Report for the Hearing in Case C-276/91

I — Facts and legislative background

A — The relevant national legislation

French legislation provides for two systems of penalties for the non-payment of value added tax. The first applies to offences committed in the course of transactions within France, while the second is limited to offences committed on the importation of certain goods into France.

If the offence is committed within France, the offender is subject to the fiscal penalty laid down by Article 2(2) of Law No 87-502 of 8 July 1987 amending fiscal and customs procedures (Journal Officiel de la République Française of 9 July 1987, p. 7470) and consisting in a 10% surcharge on the amount payable. The surcharge rises to 40% and then 80% after the first and second demands for payment respectively.

A criminal penalty may also be imposed pursuant to Articles 1741 and 1750 of the General Taxation Code, which provide that the court may fine the offender between FF 5000 and FF 250000, impose a term of imprisonment from one to five years and suspend his driving licence for not more than three years. They are worded as follows:

Article 1741

Article 1750

French law lays down a second system of penalties where the offence is committed on the importation of heavily taxed goods, that is, goods which were taxed at the rate of 33 1/3% on the date when this action was brought. In such a case the offender is liable to a fine of an amount which may be equal to the value of the goods in respect of which the offence is committed or up to twice that amount, to confiscation of the goods and to a maximum of three years' imprisonment.

Those penalties are laid down by Article 414 of the Customs Code, which is worded as follows:

In practice, failure to pay VAT on the importation of heavily taxed goods does not give rise to the application of the penalties described above, but is the subject of a compromise. The amount payable in settlement, according to a scale contained in Circular MA D/4 No 1349 of 29 October 1987, is 5% of the VAT evaded for each month of delay where the tax is paid within three to 16 months after the offence, and 80% where it is paid after a delay of more than 16 months. No fine is imposed if payment is made less than two months after the offence.

Β — Pre-litigation stage

By letter of 27 April 1989, the Commission informed the French Government that, in its opinion, the legislation described above was contrary to Community law and gave the said government formal notice to submit its observations.

In support of its views, the Commission stated, first, that the penalties laid down for an offence on the importation of heavily taxed goods were more severe than those applicable where an offence took place on national territory. Secondly, it pointed out that the customs authorities did not take account of the VAT paid in the Member State of origin when they assessed the tax due on importation and that that method affected the amount of the fine as the fine was calculated on the basis of the tax due. Finally, the Commission stated that the principle of proportionality meant that the Member States should take account of the good faith or unavoidable error of the offender, and the Commission considered that the customs authorities did not observe that requirement.

As no reply was received from the French Government, the Commission sent a reasoned opinion in which it maintained the complaints contained in the letter of formal notice and requested the French Government to take the measures necessary to comply with the opinion within two months.

As the French Government failed to reply to that request, the Commission brought this action by application of 24 October 1991.

II — Procedure before the Court

The Commission's application was lodged at the Court Registry on 25 October 1991.

Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General, the Court decided to open the oral procedure without any preparatory inquiry.

The Commission claims that the Court should:

The French Republic contends that the Court should:

III — Arguments of the parties

A — The Commission

The Commission raises four complaints against the French legislation.

First complaint: the penalty is more severe when the offence takes place at the border than within the country and that difference is contrary to Article 95 of the Treaty.

In support of this complaint, the Commission refers first to the judgment in Case 299/86 Drexl [1988] ECR 1213, in which the Court held that the said article precludes national legislation which penalizes offences concerning the payment of VAT on importation more severely than such offences committed within the country in so far as such severity is not justified by the difference between the two categories of offence.

The Commission states that the Court's position is justified by the fact that Article 95 prohibits the imposition on imported products of a heavier tax than that laid down for domestic products, and that prohibition extends to charges, such as penalties, which are ancillary to the tax.

The Court also applied that reasoning in its judgment in Case 55/79 Commission ν Ireland [1980] ECR 481 on taxation for alcohol, which concerned national legislation providing for different time-limits for the payment of VAT, depending on whether it related to imported products or domestic products.

Secondly, the Commission wishes to refute the arguments put forward by the French Government in its defence.

According to the Commission, the restriction of the field of application of Article 414 of the Customs Code following the abolition of the VAT rate of 33'/3% does not mean that the application has lost its purpose. It is clear from the Court's case-law that an action is not affected where the failure to fulfil an obligation is brought to an end after the expiry of the period laid down by the Commission.

The Commission claims that the fact that offences on importation give rise in practice to a compromise is also irrelevant. The scale used appears in an administrative circular issued by the Ministry of Economic Affairs, Finance and Privatization. However, the Court has consistently held that the incompatibility of national legislation with Community law cannot be remedied by the adoption of mere administrative measures.

Second complaint by the Commission against the French legislation: the legislation is contrary to the Gaston Schul judgments, which require the State of importation to take account of the VAT paid in the State of origin so that the imported goods are not subjected to a second payment of tax (Case 15/81 Gaston Schul, Douane Expediteur BV ν Inspecteur der Invoerrechten en Accijnzen [1982] ECR 1409; in Case 47/84 Staatssecretaris van Financien ν Gaston Schul Douane-Expediteur BV [1985] ECR 1491; and in Case 39/85 Bergères-Becque ν Head of the Interregional Customs Office, Bordeaux [1986] ECR 259).

That case-law means in fact that the Member States must also take account of the VAT paid in the country of origin when they fix the amount of a fine to be paid if that amount depends on the VAT payable in the State of importation.

Third complaint by the Commission: the penalties laid down by Article 414 of the Customs Code are disproportionate to the nature of the offence and to the object pursued.

In support of this complaint, the Commission cites the case of a person who, merely for failing to pay VAT on the importation of her car into France, had to pay a fine of FF 20000, had her vehicle (value FF 44587) confiscated and would have been imprisoned for three years if the court had not found that there were mitigating circumstances.

According to the Commission, such severity does not conform to the requirement of proportionality contained in the case-law relating to the penalties which the Member States may adopt to ensure compliance with Community rules (Case 41/76 Donckerwolcke [1976] ECR 1921, and Case 179/78 Procureur de la République ν Rivoira [1979] ECR 1147).

Finally, the Commission's last complaint: the customs authorities make an erroneous application of Council Directive 83/182/EEC of 28 March 1983 on tax exemptions within the Community for certain means of transport temporarily imported into one Member State from another (OJ 1983 L 105, p. 59).

Under that directive a vehicle may be subject to VAT only in the State in which the person concerned normally resides. However, in one particular case the customs authorities wrongly considered that a Belgian national had her normal residence in France and applied to her the penalties laid down by Article 414 of the Customs Code on the ground that the VAT on the vehicle had not been paid in France.

Β — The French Government

To begin with, the French Government points out that the 331/3% rate of tax has been abolished since this action was brought and, consequently, the category of heavily taxed goods to which Article 414 applies no longer exists.

The Government goes on to examine the various complaints by the Commission.

In reply to the first complaint (disproportion between the penalties laid down for offences at the border and those applicable to offences within the country) it contends, first, that, in the Drexl judgment cited above, the Court authorized the Member States to apply different penalties to the two categories of offence.

The Court, it is contended, justified its position on the ground that offences committed on importation can be detected only when the goods cross the border, whereas offences within the country can easily be detected because of the requirement to draw up an invoice, to keep accounts and to submit a regular declaration. In these circumstances, it is legitimate to provide for a severe penalty such as confiscation where an offence is committed on importation.

The French Government goes on to compare the penalties laid down by Article 414 of the Customs Code for offences on importation with the criminal penalties applicable to internal offences under Articles 1741 and 1750 of the General Taxation Code.

According to the government, the fine of up to twice the value of the goods for an offence at the border is similar to the fine of between FF 5000 and FF 250000 for an offence within the country. The same is true, it states, of imprisonment, which is limited to three years for offences on importation and is from one to five years for offences within France. With regard to confiscation, that is comparable to suspension of the driving licence for a maximum of three years.

In addition, the criminal penalties for the two categories of offence are hardly applied in practice. Offences on importation are settled by the payment of an amount (5% of the VAT evaded per month where the tax is paid after a delay of between three and 16 months, and 80% thereafter) which, it is contended, is similar to the fiscal penalty laid down by Article 2(2) of Law No 87/502 for offences committed within the country (10% surcharge on the amounts due, rising to 40% and then to 80% after the first and second demands for payment respectively).

With regard to the Commission's second complaint (refusal to take account of VAT paid in the State of origin), the French Government stresses that the legislation is contrary to the Gaston Schul judgments only if two conditions are met: the amount of the fine must depend on the tax due and the original VAT must not be taken into account for calculating that tax.

It adds, however, that the French legislation provides that the fine shall depend on the value of the imported goods and not on the amount of tax.

On the third complaint (severity of penalties on importation), the French Government denies that the penalties imposed when an offence is committed on crossing the border are disproportionate to the nature of the offence and the object pursued.

It points out that this complaint was not mentioned in the reasoned opinion, which referred to the principle of proportionality only in relation to the obligation to take into account the good faith and unavoidable error of the offender.

The French Government also disputes the relevance of the case-law relied upon by the Commission. It is true that the case-law relates likewise to the penalties imposed where a declaration is prescribed by national law for the importation of certain goods and that obligation is not fulfilled. However, the declaration in question in those cases was found by the Court to be contrary to Articles 30 and 36, whereas the declaration for the collection of VAT on importation is compatible with the Treaty and is necessary for ensuring the collection of the tax, part of which goes towards the Communities' budget.

The French Government refers also to the judgment in Case 68/88 Commission ν Greece [1989] ECR 2965, in which the Court stated that the penalties adopted by the Member States to ensure compliance with Community rules must be effective and dissuasive.

Finally, the French Government observes that the Commission's last complaint (erroneous imposition of penalties on persons without normal residence in France) is alien to the subject-matter of the action, which relates to the disproportion between penal-tics when the VAT offence is committed on the importation of goods and when it is committed in the course of a transaction within the country. Furthermore, the position adopted by the customs authorities in the case cited by the Commission was upheld by the Cour d'Appel, Amiens.

IV — Replies to questions put by the Court

The Court asked the French Government to clarify the field of application of Article 2(2) of the abovementioned Law No 87-502 and Articles 1741 and 1750 of the General Taxation Code.

The French Government replied that those provisions applied exclusively to transactions within the country.

For its part, the Commission explained, on request by the Court, that its first complaint is directed mainly against the fact that the penalty of confiscation applies in France to VAT offences committed on importation, but not to offences within the country.

The Commission also emphasized that the complaint related more generally to the difference between the penalties applicable to VAT offences according to whether they took place on importation or within the country.

1 Language of the case: French.