of competition is linked to the purely formal conditions laid down by the French Government for eligibility for exemption. Those conditions have no basis whatever in law and are totally extraneous to the fundamental criterion governing determination of the taxable amount for VAT purposes, namely the consideration actually received by the service provider.

22In its defence, the French Government observes, first of all, that the Commission acknowledges in point 7 of its application that Article 266(1)(a) of the Code correctly transposes Articles 2(1) and HA(1)(a) of the Sixth Directive. It contends that the exclusion of service charges from the taxable amount for VAT purposes does not constitute a rule modifying Article 266(1)(a) of the Code, being instead a mere administrative concession which undertakings are free to apply or not as they think fit.

23Consequently, according to the French Government, the whole of the price paid by the customer constitutes in principle the taxable amount for VAT purposes of supplies made by undertakings, but it has been accepted, in relation to certain undertakings only, that the price element constituting remuneration for the service provided should not be liable to VAT.

24The French Government adds that the concession in question has been in existence for a long time, since it dates back to a ministerial decision of 8 August 1923. The aim of that concession can be discerned from its historical context. The decision to exempt tips from turnover tax was taken at a time when the remuneration of employees having contact with customers was essentially composed of tips paid by those customers. Thus, although they sometimes received a low fixed salary, in most cases those employees had no guaranteed income, especially in the restaurant and hairdressing sectors. In those circumstances, the French authorities regarded it as essential to ensure that, where the tips were not paid to them direct, such employees actually received the whole of the sums paid for their benefit to the employer.

25Consequently, it was in order to protect the interests of employees that the ministerial decision of 8 August 1923, as amended by a circular of 12 March 1928, was adopted. Under those provisions, suppliers who undertook to pass on to their employees the whole of any sums received from customers were exempted from tax, in order to ensure that they did not deduct from the tips collected by them the element corresponding to the tax charge before passing them on to their employees.

26The French Government states that that administrative concession subsequently formed the subject of a ministerial decision of 29 September 1976, which was confirmed and accompanied by a commentary in the 1976 instruction. The concession in question was made subject to four conditions which made it possible to restrict its application exclusively to situations in which the employer shares out the full amount of any tips received in the form of a service charge between employees having direct contact with customers, and to oppose demands for an extension of the concession presented from time to time by suppliers whose staff do not have direct contact with customers — for example, those not offering table service.

27According to the French Government, it therefore follows that, because of the conditions governing eligibility for the exemption, it is only suppliers employing staff who have direct contact with customers and who are remunerated by the service charge included in the price paid by the customer — that is to say, principally, restaurants and hairdressing establishments — that in fact qualify for that concession.

28Second, the French Government denies that retaining for service charges a system of exemption from VAT which is contrary to the Sixth Directive violates the principle of neutrality of VAT by distorting competition between suppliers.

29It reiterates that the possibility of excluding service charges from the taxable amount for VAT purposes is not a rule but merely an administrative concession which undertakings are free to apply or not. In addition, it contends that the fact that not all suppliers apply that measure does not have an adverse effect on competition. First, not all suppliers wish to apply that concessionary measure and, second, those who do not qualify for it necessarily carry on their activities in different circumstances.

30The French Government therefore regards the Commission's action as unfounded.

31In its reply, the Commission maintains in full the claims put forward in its application. It observes, first, that the arguments of the French Government essentially recount the history of the development of the French rules regarding payment of tips, and that they do not contain anything relating to the breach of obligations complained of.

32It goes on to state that, even if, as the French Government maintains, the rationale for the conditions governing eligibility for exemption from VAT as laid down by the 1976 instruction may be gleaned from an historical perspective, those conditions are irrelevant in the light of the Community requirements concerning VAT. Nor is it possible to accept the French Government's argument that those conditions provide a ground for opposing demands for an extension of the administrative concession in question. The Commission asserts in that regard that, even if the conditions laid down make it possible to limit the scope of the infringement of Community law, they do not eliminate the infringement itself.

33Lastly, the Commission maintains that the French Government has in fact itself acknowledged that the administrative practice in issue is merely a concession which is contrary to the national legislation transposing the Sixth Directive. Thus, in noting to its satisfaction the Commission's view that Articles 266(1)(a) and 267-1 of the Code correctly transpose the Sixth Directive, the French Government is necessarily concluding, in effect, that the concession in question, which is contrary to the terms of the Code, is also contrary to Community law.

34In its rejoinder, the French Government reiterates that it is necessary to have regard to the historical context in order to comprehend the purpose of the exemption from VAT in respect of service charges, which is to protect the interests of certain employees. It points out that, even today, despite the introduction of a minimum wage, the remuneration of employees having direct contact with customers in the restaurant and hairdressing sectors continues to derive in part from service charges.

35Consequently, if the administrative concession exempting service charges from VAT were abolished, that might well have the effect of promoting the practice of giving optional tips, which would penalise employees having direct contact with customers, especially in sectors in which it is not obligatory to indicate prices on a 'service included' basis.

36As regards the exemption per se, the French Government does not deny that, as the Commission argues in its reply, the conditions laid down in the 1976 instruction governing eligibility for the exemption from VAT are irrelevant in the light of the applicable Community requirements. It merely contends that the conditions imposed for granting that exemption operate to reduce its scope.

37It adds that an investigation into the application of the administrative concession in question, carried out by the Ministry of Economic Affairs, Finance and Industry, has revealed that, in the restaurant sector, that concession continues to be applied only by a few suppliers, mainly brasseries employing substantial numbers of staff.

Findings of the Court

38It must be recalled, first of all, that, according to settled case-law, the consideration received or receivable by the supplier for the provision of a service, which constitutes, under Article 11A(1)(a) of the Sixth Directive, the taxable amount arising from that operation, must be capable of being expressed in terms of the consideration actually received for it, which is a subjective value and not a value estimated according to objective criteria (see Case C-258/95 Fillibeck [1997] ECR I-5577, paragraph 13, and the case-law cited therein). According to the same case-law, that consideration must be capable of being expressed in money (see Fillibeck, cited above, paragraph 14, and the case-law cited therein).

39As the Advocate General states in points 36 and 40 of his Opinion, in establishments covered by the 1976 instruction, the total sum demanded from the customer, or appearing on the bill presented to him, constitutes in its entirety the consideration for the service supplied to him by the service provider. That consideration, which includes the service charge, is by definition expressed in money.

40Next, it should be noted that the only provision of the Sixth Directive allowing sums to be excluded from the taxable amount for VAT purposes is Article 11A(3). According to that provision, the taxable amount does not include, subject to certain conditions, price reductions by way of discount for early payment, price discounts and rebates, or amounts received by a taxable person from his purchaser or customer as repayment for expenses paid out in the name and for the account of the latter.

41It is clear that the system of exemption from VAT allowed by the French tax authorities in the context of an administrative concession which is confirmed by the 1976 instruction, and which derogates from the rules laid down by Articles 2(1) and 11A(1)(a) of the Sixth Directive, does not fall within any of the situations covered by Article 11A(3) of that directive.

42It follows that the service charge element must be included in the taxable amount for VAT purposes attributable to the service provider concerned, and that there are no circumstances in which a supplier may be permitted to exclude such charges from his taxable amount for VAT purposes.

43In that regard, the conditions imposed by the French tax authorities governing eligibility for exemption from VAT are irrelevant. It is immaterial, for the purposes of applying VAT, whether customers have been informed of the existence of the service charge and its percentage, whether sums paid in that respect are shared out in full between staff members having direct contact with the customers, whether those payments are specified in a special register initialled in the margin by each recipient or whether or not the employer indicates on the annual wages statement the amount of the remuneration of that kind received by members of his staff.

44Consequently, Article HA(l)(a) of the Sixth Directive precludes application of the method of calculating the taxable amount authorised by the administrative practice confirmed by the 1976 instruction.

45Furthermore, whilst the foregoing is sufficient for the present action to succeed, it should be recalled that, according to settled case-law, the principle of fiscal neutrality, to which the Commission has also referred, precludes, inter alia, economic operators carrying on the same activities from being treated differently as far as the levying of VAT is concerned (Gregg, cited above, paragraph 20).

46It follows that such a principle is infringed where, pursuant to the 1976 instruction, operators offering the same service, for the same total price, may find themselves having to pay different sums in respect of VAT depending on whether or not they indicate on their bills that they are applying a service charge, because the taxable amount differs in each case even though the service provided and the consideration given for it are absolutely identical.

47Consequently, the administrative concession confirmed by the 1976 instruction violates the principle of fiscal neutrality and gives rise to a distortion of competition.

48Lastly, the arguments put forward by the French Government in an effort to justify that administrative concession cannot be accepted.

49Its explanations regarding the historical and political context and the social objective underlying the exemption of service charges from VAT are irrelevant for the purposes of assessing the compatibility of the concession in question with the rules laid down by the Sixth Directive.

50Similarly, it is necessary to reject the argument purporting to show the limited scope of the exemption from VAT granted in breach of the rules contained in the Sixth Directive.

51It is settled case-law that an action against a Member State for failure to fulfil its obligations is objective in nature (Case 415/85 Commission v Ireland [1988] ECR 3097, paragraph 9, and Case C-209/89 Commission v Italy [1991] ECR I-1575, paragraph 6). Consequently, where a Member State fails to fulfil its obligations under the Treaty or under secondary legislation, it does so regardless of the frequency or the scale of the circumstances complained of (see, to that effect, Commission v Italy, cited above, paragraph 19, and Case C-105/91 Commission v Greece [1992] ECR I-5871, paragraph 20).

52It must therefore be held that, by authorising, under certain conditions, the exclusion from the taxable amount for VAT purposes of the compulsory price supplements claimed by certain taxable persons by way of remuneration for the service provided ('service charges'), the French Republic has failed to fulfil its obligations under Articles 2(1) and 11A(1)(a) of the Sixth Directive.

Costs

Costs

53Under 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 French Republic has been unsuccessful, the latter must be ordered to pay the costs.

Operative part

On those grounds,

THE COURT (Fifth Chamber)

hereby:

1. Declares that, by authorising, under certain conditions, the exclusion from the taxable amount for the purposes of value added tax of the compulsory price supplements claimed by certain taxable persons by way of remuneration for the service provided ('service charges'), the French Republic has failed to fulfil its obligations under Articles 2(1) and 11A(1)(a) of the 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;

2. Orders the French Republic to pay the costs.

La Pergola Wathelet Edward

Jann Sevón

Delivered in open court in Luxembourg on 29 March 2001.

R. Grass A. La Pergola

Registrar President of the Fifth Chamber

Notes

(1) '

OPINION OF ADVOCATE GENERAL MISCHO delivered on 23 November 2000

1This action by the Commission of the European Communities against the French Republic for failure to fulfil its obligations with regard to the implementation of the 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') once again leads the Court to consider, though in a somewhat unusual way, the question of national administrative practices in regard to the obligations resulting from directives.

2Generally, a Member State which the Commission alleges has not correctly transposed a directive puts forward as its defence, with more or less conviction, the fact that, even if the national legislature has not acted to implement the directive, the authorities have done everything necessary, usually by issuing a circular, to ensure that the directive is in practice given effect in national law, but the case we have today is the opposite.

3What the Commission alleges against the French Republic is not at all the absence of legislative provisions correctly transposing the Sixth Directive but the official tolera tion, at the level of administrative practice, of deviations from the implementing national law, which itself is in complete harmony with the Sixth Directive.

4Article 2(1) of the Sixth Directive provides:

'The following shall be subject to value added tax:

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

and Article HA(1)(a) states that:

'1. The taxable amount shall be:

(a) in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies.'

5The Commission accepts that the French Republic has transposed these measures correctly, since Articles 266-1 A and 267-1 of the Code general des impôts provide respectively that:

'The taxable amount shall be:

in respect of supplies of goods and services and intra-Community acquisitions, all sums, assets, goods or services received or receivable by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies.'

and that:

'The taxable amount shall include:

1. Taxes, duties, levies and charges of any kind, excluding the value added tax itself.

2. Expenses incidental to supplies of goods or services, such as commissions, interest, packing, transport and insurance costs charged to customers.'

6According to the Commission, the French Republic has nonetheless failed to fulfil the obligations arising from the articles of the Sixth Directive cited above in authorising, by means of an administrative instruction published in the Bulletin officiel de la direction générale des impôts of 31 December 1976 making permanent a previous practice, certain taxable persons to exclude the service charges claimed from their customers from the taxable amount for value added tax (hereinafter 'VAT').

7More specifically, the 'basic documentation' published by the Director-General for Taxation, which taxpayers can rely on to ascertain the exact extent of their tax liabilities, states that: 'according to the fixed policy of the administration, price supplements charged by way of a tip to customers of commercial undertakings (hotels, restaurants, cafés, brasseries, bars, tea-rooms, hairdressers, clinics, spas, transport and removal businesses, rest and retirement homes, casinos, home delivery services of any kind) constitute part of the price on which value added tax is to be levied', but it is indicated that such increases in the price may be excluded from the taxable amount for VAT if the four following conditions are all satisfied:

(1) the customer is informed at the outset of the existence of a levy having the nature of a gratuity, and of its percentage by reference to the 'service not included' price;

(2) all 'gratuities' are shared among the members of staff who have direct contact with the customer;

(3) the payment is accounted for in a special register signed by each of the beneficiaries, or at least by a staff representative;

(4) the annual return of wages filed by the employer shows the total remuneration actually received by the staff remunerated by gratuities.

8For the Commission, this tolerance amounts to a system of exemption from VAT contrary to Community law, taking the form of a method of determining the taxable amount which fails to comply with the rules laid down in the Sixth Directive, since part of what is invoiced to the customer, and is thus consideration for the service rendered, escapes the tax.

9In this respect, the Commission states that its criticism is not directed to what it describes itself as 'extra gratuities', and which the French authorities describe as free gratuities, that is to say money which a customer leaves spontaneously and without obligation to any particular employee.

10The Commission accepts that these amounts, by contrast with compulsory service charges, do not need to be included in the taxable amount, since they are like the donations made by passers-by to a barrel-organ player in the street, in regard to which the Court ruled in Case C-16/93 Tolsma. 3 In both cases, the payments are entirely gratuitous and uncertain, and it is practically impossible to ascertain their amount.

11But, in the Commission's opinion, the exclusion of service charges from the taxable amount cannot be justified when they are of a predetermined amount, are compulsory, and do not appear in the exhaustive list of sums not included in the taxable amount found in Article 11A(1) of the Sixth Directive.

12Moreover, again in the Commission's view, the practice at issue is open to the objection of being contrary to the principle of fiscal neutrality, which underlies the whole of the Community system of VAT, since two taxable persons undertaking exactly the same activity may be taxed differently depending on whether or not their invoices show separately the amounts intended as remuneration for their employees; and this breach of the principle of fiscal neutrality is itself apt to create distortion of competition, since a different tax treatment of activities carried out in identical circumstances necessarily has an effect on the conditions of competition.

13In the Commission's view, the four conditions laid down in the administrative instruction at issue to enable a supplier to benefit from the exclusion of service charges from the taxable amount are entirely procedural in character and have nothing to do with the criteria for establishing the basis of assessment for VAT, namely the consideration actually received by the supplier of the service. Reference to these conditions introduces an arbitrary element into the determination of the tax burden on the various suppliers in the same sector when there is no justification for treating them differently.

14The French Government devotes the main part of its defence to a description of the context in which the administrative instruction of 1976 was issued.

15It explains that the instruction goes back to a ministerial decision in 1923 which accepts that the turnover tax, that is to say the tax which, historically, preceded VAT in the French tax system, should not be applied to receipts of obligatory gratuities by hoteliers and restaurant owners, and by commercial establishments more widely, whenever the whole of the sums received on that account were in fact paid out to staff.

16Later, for the purpose of fiscal control, a circular in 1928 made the benefit of this concession dependent on there being a special register showing the collection and redistribution of such sums.

17According to the French Government, the administrative concession was made permanent by a law of 1933 on staff remuneration, which adopted the principle that gratuities received as remuneration for service as an obligatory percentage added to bills or otherwise, as well as all sums paid to an employer by customers voluntarily in respect of service or handled centrally by him, should be paid entirely to the staff who were in contact with the customers, and to whom the latter generally gave the payments.

18This law made it possible to provide security for staff remunerated chiefly by gratuities at a time when there was no minimum wage.

19As to the current situation, the French Government dwells on the fact that only establishments which employ staff who are in direct contact with customers and who are remunerated by means of the service charge included in the price paid by the customer, that is to say principally restaurants and hairdressers, enjoy the concession, and that it has opposed the extension of it to self-service restaurants and fast-food outlets.

20The Government also points out that the VAT rules applicable to gratuities vary depending on the way in which the service charge is levied, that is, depending on whether prices are displayed as being 'service included' or 'service not included', but the cases of 'service not included' have become marginal since establishments serving meals, food or drinks to be consumed on the premises have, since the publication of a decree in 1987, been required to display their prices as 'service included'.

21In reply to the criticisms of the Commission about the anti-competitive effect of the concession confirmed by the 1976 administrative instruction and the arbitrary nature of the conditions it imposes, the French Government draws attention to the fact that it is merely a tolerance, that undertakings are free to apply it or not, the rule remaining that contained in Article 266-1 A of the Code général des impôts. It adds that undertakings which are not able to benefit from the tolerance are not carrying on business in the same circumstances as those which can, and that conditions which guarantee the payment to employees of sums received and provide a strict framework for the exemption allowed cannot be characterised as arbitrary.

22In its reply, the Commission is content to observe that the explanations provided by the French Government about the historical context of the disputed tolerance have no relevance in deciding its compatibility with the Community system of VAT.

23The Commission also points out that, if the exemption from turnover tax for gratuities to staff could, when it was introduced, be justified by the desire not to penalise those establishments which, instead of leaving gratuities to the discretion of customers, chose to levy them compulsorily in order to pay them to their staff for whom it was frequently the only form of remuneration, that is no longer the case today when there is a minimum wage and when sums levied by an employer by way of service charge have to be paid on to employees.

24It is, indeed, in view of this mismatch between what might have been a justification for the exemption at a given moment, and the present legal context, that the Commission had felt justified in describing the four conditions laid down in the administrative instruction of 1976 as arbitrary.

25It appears to the Commission that it is equally impossible to sustain the argument that the limited character of the derogation should be taken into account in assessing its compatibility with the Community VAT system.

26In its rejoinder, the French Government sets out to correct certain errors which it says the Commission has made in its reply. Thus, it is inaccurate to assert that the origin of the tolerance is to be found in a desire not to disadvantage establishments which paid back all gratuities to their staff.

27In fact, it was the protection of the employees which was sought, and this protection remains of current concern because, notwithstanding the introduction of a minimum wage, the remuneration of employees in direct contact with customers in the restaurant and hairdressing sectors is still today made up in part of gratuities. Abolishing the tolerance might extend the practice of optional gratuities, which would penalise employees in direct contact with customers, particularly in sectors where the publication of prices as 'service included' is not compulsory.

28Nor can it be claimed, as the Commission does in its reply, that the publication of prices as 'service included' has become the rule.

29In the hairdressing business, for example, there is no such obligation. For that reason, the distinction between establishments offering 'service included' prices and those with 'service not included' prices retains its importance.

30The French Government reiterated, once more, the limited character of the derogation criticised. That itself is the consequence of the strict conditions which must be fulfilled by a supplier taking advantage of it, and is confirmed by the information disclosed by an enquiry conducted by the Ministère de l'Économie, des Finances et de l'Industrie (Ministry for the Economy, Finance and Industry) which shows that in the restaurant sector only a few establishments, principally brasseries which employ a large workforce, avail themselves of it.

Analysis

31We can see at the outset that the exchange of arguments during the written procedure is not much removed from a dialogue of the deaf.

32The French Government never attempts to demonstrate that the practice in question can be justified by a provision of the Sixth Directive. It points out simply that the practice is of long standing, but is within a strict framework, and has a whole series of advantages as regards the need to guarantee a satisfactory level of income for employees in certain types of establishment.

33It goes on to emphasise that the exclusion from the taxable amount for VAT accorded to gratuities is not a rule modify ing Article 266-1 A of the Code général des impôts, but a mere administrative tolerance which undertakings are free to apply or not.

34Finally, it points out that the very limited nature of the exemption is such that it falls within the de minimis principle.

35In this respect, it should be borne in mind firstly that under Article 11A(1)(a) of the Sixth Directive the taxable amount for VAT is made up, for supplies of goods and services, of 'everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party...'. Moreover, according to the settled case-law reviewed in Case C-258/95 Fillibeck [1997] ECRI-5577, the taxable amount for the supply of goods or services is composed of the consideration actually received for that purpose, which is the consideration that is in fact received and not a value estimated on the basis of objective criteria.

36The total sum appearing on the invoice to the customer constitutes, obviously and in its entirety, the consideration for the service which has been supplied to him by the restaurateur.

37This consideration, unlike that in certain cases which have been before the Court, presents no difficulty in ascertaining its exact amount because, by definition, it is expressed in monetary terms.

38And it is beside the point that an apportionment may be made in the invoice between the different elements which, together, have made up the service supplied.

39In France today separate invoicing for restaurant service is prohibited but, in other Member States, it systematically appears on restaurant bills as a separate item. Could one really suppose that, in those Member States, the taxable amount invoiced by the restaurateur would not include the sum stated to be for service?

40The customer in a restaurant buys a comprehensive supply, made up of the meal he is going to eat, the use of the table at which he eats it, whatever he needs to eat it with and the service at the table; and the sum of money which he pays is a comprehensive payment for that comprehensive supply. To buy a ready-cooked meal from a caterer is to buy goods, whereas to have lunch in a restaurant is to receive the supply of a service which includes the delivery of goods but which comprises a whole series of other elements which cannot be dissociated from it.

41If the item for 'service charge' in a restaurant bill were to be considered, having regard to the definition of taxable amount in the Sixth Directive, not to be subject to VAT, there would be nothing to prevent a garage which, in accordance with usual practice, itemises separately the cost of spare parts and the cost of labour, from claiming the right to treat as outside the scope of VAT some, if not all, of the labour in the invoice for the servicing of the vehicle which could be identified as relating to the activity of the employee who dealt with the customer enquiring about the work which he wanted done on his vehicle, and who delivered it to him when the work was finished.

42I could go on giving examples ad infinitum, but there is no need to do so since it is clear that Article HA(1)(a) of the Sixth Directive requires that all the elements invoiced to a customer by a supplier are to be considered as making up the precise consideration for the supply made to him.

43The Commission also, as we have seen, puts forward an argument to the effect that the practice of the French tax administration undermines fiscal neutrality and leads to distortion of competition.

44I agree with the Commission that the practice at issue is in breach of the principle of fiscal neutrality which, in the words of the judgment in Case C-216/97 Gregg [1999] ECR I-4947, 'precludes, inter alia, economic operators carrying on the same activities from being treated differently as far as the levying of VAT is concerned'.

45Two restaurateurs offering exactly the same service, for an identical total price, but one of whom states on his invoice that a service charge is levied, and the other of whom does not state it but does include in his invoice a sum corresponding to the service charge, will on the basis of the administrative instruction of 1976 find that they have differing demands for VAT, because the taxable amount used as the basis for assessing the tax due will be different for each of them, even though the supply and the consideration for it will have been exactly the same.

46From the difference at the level of the charge to tax there will flow a difference at the level of the profit made from the transaction, so that a nonsense will be made of the principle of fiscal neutrality and competition will be distorted.

47We must now examine the relevance of the grounds of defence relied on by the French Government, which argues that an establishment fulfilling the four conditions laid down in the administrative instruction of 1976 cannot be said to be conducting its business in conditions identical to those governing the conduct of an establishment not satisfying them and which, on that account, is not permitted to exclude its service charges from its taxable amount.

48That is why the French Government takes issue with the Commission's description in its application of these conditions as arbitrary. The word was such as to shock the French authorities, in fact, and there would have been some advantage, as the Commission concedes in its reply, in replacing it by 'without relevance'. But the Commission's criticism seems to me essentially right in emphasising that the final destination of the sums levied as service charges, and the way in which they are dealt with, has nothing to do with the question of whether these sums should or should not form part of the taxable amount.

49What is important is to determine the amount of these sums, assets, goods or services received or to be received by the supplier by way of consideration for the service which he has furnished. The allocation of the sums is wholly irrelevant. What constitutes the taxable amount is not the profit of the supplier but, need I say it, his turnover. That is why the question of what actually becomes of the sums described on the invoice as service charges is quite immaterial in determining the taxable amount, unless of course there is any provision to the contrary in the Sixth Directive to be taken into account, and no-one in this case has argued that there is any relevant provision in that respect.

50The way in which the supplier provides for the remuneration of the staff whom he relies on to deliver the service which he supplies is quite immaterial in settling the taxable amount. That, as the Court has held, must correspond to the subjectively ascertained value of the consideration which the supplier has obtained from the customer. The cost of the service to the supplier plays no part in the determination of it, still less does the structure of that cost.

51A very specific example, drawn once more from the restaurant sector, will assist in understanding how the principle of fiscal neutrality, around which the Community system of VAT is built, can in no way be reconciled with the French practice under consideration.

52Let us suppose that a restaurateur conducts his business with a single employee. If the owner is the one who waits on the customers while the employee is the chef, the 1976 administrative instruction will offer no possibility of a deduction. Naturally, the restaurateur will be able to break down his bill and show a service charge on it. But he will still not be able to deduct it from his taxable amount since, if he puts together at the end of the day the amount invoiced as service charge, there will be no allocation of it to salaried staff. If, on the other hand, he does pay it to his employee, he will still not be able to deduct it because the beneficiary was not in direct contact with customers.

53If, on the other hand, it is the owner who is the chef and the employee who waits on the customers, the amounts invoiced as service charges will be deductible from the taxable amount if, of course, the four conditions are satisfied.

54If the point of view of the French Government were to be accepted, it would mean that the way in which an undertaking was organised could influence the amount of VAT it has to pay, which is precisely what the Community system of VAT, and the principle of fiscal neutrality which underpins it, aims to avoid.

55Lastly, it should be observed, almost as a side-note and still in connection with those conditions, which the Government claims support its practice, that in Annex 1 to its defence under the heading 'VAT rules applicable to gratuities in relation to the different ways of charging for service' the French Government discloses that a special system operates where the invoice to the customer states 'service not included'. In that case, gratuities are at the customer's discretion, and the customer may in fact leave nothing by way of gratuity. To the extent that the customer does leave something, the amount is received by the employees from hand to hand. The gratuities may then be shared among the employees by means of a 'kitty' in which they are pooled by a representative of the staff, who then distributes them among the various persons entitled, or they may be allocated on the basis that each employee keeps the gratuities that he receives. In every possible situation, the tax authority includes in the taxable amount — without exception, according to the French Government — a 'reconstituted receipt' corresponding to the amount received by the employees.

56In my view that is fatal to the French position, which is based precisely on the fact that it is because a supplier does not retain service charges but repays them entirely to his staff that he is permitted in certain cases not to include them in the taxable amount by reference to which the amount of VAT due from him will be calculated. Moreover, this system appears paradoxical, since one would have expected that the French Government would rather have based its case on the uncertainty of the sums received by employees in order, relying on the Tolsma decision cited above, simply to exclude them from the taxable amount. Fortunately, it is not my task to explain the mystery of why this Annex was produced.

57For the remainder, the French Government is content to rely on the point that when the practice made permanent by the 1976 administrative instruction was introduced it was perfectly justified. It maintains that the practice provided security for staff employed in certain sectors, who depended upon gratuities for at least the greater part of their remuneration, and who would have had it curtailed if the employer had redis tributed the service charges only after deducting the turnover tax relating to them as a consequence of their being accounted for in the overall receipts of the undertaking.

58Protection of staff was, and would now still be, essential in certain sectors and the Commission was seriously mistaken to claim, in its reply, that what was of real concern was the competitive position of establishments redistributing all the service charges received.

59I am willing to accept that the French Government is better placed than the Commission for clarifying the objectives of the French legislature before the Second World War. But that is not the problem. In 1923, the French authorities were free to provide for all the exemptions from the turnover tax that they thought desirable in the context of the French taxation system, just as they remain free today to adopt protective measures for certain categories of workers who do not enjoy a fixed remuneration.

60The question today is whether the end justifies the means, namely whether a State is free not to comply with the Sixth Directive where it considers that it has good reasons for not doing so. And to that question the reply can only be in the negative, since otherwise neither the primacy nor the uniform application of Community law would continue to be ensured.

61The French Republic is perfectly entitled to put the practice with regard to service charges on a permanent footing, and to guarantee certain workers a share in the turnover of their employers by requiring the complete payment over to staff of service charges collected, inasmuch as — and only inasmuch as — it does so without providing the establishments in question with a VAT relief prohibited by the Sixth Directive.

62The directive is in no way opposed to a protective social policy: it requires only that such a policy should not be pursued by certain means. That involves, indeed, a constraint, but it is inherent in the Community system of VAT which, as the Commission very rightly pointed out in its letter of formal notice also underpins the mechanism of the European Union's own resources.

63There is a further matter on which the analyses of the Commission and the French Government diverge. It concerns the possible significance for the practice criticised by the Commission of changes in the French legislation on price information for consumers.

64The Commission believes that a circular in 1988 about prices being displayed on a 'service included' basis recognises that the service charge is an integral part of the price paid by the customer, while the French Government points out that the obligation to display prices 'service included' is far from being as generally applicable as the Commission maintains. But, there also, the dispute seems to me to have no relevance.

65What the Commission criticises is that the administrative instruction of 1976 lays down a method for calculating the taxable amount which is incompatible with the rules of the Sixth Directive, and the French Government does not dispute that it is in practice applied by a certain number of suppliers of services.

66Whether these suppliers are numerous or not is of little importance in establishing whether or not there is an infringement. Equally beside the point is the question whether the French authorities succeed, by the strict enforcement of the four condi

67The fact is that the Community system tions laid down in the administrative of VAT, while it provides for a whole range instruction of 1976, in limiting the number of exemptions, has no de minimis rule of establishments which can pass through which would permit still more to be the breach which they themselves have created, which is what the French Republic made in the system of calculation and has claimed. The infringement seems to me, levying of VAT.

as a result, to be clearly established.

Conclusion

68In view of all the above considerations, I consider that the Court should declare that:

— by authorising, under certain conditions, the exclusion from the taxable amount for value added tax of the 'service charges' claimed by certain taxable persons, the French Republic has failed to fulfil its obligations under Articles 2(1) and HA(l)(a) of the 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 French Republic should pay the costs.

Notes

(1) Original language: French.

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

(3) [1994] ECR I-743.

(4) Paragraph 13.

(5) Paragraph 20.