C-524/10 Commission v Portugal

JUDGMENT OF THE COURT (Fourth Chamber)

8 March 2012 ( *1 )

‛Failure of a Member State to fulfil obligations — Common system of value added tax — Directive 2006/112/EC — Articles 296 to 298 — Common flat-rate scheme for farmers — Flat-rate compensation percentage set at nil rate’

In Case C-524/10,

ACTION under Article 258 TFEU for failure to fulfil obligations, brought on 11 November 2010,

European Commission, represented by M. Afonso, acting as Agent, with an address for service in Luxembourg,

v

Portuguese Republic, represented by L. Inez Fernandes and R. Laires, acting as Agents,

THE COURT (Fourth Chamber),

composed of J.-C. Bonichot, President of the Chamber, K. Schiemann, L. Bay Larsen, C. Toader and E. Jarašiūnas (Rapporteur), Judges,

Advocate General: J. Kokott,

Registrar: M. Ferreira, Principal Administrator,

having regard to the written procedure and further to the hearing on 14 September 2011,

after hearing the Opinion of the Advocate General at the sitting on 22 September 2011,

gives the following

Judgment

Legal context and the dispute

1By its action, the European Commission asks the Court to declare that, in applying to farmers a special scheme which does not comply with the scheme established by Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1, ‘the VAT Directive’), because it exempts them from the payment of value added tax (‘VAT’), and in applying a flat-rate compensation percentage at a nil rate, while at the same time making a substantial negative compensation in own resources payable to the European Union in relation to the collection of VAT, the Portuguese Republic has failed to fulfil its obligations under Articles 296 to 298 of that directive.

Legal context

European Union law

2The VAT Directive establishes, in Articles 295 to 305, the rules relating to the common flat-rate scheme for farmers (‘the flat-rate scheme for farmers’). That scheme was, until 1 January 2007, governed by Article 25 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 Sixth Directive’).

3Under Article 295(1)(1) to (5) of the VAT Directive, that scheme concerns, in essence, the supplies of goods (agricultural products) produced by agricultural, forestry or fisheries undertakings and of agricultural services, listed respectively in Annexes VII and VIII to that directive, which are made by a farmer, the expression ‘flat-rate farmer’ meaning a farmer covered by the flat-rate scheme for farmers.

4Article 295(1)(7) of the VAT Directive provides that ‘flat-rate compensation percentages’ are the ‘percentages fixed by Member States in accordance with Articles 297, 298 and 299 and applied by them in the cases specified in Article 300 in order to enable flat-rate farmers to offset at a fixed rate the input VAT charged’. The input VAT charged is, according to Article 295(1)(6), ‘the amount of the total VAT attaching to the goods and services purchased by all agricultural, forestry and fisheries undertakings of each Member State subject to the flat-rate scheme where such tax would be deductible in accordance with Articles 167, 168 and 169 and Articles 173 to 177 by a farmer subject to the normal VAT arrangements’.

5Articles 296 to 298 of the VAT Directive state:

1. Where the application to farmers of the normal VAT arrangements, or the special scheme [for small enterprises] provided for in Chapter 1, is likely to give rise to difficulties, Member States may apply to farmers, in accordance with this Chapter, a flat-rate scheme designed to offset the VAT charged on purchases of goods and services made by the flat-rate farmers.

2. Each Member State may exclude from the flat-rate scheme certain categories of farmers, as well as farmers for whom application of the normal VAT arrangements, or of the simplified procedures provided for in Article 281, is not likely to give rise to administrative difficulties.

3. Every flat-rate farmer may opt, subject to the rules and conditions to be laid down by each Member State, for application of the normal VAT arrangements or, as the case may be, the simplified procedures provided for in Article 281.

Member States shall, where necessary, fix the flat-rate compensation percentages. They may fix varying percentages for forestry, for the different sub-divisions of agriculture and for fisheries.

Member States shall notify the Commission of the flat-rate compensation percentages fixed in accordance with the first paragraph before applying them.

The flat-rate compensation percentages shall be calculated on the basis of macro-economic statistics for flat-rate farmers alone for the preceding three years.

The percentages may be rounded up or down to the nearest half-point. Member States may also reduce such percentages to a nil rate.’

6Article 299 of the VAT Directive provides that the flat-rate compensation percentages may not have the effect of obtaining for flat-rate farmers refunds greater than the input VAT charged.

7Under Article 300 of the VAT Directive, the flat-rate compensation percentages are, in essence, to be applied to the prices, exclusive of VAT, of agricultural products and services which the flat-rate farmers supply to taxable persons other than those covered by the flat-rate scheme.

8Article 301 of the VAT Directive provides:

‘1. In the case of the supply of agricultural products or agricultural services specified in Article 300, Member States shall provide that the flat-rate compensation is to be paid either by the customer or by the public authorities.

2. In respect of any supply of agricultural products or agricultural services other than those specified in Article 300, the flat-rate compensation shall be deemed to be paid by the customer.’

9Article 302 of the VAT Directive states that, if a flat-rate farmer is entitled to flat-rate compensation, he is not to be entitled to deduction of VAT in respect of activities covered by this flat-rate scheme.

10Article 303(1) of the VAT Directive states in essence that, where the taxable customer pays flat-rate compensation pursuant to Article 301(1), he is to be entitled to deduct the compensation amount from the VAT for which he is liable in the Member State in which his taxed transactions are carried out. Under Article 303(2) the customer may also, in certain situations, obtain a refund of that amount from the tax authority.

11The Sixth Directive also provided, in Article 25(12), that, if Member States decide to apply the flat-rate scheme for farmers in their territory, they are to fix the uniform basis of assessment of VAT in order to apply the scheme of own resources using the common method of calculation in Annex C to that directive. That provision and that annex are not reproduced in the VAT Directive, but they are covered by Article 5(2) of Council Regulation (EEC, Euratom) No 1553/89 of 29 May 1989 on the definitive uniform arrangements for the collection of own resources accruing from value added tax (OJ 1989 L 155, p. 9).

12Under Article 272(1)(e) of the VAT Directive, Member States may release taxable persons covered by the flat-rate scheme for farmers from certain or all obligations referred to in Title XI, Chapters 2 to 6, of that directive, including, inter alia, the obligation to inform the tax authorities of any activity as a taxable person for the purposes of identification, to issue invoices with VAT, to keep accounts and to submit VAT returns.

13In accordance with Article 395 of the Act concerning the conditions of accession of the Kingdom of Spain and of the Portuguese Republic and the adjustments to the Treaties (OJ 1985 L 302, p. 23), read together with Annex XXXVI of that Act, the Portuguese Republic was able to defer until 1 January 1989 full application of the rules constituting the common system of VAT.

National law

14Decree-law No 195/89 of 12 June 1989 (Diário da República, First Series, No 133, of 12 June 1989), introduced into the Portuguese value added tax code (Código do Imposto sobre o Valor Acrescentado, ‘the CIVA’), approved by Decree-law No 394-B/84 of 26 December 1984 (Diário da República, First Series, No 297, of 26 December 1984), amended and replaced by Decree-law No 102/2008 of 20 June 2008 (Diário da República, First Series, No 118, of 20 June 2008), corrigendum No 44-A/2008 of 13 August 2008 (Diário da República, First Series, No 156, of 13 August 2008), several provisions intended to bring the Portuguese VAT legislation into line with the Sixth Directive. The amendments made to that legislation include provisions establishing the particular scheme applicable to farmers (‘the Portuguese scheme at issue’).

15Under Article 9(33) of the CIVA, ‘supplies of goods made in the course of activities listed in Annex A of this code, and of agricultural services defined in Annex B, provided that they are carried out as incidental activities by a farmer using his labour force or the equipment normally employed in his agricultural or forestry undertaking are exempt from VAT’. Annexes A and B of the CIVA correspond, in essence, to Annexes VII and VIII to the VAT Directive.

16It is apparent from reading Article 9(33) and Article 20(1) of the CIVA together that, in exchange for the abovementioned exemption, farmers cannot make a deduction or obtain any refund of sums paid by them as VAT on the acquisition of goods and services intended to be used for the making of the above supplies.

17Under Article 29(3) of the CIVA, farmers who engage solely in VAT-exempt transactions are released from obligations imposed on taxable persons subject to the normal VAT arrangements, in respect of settlement of that tax and passing it on to their customers, issuing invoices, making returns and keeping accounts.

The pre-litigation procedure

18By a letter of formal notice of 6 June 2008 the Commission stated to the Portuguese Republic that it considered that the Portuguese scheme at issue was incompatible with the provisions of the flat-rate scheme for farmers provided for by the VAT Directive, in particular Articles 296 to 298 thereof, since the Portuguese legislation does not provide that farmers covered by that national scheme are to receive compensation in respect of paid input VAT and does no more than establish an exemption in respect of farming, with the proviso that it is impossible to deduct the amount of paid input tax.

19In its reply of 20 August 2008 to that letter, the Portuguese Republic denied that it had failed to fulfil its obligations, contending that the second sentence of the second subparagraph of Article 298 of the VAT Directive (‘the provision at issue’) expressly permits Member States to fix flat-rate compensation percentages at a nil rate, and that possibility is not linked to the amount of the tax paid by the farmers covered by the Portuguese scheme at issue. The Portuguese Republic claimed that the Portuguese legislation has an effect which is compatible with the objectives pursued by the flat-rate scheme for farmers, in particular that of simplification, and that the tax treatment provided for by such a scheme, when accompanied by zero-rate compensation, is equivalent to that applying to VAT-exempt activities where input VAT is not deductible. The Portuguese Republic concluded that, since it is for each Member State to choose the form and means which it intends to use in order to transpose into its legal system the directives addressed to it, the Portuguese scheme at issue can fall under the list of exempted activities appearing in Article 9 of the CIVA.

20Since the Commission found that reply unpersuasive, on 26 June 2009 it sent to the Portuguese Republic a reasoned opinion in which it restated its position that the Portuguese scheme at issue does not comply with Articles 296 to 298 of the VAT Directive.

21By letter of 31 August 2009 the Portuguese Republic informed the Commission that it declined to adopt the measures required to comply with that reasoned opinion, and expanded in more detail on the argument submitted in its reply to the letter of formal notice.

22The Commission maintained its position that the Portuguese legislation is not compatible with Articles 296 to 298 of the VAT Directive and decided to bring this action.

The action

Arguments of the parties

23In the first place, the Commission states that one objective pursued by the flat-rate compensation scheme is simplification, enabling flat-rate farmers to be released from compliance with a certain number of obligations characteristic of the normal or simplified VAT schemes, and another is the provision of compensation for paid input tax, the aim being to ensure that that input tax is not a factor, as ‘hidden VAT’, in the formation of the prices of agricultural products.

24When a Member State decides to apply that scheme in its territory, it is obliged, pursuant to the first sentence of the first subparagraph of Article 297 of the VAT Directive, to fix, where necessary, flat-rate compensation percentages. The Portuguese scheme at issue does not comply with the obligation to provide compensation for farmers covered by that scheme in respect of the input VAT paid by them.

25The arguments of the Portuguese Republic to justify the Portuguese scheme at issue cannot be accepted. First, the provision at issue does not have the scope which the Portuguese Republic attributes to it. The drafting history of the Sixth directive does not allow the interpretation advocated by the Portuguese Republic.

26Second, the characteristics of Portuguese agriculture do not justify the view that zero-rate compensation, because it remains advantageous for Portuguese farmers covered by the Portuguese scheme at issue, is in any event compatible with the provisions of the VAT Directive.

27Third, the obligation to fix flat-rate compensation in respect of input VAT charged is not subject to the condition that flat-rate farmers are, as a group, so placed as to be in tax credit vis-à-vis the Member State concerned.

28Fourth, it is of no relevance that the Commission was slow to challenge the Portuguese scheme at issue, since that scheme has been established, in all essential respects, since 1992. In that regard, one of the points made by the Commission is that only after an inspection of own resources carried out in Portugal in November 2007 did it become apparent that the amount of VAT not deducted by farmers subject to that scheme reached almost 5.3% of their sales in 2004 and 7.9% in 2005. Since the Portuguese authorities considered that the amount of VAT levied in the agricultural sector was excessive, they therefore applied in 2004 a negative compensation of almost EUR 70 million in their calculation of the basis of assessment of own resources.

29Fifth, the alleged recovery of input VAT by means of subsidies and other government support for agricultural activities cannot take the place of a correct application of the flat-rate scheme for farmers as provided for by the VAT Directive.

30Sixth, neither the VAT Directive, nor the recitals in the preamble to the Sixth Directive, nor the Court’s case-law provide any basis for the view that the flat-rate compensation at issue can be described as non-fiscal.

31In the second place, the Commission claims that the Portuguese legislation is confined to exempting from payment of VAT and, consequently, excluding from the common system of VAT, all farmers who are not subject to the normal arrangements, who represent a significant part of the Portuguese agricultural sector, 27% in 2004 and 29% in 2005. The Portuguese scheme at issue therefore seriously undermines the principle of the generality of VAT.

32The Portuguese Republic denies, initially, that the arguments submitted by the Commission are well founded. When the Sixth Directive was adopted, the zero rate was applied only residually and transitionally. Consequently, it cannot be held that the application of a compensation percentage at a nil rate was connected to the application of zero-rate tax on input acquisitions, unless it is to be conceded that the option given to Member States by Article 25(3) of the Sixth Directive, a provision which is now the second subparagraph of Article 298 of the VAT Directive, was, from the outset, practically inapplicable.

33Next, first, the Council of the European Union decided to amend the draft Sixth Directive produced by the Commission by adding that option to it. However, given that that draft directive already provided for the possibility of rounding the percentages up or down, and therefore the option of rounding the percentages to nil when they were close to that figure, the amendment made by the Council necessarily went further than that draft directive. In the recitals attached to that draft, the Commission also stated that the Member States should have the power freely to fix the flat-rate compensation percentages and that the percentages resulting from the relevant macro-economic calculations were only maximum limits. The addition of the word ‘also’ in the provision at issue, which did not appear in the corresponding provision of the Sixth Directive and is a purely formal alteration, confirms that Member States have the power to fix a flat-rate compensation percentage at a nil rate whatever the circumstances.

34According to the Court’s case-law, a Member State whose national law complies with the clear and precise wording of a provision of the VAT Directive cannot be accused of having failed to fulfil the obligations specifically arising from that provision. The action should therefore be dismissed.

35Second, to accept the interpretation maintained by the Commission would run counter to the principle of legal certainty and the objective of simple and uniform application of the rules of the common system of VAT.

36Third, in relation to the flat-rate scheme for farmers, the Commission’s sole role is to check that the level of compensation fixed by a Member State does not result in compensation which is too high. The Commission does not have the power to request a Member State to apply a compensation percentage higher than that which the Member State has decided to establish.

37Those various factors support the literal interpretation of the provision at issue. The interpretation advocated by the Portuguese Republic is not, moreover, contrary either to the requirement of the uniform application of European Union law or to the principle of equal treatment and tax neutrality. In that regard, the Portuguese Republic contends that the flat-rate scheme for farmers is in itself likely to jeopardise that neutrality, to the extent that it allows the application of flat-rate compensation percentages determined on the basis of a mere estimate.

38For the sake of completeness, the Portuguese Republic contends that its choice not to provide for compensation for input VAT borne by farmers covered by the Portuguese scheme at issue is fiscally coherent.

39First, the circumstances which prevailed in Portugal on the date the Sixth Directive came into force in that Member State have not since that date significantly changed, the current position in relation to VAT having the same features as existed on 1 January 1989. Further, even if there had been the change in circumstances relied on by the Commission, that change occurred almost 17 years ago, the zero rate being abolished in the Portuguese legislation in March 1992.

40The fact that flat-rate compensation percentages are to be fixed ‘where necessary’ implies that there are situations where the fixation of such percentages is not justified. That is the case, in particular, where farmers as a group are not so placed as to be in tax credit vis-à-vis the State. Further, it is apparent in particular from the Court’s case-law that the calculation of the maximum limit of compensation must take account of the output VAT which is collected in accordance with the normal arrangements and that, if it is not to constitute State aid, the flat-rate scheme for farmers cannot allow Member States to refund to flat-rate farmers sums greater than the refund of VAT to which they would have been entitled if they were covered by the normal arrangements.

41In Portugal, both on 1 January 1989 and currently, the amounts of VAT linked to the acquisitions of goods and services intended for agricultural activities and which are deductible under the normal arrangements are lower than the amounts of VAT payable to the State which result from the collection and passing-on of VAT to the acquirers of agricultural goods and services. Farmers are therefore not, as a group, so placed as to be in tax credit vis-à-vis the State. Accordingly, the decision to fix the compensation percentage in respect of input VAT at a nil rate is, in the case of the Portuguese Republic, the only appropriate and coherent fiscal solution.

42In that regard, the Portuguese Republic maintains that the Commission has not demonstrated either in the pre-litigation procedure or in the application how it arrived at the rates of 5.3% and 7.9% and that, moreover, the Portuguese Republic does not know where those rates come from. The Portuguese Republic is therefore not in a position to rebut those rates, which consequently cannot be used by the Commission in order to require it to grant to farmers covered by the Portuguese scheme at issue compensation at a rate equal or close to those rates. In any event, those rates represent only a maximum ceiling.

43Second, the Portuguese Republic claims that the Portuguese scheme at issue is consistent with the scope of the scheme as provided for by the VAT Directive and with the objective of simplification of rules and procedures, since national law releases the farmers covered by that scheme from any obligation in respect of issuing invoices, collection, making returns, keeping accounts, passing on and paying VAT. Moreover, only by fixing a compensation percentage at a nil rate is it possible to achieve complete, and therefore real, simplification. The scheme at issue thus also satisfies the requirements governing the obligation to transpose secondary legislation into national law.

44Further, the recovery of amounts of VAT borne in respect of the acquisitions of goods and services intended for agricultural activities is almost always ensured by means of aid or other subsidies allocated by the State and other public bodies.

45Third, the Portuguese Republic contends that the objective of compensation, for flat-rate farmers, in respect of input VAT borne by them on such acquisitions was not relied on in either the letter of formal notice or in the reasoned opinion. That said, even if that objective of compensation were established, any compensation would be non-fiscal in nature. The Sixth Directive and the VAT Directive were therefore incapable of imposing the obligation to pay that compensation.

46Lastly, the Portuguese Republic states that the Commission itself, in its application, dismisses the matter of the claimed Portuguese debt in respect of European Union own resources linked to the flat-rate scheme for farmers. The Portuguese Republic claims however, inter alia, that, even if the Court were to accept the Commission’s position, that could not entail an increase in the Portuguese share of European Union own resources accruing from VAT.

Findings of the Court

47In support of its action, the Commission relies on two separate grounds of complaint, one relating to the application to farmers covered by the Portuguese scheme at issue of a special scheme which exempts them from payment of VAT and involves the application of a flat-rate compensation percentage at a nil rate, the other relating to the negative compensation of own resources payable by the Portuguese Republic in connection with the collection of VAT.

The first ground of complaint, relating to exemption and the application of a flat-rate compensation percentage at a nil rate

48As is clear from Article 272(1)(e) and Article 296(1) of the VAT Directive, the objective of the flat-rate scheme for farmers is to enable Member States to release farmers, on whom the application of the normal VAT arrangements or the special scheme for small enterprises would be likely to give rise to difficulties, from certain or all of the obligations usually imposed on taxable persons covered by the normal VAT arrangements, by granting to them flat-rate compensation for the amount of input VAT paid by those farmers. That scheme therefore pursues both the objective of simplification (Case C-43/04 Stadt Sundern [2005] ECR I-4491, paragraph 28) and the objective of offsetting the amount of input VAT (Case C-321/02 Harbs [2004] ECR I-7101, paragraph 29). Since the Commission has, as is clear from the documents submitted to the Court, referred to that latter objective both in the letter of formal notice and in the reasoned opinion, there is no basis, in any event, for the Portuguese Republic’s claim that that objective was not relied on as a ground for complaint in the present action.

49It must also be recalled that the flat-rate scheme for farmers is a scheme which derogates from and is an exception to the general scheme of the VAT Directive and must therefore be applied only to the extent necessary to achieve its objective. Further, in accordance with settled case-law of the Court, any derogation or exception to a general rule is to be interpreted strictly (Harbs, paragraph 27, and Stadt Sundern, paragraph 27). Next, no provision is made in the VAT Directive for an exemption from VAT in respect of farming. On the contrary, as the Advocate General stated in points 46 to 48 of her Opinion, although no VAT is charged on the sales of flat-rate farmers, the flat-rate scheme for farmers was specifically not designed to be an exemption scheme, because such a scheme would not have made it possible to eliminate the burden of input VAT and therefore to safeguard the neutrality of the common system of VAT. It is clear moreover from Article 296(1) of that directive that farmers are as a general rule subject either to the normal arrangements, the special scheme for small enterprises, or the said flat-rate scheme.

50Moreover, while the simplification of administrative obligations burdening flat-rate farmers is indeed one of the objectives pursued by the flat-rate scheme for farmers, the goal of simplification cannot justify the introduction of an exemption which is not provided for by the VAT Directive (see, to that effect and by analogy, Case C-128/05 Commission v Austria [2006] ECR I-9265, paragraph 25). That is reinforced by the fact that the objective of simplification must, in the present case, be reconciled with the objective of offsetting the input VAT borne by the farmers concerned, which necessarily implies that a minimum of administrative obligations are imposed on flat-rate farmers, inter alia, in order to collect the data required for the determination of the applicable flat-rate compensation percentages.

51However, where flat-rate farmers in fact bear a burden of input VAT which is not negligible, it would be contrary to the latter objective not to grant them compensation for such a burden.

52Further, in the wording of recital 7 of the preamble to the VAT Directive, the common system of VAT should result in neutrality in competition, such that within the territory of each Member State similar goods and services bear the same tax burden, whatever the length of the production and distribution chain. Accordingly, as stated by the Advocate General in points 45 to 48 of her Opinion, the aim of the flat-rate scheme for farmers is also to preserve so far as possible the neutrality of VAT, the purpose of compensation being to ensure that the burden of input VAT is not passed on in output transactions and does not then entail an addition to the price which would in turn be subject to VAT and would increase step by step down the entire length of the production and distribution chain of goods and services supplied by flat-rate farmers. Consequently, to interpret the provision at issue as giving Member States the freedom to reduce flat-rate compensation percentages to a nil rate even where flat-rate farmers bear a burden of input VAT which is not negligible, would be to jeopardise that neutrality.

53It is true that the result of paying simple compensation which is entirely flat-rate does not, by definition, ensure the complete neutrality of VAT. It does however achieve the highest neutrality possible taking into account the need to reconcile that payment and the objective of compensation with the objective of simplification of the rules to which flat-rate farmers are subject, which is also one of the objectives of the flat-rate scheme for farmers, as stated in paragraph 48 of this judgment.

54In that context, the rules governing the determination of the flat-rate compensation percentage as laid down in Article 298 of the VAT Directive cannot, without more, be regarded as calling those objectives into question. It cannot therefore be accepted that a mere exemption of agricultural activities, because it would, from an operational viewpoint, be equivalent to the application of a flat-rate compensation percentage at a nil rate, can be regarded as a correct transposition of the rules of the VAT Directive relating to the flat-rate scheme for farmers and, in particular, of Articles 296 to 298 of that directive.

55In that regard, it is also clear that the option of reducing flat-rate compensation percentages to a nil rate constitutes an option which is in addition to the option, provided for in the first sentence of the second subparagraph of Article 298 of the VAT Directive, of rounding those percentages up or down to the nearest half-point. However, in the light of the foregoing, that option of reduction to a nil rate is made available to Member States only where the percentages resulting from the calculations made in accordance with the first subparagraph of Article 298, even when they are greater than 0.5%, are not less insignificant than that figure and, consequently, where the overall burden of input VAT borne by flat-rate farmers can itself be regarded as insignificant.

56As stated by the Advocate General in points 20 to 33 and 56 to 58 of her Opinion, first, neither the wording of the provision at issue nor the drafting history of the Sixth Directive preclude that interpretation of Articles 296 to 298 of the VAT Directive and, secondly, the Portuguese Republic cannot validly rely on the judgment of 15 July 2010 in Case C-582/08 Commission v United Kingdom [2010] ECR I-7195 in support of the view that that interpretation cannot be pleaded against it.

57It must also be made clear that, contrary to what is maintained by the Portuguese Republic, it is an interpretation of the provision at issue as leaving Member States free to fix flat-rate percentages at a nil rate whatever the circumstances which would be contrary to the principle of legal certainty and the uniform application of the rules of the common system of VAT in the European Union.

58In the present case, there is no need to adjudicate on the admissibility or relevance of the Commission’s arguments based on the rates it refers to of 5.3% and 7.9%, since it is sufficient to state that the Portuguese Republic accepts that the zero rate of VAT was repealed in its legislation in 1992 and that goods and services generally acquired by farmers in order to pursue their activities have since been subject, as appropriate, to a VAT rate of 6% or 13%. Portuguese flat-rate farmers therefore necessarily bear a burden of input VAT which is not negligible and which, accordingly, must be compensated. Consequently, there is no basis for that Member State’s application to farmers covered by the Portuguese scheme at issue of a flat-rate compensation percentage at a nil rate.

59Further, it must be observed, first, that the Portuguese Republic’s argument that it is appropriate to fix a flat-rate compensation percentage higher than zero only where the farmers are so placed as to be in tax credit in respect of VAT vis-à-vis the State has no basis in the text of the VAT Directive. On the contrary, the Court has previously stated that, while the macro-economic data relating to flat-rate farmers alone, to which Article 298 of the VAT Directive refers, do comprise, as stated by the Portuguese Republic, inputs (intermediate consumption and gross fixed-asset formation) and outputs (final production, including own consumption), together with the total amount of taxes relating to inputs, the Court has also stated that the flat-rate compensation percentages are obtained by dividing the total amount of taxes relating to inputs by the outputs (Case 3/86 Commission v Italy [1988] ECR 3369, paragraph 8). The VAT which may be payable on output transactions and, consequently, the possibility of the farmers, in particular those covered by the flat-rate scheme, being in tax credit, is therefore not taken into account in determining the applicable flat-rate compensation percentage.

60Next, it is clear from settled case-law of the Court that the question whether a Member State has failed to fulfil its obligations must be determined by reference to the situation in that Member State as it stood at the end of the period laid down in the reasoned opinion (see, inter alia, Case C-110/00 Commission v Austria [2001] ECR I-7545, paragraph 13, and Case C-487/08 Commission v Spain [2010] ECR I-4843, paragraph 34). Further, the rules laid down in Article 258 TFEU are to be applied without the Commission being required to comply with fixed time-limits. The Commission is thus entitled to decide, in its discretion, on what date it may be appropriate to bring an action and it is not for the Court, as a general rule to review the exercise of that discretion (Case C-297/08 Commission v Italy [2010] ECR I-1749, paragraph 87 and case-law cited).

61It follows that, since the Portuguese Republic does not dispute that, on the expiry of the period laid down in the reasoned opinion, the overall VAT burden on agricultural inputs borne by farmers covered by the Portuguese scheme at issue was not negligible, as stated in paragraph 58 of this judgment, the fact, were it to be established, that the circumstances prevailing in Portugal in that regard are substantially unchanged since 1992, and even since 1989, is of no relevance to the analysis of whether the Commission’s action is well-founded.

62Lastly, first, the VAT Directive expressly states, in Article 296(1), that the flat-rate scheme for farmers is designed to offset the input VAT borne by flat-rate farmers. It cannot therefore be accepted that that compensation is concerned in a general way with the incidental costs of farming and therefore is non-fiscal in nature, and that its payment cannot be imposed as an obligation by the VAT Directive. Next, the VAT Directive lays down, in Articles 300 and 301, the main rules governing how the actual compensation to which a given flat-rate farmer is entitled must be determined and paid to that farmer. Accordingly, it can further not be accepted that the burden of input VAT borne by farmers covered by the Portuguese scheme at issue can be offset to their advantage by means of measures other than the payment of flat-rate compensation as provided for by that directive.

63In those circumstances, the first ground of complaint relied on by the Commission in support of its action must be considered to be well founded.

The second ground of complaint, on the negative compensation of own resources payable in respect of the collection of VAT

64In accordance with settled case-law, the Court may of its own motion examine whether the conditions laid down in Article 258 TFEU for bringing an action for failure to fulfil obligations are satisfied (Case C-362/90 Commission v Italy [1992] ECR I-2353, paragraph 8, and Commission v Spain, cited above, paragraph 70).

65It is clear in particular from Article 38(1)(c) of the Rules of Procedure of the Court of Justice and from the case-law relating to that provision that an application initiating proceedings must state the subject-matter of the dispute and a summary of the pleas in law on which the application is based and that that statement must be sufficiently clear and precise to enable the defendant to prepare its defence and the Court to rule on the application. It is therefore necessary for the essential points of law and of fact on which a case is based to be indicated coherently and intelligibly in the application itself (Case C-178/00 Italy v Commission [2003] ECR I-303, paragraph 6, and Case C-211/08 Commission v Spain [2010] ECR I-5267, paragraph 32).

66In the present case, the Commission’s second ground of complaint does not satisfy those requirements. That is because the Commission complains that the Portuguese Republic applied a substantial negative compensation of own resources payable in relation to the collection of VAT. However, in setting out its pleas in law, the Commission does no more than state that, if an infringement of the VAT Directive is established, with the result that European Union own resources are reduced, the Commission is entitled to receive the total amount of own resources concerned, with the addition of interest for late payment. The Commission fails thereby to explain precisely which obligation that Member State was bound by and failed to fulfil by applying such negative compensation. Moreover, the Commission states, in its application, that ‘it is not the purpose of these infringement proceedings to examine to what extent the Portuguese Republic complied with the legislation on the collection of own resources’, thereby contradicting the second ground of complaint stated in its claims submitted to the Court.

67It follows that the second ground of complaint must be rejected as being inadmissible.

68In the light of all the foregoing, the Court must declare that, by applying to farmers a special scheme which does not comply with the scheme established by the VAT Directive, because it exempts farmers from payment of VAT and involves the application of a flat-rate compensation percentage at a nil rate, the Portuguese Republic failed to fulfil its obligations under Articles 296 to 298 of that directive.

Costs

69Under 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. Under the first subparagraph of Article 69(3) of those Rules, the Court may order that the costs be shared or that the parties bear their own costs, in particular where each party succeeds on some and fails on other heads. Since the Commission’s application has been upheld only in part, each party must be ordered to bear its own costs.

Operative part

On those grounds, the Court (Fourth Chamber) hereby

Declares that by applying to farmers a special scheme which does not comply with the scheme established by Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, because it exempts farmers from payment of value added tax and involves the application of a flat-rate compensation percentage at a nil rate, the Portuguese Republic failed to fulfil its obligations under Articles 296 to 298 of that directive;

Signatures

Dismisses the action as to the remainder;

Orders the European Commission and the Portuguese Republic to bear their own costs.

[Signatures]

( *1 ) Language of the case: Portuguese.

OPINION OF ADVOCATE GENERAL

KOKOTT

delivered on 22 September 2011 ¹

‛Common system of value added tax — Directive 2006/112/EC — Input VAT charged — Flat-rate scheme for farmers — Flat-rate compensation rather than deduction — Flat-rate compensation at nil rate — Conditions’

I – Introduction

1The common system of value added tax ² essentially provides for VAT to be levied as generally as possible and at each stage of the production and distribution process. Any undertaking participating in the production or distributions chains is required to add VAT to the net price of its products or services and to pay it to the tax authorities. However, such an undertaking liable to VAT has the right to deduct, i.e. it may deduct the VAT which it has paid to its own suppliers. Consequently, each undertaking only pays VAT on the added value which it creates itself. From an economic point of view, the VAT collected at the different stages is borne by each customer and ultimately solely by the end consumer.

2The Member States may apply a special scheme, the ‘common flat-rate scheme for farmers’, to farmers where the application of the normal VAT arrangements is likely to give rise to difficulties. Under that scheme, they may release farmers from the duty to collect VAT, in which case the normal, specifically calculated VAT deduction is replaced by compensation for the input VAT charged, which is calculated on a flat-rate basis.

3In the present action for failure to fulfil obligations, the European Commission essentially takes issue with the fact that Portugal has fixed the percentage for that flat-rate compensation at a nil rate, with the result that the Portuguese farmers covered by that scheme do not receive any input tax compensation.

II – Legislative framework

A – European Union law

4Chapter 7 (‘Miscellaneous provisions’) of Title XI of the VAT Directive, which is entitled ‘Obligations of taxable persons and certain non-taxable persons’, contains Article 272(1)(e), which provides that Member States may release taxable persons covered by the common flat-rate scheme for farmers from certain or all obligations referred to in Chapters 2 to 6. These include the duty to identify oneself to the tax authorities as a taxable person for VAT, to issue invoices with VAT, to keep accounts and to submit VAT returns.

5Chapter 2 of Title XII (‘Special schemes’) of the VAT Directive, which encompasses Articles 295 to 305, regulates the ‘common flat-rate scheme for farmers’.

6Under Article 296(1) of the directive, where the application to farmers of the normal VAT arrangements, or the special scheme for small enterprises, is likely to give rise to difficulties, Member States may apply to farmers a flat-rate scheme in order to compensate for the VAT payable on their input transactions. The envisaged flat-rate compensation replaces the entitlement to deduct (Article 302). However, a flat-rate farmer may also opt for normal taxation (Article 296(3)).

7Article 297 of the directive reads as follows:

‘Member States shall, where necessary, fix the flat-rate compensation percentages. They may fix varying percentages for forestry, for the different sub-divisions of agriculture and for fisheries.

Member States shall notify the Commission of the flat-rate compensation percentages fixed in accordance with the first paragraph before applying them.’

8Article 298 of the directive provides:

‘The flat-rate compensation percentages shall be calculated on the basis of macro-economic statistics for flat-rate farmers alone for the preceding three years.

The percentages may be rounded up or down to the nearest half-point. Member States may also reduce such percentages to a nil rate.’ ³

9The flat-rate compensation percentages may not have the effect of obtaining for flat-rate farmers refunds greater than the input VAT charged (Article 299). The flat-rate compensation to which the individual flat-rate farmer is entitled is calculated by applying the relevant flat-rate compensation percentage to the net price of the products and services supplied by him (Article 300). The flat-rate compensation is paid either by the customer or by the public authorities (Article 301). Where it is paid by the taxable customer, he may deduct it from the VAT on his own output transactions or claim a refund from the tax authorities (Article 303).

B – Portuguese law

10Under Article 9(33) of the Código do Imposto sobre o Valor Acrescentado (VAT Code, ‘CIVA’), ⁴ supplies of goods made in the course of activities listed in Annex A (‘List of agricultural production activities’) to the CIVA and the agricultural services mentioned in Annex B (‘List of agricultural services’) are exempt from VAT, provided the supplies are made incidentally by a farmer using his labour force or the equipment normally employed in the agricultural or forestry undertaking operated by him. The abovementioned Annexes A and B correspond, in essence, to Annexes VII and VIII to the VAT Directive.

11Under Article 29(3) of the CIVA, farmers who effect solely VAT-exempt transactions are exempt from the normal obligation to collect VAT, to issue invoices, to make tax returns and to keep accounts. They may opt for the normal regime, including entitlement to deduct VAT, but they must belong to the chosen regime for a period of five years (Article 12).

III – Facts, pre-litigation procedure and forms of order sought

12By letter of 6 June 2008 the Commission informed the Portuguese authorities that it considered the optional scheme for farmers which applied in Portugal to be incompatible with the common flat-rate scheme under the VAT Directive. The Portuguese scheme made no provision for input tax compensation, but in reality simply laid down an exemption for agricultural activities, combined with no possibility of deducting VAT.

13In their reply of 20 August 2008 the Portuguese authorities disputed the existence of an infringement: the second sentence of the second paragraph of Article 298 of the VAT Directive expressly permits the Member States to fix the flat-rate compensation percentage at a nil rate, irrespective of the amount of input VAT paid by the flat-rate farmers. The Portuguese scheme is also consistent with the aims of the common flat-rate scheme for farmers, in particular the aim of simplification. In addition, the contested scheme is comparable with an exemption without entitlement to deduct. Furthermore, the Member States may freely choose the form and method of implementation of directives, with the result that there is nothing to preclude the Portuguese scheme.

14As the Commission was not persuaded by these arguments, it sent the Portuguese Republic a reasoned opinion on 26 June 2009, in which it maintained that the Portuguese scheme was not compatible with Articles 296 to 298 of the VAT Directive.

15By letter to the Commission of 31 August 2009, the Portuguese Republic declined to comply with the reasoned opinion, and maintained its position.

16The Commission continues to take the view that the Portuguese scheme infringes European Union law and by the present action, which was received at the Court on 11 November 2010, therefore claims that the Court should:

1declare that, in applying to farmers a special scheme which derogates from the directive and which exempts them from the payment of VAT and applies a zero rate flat-rate compensation to them whilst at the same time making a substantial negative compensation in its own resources to offset the levying of VAT, the Portuguese Republic has failed to comply with Articles 296 to 298 of the VAT Directive;

2order the Portuguese Republic to pay the costs.

17The Portuguese Republic contends that the Court should

1dismiss the action;

2order the Commission to pay the costs.

18After the conclusion of the written procedure, a hearing was held on 14 September 2011.

IV – Legal assessment

A – The complaint relating to the zero flat-rate compensation

1. The interpretation of the second sentence of the second paragraph of Article 298 of the directive

19In order to resolve the present dispute, it is necessary to clarify, first and foremost, under what conditions the Member States, including Portugal, are entitled, under the VAT Directive, to provide for flat-rate compensation at a nil rate in connection with the flat-rate scheme for farmers. The effect of such a zero rate is that there is no compensation for the VAT charged on the farmers’ input transactions.

a) The wording of the second sentence of the second paragraph of Article 298 of the directive

20Portugal considers a nil rate to be perfectly permissible and refers to the wording of the second sentence of the second paragraph of Article 298 of the directive. That provision expressly states that ‘Member States may also reduce such percentages to a nil rate’.

21The Commission takes the view, however, that this should not be understood as a carte blanche. A nil rate is permissible only under certain conditions, namely where the flat-rate compensation percentage calculated in accordance with the directive is close to zero or where the farmers’ input transactions are tax-exempt, with the result that there is nothing to offset.

22There is no support in the wording of the second sentence of the second paragraph of Article 298 of the directive for such a restriction of the possibility given to the Member States to reduce the flat-rate compensation percentage to a nil rate. However, the wording does not rule out the strict interpretation advocated by the Commission either. It is therefore necessary to consider the general structure and the purpose and objectives of the provision ⁵ and its drafting history ⁶ to obtain further guidance as to how that provision is to be interpreted.

b) The drafting history of the second sentence of the second paragraph of Article 298 of the directive

23As regards the drafting history of the second sentence of the second paragraph of Article 298 of the directive, to which the parties pay particular attention, it should be stated, first of all, that the fourth sentence of the first subparagraph of Article 25(3) of Sixth Council Directive 77/388, ⁷ which was recast in the VAT Directive, provided from the outset that ‘Member States shall have the option of reducing such percentages to a nil rate’.

24Apparently, this provision dates back to an amendment to the original Commission draft directive ⁸ which was proposed by Ireland. In the ‘final compromise text’ on the special scheme for farmers, ⁹ prepared by the Commission in the course of the discussions on its draft and sent to delegations with the Council Note (R/2892/1/76(fin 758 rev.1) of 7 December 1976, which includes ‘a number of amendments made at the Permanent Representatives Committee meeting on 3 December 1976’, there is a new fourth sentence of the first subparagraph of Article 27(3), ¹⁰ under which ‘Member States shall have the option of reducing such refunds to a nil rate’. It is stated in a footnote that the Permanent Representatives Committee agreed to add this phrase at the request of the Irish delegation.

25Council Note R/3260/76 (FIN 892) of 21 December 1976 ¹¹ on the meetings of the Permanent Representatives Committee on 3 and 8 December 1976 then states that ‘all delegations were in favour of Member States having the option of reducing the refunds in question to zero’.

26However, a letter sent to the Council by the Permanent Representative of Ireland on 19 November 1976 ¹² concerning Article 27 of the Sixth Directive on VAT – Special scheme for farmers — does not contain the proposal in question and does not allow conclusions to be drawn as to the ideas behind it. It is merely stated, in fairly general terms, that ‘the present text raises major difficulties for Ireland. The Commission has been informed of these difficulties with a view to having the draft adapted ...’

27The Commission argues in the present case that the provision in question can be explained in particular by the fact that at the time certain Member States, including Ireland, had a zero-rate on agricultural inputs and Directive 77/388 continued to permit this, albeit only within strict limits. ¹³ For such situations the Council accorded the Member States the option of providing for a zero flat-rate compensation.

28On the other hand, the flat-rate compensation necessarily presupposes the payment of input VAT, ¹⁴ with the result that where input transactions are zero-rated, a flat-rate compensation percentage of more than zero is not possible from the outset and no express authorisation is therefore required. Furthermore, at the time the provision in question was incorporated into the draft version of Directive 77/388, Article 27(3) ¹⁵ already provided for the Member States to fix the flat-rate compensation percentages ‘where necessary’. If a zero-rate applies to the input transactions, it is not necessary and there is also no need for authorisation to apply a zero flat-rate compensation.

29Portugal refers to the Commission’s explanatory memorandum for its original draft directive of June 1973, ¹⁶ in which the Commission itself states with regard to paragraphs 4 and 5 of Article 27 (‘flat-rate scheme for farmers’) that the Member States may freely fix the flat-rate compensation percentages within the upper limits fixed under paragraph 3. The word ‘freely’ (‘frei’) does not appear in the German version of the explanatory memorandum for the draft, although the French text states ‘peuvent librement fixer’, the English ‘may freely fix’, the Italian ‘possono liberamente fissare’ and the Dutch ‘vrijelijk kunnen vaststellen’.

30The apparent generosity here is surprising. If the Commission had actually wished to give the Member States absolute freedom below the abovementioned upper limits, there would have been nothing easier for it and for the Council than to make such provision in the text of the directive. That did not happen, however. Instead, only at a very late stage in the negotiations did the Council agree, on the insistence of Ireland, on a provision which is much less clear as regards the margin of discretion enjoyed by the Member States.

31Furthermore, at the time it was considering the Irish proposal for an amendment, the Council also dealt with an addition to the first subparagraph of Article 27(3) proposed by the German Permanent Representation, ¹⁷ which considered it to be ‘absolutely important’, ¹⁸ to the effect that the flat-rate compensation percentages may be rounded up or down to the nearest half point. That proposal was incorporated as the fifth sentence of the provision. ¹⁹ If the delegations had taken the view, at the time of the original draft directive or at the latest after the addition of the fourth sentence at the instigation of Ireland, that the Member States were completely free to fix the flat-rate compensation percentage, below an upper limit, a rounding-off rule would not have been necessary. Rather, the strict requirements of the rounding-off rule suggest that the Member States do not enjoy completely free discretion.

32The Commission’s arguments in the explanatory memorandum for the original draft directive cannot therefore be crucial in determining the way in which the provision at issue is to be interpreted.

33The drafting history of the second sentence of the second paragraph of Article 298 of the VAT Directive does not therefore offer any clear guidance whether it is to be interpreted as advocated by the Commission or as advocated by Portugal.

c) The general structure and the purpose and objectives

i) The general structure concerned

34Certain structural considerations have already been mentioned in the statements on drafting history.

35It has thus already been stated that in any case provision is made for flat-rate compensation percentages to be fixed under the first paragraph of Article 297 of the directive ²⁰ only where necessary. If VAT is not charged on agricultural inputs, this is not necessary and there would essentially be no need for the second sentence of the second paragraph of Article 298 of the directive in order to be able to fix a zero compensation rate.

36With this in mind, Article 299 of the directive ²¹ provides that the flat-rate compensation percentages may not have the effect of obtaining for flat-rate farmers refunds greater than the input VAT charged. It is thus ensured that the flat-rate scheme for farmers does not contain an aid element. ²²

37These two structural aspects tend to suggest that the second sentence of the second paragraph of Article 298 of the directive lays down an autonomous provision and seeks to grant the Member States the option of zero-rated compensation even where VAT is charged on input transactions.

38On such an interpretation, however, it is difficult to imagine that ‘major difficulties’ for Ireland resulting from the zero taxation rate applicable there on agricultural inputs could have been the reason for that provision. At the time when Ireland was claiming ‘major difficulties’, ²³ the draft version of Directive 77/388 already contained a provision similar to Article 299 of the VAT Directive, ²⁴ and when, as proposed by Ireland, the precursor to the second sentence of the second paragraph of Article 298 of the VAT Directive was added to the draft version of Directive 77/388, ²⁵ the precursor to the first paragraph of Article 297 of the VAT Directive ²⁶ stated that Member States must fix the flat-rate compensation percentages only ‘where necessary’. ²⁷

39The abovementioned rounding-off rule in the first sentence of the second paragraph of Article 298 of the directive nevertheless tends to indicate that the second sentence should not be understood to mean that the fixing of a nil rate is unconditional. If the Member States were actually free, under the second sentence of the second paragraph of Article 298 of the directive, which is in the drafting history older, to provide for zero compensation despite a considerable VAT burden, there would be no need for a provision which gives authorisation to round up or down to the nearest half-point the flat-rate compensation percentage calculated on the basis of certain parameters.

40From a structural point of view, however, the second sentence is again not purely a complement to the first sentence in the sense that rounding-off can also produce a nil rate. First, the order of those sentences was the other way round in Directive 77/388; second, the historical sequence of the insertion of those sentences in the draft version of Directive 77/388 precludes such a view and, third, it is logical that rounding-off can also produce a nil rate. It should be pointed out, for the sake of completeness, that the word ‘also’ in the second sentence of the second paragraph of Article 298 of the VAT Directive is an innovation of that directive. Since, however, that change is not listed in the provisions governing transposition and entry into force in accordance with the third recital in the preamble to that directive, ²⁸ a substantive amendment was not therefore intended. No further guidance as to the interpretation required here can be derived from this purely editorial amendment.

41Since the structural considerations discussed above do not point the interpretation of the second sentence of the second paragraph of Article 298 of the VAT Directive clearly in either direction, that provision must be placed in its broader context, and an examination of the purpose and objectives of the flat-rate scheme for farmers must also be undertaken.

ii) The broader context and the purpose and objectives of the flat-rate scheme

42The flat-rate scheme for farmers is one of the special schemes of the common system of value added tax and, as such, is to be interpreted strictly. ²⁹

43As is intimated by the title of the relevant Chapter 2 of Title XII of the VAT Directive: ‘Common flat-rate scheme for farmers’, and as is clarified by Articles 296 and 302 in conjunction with Article 272(1)(e) of the directive, the purpose of that special scheme is that the farmers in respect of whom the normal scheme or even the special scheme for small enterprises is likely to give rise to difficulties are intended to be able to obtain a flat-rate compensation for VAT on their input transactions. ³⁰ That scheme is devised in such a way that the farmers covered by it do not levy and pay any VAT on their output transactions, but in return also do not have any right to deduct. Instead, the input VAT is to be offset on a flat-rate basis.

44It should be borne in mind in this connection that, in accordance with settled case-law, the right to deduct VAT is a fundamental principle of the common system of VAT ³¹ and in principle may not be limited. ³² The right to deduct ensures the neutrality of VAT. ³³

45Flat-rate compensation does not achieve VAT neutrality on an individual basis like the entitlement to deduct, but the basic idea of the scheme is to ensure neutrality of VAT for the group of flat-rate farmers as a whole ³⁴ and to be as close to it as possible on an individual basis. This is achieved by the flat-rate compensation percentages which, according to Article 295(1)(7) of the directive, are intended to offset the input VAT charged, being calculated under the first paragraph of Article 298 of the directive on the basis of macro-economic statistics relating to that group ³⁵ and then being applied under Article 300 of the directive to the output transactions of the individual flat-rate farmer.

46Unlike the case of taxable persons coming under the normal arrangements, the flat-rate scheme for farmers means that no VAT is levied on their output transactions, and it might therefore be asked why there should be any compensation for the input VAT charged where, as Portugal argues, there is also no entitlement to deduct in the case of VAT-exempt output transactions under Article 168 of the directive.

47However, the special scheme for farmers was specifically not conceived as a form of tax exemption. Because, as the Commission argues, farmers are generally among the first links in long production and distribution chains, leading to the final consumer, ³⁶ the result of a simple exemption of their output transactions would be that the VAT charged on their input transactions would be passed on as hidden VAT and VAT would also be levied on the relevant tax amounts at later stages, so that there would be multiple taxation and the neutrality of the VAT system would be jeopardised.

48Specifically to avoid such effects of flat-rate compensation, Article 303 of the directive provides that where, rather than the Treasury, the VAT-liable customer pays the flat-rate compensation to the farmer, the customer may deduct that amount from the VAT on his own output transactions or may claim a refund of the amount. It is thus ensured that no hidden VAT is passed on.

49However, the second sentence of the second paragraph of Article 298 of the directive makes it possible to rule out input tax compensation completely since the flat-rate compensation percentage can also be fixed at a nil rate. This is not an exception to the exception, which takes us back to the fundamental rule and would therefore have to be interpreted broadly, ³⁷ but the VAT treatment of flat-rate farmers is thus even further removed from the normal arrangements than is the case already. The second sentence of the second paragraph of Article 298 of the directive must therefore be given a strict interpretation.

50According to the explanatory memorandum for the original Commission draft, the common flat-rate scheme for farmers is ‘only one technical and practical method of applying value added tax’, aimed at allowing flat-rate farmers to offset at a flat rate the deductible tax. It was introduced as a transitional scheme in order, above all, to relieve small agricultural holdings of the formalities which are necessary under the normal arrangements. ³⁸

51In order to ensure that the European Union’s own resources are collected fairly and to avoid the application of value added tax in the various Member States leading to distortions of competition, the common flat-rate scheme must not, according to the explanatory memorandum on the original draft, include financial advantages or disadvantages for the totality of flat-rate farmers. ³⁹ It is clear that application of the flat-rate scheme would not have the same consequences — as regards the collection of the European Union’s own resources and the conditions of competition between farmers of different Member States — if flat-rate farmers in one such State were entitled to offset tax at a flat-rate when flat-rate farmers in other States were not entitled to offset tax in this way. ⁴⁰

52Even though the original draft directive has been amended in many respects, I believe that the cited passages of the relevant explanatory memorandum still accurately describe the purpose and objectives of the common flat-rate scheme for farmers. If a Member State could freely decide, despite a considerable VAT burden, not to grant flat-rate compensation, the common flat-rate scheme would be otiose. Such an interpretation would not therefore be consistent with the purpose and objectives of the scheme.

53Portugal claims, however, that the primary aim of the common flat-rate scheme for farmers is to simplify the VAT system for flat-rate farmers and that its scheme meets that aim by achieving maximum simplification. Using figures for 2005, Portugal states that its agriculture consists almost exclusively of very small family farms, the level of education is very low in some cases, and almost 50% of farmers are already older than 65. A positive flat-rate compensation percentage would inevitably entail certain minimum obligations for farmers, in particular keeping accounts and issuing invoices.

54There is no question that the common flat-rate scheme, as follows in particular from Article 296(1) in conjunction with Article 272(1)(e) of the directive, has the aim of simplifying the VAT system for certain farmers. ⁴¹ However, the directive does not provide for simplification at any price. Instead, simplification is linked to a mechanism which ensures the neutrality of VAT as far as possible by means of flat-rate compensation for VAT charged on inputs.

d) Interim conclusion

55Against this background, and in view of the fact that the second sentence of the second paragraph of Article 298 of the directive is to be interpreted strictly, the purpose and objectives of the common flat-rate scheme for farmers require that provision to be interpreted to the effect that it does not accord the Member States a completely free margin of discretion to fix the flat-rate compensation percentage at a nil rate, irrespective of the amount of input VAT actually payable. Rather, such a nil rate is permissible only where it is justified by the VAT burden, because it either does not exist or is so small that it may be ignored.

e) The argument relating to the inadmissibility of a corrective interpretation

56Portugal invokes, against an interpretation of this kind, the judgment in Commission v United Kingdom of 15 July 2010. ⁴² The Court held that a Member State whose national law complies with the clear and precise wording of a provision of a directive cannot be accused of failing to comply with that provision because it allegedly failed to interpret that provision with the aim of correcting it, in order to comply with the overall logic of the common system of VAT and to remedy an error of the European Union legislature.

57That case ultimately concerned the question whether the United Kingdom was required to understand and apply Article 2(1) of the Thirteenth VAT Directive 86/560/EEC, ⁴³ which merely refers to Article 169(a) and (b) of the VAT Directive, also as referring to Article 169(c). The Commission based its arguments on the drafting history, the general structure and the purpose of the relevant provisions. However, the Court could not concur with the Commission’s argument that an actual error had been made and pointed out that even assuming it had been made and the Commission’s reading were consistent with the logic of the common system of VAT, it was not for the Court to make such a corrective interpretation. ⁴⁴

58In the present case, however, the situation appears to be different. The second sentence of the second paragraph of Article 298 of the VAT Directive is much less clear than the provision at issue in Commission v United Kingdom and, on account of the general structure and the purpose and objectives of the common flat-rate scheme, which includes that provision, the question which really arises is when a nil rate may be fixed. As I have explained, according to a teleological interpretation consistent with the wording, the second sentence of the second paragraph of Article 298 of the directive does not allow the Member States absolute freedom. Certainly, a clearer wording for the provision would have been more in keeping with the principle of legal certainty. Nevertheless, it was possible to determine the tenor of that provision using the normal methods of interpretation and, on the basis of that interpretation, a national provision under which, despite a considerable VAT burden, no flat-rate compensation is granted is not compatible with it.

2. The existence of a considerable VAT burden

59It having been established that the Member States do not have free discretion, irrespective of the actual VAT burden of flat-rate farmers, to fix flat-rate compensation at a nil rate, it must next be examined whether it is ‘necessary’ in Portugal to grant a flat-rate compensation or whether the VAT burden of the flat-rate farmers amounts to zero or is close to zero.

60In its application, the Commission points out that under the CIVA most agricultural input transactions in Portugal are subject to a tax rate of 6% and machinery, equipment and fuel are subject to a tax rate of 13%. This was essentially confirmed by Portugal in its defence.

61The Commission also stated that the amount of input VAT that Portuguese flat-rate farmers could not have deducted in 2004 and 2005 was equivalent to 5.3% and 7.9% of their sales. The Portuguese authorities indicated this to the Commission in an audit of own resources for those years which it conducted in Portugal in November 2007.

62The source and accuracy of these figures are, on points of detail, disputed by the parties. In its reply, however, the Commission rightly points out that the present case is not concerned with determining the actual flat-rate compensation percentages, but the question whether the conditions for fixing zero compensation are met. The Commission has sought to show, on the basis of these figures, that the VAT burden on flat-rate farmers is considerable. Portugal has not substantiated its challenge to that assertion which, in view of the VAT rates applicable to agricultural input transactions in Portugal, is also plausible.

63It must therefore be concluded that Portugal applies a zero flat-rate compensation even though the input transactions of the Portuguese flat-rate farmers are subject to a considerable VAT burden and it is thus necessary to offset that VAT.

3. The other arguments put forward in Portugal’s defence

a) Flat-rate compensation only where the agricultural sector is in tax credit

64Portugal claims that under the flat-rate scheme the Member States may also take into account the VAT which the flat-rate farmers would be required to pay if they were subject to the normal scheme. It evidently takes the view that a positive flat-rate compensation must be considered only where under the normal scheme the input VAT would exceed the tax payable and the totality of the flat-rate farmers would be in tax credit vis-à-vis the State. If the normal scheme were applied in Portugal, however, the tax payable would exceed the deductible VAT. The zero compensation is therefore consistent with budgetary rationality and does not entail any disadvantages for flat-rate farmers.

65As the Commission rightly argues in its reply, however, there is nothing in the directive to suggest that a positive flat-rate compensation would have to be granted only in the atypical case that the input VAT burden of the economic sector as a whole exceeded the VAT on the output transactions that would be payable if the normal scheme were applied. If the position taken by Portugal is adopted, the flat-rate scheme would be far removed from the normal scheme and the associated option to deduct VAT; the passing-on of hidden VAT would not, as a rule, be prevented.

66In so far as purely budgetary considerations might lie behind Portugal’s arguments, it should also be pointed out that the common flat-rate scheme for farmers is merely an optional special scheme and that Member States are not required to avail themselves of it. If, however, they decide to apply the special scheme, their implementing provisions must remain within the limits stipulated by the VAT Directive. Portugal’s argument that it is for the Member States to choose the form and means of implementation therefore also comes to nothing.

b) No change in the VAT situation of the agricultural sector.

67Portugal also claims that the Commission is wrong in its view that the VAT situation of the agricultural sector in Portugal has changed in such a way that, unlike previously, a zero flat-rate compensation is now no longer possible. Even though the tax rates have changed, the situations in 1989, when Portugal should have adapted to Directive 77/388 after a transitional period, and today are comparable in terms of the taxation of input and output transactions. Even if a significant change were to be assumed, it took place 17 years previously when Portugal abolished zero-rating on various agricultural inputs in 1992.

68It is sufficient in this regard to refer to settled case-law, according to which the question whether a Member State has failed to fulfil its obligations must be determined by reference to the situation prevailing in the Member State at the end of the period laid down in the reasoned opinion, ⁴⁵ and it is solely for the Commission to decide whether ⁴⁶ and when ⁴⁷ it initiates proceedings for failure to fulfil obligations. It is not therefore necessary to ascertain the situation in 1989 and in 1992.

c) Compensation by other means

69Lastly, Portugal claims that, if it is in fact to be granted, the flat-rate compensation is not fiscal in nature, unlike the entitlement to deduct. Rather, it is intended solely to give the flat-rate farmers financial compensation for their operational costs. In Portugal this is nearly always done by means of aid, indemnification, premiums and other State subsidies.

70However, the common flat-rate scheme for farmers is undoubtedly part of the common system of value added tax, as laid down in the directive. It is not tenable, in my view, to regard this special scheme, in so far as it provides for flat-rate compensation, as non-fiscal. Furthermore, the need for the uniform application of that system does not permit aid or other State subsidies to be chosen as a substitute for insufficient input tax compensation.

4. Conclusion

71It must therefore be concluded that, by fixing the flat-rate compensation percentage at a nil rate, even though the input VAT payable by the flat-rate farmers is neither zero nor close to zero, Portugal has infringed the common flat-rate scheme for farmers.

B – The complaint relating to calculation of own resources

72By its claim, the Commission not only objects to the abovementioned special scheme which Portugal applies to flat-rate farmers, but also complains that Portugal makes a considerable negative compensation in own resources to offset the levying of VAT.

73Unlike the complaint concerning the special scheme, both parties deal with this second part of the Commission’s claim only in passing in their written pleadings.

74The Commission devoted to it only one short paragraph in its application. The Commission states that the present case does not seek to establish the extent to which Portugal has failed to fulfil its obligations in connection with the collection of own resources, although it should be pointed out that the Commission could demand an additional payment plus interest in the event that Portugal has infringed the directive and this has resulted in a reduction in the European Union’s own resources. In its statements on the interpretation of Article 298 of the directive, the Commission pointed out, somewhat incidentally, that in 2004 Portugal made a negative compensation of approximately EUR 70 million in connection with the calculation of own resources in order to take account of the input VAT not deducted by the flat-rate farmers.

75In its defence Portugal is equally brief on this point. The present proceedings stem from differences between the Commission and Portugal regarding the correct calculation of own resources in connection with the special scheme for farmers; however, as the Commission itself states, this is not the subject of these proceedings. Even if the Court were to concur with the interpretation of the common flat-rate scheme advocated by the Commission, this could not lead to an increase in Portugal’s contribution to own resources, since the maximum level has already been reached. In its rejoinder, Portugal also points out that the Commission relied on provisions of Sixth Directive 77/388 on the calculation of own resources in connection with the common flat-rate scheme for farmers ⁴⁸ which had not been applied for some time, and at least since the entry into force of Regulation No 1553/89, ⁴⁹ and which also had no counterpart in the VAT Directive.

76Portugal has not expressly disputed that it made a negative compensation in own resources having regard to the scheme which it applies to flat-rate farmers, specifically in 2004. However, in view of the Commission’s statements reproduced above and confirmed again upon request at the hearing, according to which the present case does not concern the collection of own resources, this cannot be held against Portugal. It follows from Article 38(1)(c) of the Rules of Procedure of the Court of Justice and from the case-law relating to that provision that the application initiating proceedings must state the subject-matter of the dispute and a summary of the pleas in law on which the application is based and that that statement must be sufficiently clear and precise to enable the defendant to prepare its defence and the Court to rule on the application. It is therefore necessary for the points of law and of fact on which a case is based to be indicated coherently and intelligibly in the application itself. ⁵⁰ These conditions are not met by the Commission’s application as regards the second part of its claim.

77Since the Commission has not expressly withdrawn the second part of its claim and a ruling on it must therefore be given, it must be rejected as inadmissible in the absence of sufficient grounds.

V – Costs

78Since both parties have applied for the other to be ordered to pay the costs, and both have been partially unsuccessful in their pleadings, I propose that each party should bear its own costs in accordance with Article 69(3) of the Rules of Procedure.

VI – Conclusion

79I propose that the Court should:

declare that, in applying to farmers a special scheme which derogates from the directive and which exempts them from the payment of VAT and applies flat-rate compensation at a nil rate to them, the Portuguese Republic has infringed Articles 296 to 298 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax;

dismiss the action as to the remainder;

order each party to bear its own costs.

¹ Original language: German.

² Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1, ‘the VAT Directive’ or ‘the directive’).

³ Emphasis added.

⁴ As amended by Decree-Law No 195/89 of 12 June 1989, re-published by Decree-Law No 102/2008 of 20 June 2008 (as published in Corrigendum No 44-A/2008 of 13 August 2008).

⁵ See Case C-321/02 Harbs [2004] ECR I-7101, paragraph 28; Case C-43/04 Stadt Sundern [2005] ECR I-4491, paragraph 24; and Case C-518/07 Commission v Germany [2010] ECR I-1885, paragraph 17.

⁶ See Case C-533/07 Falco Privatstiftung and Rabitsch [2009] ECR I-3327, paragraph 20; Case C-199/08 Eschig [2009] ECR I-8295, paragraph 58; and Case C-203/09 Volvo Car Germany [2010] ECR I-10721, paragraph 40.

⁷ 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).

⁸ COM(73) 950 final, available at http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/COM(1973) 950_en.pdf

⁹ Sent to the delegations with Council Note R/2892/1/76 (FIN 758) rev. 1 of 7 December 1976, available at http://www.consilium.europa.eu/uedocs/cmsUpload/226.pdf. The German, Danish, Italian, Dutch and English versions are dated 8 December 1976.

¹⁰ Subsequently Article 25 of Directive 77/388.

¹¹ Available at http://www.consilium.europa.eu/uedocs/cmsUpload/227.pdf. The German version is dated 23 December 1976, whilst the Danish, Italian, Dutch and English versions are dated 22 December 1976.

¹² Council document R/2855/76 (FIN 750) of 23 and 24 November 1976, available at http://www.consilium.europa.eu/uedocs/cmsUpload/222.pdf

¹³ The Commission refers inter alia to Case 415/85 Commission v Ireland [1988] ECR 3097, paragraphs 29 and 30. In that case the Commission had complained, among other things, that Ireland had zero-rated animal feedingstuff, fertilizer and seeds, but the Court considered the nil rate on these agricultural inputs to be compatible with Directive 77/388.

¹⁴ See Case 415/85 Commission v Ireland, cited in footnote 13, paragraph 25.

¹⁵ Which became Article 25(3) of Directive 77/388 and later Article 297(1) of the VAT Directive.

¹⁶ See footnote 8.

¹⁷ Telex of 19 November 1976 to the Council, Council document R/2847/76 (FIN 747) of 22 and 24 November 1976, available at http://www.consilium.europa.eu/uedocs/cmsUpload/222.pdf.

¹⁸ See Council document R/2892/1/76 (FIN 758) rev. 1 of 7 December 1976 (cited in footnote 9).

¹⁹ See the fifth sentence of the first subparagraph of Article 25(3) of Directive 77/388 and the first sentence of the second subparagraph of Article 298 of the VAT Directive.

²⁰ Previously the first sentence of Article 25(3) of Directive 77/388.

²¹ The draft version of Directive 77/388 contains such a provision in the third sentence of the first subparagraph of Article 27(1), before the fourth and fifth sentences were added; see Council document R/2892/1/76 (FIN 758) rev. 1 of 7 December 1976 (cited in footnote 9).

²² See, for similar arguments by the Commission in connection with the original draft of Directive 77/388 (cited in footnote 8), but with regard to Article 27(11) of that draft, the explanatory memorandum annexed thereto, according to which excessive compensation would amount to economic aid. See also Case 3/86 Commission v Italy [1988] ECR 3369, paragraph 14.

²³ See the letter from the Permanent Representative of Ireland of 19 November 1976 (cited in footnote 12).

²⁴ The third sentence of the first subparagraph of Article 27(3), which became the third sentence of the first subparagraph of Article 25(3) of Directive 77/388.

²⁵ As the fourth sentence of the first subparagraph of Article 27(3), which became the fourth sentence of the first subparagraph of Article 25(3) of Directive 77/388.

²⁶ The first sentence of the first subparagraph of Article 27(3), which became the first sentence of the first subparagraph of Article 25(3) of Directive 77/388.

²⁷ See the different stages of the drafting process, which can be seen from Council documents R/2514/76 (FIN 663) of 22 October 1976 (the German version is dated 27 October 1976), available at http://www.consilium.europa.eu/uedocs/cmsUpload/219.pdf, R/2892/1/76 (FIN 758) of 25 November 1976 (the German version is dated 1 December 1976), available at http://www.consilium.europa.eu/uedocs/cmsUpload/222.pdf, and R/2892/1/76 (FIN 758) rev. 1 of 7 December 1976 (cited in footnote 9).

²⁸ See Article 412 of the directive.

²⁹ Case C-321/02 Harbs, cited in footnote 5, paragraph 27, and Case C-43/04 Stadt Sundern, cited in footnote 5, paragraph 27; see, with regard to the special scheme for small enterprises, Case C-128/05 Commission v Austria [2006] ECR I-9265, paragraph 22, and my Opinion in Case C-97/09 Schmelz [2010] ECR I-10465, point 32.

³⁰ See also recital 50 in the preamble to the directive.

³¹ Case C-25/07 Sosnowska [2008] ECR I-5129, paragraph 14; Case C-392/09 Uszodaépítő [2010] ECR I-8791, paragraph 15; and Case C-107/10 Enel Maritsa Iztok 3 [2011] ECR I-3873, paragraph 31.

³² Case C-371/07 Danfoss and AstraZeneca [2008] ECR I-9549, paragraph 26; Case C-368/09 Pannon Gép Centrum [2010] ECR I-7467, paragraph 37; and Case C-277/09 RBS Deutschland Holdings [2010] ECR I-13805, paragraph 39.

³³ Case C-371/07 Danfoss and AstraZeneca, paragraph 26; Case C-392/09 Uszodaépítő, paragraph 35; and Case C-438/09 Dankowski [2010] ECR I-14009, paragraph 24.

³⁴ See Article 295(1)(6) and (7).

³⁵ See Case 3/86 Commission v Italy, cited in footnote 22, paragraph 8.

³⁶ In Case 415/85 Commission v Ireland, cited in footnote 13, paragraph 29, and Case 416/85 Commission v United Kingdom [1988] ECR 3127, paragraph 20, the Court nevertheless regarded the supply of means of agricultural production in connection with the question whether their supply may exceptionally continue to be zero-rated as sufficiently close to the final consumer.

³⁷ See Case C-305/01 MKG-Kraftfahrzeuge-Factoring [2003] ECR I-6729, paragraph 72, and Case C-175/09 Axa UK [2010] ECR I-10701, paragraph 30.

³⁸ See the draft explanatory memorandum, cited in footnote 8, at Article 27(1), (6), (12), (13) and (16).

³⁹ See the draft explanatory memorandum cited in footnote 8 at Article 27(1).

⁴⁰ See the draft explanatory memorandum cited in footnote 8, at Article 27(2), fourth and fifth indents.

⁴¹ See also Case C-43/04 Stadt Sundern, cited in footnote 5, paragraph 28.

⁴² Case C-582/08 Commission v United Kingdom [2010] ECR I-7195, paragraph 48.

⁴³ Thirteenth Council Directive 86/560/EEC of 17 November 1986 on the harmonisation of the laws of the Member States relating to turnover taxes — Arrangements for the refund of value added tax to taxable persons not established in Community territory (OJ 1986 L 326, p. 40).

⁴⁴ Case C-582/08 Commission v United Kingdom, cited in footnote 42, paragraph 28 et seq., paragraphs 36 and 46.

⁴⁵ Case C-494/01 Commission v Ireland [2005] ECR I-3331, paragraph 29; Case C-333/08 Commission v France [2010] ECR I-757, paragraph 55; and Case C-20/09 Commission v Portugal [2011] ECR I-2637, paragraph 31.

⁴⁶ Case C-233/00 Commission v France [2003] ECR I-6625, paragraph 31; Case C-266/03 Commission v Luxembourg [2005] ECR I-4805, paragraph 35; judgment of 21 January 2010 in Case C-17/09 Commission v Germany, paragraph 20; and Case C-306/08 Commission v Spain [2011] ECR I-4541, paragraph 66.

⁴⁷ Case C-333/99 Commission v France [2001] ECR I-1025, paragraph 25; Case C-297/08 Commission v Italy [2010] ECR I-1749, paragraph 87; Case C-350/08 Commission v Lithuania [2010] ECR I-10525, paragraph 33; and Case C-306/08 Commission v Spain, cited in footnote 46, paragraph 66.

⁴⁸ Article 25(12) in conjunction with Annex C to Sixth Directive 77/388.

⁴⁹ Council Regulation (EEC, Euratom) No 1553/89 of 29 May 1989 on the definitive uniform arrangements for the collection of own resources accruing from value added tax (OJ 1989 L 155, p. 9).

⁵⁰ Case C-412/04 Commission v Italy [2008] ECR I-619, paragraph 103; Case C-165/08 Commission v Poland [2009] ECR I-6843, paragraph 42; and Case C-267/09 Commission v Portugal [2011] ECR I-3197, paragraph 25.