C-415/85

COMMISSION v IRELAND

OPINION OF MR ADVOCATE GENERAL DARMON delivered on 2 December 1987 *

1 Member States relating to turnover taxes according to Community rules'. 9 (hereinafter referred to as 'the directive'). The essence of the claim is that Ireland applies to certain categories of goods and services 2contained in a list laid down by the Value-Added Tax Act 1972 3 a 'zero rate' which is not justified for 'clearly defined social reasons and for the benefit of the final consumer', as required by the last 3. 'So that the Communities' own resources indent of Article 17 of the Second Council may be collected in a uniform manner in all

2. That provision was adopted as part of a criteria set out in Article 17. That possibility process initiated in April 1967, when the was left open on the ground that it was first two directives on the harmonization of 'vital to provide for a transitional period to allow national laws in specified fields to be 1 * Translated from the French. gradually adapted'. 1 1 — 'Common system of value-added tax: uniform basis of assessment', OJ L 145, 13.6.1977, p. 1. 5 — First Council Directive of 11 April 1967 on the harmon- 2 — The action concerns certain agricultural inputs (feeding- ization of legislation of Member States concerning turnover stuffs for animals other than domestic pets, certain taxes (67/227), Official Journal, English Special Edition fertilizers supplied in units of not less than 10 kg, 1967, p. 14; Second Directive, cited above. medicines for the oral consumption of animals other than domestic pets, and seeds and other products used for 6 — Eighth recital in the preamble to the First Directive. sowing in order to produce food) and supplies of electricity 7 — Article 2 (1) of the First Directive. other than to the final consumer. 8 — The third, fourth and fifth directives merely delayed the 3 — As amended most recently by the Finance Act 1985. introduction of the common VAT system. 4 — Directive 67/228 on the harmonization of legislation of 9 — Second recital in the preamble to the Sixth Directive (my Member States concerning turnover taxes — 'Structure and emphasis). procedures for application of the common system of 10 — Eleventh recital in the preamble to the Sixth Directive. value-added tax' (hereinafter referred to as VAT).

OPINION OF MR DARMON — CASE 415/85

5. Let me state right away that the system itself is not challenged by the Commission, which considers it to be equivalent to the 7. In its pleadings Ireland did not dispute system of exemption and refund. However, the Commission's interpretation of the term the Commission disputes the application of 'final consumer', although in its letter of 23 zero-rating to the goods and services July 1982, in the course of the adminis­ 12 referred to above on the ground that it trative proceedings, it stated that that inter­ does not comply with the criteria laid down pretation was too narrow and not 'neces­ in Article 17. While it admits that zero- sarily correct'. It argues first of all that rating has no effect on own resources, it zero-rating is justified where, having regard states that 'in the context of the completion to the commercial circumstances, there is a of the internal market, of the abolition of benefit, even an indirect one, for the final consumer. In any event, in so far as the 12 — Sec note 2, above. agricultural inputs at issue are concerned,

COMMISSION v IRELAND

10. Let me say right away that these objections concerning the Commission's possible motives for bringing the action do 8. However, in its defence Ireland relies not seem relevant to the role of the Court. mainly on Article 27 (5) of the Sixth It scarcely needs pointing out that the Directive (hereinafter referred to as Article decision whether or not to bring an action 27). That provision allows Member States to against a Member State for failure to fulfil retain special derogating measures of the its obligations is in any event in the entire kind referred to in Article 27 (1), provided discretion of the Commission, as the that they were notified to the Commission custodian of the Treaties, and that it is for before 1 January 1978, in order 'to simplify the Commission 'to judge at what time it 14 the procedure for charging the tax or to shall bring an action before the Court'. prevent certain types of tax evasion or Moreover, the role of the Court in avoidance'. Ireland argues that that proceedings of this kind is to determine provision is sufficient to justify zero rates on whether or not a Member State has failed to agricultural inputs and also, in an alternative fulfil its obligations towards the Community submission, on supplies of electricity. The as defined by the law in force. It should be Commission considers in essence that from recalled in that regard that in Parliament v the point of view of their scope ratione Council, where the Council contended that materiae, the cumulative application of the Parliament was using the action for Articles 27 and 28 (2) is not possible. In failure to act as a means of furthering particular, Article 27 cannot be used in political objectives, the Court held that: order to escape the rules laid down in Article 28 (2).

I — Measures taken for clearly defined social reasons and for the benefit of the final consumer 'It is not for this Court to decide whether the action has political objectives. An action is being prosecuted before the Court according to the rules of procedure on a 11. Let me emphasize right away that question of law, namely the scope of the 'clearly defined social reasons' and 'benefit duties of a Community institution. The of the final consumer' are not alternative action will be decided according to the conditions. One of them concerns the relevant provisions, namely those of the objective of the measures in question, the Treaty establishing the European Economic other its beneficiaries. They are therefore Community of 25 March 1957. It is pros­ cumulative. Moreover, a provision creating ecuted in the interests of the Community an exception to the rules on the uniform and its legal system for the purpose of basis of assessment for VAT cannot be obtaining a binding ruling on the scope of construed liberally. 16 the rights and obligations of the parties'.

A — 'Clearly defined social reasons'

COMMISSION v IRELAND

of the Court to review the expediency of or services for his personal use, as opposed choices made by the Member States. With to an economic activity, which Article 4 of reference to the 'public moralit' exception the directive uses as the criterion for deter­ to the rules on the free movement of goods, mining who is a taxable person. The the Court has held that: distinction between a taxable person and a final consumer lies in the fact that a taxable person carries out transactions for 'In principle, it is for each Member State to consideration, while a final consumer is one determine in accordance with its own scale who acquires goods or services for his own of values and in the form selected by it the use. That distinction has fundamental requirements of public morality in its consequences for tax purposes: in principle territory'. 17 a taxable person deducts VAT, whereas a final consumer bears that tax 'unless there is a further transaction in which a price is 18 paid'. That consequence cannot be I propose that the Court take the same ignored in the case of a zero rate. In such a approach in this case. That is to say, if it is case the final consumer is the person who accepted that the Member States can restrict would have to bear a positive tax and would that fundamental freedom in the manner not be able to deduct it. That definition is described, it must be possible to accord not, I think, based on a narrow approach; it them, without thereby endangering to any corresponds strictly to a fiscal interpre­ greater extent the consistency of the tation, the only one which, in the context of Community legal system, a similar latitude provisions on VAT, is appropriate to the with regard to provisional exceptions to categories relevant to such taxation. It is, rules establishing a uniform basis of moreover, that which appears in Article 3 of assessment for VAT. 19 the proposal for a 16th VAT directive:

(2) a taxable person who was not entitled to which are revealed by an economic analysis, deduct value-added tax when should be regarded with prudence in so far purchasing goods.' as they vary according to the time-limits for deductions, the size and structure of the producers or dealers in question, credit arrangements between them, etc. The C — 'For the benefit' of the final consumer: complexity of such effects requires, in my the concept of a benefit opinion, a degree of caution in that respect in considering the notion of a 'benefit' for the final consumer for the purposes of Article 17. However, in so far as the very existence of a reduction in production costs 16. It remains for me to consider the is likely to result in a benefit for the final concept of a 'benefit' as used in Article 17, consumer, albeit a variable one, I propose where it speaks of exemptions 'for the that the Court should not reject, as a matter benefit of the final consumer'. In the case of of principle, the zero-rating of inputs which a 'normal' exemption, such a benefit results are directly and exclusively used in a from the non-application of VAT at the product which itself is properly zero-rated. retail stage. In essence, the benefit is entirely identical under the zero-rating system: the consumer pays no VAT. The application of zero-rating at earlier stages of distribution results in no additional fiscal benefit for the 18. Now that the conditions laid down in consumer since he does not pay the tax in the provision at issue have been defined, we any event. However, as the Commission may determine whether or not the contested says, zero-rating may be accepted higher in measures comply with them. the commercial chain in so far as it is applied to the product itself which is zero-rated on purchase by the final consumer. II — The contested zero rates

that farm households account for as much electricity, which account for 41 % of elec­ as a quarter of the total population of the tricity consumption in Ireland, is inseparable State, and that the zero-rated goods in from the rating of non-domestic supplies. question are direct inputs in the production The domestic use of electricity is significant of food which is in part consumed by the enough to justify a zero-rating of all such producers themselves. Such home supplies. It goes on to argue that the consumption, estimated by Ireland at up to application of different rates to the same 9 % of total output, seems all the more product would be impractical from a likely inasmuch as there are many small taxation viewpoint, and that there is little farms. It seems undeniable that positive point in taxing consumers who are taxation would have the effect of increasing registered for VAT whether electricity is costs in respect of that portion of final subject to a positive rate or a zero rate. The consumption. Ireland further submits that if latter assertion no doubt relates to Ireland's a positive rate of VAT were imposed on the statement that even if a positive rate of tax inputs in question producers might increase were applied to the supplies at issue, 80 % of their prices in order in particular to make electricity consumption would be either up for the cash-flow loss incurred as a result zero-rated or entitled to a tax credit. of having to wait to obtain flat-rate compensation. Such a consequence cannot be excluded out of hand. Furthermore, since these inputs are in my view used directly and exclusively for food, I suggest that the Court accept that zero-rating results in an indirect benefit for the final consumer, having regard to the 'sensitive' nature of 23. That argument is unconvincing. The retail food prices. I therefore propose that industrial and commercial sectors cannot be the Court dismiss the Commission's claim in regarded as 'final consumers'. Because of this respect. the zero-rating of supplies for industrial use the final consumer will not, of course, bear the VAT on the electricity used in the manufacture of finished products taxed at the normal rate. However, quite apart from the fact that it is difficult to see what social B — Electricity reasons might account for the zero-rating in question, I think the benefit is too indirect and remote. Moreover, while the Commission may be correct to say that zero-rating remains permissible where it only incidentally benefits a category of goods or users which are not, in principle, 21. At issue is the application of a zero rate entitled to such a measure, that proposition to electricity supplied to persons other than cannot be accepted in respect of supplies of the final consumer. electricity to the entire industrial sector of a Member State. It does not appear impossible, moreover, to distinguish among categories of users of a product and apply different rates of VAT to them depending on their status. I do not think, therefore, 22. Ireland argues in essence that the rating that the criteria for the application of for VAT purposes of domestic supplies of Article 28 (2) are fulfilled in this respect.

26 . I therefore propose that the Court hold that by applying a zero rate to supplies of electricity to users other than final consumers , Ireland has failed to fulfil its obligations under the EEC Treaty and under Article 28 (2) of the Sixth Council Directive of 17 May 1977 ( 77 / 388 ), and that it dismiss the remainder of the action . In view of the latter proposal I suggest that the parties be ordered to bear their own costs .

20 — My emphasis.