Report of the Judge-Rapporteur in Case C-111/92
I — Legislative background
1. Title X of the Sixth Council Directive of 17 May 1977 (77/388/EEC) 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), entitled Exemptions, contains four articles concerning exemption from value added tax (hereinafter VAT) within the territory of the country (Article 13), on importation (Article 14) and of exports (Article 15), and special exemptions linked to international goods traffic (Article 16).
2. Article 15 of the Sixth Directive provides that:
II — Facts and procedure before the national court
3. According to the order for reference, during the years 1985 and 1986, Wilfried Lange operated the PPC Purchasing Pool Company (hereinafter the PPC) as a one-man business, trading in computer systems (hard-and software).
4. In order to be able to export such systems, the PPC applied for export permits in accordance with Paragraph 17(1) of the Aussenwirtschaftsverordnung (Foreign Trade Regulation) (hereinafter the AWV) as amended on 3 August 1981 (BGBl. I, p. 853), and by the 58th Regulation amending the AWV, 1 July 1985 (BGBl. I, pp. 1258 and 1313). The applications for export permits submitted in accordance with Annex A5 to Paragraph 17(1) of the AWV identified the purchasers, countries of use, consignees (end use) and countries of use as either Mercantile Agencies, of Karachi, Pakistan or ΕΜA International Trading Ltd, of Ramat Gan, Israel.
5. The Bundesamt für Gewerbliche Wirtschaft (Federal Office of Commerce) granted the export permits requested for those consignees.
6. For each consignment, the PPC made out an invoice addressed to the consignees mentioned above, At the same time it entrusted to international forwarding agents the dispatch of the goods abroad. On presentation to the customs authorities of the requisite documents (consignment note, export permit, export declaration, declaration of goods) the goods were dispatched to Vienna, to Belgrade or to Belgrade via Vienna. In Vienna and Belgrade they were collected by local carriers and dispatched to Bulgaria, Hungary, the USSR and Czechoslovakia.
7. Furthermore, the PPC obtained export certificates from the forwarding agents for the purposes of turnover tax in accordance with Paragraph 10(1)(2) of the Umsatzsteuer-Durchführungsverordnung (Turnover Tax Implementing Regulation, hereinafter the UstDv). Those documents confirmed that the goods had been conveyed to Vienna and Belgrade. The Pakistani and Israeli companies were identified therein as the consignees or authorized agents.
8. In the context of supervisory measures laid down by the rules on foreign trade, the Zollfahndungsamt (Customs Inspectorate) Frankfurt am Main carried out an investigation with regard to Mr Lange. In the course of that investigation, the Zollfahndungsamt seized import certificates (certificates of end use) issued by the Pakistani and Israeli customs authorities. The import certificates proved to be false, because it became apparent that neither the consignees nor the authorized agents carried on that line of business nor would they have ordered or received electronic goods.
9. In his declarations for turnover tax for 1985 and 1986, Mr Lange had requested exemption for these transactions on the basis of Paragraph 4(1) of the Umsatzsteuergesetz 1980, (Turnover Tax Law, hereinafter the UStG) as well as the deduction of the input tax levied on the goods supplied on the basis of Paragraph 15(1)(1) in conjunction with sub-paragraph (3)(l)(a) of the UStG.
10. At the time of the investigation carried out by the Zollfahndungsamt, the Finanzamt undertook an examination of Mr Lange's tax situation (Tax Inspection Report dated 12 December 1988). The tax inspector, and subsequently the Finanzamt, took the view that the transactions declared exempt should be subject to turnover tax on the grounds inter alia that exports were prohibited. In that respect, the Finanzamt relied on the combined provisions of Paragraph 7(1) of the Aussenwirtschaftsgesetz (Foreign Trade Law, hereinafter the AWG), BGBl. I, 1961, p. 481, and Paragraph 5(1) of the AWV, according to which authorization is required for the export of the goods included in the export list (Annex AL to the AWV). According to Paragraphs 33(1) and 34(1) in conjunction with Paragraph 70(1)(1) of the AWV, breach of the provisions relating to authorization is a criminal offence.
11. Mr Lange challenged that decision and brought an action against the Finanzamt before the Finanzgericht München. In his application he maintained that, in accordance with Paragraph 4(1) and (6) in conjunction with Paragraph 6(1 )(1) of the UStG, it was sufficient for exemption that the goods had been dispatched abroad. According to Mr Lange, a breach of legal provisions could not justify the refusal of tax exemption, because the UStG refers only to the act of exportation, without any value judgment as to the transaction. Furthermore, he maintained that it could not be expected that the whereabouts of the goods should be monitored and traced for years after delivery.
12. The Finanzgericht, considering that the outcome of the proceedings depended on the interpretation of the EEC Treaty and the Sixth Directive, stayed the proceedings by order of 23 March 1992 and referred the following questions to the Court of Justice for a preliminary ruling:
III — Opinion of the court of reference
13. In the statement of the reasons on which its order was based, the Finanzgericht states that it has no doubt that the Sixth Council Directive covers exports to countries for which no authorization has been given on the basis of Paragraph 5 in conjunction with Paragraph 17 of the AWV.
14. It refers to the case-law of the Court according to which neither unlawful trade in drugs within the territory of a Member State, nor their illegal importation, is subject to VAT (Cases 269/86 Mol ν Inspecteur der Invoerrechten en Accijnzen [1988] ECR 3627 and 289/86 Happy Family ν Inspecteur der Omzetbelasting [1988] ECR 3655). The Finanzgericht considers that the abovementioned case-law concerns only products for which there is an absolute prohibition of importation and trade within the Community, whereas the trade in computer systems is not absolutely prohibited, but is in principle unrestricted, since the restrictions which do exist concern only exportation, which is merely subject to authorization in accordance with national legislation (Paragraph 7 of the AWG in conjunction with Paragraph 5 of the AWV and Part I Section C of the export list, Annex AL).
15. The Finanzgericht explains that, as is permitted by Article 15(1) of the Sixth Directive, the German Law makes provision for VAT exemptions for exports in the combined provisions of Paragraphs 4(1) and 6(1)(1) of the UStG 1980. However, it points out that there is some disagreement in case-law and in academic literature with regard to the interpretation of those provisions.
16. One view is that those provisions are to be interpreted, in accordance with their meaning and purpose, as prohibiting the granting of tax exemption where exports are effected in breach of a law requiring an authorization or under an authorization obtained from the authorities by fraudulent means.
17. That interpretation is based, according to the Finanzgericht, on two arguments: on the one hand, the German provisions should not be regarded as the technical legal implementation of the principle of the country of destination — regardless of any value judgment — but rather as a means of promoting exports by granting relief from VAT for reasons of economic policy, and on the other hand it must be contrary to the principle of the unity of law for one provision to encourage what another more specific provision prohibits. Thus, export consignments subject to an embargo for other more specific reasons should not be promoted for tax reasons.
18. The second view is that the turnover tax rules are guided by the general principle of fiscal neutrality and, consequently, do not distinguish between lawful and unlawful business dealings.
19. According to the Finanzgericht, there is nothing in Article 15(1) of the Sixth Directive to indicate whether it is subject to the principle of fiscal neutrality or whether it is affected by value judgments according to which no tax exemption may be considered for exports effected in breach of a law requiring authorization to be granted or providing for criminal penalties in the event of infringement.
20. Since the courts of the Member States are bound to interpret national law in the light of the wording and purpose of directives, selecting whichever interpretation of national law best reflects the content of the directive (see Case 80/86 Kolpinghuis Nijmegen [1987] ECR 3969), the Finanzgericht is in doubt as to whether the Court wishes to see the principle of fiscal neutrality confirmed in the judgments in Mol and Happy Family extended to cases in which there is no absolute prohibition on marketing.
21. The Finanzgericht notes that no Member State of the European Communities would have authorized the exportation to (former) Communist countries of the goods supplied by Mr Lange. In fact, the member States of NATO (with the exception of Iceland), Japan and Australia have combined (without any formal institutional framework) to form a Coordinating Committee for East West Trade Policy (COCOM) in order to restrict exports of strategically important goods to Communist countries. COCOM draws up lists of goods which should be covered by this embargo. The COCOM lists are transposed by the NATO States into their individual foreign trade laws. In the Federal Republic of Germany the COCOM lists have been transposed into national law by Annex AL to Paragraph 5 of the AWV.
22. Since all the countries of the European Communities, with the exception of Ireland, were members of NATO during the material years 1985 and 1986, and since Ireland's foreign trade laws contained broadly similar provisions, intended to prevent the export of strategically important goods to Communist countries, the Finanzgericht considers that it is possible that the Court may take account of the special situation in interpreting Article 15(1) of the Sixth Directive and depart from the principle of fiscal neutrality as regards trade with the countries affected by the embargo.
23. The Finanzgericht also points out that the Court links the principle of neutrality to the levying of VAT. That might be explained inter alia by the consideration that those who pursue unlawful activities should not be granted more favourable tax treatment than those who pursue lawful activities. But an undertaking which supplies goods in breach of the authorization procedure laid down by the foreign trade law secures, together with a wrongfully claimed tax exemption, a competitive advantage over undertakings which conduct only transactions which do not require or have received authorization.
IV — Procedure before the Court
24. The order for reference was lodged at the Court Registry on 7 April 1992.
25. Pursuant to Article 20 of the Protocol on the Statute of the Court of Justice of the EEC, written observations were submitted by the Commission of the European Communities, represented by Henri Étienne, Legal Adviser, acting as Agent.
26. Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General and after consulting the parties referred to in Article 20 of the Protocol on the Statute of the Court of Justice of the EEC, the Court decided, pursuant to Article 104(4) of the Rules of Procedure, to dispense with the oral procedure and with a preparatory inquiry and, pursuant to Article 95(1) and (2) of the Rules of Procedure, to assign the case to the Sixth Chamber.
V — Observations submitted to the Court
27. By way of introduction the Commission examines the preliminary issue of whether dual purpose products, such as computers, which may be used both for civil and for military purposes and which circulate freely in the West but are subject to restrictions when they are intended for countries of the former Eastern bloc, fall within the field of application of Community customs duties and VAT.
28. The Commission agrees with the Finanzgericht on this point, observing that in contrast to narcotic drugs, the importation and marketing of computers within the Community is wholly unrestricted and that trade in these products falls under the Sixth Directive. In this respect, the Commission relies on the judgment of the Court in Case C-367/89 Richardt [1991] ECR I-4621), according to which customs provisions apply to goods subject to an export prohibition. That applies also to Community law on turnover tax.
29. The Commission refers to the judgments in Case C-343/89 Witzemann ν Hauptzollamt München-Mitte [1990] ECR I-4477 and Case 294/82 Senta Einherger ν Hauptzollamt Freiburg {Einherger II) [1984] ECR 1177) and observes that the fact that the common customs legislation and the common system of turnover tax do not apply to the drugs trade does not in any way restrict the powers of the Member States to apply the necessary penalties to enforce observation of the prohibition; the Court distinguishes between products which are excluded from the scope of the Sixth Directive (and the Community customs duties) and products which are not excluded, to which the principle of fiscal neutrality applies.
30. The Commission adds that the principle of neutrality is also confirmed by Community customs legislation; thus Article 2(2) of Council Regulation (EEC) No 2144/87 of 13 July 1987 on customs debt (OJ 1987 L 201, p. 15) provides that the customs debt on importation shall be incurred even if it relates to goods subject to measures prohibiting or restricting importation, of whatever kind.
The first question
31. The Commission considers that the reply to the first question should be in the negative; its observations relate to the following points:
32. A. Although Regulation (EEC) No 2603/69 of the Council of 20 December 1969 establishing common rules for exportation (OJ, English Special Edition 1969 (II), p. 590) contains no restriction on exports of products capable of being used for strategic purposes, a Member State is entitled, on the basis of Article 36 of the EEC Treaty, to prohibit the export of goods on grounds of public security, as was indirectly confirmed by the Court in its judgment in Case C-367/89, cited above.
33. However, Article 36 of the Treaty does not concern the inapplicability of the Community system of turnover tax, which contains no provision on the subject, but merely authorizes Member States to refrain from applying Articles 30 to 34 in certain circumstances. Consequently, Article 36 of the EEC Treaty could not be used outside its area of application, as would be the case here.
34. B. The conditions for exemption were satisfied in this case, in accordance with both national provisions and Article 15(1) of the Sixth Directive, but the documents submitted to the national authorities were false. The question is therefore whether the neutrality of the Community system of taxation recognized by the Court and expressly decided by the Council also applies in a case such as that which is the subject of the main proceedings.
35. The purpose of the principle of neutrality is to ensure that the citizen who does not comply with the provisions is not treated more favourably than the citizen who does. The two aims of this neutrality — namely the simplification secured by an objective mechanism, on the one hand, and the equal treatment of the honest and less honest citizen, on the other, coincide when it is a matter of the importation and supply within the territory of a country. This double aim was taken into consideration by the Court in Case 269/86 Mol, cited above.
36. It should be noted, however, that whilst the taxpayer who imports goods affected by an import ban without paying customs duty obtains an advantage over taxpayers who import competing goods which are not prohibited and arc therefore subject to duty, the taxpayer who has carried out a foreign transaction in breach of a national prohibition and who has not been subject to turnover tax thereon obtains no advantage over other taxpayers whose exports were not prohibited. Consequently, the taxation of the foreign transaction is a penalty and cannot be regarded as an application of the rule that a person who has acted unlawfully cannot be treated more favourably than one who has acted lawfully.
37. C. In this case therefore, the issue is not the equal treatment of the honest and less honest taxpayer, but the compatibility with the EEC Treaty of the decision of a Member State not to apply an exemption authorized by the Sixth Directive in order to penalize the breach of a national prohibition.
38. The reply to this question depends on whether the Community system of VAT is to be regarded as a neutral (objective) tax law or whether specific subjective facts may rule out an automatic application of the mechanisms of the common system.
39. The Community system of turnover tax, which, pursuant to Articles 2 and 4 of the Sixth Directive, consists in taxing the final consumer within the area of application of VAT, militates in favour of the principle of fiscal neutrality. Thus the fact that, as laid down in Article 15(1) of the Sixth Directive, there is no taxation on supply for consideration outside the area of application of VAT can only be regarded as a consequence of a general scheme. That scheme must be applied regardless of considerations unrelated to turnover tax.
40. Consequently, the non-taxation of supply abroad for consideration is not an advantage conferred by a Member State, for example to promote exports whilst taxing imports. This non-taxation, which in effect precludes any taxation of the transaction in question, implies that such taxation would be equivalent to a tax imposed directly on the taxpayer himself. That would be incompatible with the scheme, according to which the taxpayer is taxed only in two specific situations laid down in Articles 5(6) (supply of goods for own use) and 6(2) (supply of services for own use).
41. D. As far as possibilities for exemption are concerned, the discretion left to the Member States by Article 15 of the Sixth Directive concerns only the operation of the common system for the purpose of ensuring the correct and straightforward application of the exemptions laid down and of preventing any evasion, avoidance or abuse. As established by the case-law of the Court, there can be no derogation from the foundations of the common system except where provided by the Sixth Directive (see Article 27) or where the Council itself derogates from the Sixth Directive by a subsequent measure (see the 20th Council Directive 85/361/EEC of 16 July 1985, OJ 1985 L 192, p. 18) or exceptionally grants Member States the right to determine whether the requirements for the application of Community law are met (see the second subparagraph of Article 2(2) of Council Regulation (EEC) No 2144/87 of 13 July 1987, cited above (paragraph 31)).
42. The exemption for supplies abroad for consideration must be regarded as fundamental to the Community system, like the basis of assessment, which, according to the case-law of the Court, may not be completely or generally amended (Case 324/82 Commission ν Belgium [1984] ECR 1861).
43. The case-law of the Court relating to areas where the common customs legislation and the common system of turnover tax do not apply (exclusion of trade in narcotic drugs) and the case-law on the neutrality of both measures justify the inference that there is a kind of common tax legislation; the Court's case-law in the area of customs may also be applied to the common system of turnover tax. The Commission refers to the judgment in Case 65/79 Chatain [1980] ECR 1345, in which the Court states that for a Member State to apply the Community rules on the valuation of goods for customs purposes in order to penalize other practices is not compatible with the Treaty.
44. Consequently, even though there might be some justification if there were no other penalty to guarantee that a national provision would be respected, the exemption laid down in Article 15 of the Sixth Directive is a fundamental aspect of the system established by that directive. It follows that the directive docs not authorize Member States to protect other, non-Community, provisions by refusing tax exemption for supplies abroad for consideration except in the event of a decision by the Council.
45. E. That conclusion, the Commission continues, is not completely satisfactory, since, as the Finanzgericht mentions, the Member States have a uniform policy in the area concerned. Nor does it appear to be in the interest of European cooperation as a whole, or in the interest of the Community, to remain in a way on the fringe of a joint process. The fact cannot be ignored that it is in the interest of the common market for the Member States to adopt a uniform approach, as they have done on this subject, in order to respect the prohibitions laid down by COCOM, even in the absence of Treaty provisions on the subject of defence policy.
46. However, the arguments against the foregoing observations by the Commission (that it cannot be pleaded against a Member State that exportation has taken place if it was manifestly unlawful, and that a Member State is entitled to prohibit exports of a product on grounds of security and to penalize the breach of such a prohibition) may be set aside inasmuch as the Court has not regarded them as paramount in cases in which it has confirmed the neutrality of the Community tax system.
47. Consequently, the Commission, whilst taking into consideration the reasoning of the Finanzamt, which in particular concentrated the reply to the question referred to the Court of Justice on the fact that no export permit could have been granted in any Member State as a result of the national embargoes, takes the view that as Community law stands at present such considerations cannot be relied on to justify using national law to bypass Community legislation.
48. The Commission suggests, therefore, that the first question referred to the Court should be answered to the effect that Article 15(1) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment — should be interpreted as meaning that the tax exemption of exports provided for therein may not be refused if goods are delivered for export, in breach of national provisions requiring export authorization, to States for which no authorization would have been considered in any Member State of the European Communities in view of the existence of national embargoes.
The second question
49. In view of the reply to the first question, the Commission considers that there is no need to reply to the second question. However, it makes the following comments in the alternative.
50. The taxation of foreign transactions operates as a penalty proportional to the rate of the tax. In this case, the taxation is equivalent to a financial penalty of 14% of the sale price (although the file does not indicate precisely how that price has been calculated, in particular in relation to transport costs). The penalty is therefore an indiscriminate one, the amount of which does not depend on individual circumstances, such as, for example, the subjective awareness of the breach which has been committed.
51. If the view is taken that the Member State is entitled to tax the supply by way of a penalty for the failure to comply with the authorization requirement, the person concerned must have acted knowingly. Furthermore, the Member State must ensure that its penalty is in accordance with the principle of proportionality, as stated in Case C-367/89 Richardt, cited above.
52. According to the Commission, the reply to the second question should therefore be to the effect that since the reply to the first question is in the negative, there is no need to reply to the second question. However, in the event of the Court's replying to the first question in the affirmative, it must be shown, in order to justify refusal of tax exemption, that there was not only an objective breach of the national authorization requirement, but also a subjective awareness by the undertaking of the breach in respect of each consignment.
1 Language of the case: German.