Opinion of Advocate General
Mr President,
Members of the Court,
1. The Commission has brought these proceedings for a declaration that by applying a system of value added tax which is incompatible with the provisions of Article 26 of the Council's Sixth VAT Directive the Federal Republic of Germany has failed to fulfil its obligations under the EEC Treaty.
2. Title XIV of the Sixth VAT Directive contains a number of special schemes in connection with the directive's general rules. Article 24 lays down a special scheme for small undertakings, Article 25 lays down rules for a common flat-rate scheme for farmers and Article 26 lays down a special scheme for travel agents.
3. Under Article 26(1) Member States are to apply the scheme to operations of travel agents where the travel agents deal with customers in their own name and use the supplies and services of other taxable persons in the provision of travel facilities.
4. Article 26(3) provides:
5. The Sixth VAT Directive was implemented in Germany by the Law of 29 November 1979 on Turnover Tax which entered into force on 1 January 1980 (referred the 1980 VAT Law). The special rules for value added tax on travel services were laid down in Paragraph 25 of the Law and no amendments of any significance for this case have subsequently been made. The rules in Paragraph 25 implement the main principles of Article 26 of the Sixth VAT Directive. That is not true, however, of Paragraph 25(2) which contains rules on tax exemptions. Under Paragraph 25(2) inter alia supplies consisting of cross-frontier transport by air or sea and transport by air or sea taking place exclusively outside the Federal Republic of Germany (hereinafter international transport by air and sea) are exempted.
6. The Commission claims that those rules mean that as far as German travel agents are concerned the scope of the tax exemption is greater than that permitted under Article 26(3) of the directive.
7. The German Government does not dispute that the said provision in the 1980 VAT Law constitutes a defective implementation of Article 26(3) of the Sixth VAT Directive. It contends, however, that that defective implementation is justified on the following two grounds:
Should Article 26(3) be deemed nonexistent because it cannot in practice be implemented?
8. The Commission asks that the German Government's submissions concerning the invalidity of the provision be rejected. It argues that according to the case-law of the Court the question of the validity of a provision in a measure adopted by the Council, including provisions in directives, cannot be examined in an infringement action.
9. The German Government claims that Article 26(3) should be deemed nonexistent because in practice it is not possible to apply the provision to services consisting of international air transport. It mentions in particular that it follows from the Court's case-law that it should be possible for taxable persons to calculate their tax liability in advance, and that such advance calculation is impossible in the case of international air transport. It refers, in particular, to the fact that not only in many cases is it extremely laborious for travel agents to split up the cost of air transport taking place partly over Community territory and partly over international waters and the territory of nonmember countries, but that it can even be impossible to calculate in advance the various parts of a given air journey. Travel agents do not always know beforehand the routes which air companies will use. There may be alternative routes and there may be routes on which it is impossible to know in advance whether the flight will pass over the territory of a Member State or over international waters, and not infrequently it might happen that, for example, because of meteorological conditions it becomes necessary to alter the planned route.
10. The Commission disputes the fact that the problems raised by the German Government make it impossible to apply Article 26(3) in practice. In this connection the Commission has pointed out inter alia that according to its information the other Member States which have not availed themselves of the directive's exemption provisions have been able to apply the provision in practice.
11. It is clear that the German Government has succeeded in showing that Article 26(3) must be difficult for the travel agents concerned to apply. That is presumably also the reason why the Commission, according to the evidence, is in the course of preparing a draft amendment of the provision.
12. In addition the German Government's contention that the implementation effected represents the implementation closest to the legal reasoning behind Article 26(3) would not appear justified. The German rules exempt from tax every form of international air (and sea) transport and can certainly not be regarded as a genuine attempt to implement Article 26(3) of the directive, even if account was taken in that implementation of the abovementioned practical difficulties.
13. The German Government has argued that international sea transport must be exempted from tax because it is almost exhaustively carried out outside the Community. That fact, which may perhaps be used as an argument for amending Article 26(3) of the directive, cannot of course be used as a ground for not implementing the rule in force.
14. The German Government has also claimed that the provision of the directive at issue is in breach of the principle of legal certainty, including the requirement that Community provisions which can have financial consequences should be clear and foreseeable. That submission can be dismissed by the Court straight away, in my view. It is hard to see that it has any significance of its own alongside the Government's submission concerning the difficulties of applying the provision in practice.
15. There is no need either to examine further the German argument concerning the distortive effects on competition of a correct implementation of Article 26(3). It is true that if the provision was implemented correctly German travel agents would be placed in a worse position from the competition point of view than travel agents in the Netherlands and Denmark, where Article 26(3) has not been implemented. The reason for that difference, however, is that those two countries have made use of the transitional provision in the directive. That circumstance cannot therefore be put forward as a reason for non-implementation of a provision of the directive in Member States which have not made use of the transitional provision.
16. The Court should, on those grounds, dismiss the German submission that Article 26(3) should be deemed nonexistent. Germany was and is under an obligation to implement Article 26(3) properly unless incomplete implementation is based on one of the transitional provisions of the directive.
The transitional provision in Article 28(3)(b) of the directive
17. As stated, the German Government has contended that, in so far as Article 26(3) should be regarded as valid, the basis for the German rules at issue Hes in the special transitional provision in Article 28(3)(b) of the directive, in conjunction with Annex F, point 27.
18. The transitional provision is, in the Commission's view, not applicable in the present case. The Commission claims that the transitional provision does not provide a basis for only partly derogating from the directive's provisions when derogations can be made under the transitional provisions. A Member State may not, therefore, choose, as the Federal Republic has done, to implement the main principles of Article 26 of the directive yet not to implement the provision as far as part of the content of Article 26(3) is concerned.
19. In their reply to the questions posed by the Court the parties submitted detailed information regarding the legal situation in the Federal Republic before the adoption of the 1980 VAT Law. It appears from that information that the adoption of the new VAT Law led to fundamental changes in the calculation of tax for travel agents' services. Under the VAT law in force previously there was no special treatment of travel agents, and their transactions were therefore mainly dealt with under the law's general rules, that is to say the travel agents paid VAT on each single supply, with the right to deduct the VAT paid to other taxable persons. It further appears that the rules on the tax treatment of international air and sea transport at issue in this case were different both in their formulation and legal bases from the rules in the 1980 VAT law. Finally, it appears from the information provided that the conclusion may be drawn that despite those differences the rules in force previously did in fact lead to the same tax result as the rules in the 1980 VAT law.
20. On that basis it cannot be disputed in that respect that the activities consisting of international air and sea transport continue to be exempted. The question remains therefore, first, whether the Commission is right in its view that a Member State wishing to apply the transitional provision may do so only in relation to Article 26 as a whole, and secondly whether the exemption continues to apply under conditions existing in the Member State concerned.
21. As a preliminary point it is worth emphasizing that the transitional provisions which enable exemptions to be made from the rules of the directive and thus delay implementation of the harmonization of the rules of the Member States,
22. Whilst application of the transitional provision in Article 28(3)(b) therefore should not, in my view be rejected on the first of the grounds put forward by the Commission, I believe that the Commission is right in its argument that continued exemption of international air and sea transport did not, as required by the transitional provision take place under conditions existing in the Member State concerned.
23. Accordingly the conclusion may be drawn that the transitional provision in Article 28(3)(b) may not be relied upon as the basis for defective implementation of Article 26 of the directive.
24. Moreover, I find some support for the correctness of that result in the fact that in the preparatory work for Paragraph 25(2) of the 1980 VAT Law reference was made to the fact that the special rules for international air and sea transport implied maintenance of the rules hitherto applicable contrary to the Sixth VAT Directive, and that their legal basis was constituted by the transitional provisions of the directive. Furthermore, the Germany Government first made that submission at a late point in the infringement procedure, that is to say in a supplementary reply of 30 April 1990 to the Commission's reasoned opinion of 29 December 1989.
Conclusion
25. I accordingly suggest that the Court should declare that the Federal Republic of Germany has failed to fulfil its obligations under the Treaty as requested by the Commission and order the Federal Republic to pay the costs.
1 Original language: Danish.
2 Council Directive 77/388ÆEC 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).
3 [1988] ECR 3611. Amongst other cases mention should also be made of Case 156/77 Commission v Belgium [1978] ECR 1881.
4 The question is not discussed by the parties to the case. To my Knowledge there is no examination of this particular issue in legal writing on the subject. For a more genereal review of theory and practice in relating to objections of ille-t ality see Kovar, Contentieux de la légalité — L'exception d'illégalité, Jurisclasseur de droit international, 1981, vol. 161-C, part three, sections 19 to 25.
5 See paragraph 16 in the judgment cited in footnote 2.
6 See the Court's judgment in Case 15/81 Gaston Schul [1982] ECR 1409, especially paragraph 14.
7 The Member States concerned are Spain, France, Italy, Luxembourg and Great Britain. The evidence indicates that the other Member Sutes have used the directive's exemption provisions either wholly to exempt the relevant services from VAT whether transport takes place inside or outside the Community (Denmark, Ireland and the Netherlands) or to impose tax on all supplies, whether made inside or outside the Community. That information is contained in a survey submitted as an annex to the working document prepared by the Commission, see annex 18 to the application (sub-annex II).
8 At the Committee's Twenty-fifth Meeting held on 10 and 11 April 1989 the problem was discussed and a majority of the delegations were in favour of allowing the place of destination to determine whether a journey takes place inside or outside the Community. The Committee's recommendations are not binding.
9 It appears from the preparatory documents of the 1980 VAT Law that the reasons for the rules at issue here were the risk of distortion of competition and the need for a simplied tax charge, see Schriftlicher Bericht des Finanzausschusses des Deutschen Bundestages of 8 May 1979 on Article 25 (Annex 16 to the Commission's answers to the Court's questions).
10 See, for example, the judgments in Joined Cases 92/87 and 93/87 Commission v France and the United Kingdom [1989] ECR 405 and Case C-30/89 Commission v France [1990] ECR I-681.
11 In the course of the administrative procedure the Government also referred to point 17 of Annex F, but that was not cited before the Court.
12 The wording of the provision in German and French is as follows: b) die in Anhang F aufgeführten Umsätze unter den in den Mitgliedstaaten bestehenden Bedingungen weiterhin befreien; b) continuer à exonérer les opérations énumérées a l'annexe F dans les conditions existantes dans l'Eut membre;
13 The Commission suggested that the provision should be repealed in its proposal for the Eighteenth VAT Directive on the abolition of certain derogations provided for in Article 28(3) of the Sixth Directive. That part of the Commission's proposal was not, however, adopted by the Member Sutes: see Eighteenth Council Directive, OJ 1989 L 226, p. 21.
14 Thus international sea transport was not covered at all by the tax system previously in force and there was therefore no question of any actual exemption. On the other hand international air transport was in principle subject to VAT, but exempted by a dispensation pursuant to a ministerial decree.
15 Thus it was not the case here that the German Government after first implementing the directive correctly then reintroduced an earlier exemption system. The judgments in Case C-35/90 Commission v Spain [1991] I-5073 and Case 73/85 Kerrutt [1986] ECR 2219, which the Commission cited, are not therefore directly relevant, because they concerned cases where a Member State had reintroduced exemptions that had applied previously.