C-45/95 Commission v Italy

J U D G M E NT OF THE COURT (Sixth Chamber)

25 June 1997*

In Case C-45/95,

Commission of the European Communities, represented by Enrico Traversa, of its Legal Service, acting as Agent, with an address for service in Luxembourg at the office of Carlos Gómez de la Cruz, of the same Service, Wagner Centre, Kirchberg,

applicant,

v

Italian Republic, represented by Umberto Leanza, Head of the Department for Legal Affairs in the Ministry for Foreign Affairs, acting as Agent, assisted by Maurizio Fioriľli, Avvocato dello Stato, with an address for service in Luxembourg at Marie-Adélaïde, the Italian Embassy, 5 Rue

defendant,

APPLICATION for a declaration that, by enacting and maintaining in force legislation which does not exempt from value added tax supplies of goods used wholly for an exempted activity or in any event excluded from the right of deduction, the Italian Republic has failed to fulfil its obligations under Article-!3B(c) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1),

* Language of the case: Italian.

THE COURT (Sixth Chamber),

composed of: G. F. Mancini, President of the Chamber, P. J. G. Kapteyn, G. Hirsch (Rapporteur), H. Ragnemalm and R. Schintgen, Judges,

Advocate General: D. Ruiz-Jarabo Colomer, Registrar: L. Hewlett, Administrator,

having regard to the Report for the Hearing,

after hearing oral argument from the parties at the hearing on 14 November 1996,

after hearing the Opinion of the Advocate General at the sitting on 10 December 1996,

gives the following

Judgment

Grounds

1By application lodged at the Court Registry on 24 February 1995, the Commission of the European Communities brought an action under Article 169 of the EC Treaty for a declaration that, by enacting and maintaining in force legislation which does not exempt from value added tax ('VAT') supplies of goods used wholly for an exempted activity or in any event excluded from the right of deduction, the Italian Republic has failed to fulfil its obligations under Article 13B(c) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1; 'the Sixth Directive').

Community law

2Article 13B(c) of the Sixth Directive provides:

'B. Other exemptions

Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:

(c) supplies of goods used wholly for an activity exempted under this Article ... when these goods have not given rise to the right to deduction, or of goods on the acquisition or production of which, by virtue of Article 17(6), value added tax did not become deductible;

»

3Article 17(6) states:

'Before a period of four years at the latest has elapsed from the date of entry into force of this Directive, the Council, acting unanimously on a proposal from the Commission, shall decide what expenditure shall not be eligible for a deduction of value added tax. Value added tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.

Until the above rules come into force, Member States may retain all the exclusions provided for under their national laws when this Directive comes into force'.

The Community rules referred to in that provision have not yet been adopted.

Italian law

4In Italian law, Article 2 of Decree No 633 of the President of the Republic of 26 October 1972 imposing value added tax ('the Presidential Decree') provides:

'(Supplies of goods)

Transactions for value involving the transfer of property or the creation or transfer of a right in rem to use and enjoy assets, of whatever kind, constitute supplies of goods.

The following also constitute supplies of goods: ...

The following are deemed not to be supplies of goods: ...

(h) supplies of goods obtained or imported by the supplier without a right of deduction under the second paragraph of Article 19.'

5The first paragraph of Article 19 of the Presidential Decree governs the right of taxable persons to deduct from the amount of tax payable on their transactions the input tax paid on 'goods and services imported or obtained in the course of carrying on a business or being engaged in a trade or profession'. Under the second paragraph of that article, VAT paid on the purchase of certain types of goods, such as cars, other self-propelled vehicles and pleasure craft, is not deductible.

6Article 10 of the Presidential Decree, which contains a detailed and exhaustive list of 'exempt transactions', does not lay down any exemption for the supply of goods which have been used by a taxable person wholly for an exempted activity and in respect of which a right to deduct input tax did not therefore arise.

Procedure

7By letter of 19 November 1992, the Commission informed the Italian Republic that, in its view, Article 13B(c) of the Sixth Directive had not been correctly implemented by Articles 2, 10 and 19 of the Presidential Decree and accordingly gave it formal notice to submit its observations within a period of two months.

8In a letter of 31 March 1993, the Italian Government acknowledged that Article 13B(c) of the Sixth Directive had been only partially transposed into national law.

9Despite the reasoned opinion sent to it on 19 July 1994 Italy maintained those provisions in force. The Commission therefore brought this action.

io In its application, the Commission raises two objections alleging incorrect transposition of Article 13B(c) of the Sixth Directive in so far as it (i) requires the Member States to exempt 'supplies of goods used wholly for an activity exempted under [that] article ... when these goods have not given rise to the right to deduction' and (ii) requires exemption of 'supplies ... of goods on the acquisition or production of which, by virtue of Article 17(6), value added tax did not become deductible'.

n In its defence, the Italian Government disputes that the provision has not been correctly transposed into Italian law.

Incorrect transposition of the first part of Article 13B(c) of the Sixth Directive

i2 The first part of Article 13B(c) requires the Member States to exempt supplies of goods used wholly for an activity exempted under Article 13 where those goods have not given rise to a right of deduction such as that provided for in Article 17(3)(c).

i3 It is common ground that, as the Commission maintains, the Italian Republic has not exempted such supplies of goods and that they are not among the 30 or so categories of exempt transaction listed in Article 10 of the Presidential Decree.

u The Italian Government contends, however, that a taxable person who buys goods used wholly for an exempt activity normally acquires them for his own use, so that the subsequent supply of those goods is hypothetical. In addition, since the goods would be second-hand, the amount of double taxation would be small in any event.

is That argument cannot be accepted. Even if the amount of VAT due in the event of double taxation would in fact be insignificant, which the Commission disputes, that cannot absolve Italy from properly implementing Article 13B(c) of the Sixth Directive whose very purpose is to avoid double taxation contrary to the principle of fiscal neutrality inherent in the common system of value added tax.

Incorrect transposition of the final part of Article 13B(c) of the Sixth Directive

ie The final part of Article 13B(c) requires the Member States to exempt the supply of goods in respect of which, by virtue of Article 17(6), VAT did not become deductible when they were previously acquired or produced by the taxable person.

i7 Italy does not deny that subparagraph (h) of the third paragraph of Article 2 of the Presidential Decree excludes from the scope of VAT, rather than exempts, the supply of certain goods which are not strictly business goods and whose acquisition did not give rise to a right of deduction in accordance with the second paragraph of Article 19 of the Presidential Decree, that provision of Italian law corresponding to Article 17(6) of the Sixth Directive.

is However, it submits in essence that Article 13 of the Sixth Directive does not oblige the Member States to transpose the exemption therein literally, provided that its substance is respected. Subparagraph (h) of the third paragraph of Article 2 of the Presidential Decree, which excludes from the scope of VAT, rather than exempts, certain supplies of goods which are not strictly business goods, does not conflict with the objective set out in Article 17(6) of the Sixth Directive, the provision to which Article 13B(c) refers.

i9 In regard to that argument, it must be pointed out that, while Article 13B(c) of the Sixth Directive enables the Member States to determine the conditions for the purpose of ensuring the correct and straightforward application of the exemptions laid down therein, it does not allow them to treat a transaction which is to be exempted as one which falls outside the scope of VAT. Such a transposition is in any event contrary to the correct and straightforward application of exemptions required by Article 13B(c) if it does not have the same effects as an exemption.

20 That is the case here. As the Advocate General has explained in paragraph 42 et seq. of his Opinion, the calculation of the deductible proportion provided for by Article 19 of the Sixth Directive and the third paragraph of Article 19 of the Presidential Decree and, therefore, the amount of VAT which a taxable person may deduct, differ according to whether the supplies of goods in issue are rightly exempted or, as subparagraph (h) of the third paragraph of Article 2 of the Presidential Decree provides, fall outside the sphere of application of VAT.

2i It must therefore be held that, by enacting and maintaining in force legislation which does not exempt from value added tax supplies of goods used wholly for an exempted activity or otherwise excluded from the right of deduction, the Italian Republic has failed to fulfil its obligations under Article 13B(c) of the Sixth Directive.

Costs

Costs

22 Under 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 not asked for the Italian Republic to be ordered to pay the costs, each party must bear its own costs.

Operative part

On those grounds,

THE COURT (Sixth Chamber)

hereby:

1. Declares that, by enacting and maintaining in force legislation which does not exempt from value added tax supplies of goods used wholly for an exempted activity or otherwise excluded from the right of deduction, the Italian Republic has failed to fulfil its obligations under Article 13B(c) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment;

2. Orders the parties to bear their own costs.

Mancini Kapteyn Hirsch

Ragnemalm Schintgen

Delivered in open court in Luxembourg on 25 June 1997.

R. Grass G. E Mancini

Registrar President of the Sixth Chamber

OPINION OF ADVOCATE GENERAL RUIZ-JARABO COLOMER delivered on 10 December 1996

1In this action the Commission alleges that the Italian Republic has failed to fulfil the obligation to bring part of its tax law into conformity with Council Directive 77/388/EEC of 17 May 1977, Sixth Directive on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment ' ('the Sixth Directive' and 'VAT').

2The Commission asks the Court to rule that by enacting and maintaining in force a provision concerning value added tax which does not exempt supplies of goods used wholly for an activity which is exempted, or supplies of goods excluded from the right of deduction, the Italian Republic has failed to fulfil its obligations under Article 13B(c) of the Sixth Directive.

Procedure

3The Commission initiated the procedure laid down in Article 169 of the EC Treaty by a letter of 24 November 1992 giving formal

* Original language: Spanish.

notice to the Italian Republic to submit its observations on the alleged failure. No reply was received within the period allowed.

4Nevertheless, the Italian Government sent the Commission a letter dated 31 March 1993 admitting, with regard to the first part of the allegation, that 'the said Community provision has been only partly incorporated into national law'. With regard to the second part of the allegation, the Italian Government admitted that it was justified and added, 'the Italian tax authorities intend very shortly [...] to draw up the necessary provisions for incorporating the exemption to the system laid down by the Sixth Directive'.

5In view of the continuing failure to fulfil the abovementioned obligations, on 19 July 1994 the Commission sent the Italian Government a reasoned opinion to which no reply was received.

6An application was lodged with the Court on 13 February 1995. The defence lodged by the Italian Government opposed the claims in the application.

7The Commission's reply drew attention, among other points, to the document of 31 March 1993 originating from the Italian Government itself, which admitted the existence of the failure. However, the Italian Government did not reply to those contentions as it did not lodge a rejoinder.

The contested provisions

8Article 13B(c) of the Sixth Directive, •which in the Commission's opinion has not been correctly implemented by the Italian legislature, provides as follows:

'Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemption and of preventing any possible evasion, avoidance or abuse:

[...]

(c) supplies of goods used wholly for an activity exempted under this Article or under Article 28(3)(b) when these goods have not given rise to the right to deduction, or of goods on the acquisition or production of which, by virtue of Article 17(6), value added tax did not become deductible;

[...]'

9Article 17(6) in turn provides as follows:

'Before a period of four years at the latest has elapsed from the date of entry into force of this Directive, the Council, acting unanimously on a proposal from the Commission, shall decide what expenditure shall not be eligible for a deduction of value added tax. Value added tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.

Until the above rules come into force, Member States may retain all the exclusions provided for under their national laws when this Directive comes into force'.

10Article 10 of the Decree of the President of the Italian Republic of 26 October 1972, No 633 ('the Presidential Decree') concerning VAT, does not include among the exempt transactions the supplies of goods referred to by the Community rules set out above.

11Article 2(3)(h) of the Presidential Decree provides that 'supplies of goods purchased or imported by the supplier without a right of deduction, pursuant to Article 19(2)' are not deemed to be supplies of goods.

12Article 19 of the Presidential Decree in turn regulates the right of deduction. A taxable person may deduct from the VAT payable on the transactions carried out by him the VAT he has paid to purchase goods or obtain services, in both cases in the context of carrying on a business or pursuing a profession or occupation.

13Article 19(2) of the Presidential Decree excludes a right to deduct the VAT paid on purchasing certain types of goods, such as motor vehicles, other self-propelled vehicles and pleasure boats in terms which I shall examine below.

Exemption of supplies of goods previously used for an exempted activity

14The deduction of VAT regulated by Article 17 of the Sixth Directive is a key element of the VAT system. The deduction rule ensures that the VAT amounts paid by traders do not give rise to any tax charge for them, thus upholding the principle of neutrality on which the system of VAT, which is a tax on the final consumer and not on the previous economic stages, is based. If there were no right to deduct the amounts of VAT paid, they would become one more tax charge on traders, thus distorting the principle of neutrality.

15VAT previously paid may be deducted in so far as the goods or services in question (i. e. those the purchase or use of which determines the right of deduction) are purchased and used by the taxable person in turn to carry out transactions in the course of his economic activity.

16This principle must be modified where the taxable person purchases such goods or services and uses them solely for exempt transactions because in that case a right to deduction does not arise and he becomes, so to speak, the 'final consumer' and is not entitled to deduct the amount of tax.

17In this situation the taxable person must pay the whole of the VAT passed on to him by previous producers, traders and persons supplying services (i. e. those who supplied him with the goods or services) and, in strictly legal terms, he cannot deduct it. He is therefore in the same position as the final consumers, who are the true payers of VAT.

18However, it may happen that a taxable person purchases a particular product under such conditions (i. e. paying VAT 'but unable to deduct it subsequently) and decides to transfer it at a later date.

19This would give rise to double taxation if the Sixth Directive had not, in order to avoid this, provided for the exemption laid down by the first indent of Article 13B(c). The Member States must exempt supplies of goods used wholly for an exempted activity 'when these goods have not given rise to the right of deduction'.

20The reason for this exemption is merely technical. It avoids the double tax charge which arises where tax is charged on the transfer by a trader who resells goods on which he has already made a final VAT payment, without having been able in turn to deduct the amount paid.

21The Italian Government has not incorporated this exemption into its tax system. This fact alone constitutes failure in respect of its obligation under Article 13 of the Sixth Directive because this provision requires the Member States to provide precisely for such a tax 'exemption' with the features described above.

22The explanation for this situation given by the Italian tax authorities differs, depending on whether one reads the statement to the Commission of 31 March 1993 or the defence.

23According to the first statement, the Italian legislature considered that it should not introduce an exemption for supplies of goods intended exclusively for an exempt activity because of the existing difficulties of verification. Taxable persons engaged in exempt activities normally carry out taxable transactions at the same time and this enables them to recover, by means of the deductible proportion rules, part of the VAT paid for the purchase of those goods. In any case, according to the statement, the double taxation arising from the Italian provision is 'only marginal'.

24The defence changes this approach and now attempts to justify the absence of the exemption by claiming that Article 2(3) of the Italian Presidential Decree, instead of adopting the exemption, preferred to declare that supplies of goods of that kind are 'outside the ambit' of VAT, which, in its opinion, would lead to the same result as that desired by the Sixth Directive.

25However, somewhat confusedly, the defence manages to admit that the later supply of goods 'must be deemed taxable' where it has not been possible to deduct the tax previously paid (because the goods were purchased or used for exempt transactions). It adds that such supplies must be deemed 'hypothetical because normally an exempt person purchases the goods for his own use and not with a view to selling them immediately'. Consequently, the defence concludes that the amount of double taxation must be limited because of the difference in value between goods purchased at market prices and those sold second-hand.

26I am not persuaded by these arguments. On the contrary, I consider that the Commission is right to claim that the Italian Government should simply fulfil its obligation under Article 13 of the Sixth Directive. The nature of the obligation is quite specific: to grant an exemption, not to exclude a particular transaction from the ambit of the tax.

27Furthermore the Italian legislation differs on this point from the case-law of the Court of Justice, according to which, the purpose of the Sixth Directive is 'to base the common system of VAT on a uniform definition of taxable transactions. This objective might be jeopardized if the preconditions for a supply of goods — which is one of the three taxable transactions — varied from one Member State to another (see the judgment in Case C-320/88 Staatssecretaris van Financiën v Shipping and Forwarding Enterprise Safe BV [1990] ECR 1-285)'.

28Both explanations (which, moreover, are contradictory) given by the Italian authorities are unsatisfactory:

— the first (difficulty of verifying the actual use of the goods) because it distorts the VAT tax system and gives rise to double taxation;

— the second (deeming to be 'non-supplies of goods' transactions which, in the terms of the Sixth Directive, are as a matter of law 'supplies of goods' but are exempt) because this means that the Italian provision differs from the uniform definition which the Community legislature wished to give to transactions which are subject to the tax.

29This alone would be a sufficient reason for granting the Commission's application in this first respect. In addition, it is not certain that the legal and financial consequences of the Italian provision (in so far as it formulates as a case of non-taxation what should be a case of exemption) are the same as those ensuing from the correct incorporation of the Sixth Directive.

30In its reply, the Commission correctly points out that, if the Italian Government accepts the existence of double taxation as an actual effect of its legislation on the matter, it is irrelevant that, financially, it is more or less 'insignificant', as claimed in the defence (although no figures whatever are produced in support).

31Even if the financial repercussions were negligible, the de minimis rule does not apply in relation to the failure of Member States to fulfil their obligations with regard to legislation. The decisive factor is that double taxation is inconsistent with the scheme of the VAT system and precisely for that reason Article 13 of the Sixth Directive requires the Member States to exempt supplies of goods used wholly for an exempted activity.

Exemption of supplies of other goods the purchase or use of which has not given rise to a right of deduction

32The second ground of the application relates to the last part of Article 13B(c) which, as cited above, requires the Member States to exempt from VAT the later supply of goods 'on the acquisition or production of which [by the taxable person], by virtue of Article 17(6), value added tax did not become deductible'.

33Article 17(6) refers to certain expenditure described in general terms as 'that on luxuries, amusements or entertainment', which is not strictly business expenditure and which is not eligible for the deduction of VAT by the taxable person. As in relation to the first ground of the application, the taxable person purchasing items of this kind acts as the final consumer, who is the true taxpayer.

34The counterpart of this restriction of the right of deduction should be, as with the first ground of the application, exemption from VAT when the taxable person resells — or, in general, transfers — goods of this kind. Otherwise, there would again be double taxation, which is contrary to the principles of the Sixth Directive and which Article 13 tries to avoid by means of the contested exemption.

35On the other hand, as there is generally no right to deduct VAT on the purchase of goods of that kind (subject to the qualification which I shall consider below), the Italian Presidential Decree does not grant an exemption on their subsequent transfer.

36Article 19(2) of the Presidential Decree regulates the deduction of VAT on the purchase of goods of that kind, whether aircraft and motor vehicles referred to in Table B(e), irrespective of cylinder capacity, " or 'the other goods included in the said table B, sea going vessels and pleasure craft'. The deduction is provided for as follows:

(a) The purchase of such goods gives a right to deduction only where they are the subject matter of the trader's activity itself; in the case of aircraft and motor vehicles, deduction is also possible where they are intended for use in the trader's own business.

(b) Deduction is excluded in the other cases of the purchase of such goods, and 'in any case for persons engaged in a trade or profession'.

37In these latter cases of exclusion of the right of deduction, the later transfer of the purchased goods is not exempt, as required by the Sixth Directive. Instead of granting the exemption, the Italian legislature provided, by means of Article 2(3)(h) of the Presidential Decree, that such transfers would not be deemed supplies of goods (i. e. would not be deemed subject to VAT).

38To justify this action, the Italian Government states that classifying such supplies as non-taxable is 'consistent with the presumption that the purchase [of goods of that kind] is not connected with carrying on a business', citing for this purposes Article 17(3) of the Sixth Directive and Article 11(2) of the Second VAT Directive.

39I am not convinced by this argument, which concerns a different problem from that in the present case. The Commission is not complaining in this case that Article 17(6) of the Sixth Directive has not been fulfilled by reason of the fact that the right of deduction for professional persons or artists is excluded in any case under the Italian provisions cited above, when they purchase the goods in question. It would be debatable whether this general exclusion meets the requirements of the Sixth Directive.

40The failure of which the Commission complains in this case refers, on the contrary, to the fact that the Italian Republic does not consider as exempt subsequent sales or supplies of goods which, when originally purchased, did not give rise to a right to deduct VAT, regardless of whether the taxable person is a professional person, artist or any other economic agent.

41May exemption be replaced by non liability to tax? At first sight, it might appear that the practical effect is the same. In its defence, the Italian Government's defence contends that non-liability depends on establishing the Objective impossibility of deduction', whereas exemption means the 'subjective impossibility of deduction [...] depending on calculation of the deductible proportion'.

42However, the legal effects of the two concepts are not absolutely identical. It is precisely in the effect on the calculation of w the deductible proportion that the consequences of the Italian rule appear, with the difference in effect entailed by choosing one principle or the other.

43If the supply of the contested goods were excluded from the ambit of VAT, which is what the Presidential Decree does, the taxable person's total turnover used in calculating the deductible proportion would be reduced. The reduction in this figure, which is the denominator of the fraction, increases the final result or percentage by reference to which the deductible proportion is calculated.

44Such increase in the percentage of the deductible proportion also results in increasing the amount which may be deducted from the VAT previously paid by a taxable person who carries out transactions -with and without a right of deduction, without distinction.

45Even apart from the effect on the deductible proportion rule, I consider that the legal system applied by the Presidential Decree to these supplies of goods is contrary to the Sixth Directive.

46However wide 'the legal scope for the States' discretion in implementing this Directive' to which the defendant Government refers, I consider that there is a clear, specific and unconditional obligation to classify as exempt a subsequent supply of the goods in question. Therefore exemption cannot be replaced by a different principle, particularly where the legal and practical consequences of the two options differ.

47In this connection I must repeat what I have already said with regard to the definition of taxable transactions given in the Sixth Directive. If it is desired to ensure the uniform application of VAT, such definition does not allow a 'supply of goods' to be converted, by a decision of the national legislature, into a 'non-supply of goods'.

48Furthermore, the same position was adopted by the Italian authorities in the letter to the Commission to which I have already referred. The Italian Avvocato dello Stato has not offered any argument, even in the course of the oral procedure, to justify the change, as against the preceding official argument, made by the defence.

49I therefore find that the application should be granted in full. The defendant should pay the costs in accordance with Article 69(2) of the Rules of Procedure.

Conclusion

50Consequently I propose that the Court grant the Commission's application by:

(1) declaring that, by enacting and maintaining in force a provision concerning value added tax which does not exempt supplies of goods used wholly for an activity which is exempted, or supplies of goods excluded from the right of deduction, the Italian Republic has failed to fulfil its obligations under Article 13B(c) of Council Directive 77/388/EEC of 17 May 1977, Sixth Directive on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment;

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

Notes

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

(2) The Spanish translation of this part of the Sixth Directive, as published in the Special Spanish Edition of the Official Journal, omitted the adverb 'wholly' which appears in the other language versions.

(3) On 25 January 1983 the Commission submitted to the Council a proposal for a Twelfth Directive on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value added tax: expenditure which is not eligible for deduction (OJ 1983 C 37), which was subsequently amended by a further proposal of 20 February 1984 (OJ 1984 C 56). The Council did not achieve the unanimity necessary to approve it.

(4) The Presidential Decree regulates the legal system of VAT and was issued under a prior delegated legislative power. It was published in the Cazzeta Ufficiale delta Repubblica Italiana (GURI) 292, 11 November 1972, and has been amended on numerous occasions.

(5) It is a different miner where, by way of an increase in prices, a trader engaging in exempt transactions, for example an insurance company in relation to most of its services, or a doctor in relation to certain health services supplied to patients, shifts the tax burden on to customers.

(6) Sec the judgment in Case C-50/88 Kühne v Finanzamt München Iil [1989] ECR 1-1925, which reaches the same conclusion in a case similar in some respects to the present case, in finding that 'such taxation of business goods on which the residual tax was not deductible would lead to double taxation contrary to the principle of fiscal neutrality which is inherent in the common system of value added tax, of which the Sixth Directive forms part'. In triat case, the taxable person was not entitled to deduct the residual tax because he had purchased the goods second-hand from a non-taxable person.

(7) Delivered by the Permanent Representation of Italy to the European Communities (letter No 2868). I referred to it in my account of the prc-litigation procedure.

(8) Strictly speaking; a tax exemption can be said to exist only where there is an act which was previously chargeable, i. e. subject to tax. By definition, an exemption presupposes in initial obligation to pay tax which, on various grounds, is waived by the legislature. Consequently there must be a right arising from a mandatory positive reference in the law in order to provide for exemption from the duty to pay the tax. Before ascertaining whether a particular transaction meets the requirements for the exemption, it is necessary to ensure that it falls within the ambit of the tax.

(9) Case C-291/92 Annbrecht [1995] ECR 1-2775, paragraph 13.

(10) Further details or a list should have been given by the Council, as I mentioned in footnote 3, but successive attempts at doing so were unsuccessful.

(11) These are referred to by Article 19(2Xa), which extends this system not only to purchase or importation, but also to supplies of services and maintenance relating to those goods.

(12) These ire referí«! to by Arricie 19(2)(b) of the Presidential Decree.

(13) It is logical that a trader providing a driving tuition service, or tuition for pilots, should be able to deduct the VAT'paid on the purchase of the vehicles or aircraft which it intends to use solely for that purpose.

(14) The term 'trade' appears to be used to mean an occupation which requires a skdl and special knowledge on the part of the person concerned. The Italian provision refers to 'gli essercenti arti o professioni'.

(15) In paragraph 3 of the operative part of the judgment in Case C-97/90 Lennartz v Finanzamt München [1991] ECR

(1) 3795, the Court held that 'a rule or administrative practice imposing a general restriction on the right of deduction in cases where there is a limited, but none the less, business use constitutes a derogation from Article 17 of the Directive and is valid only if the requirements of Article 27(1) or Article 27(5) of the Directive arc met,'

(16) In the opinion of P. Filippi, in his work Le cessioni di beni nell'imposta sul valore aggiunto (Padua 1984), there is some confusion in the Italian VAT legislation with regard to the concepts of exclusion and exemption. Certain situations described as exemptions should be regarded as exclusions and vice versa. According to this author, the excessive number of exclusions makes it difficult to understand the criteria used when opting for one concept or the other.

(17) Regulated by Article 19 of the Sixth Directive. The deductible proportion arises where the taxable person simultaneously carries out transactions in respect of which VAT is deductible and transactions for which it is not deductible. In such a case, it is necessary to determine the degree of use of the goods and services purchased in relation to each category of transaction, establishing the percentage (of all the taxable person's transactions) which is attributable to those giving a right of deduction. Article 17(5) of the Sixth Directive permits the Member Sutes certain alternatives to the deductible proportion rule. In the case of Italy, this is regulated by Article 19(3) of the abovementioned Presidential Decree. ls

(18) To calculate the deductible proportion, it is necessary to determine the percentage or the total turnover which is attributable to transactions giving rise to a right of deduction. The result of multiplying by one hundred the turnover with a right of deduction and dividing it by the tota! amount of taxable transactions is precisely the percentage which determines the deductible proportion.