C-294/82

JUDGMENT OF THE COURT 28 F E B R U A R Y 1984 1

Senta Einberger­ ν Hauptzollamt Freiburg (reference for a preliminary ruling from the Finanzgericht Baden-Württemberg)

(Import turnover tax — Smuggled drugs)

Case 294/82

Tax provisions — Harmonization of laws — Turnover tax — Common system of value- added tax — Tax on importation — Application to the unlawful traffic in drugs — Not permissible — Criminal sanctions for offences — Power of the Member States (Council Directives 67/228, Art. 2 and 77/388, Art. 2)

Illegal imports of drugs into the strictly controlled by the competent Community, which can give rise only to authorities for use for medical and penalties under the criminal law, are scientific purposes. That interpretation alien to the provisions of the Sixth applies also to Article 2 of the Second Directive on the harmonization of the Directive on the harmonization of value- laws of the Member States relating to added tax. turnover taxes — Common system of value-added tax: Uniform basis of assessment. Accordingly Article 2 thereof That finding is without prejudice to the must be interpreted as meaning that powers of Member States to impose no import turnover tax arises upon appropriate penalties in respect of the unlawful importation into the contraventions of their drugs laws, with Community of drugs which are not all the attendant consequences, in confined within economic channels particular fines.

HAUPTZOLLAMT [Principal Customs Office] FREIBURG,

on t h e interpretation of Article 2 (2) of t h e Sixth Council Directive of 17 M a y 1977 o n t h e h a r m o n i z a t i o n of t h e laws of t h e M e m b e r States relating t o turnover taxes — C o m m o n system of v a l u e - a d d e d t a x : U n i f o r m basis of assessment (Official J o u r n a l 1977 L 145, p . 1),

THE COURT

composed of: J. M e r t e n s d e Wilmars, President, T . K o o p m a n s , K. Bahlmann and Y. G a l m o t (Presidents of C h a m b e r s ) , P . Pescatore, Lord M a c k e n z i e Stuart, A. O'Keeffe, G. Bosco, O . D u e , U . Everling a n d C . . K a k o u r i s , Judges,

Advocate G e n e r a l : G . F. M a n c i n i Registrar: H . A. R ü h l , Principal Administrator

gives the following

27 July 1977 Miss Senta Einberger, the requested the Court to give a ruling on plaintiff in the main proceedings, was the following question: given a suspended sentence of one year's imprisonment for infringement of the Drugs Law (Betäubungsmittelgesetz). "Is the imposition of import turnover tax on drugs compatible with Article 2 (2) of According to the findings of the Land- the Sixth Council Directive of 17 May gericht, Miss Einberger travelled on a 1977 on the harmonization of the laws number of occasions between the spring of the Member States relating to and autumn of 1974 to Basel in turnover taxes — Common system of Switzerland and there sold to a Mr and value-added tax: Uniform basis of Mrs Winiger a total of 280 grams of assessment (Official Journal 1977 L 145, morphine in single lots of between 30 p. 1 et seq.), if Member States are not and 100 grams for a price of between Sfr permitted to levy customs duty?" 150 and 170 per gram. The morphine was unlawfully brought into the Federal Republic of Germany and was then 3. In the statement of grounds of the taken to Switzerland by the plaintiff. order making the reference, the Finanz- gericht mentions that in the judgment of On the basis of Paragraph (2) of the 26 October 1982 cited above the Court Customs Law (Zollgesetz), the Haupt- held that no customs duty may be levied on imports of morphine. It points out zollamt Freiburg, the défendent in the that the arguments against the lawfulness main proceedings, considered that the of the imposition of import turnover tax plaintiff should pay import duties on the are essentially the same as those against quantities of drugs concerned because the imposition of customs duty, namely she had obtained smuggled goods after that morphine could not, for example, be the liability to pay customs duty had freely or legally marketed. arisen and before it had been ex- tinguished, whilst she knew, or should have known, that the goods in question were subject to customs control. Con- 4. The order making the reference was sequently by notice of assessment of 19 received at the Court Registry on 17 January 1978, the Hauptzollamt claimed November 1982. payment from the plaintiff of import duties in the sum of D M 10 960.30 (DM 5 712 customs duty and D M 5 248.30 Pursuant to Article 20 of the Protocol on turnover tax levied on imports). the Statute of the Court of Justice, written observations were submitted by the German Government, represented by The objection lodged by the plaintiff in Martin Seidel and Ernst Röder, acting as the main proceedings against the notice Agents, by the French Government, of assessment was dismissed and she represented by Jean-Paul Costes, acting appealed to the Finanzgericht [Finance as Agent, and by the Commission of the Court] Baden-Württemberg. European Communities, represented by its Legal Adviser, Rolf Wägenbaur, acting as Agent. 2. Referring to the judgment of the Court of Justice of 26 October 1982 (Case 240/81 Einberger [1982] ECR Upon hearing the report of the Judge- 3699), the Finanzgericht Baden-Würt- Rapporteur and the views of the temberg, Außensenate Freiburg, Second Advocate General the Court decided to Senate, by order of 29 October 1982, open the oral procedure.

The German Government observes in the to implement the principle, which is first place that the imports of drugs took applied throughout the world, whereby place before or during the autumn of indirect taxes are levied in the State of 1974 and that as a result the legislation destination. applicable in this case is not the Sixth Council Directive of 17 May 1977 on the common system of value-added tax (uniform basis of assessment) but rather Since the system is intended to ensure the Second Council Directive of 11 April neutrality in competition regarding 1967 concerning the structure and pro- national and imported goods, the import cedures for application of the common turnover tax ought to correspond to the system of value-added tax (Official tax payable on domestic supplies of the Journal, English Special Edition 1967, same kind. In view of the clear terms of p. 16), which ceased to be effective the provisions of the directive (see, on only when the Sixth Directive entered the one hand, Article 2 (b) in into force. The German Government conjunction with Article 7 and, on the considers therefore that the question other, Article 2 (a) in conjunction with submitted for a preliminary ruling should Article 5), unlawful transactions can be answered on the basis of the Second escape turnover tax only pursuant to· an Directive. express exempting provision. However, there is no provision of that kind (see Article 10 of the directive). It proposes that the Court's answer should be to the effect that the imposition of an import turnover tax on drugs must be compatible with Article 2 In the view of the German Government, (b) of the Second Directive because that the absence of any such exempting provision' relates to all imports, whether provision for prohibited transactions or not they are lawful, a fact which is does not constitute a lacuna resulting confirmed by the wording of Article 7 of from an omission on the part of the the same directive. Only that interpre- Council but derives from the principle tation is in keeping with the spirit and that taxes must be fair, which prohibits the objectives of the common system of more favourable tax treatment for value added tax, the purpose of which, unlawful acts than for lawful acts. The as intended by the Council, is inter alia: application of criminal-law provisions is not sufficient to combat the "under- ground economy" in particular because to levy a general tax on consumption; on occasion a person other than the criminal offender benefits from the unlawful activity. Moreover, in certain to ensure that all goods bear the same cases it is impossible to impose a penalty charge regardless of their origin and with the result that the competitive channels of distribution; advantage arising from tax exemption continues to exist. The principle that an unlawful act must not enjoy more to permit, with a view to ensuring favourable tax treatment than a lawful neutrality in competition in international act is laid down in German tax law in

In the view of the German Government, A fortiori that principle applies with Article 2 (b) of the Second Directive, as respect to fiscal practice, in so far as the interpreted by it, that is to say to the administration is in no position to verify effect that all imports, both lawful and whether any particular act is lawful. The unlawful, are subject to turnover tax, German Government also emphasizes does not infringe any provision of that according to the First Directive "a Community law, in particular Article 95 system of value-added tax achieves the of the EEC-Treaty, and has an adequate highest degree of simplicity and of legal basis (Article 99 et seq. of the EEC neutrality when the tax is levied in as Treaty). general a manner as possible . . ."; for that reason, the fourth recital in the preamble to the Second Directive states Finally, the German Government argues that in order to enable the system to be that, by contrast with the case of applied in a simple and neutral manner, customs duties, the Member States retain and to keep the standard rate of tax power to impose taxes on imports of drugs. within reasonable limits, it is "necessary to limit special systems and exceptional measures". As a secondary point, the German Government maintains that the legal situation described above was not Also, the German Government refers to changed, as regards its result, by the the fact that Article 7 of the directive entry into force of Article 2 (2) of the adopts the criterion of entry of the goods Sixth Directive, the content of which into a Member State and takes no corresponds to Article 2 (b) of the account of what happens to them there­ Second Directive and which subject after. imports to value-added tax. Article 14 of the Sixth Directive provides no greater tax exemption for imports of drugs than It also states that that interpretation the Second Directive. cannot be rejected merely because, according to the case-law of the Court, customs duties may not be levied on the The German Government therefore import of drugs. Whereas the essential concludes that the imposition of import purpose of customs duties is to provide turnover tax on drugs is compatible with protection against imports from non- Article 2 (2) of the Sixth Directive. member countries, turnover tax is characterized by fiscal interests and by The French Government on the other the principles of equality and neutrality hand considers that the reasoning in competition. The obligation to pay expounded by the Court in the two turnover tax can always arise regardless judgments concerning the imposition of

customs duties on the importation of which are not prohibited on grounds of drugs (see judgments of 26 October 1982 public policy may be subjected to the in Cases 221/81 and 240/81) should be charging of value-added tax. transposed to the present case. The French Government refers therefore to the views which it put forward in those cases and to the fact that the Court held The French Government also refers to that no customs debt could arise in the difficulty of determining the connection with the importation of a chargeable event where the drugs are not drug which could not be marketed and seized at the time of importation but states that it does not appear that any have been disposed of or indeed other solution could be adopted with consumed. If a tax debt should arise in regard to a tax debt. such circumstances, it would depend merely on the success of inquiries and inspections. The French Government points out in that connection that the Court held in Case 240/81 that there is There are three reasons for this view: no justification for making a distinction, for customs purposes, between drugs which have not been discovered and those which are destroyed under the control of the competent authorities In the first place, Article 2 (2) of the "since if such a distinction were made Sixth Directive clearly refers only to the application of customs duties would imports of goods which may be be subject to the chance of discovery" marketed. Secondly, Article 10 (3) (paragraph 15 of the Decision). thereof permits Member States to link the chargeable event and the date on which tihe value-added tax becomes chargeable with those laid down for The French Government also points out customs duties and therefore the that an exemption from import turnover considerations regarding the uncertainty tax in no way encroaches upon the of the chargeable event apply in their prerogative of Member States to take entirety to the present case. Thirdly, in proceedings against those who commit view of the rules for the collection of offences and cannot prevent the value-added tax on imports and the imposition of value-added tax within the practice followed by the French auth- country on transactions involving un- orities, a system under which total lawfully imported drugs which are sub- exemption from the customs and fiscal sequently put to lawful uses. charges on drugs imported through clandestine channels is granted should be adhered to. Finally, the French Government states that in Case 240/81 the Court limited the scope of its judgment to unlawful The French Government is of the imports of drugs. It proposes therefore opinion that although there is no express that the Court should rule that the provision to that effect, it is apparent import of drugs other than those from any analysis of the provisions of the intended for medical or scientific uses Sixth Directive, in particular Articles 5, authorized by the Member States cannot 7, 9 and 10, that only the supply of give rise to the imposition of turnover goods and services and imports of goods tax.

The Commission of the European Com (h), "the approximation of the laws of munities states that in its opinion the Member States to the extent required for question submitted is directly linked with the proper functioning of the common Case 240/81 and to the findings of the market". Imports of drugs into the Court in that case. It is therefore Community which can give rise only to necessary to bear in mind in particular repressive measures fall wholly outside that the harmful nature of drugs such those objectives and guidelines, as the as morphine, heroin and cocaine is Court held in Case 240/81.

It follows According to Article 10 (3), the that the unlawful importation of drugs is chargeable event occurs and the tax alien to the free movement of goods, the becomes chargeable in respect of the interpenetration of economies and the importation as soon as the goods are creation of a true internal market, in so brought into the country. far as it normally results in seizure of the goods and lawful trade (with the exception of officially permitted cases) is not possible. In consequence the

JUDGMENT OF 28. 2. 1984 — CASE 294/82

that the question whether the unlawful tax debt arising in respect of the importation of drugs must give rise to unlawful importation and marketing of the imposition of value added tax is drugs, and the tax legislation of each unrelated to the functioning of the Member State dealing with any such tax common market and that unlawful debt. On 21 July 1983 the Commission importations of drugs fall wholly outside submitted to the Court a table dealing the scope of the Sixth Directive, so that with the legal position in the Member the Member States retain the power to States. regulate that matter. However the Commission counters this by stating that such an interpretation of the applicable IV — O r a l p r o c e d u r e provisions of the directive would fail to take into account the exhaustive At the sitting on 27 September 1983, oral character of the Sixth Directive. argument was presented by the plaintiff in the main proceedings, represented by R. Endriss, Rechtsanwalt, by the I I I — A n s w e r to t h e q u e s t i o n p u t German Government, represented by by t h e C o u r t Ernst Röder, acting as Agent, and by the Commission, represented by R. The Court invited the Commission to Wägenbaur, acting as Agent. describe the provisions laid down by statute and regulation and the customs The Advocate General delivered his procedure applicable in each of the opinion at the sitting on 22 November Member States in the case of a turnover 1983.

Decision

1 By o r d e r of 29 O c t o b e r 1982, received at the C o u r t Registry o n 17 N o - vember 1982, the Finanzgericht [Finance C o u r t ] B a d e n - W ü r t t e m b e r g referred to the C o u r t for a preliminary ruling u n d e r Article 177 of the E E C T r e a t y a question on the application of turnover tax to smuggled drugs.

5 Having regard to those considerations, the Finanzgericht submitted the following question for a preliminary ruling:

"Is the imposition of import turnover tax on drugs compatible with Article 2 (2) of the Sixth Council Directive 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 (Official Journal 1977 L 145, p. 1), if Member States are not permitted to levy customs duty?"

6 It should be noted in the first place that the Finanzgericht refers to the Sixth Directive in its reference for a preliminary ruling, whereas it is apparent from the documents before the Court that the imports of drugs regarding which the national court is to give judgment took place in 1974, that is to say before the entry into force of that directive and therefore while the Second Directive applied (Official Journal, English Special Edition 1967, p. 16). However, it appears that there is no difference between those two directives as regards the essential issue in this case, either in the wording of the relevant provisions or in their context; consequently, the interpretation to be

JUDGMENT OF 28. 2. 1984 — CASE 294/82

given by the Court of Article 2 (2) of the Sixth Directive will apply equally to Article 2 (b) of the Second Directive.

7 Article 2 of the Sixth Directive, in defining the scope of value-added tax, mentions:

EINBERGER ν HAUPTZOLLAMT FREIBURG

12 In the first place it must be stated that the directive may not be interpreted as leaving that question outside its scope with the result that it would be for each of the Member States to decide that question for itself. Such an in­ terpretation would be irreconcilable with the aim pursued by the directive which is to achieve far-reaching harmonization in that area, particularly with regard to the basis of assessment to value-added tax.

1 3 That having been established, it is also apparent from its context and objectives that the Sixth Directive precludes the levying of value-added tax on drugs when they are illegally imported into the Community. That conclusion is unavoidable, in view of the previous decision of the Court pre­ cluding the collection of customs duties in those same circumstances, by reason of the fact that the legal situation, represented in this instance by the chargeable event, is essentially the same in the two cases.

1 4 As regards the non-collection of customs duties when drugs are illegally imported, regard must be had to the decisions of the Court to the effect that when drugs are imported into the Community otherwise than through strictly controlled economic channels for use for medical and scientific purposes, no customs debt arises (see judgment of 5 February 1981 in Case 50/80 Horvath [1981] ECR 385, and the judgments of 26 October 1982 in Case 221/81 Wolf [1982] ECR 3681 and Case 240/81 Einberger [1982] ECR 3699).

15 The Court held that drugs not distributed through channels strictly controlled by the competent authorities for use for medical and scientific purposes were, by definition, subject to a total prohibition and marketing in the Community and that, for that reason, those drugs were not liable to customs duties where they remained within illegal channels, regardless of whether they were discovered and destroyed or were not detected by the authorities.

20 Accordingly,· as the Court has already held in relation to customs duties on importation, illegal imports of drugs into the Community, which can give rise only to penalties under the criminal law, are wholly alien to the provisions of the Sixth Directive on the definition of the basis of assessment and, in consequence, to the origination of a turnover tax debt.

21 That finding is without prejudice to the powers of Member States to impose appropriate penalties in respect of contraventions of their drugs laws, with all the attendant consequences, in particular fines.

22 The reply to the question submitted must therefore be that Article 2 of the Sixth Directive must be interpreted as meaning that no import turnover tax arises upon the unlawful importation into the Community of drugs which are not confined within economic channels strictly controlled by the competent authorities for use for medical and scientific purposes. That interpretation applies also to Article 2 of the Second Directive.

EINBERGCR ν HAUPTZOLLAMT FREIBURG

Costs

23 The costs incurred by the German Government, the French Government and the Commission of the European Communities, which have submitted obser­ vations to the Court, are not recoverable. As these proceedings arc, so far as the parties to the main proceedings are concerned, in the nature of a step in the action pending before the national court, the decision on costs is a matter for that court.

Delivered in open court in Luxembourg on 28 February 1984.

P. Heim J. Mertens de Wilmars Registrar President