C-433/85

1. The Tribunal de grande instance (Court 4. The Court has had occasion in numerous of First Instance), Mulhouse, has submitted judgments to define the criteria for the the following question to the Court: application of Article 95. One of the most detailed judgments is that of 27 February 1980 in Case 169/78 Commission v Italy [1980] ECR 385 in which the Court stated 'Does Article 95 of the Treaty of Rome in particular that 'Article 95 must guarantee forbid the imposition, on motor vehicles the complete neutrality of internal taxation exceeding a certain power rating for tax as regards competition between domestic purposes, of a differential tax which products and imported products' (paragraph increases exponentially according to that 4)· rating, where the rating is arrived at by means of a formula which has the effect of subjecting to the said exponential increase any vehicle of a given cylinder capacity and 5. In a judgment delivered on 15 March such vehicles are manufactured only in 1983 in Case 319/81 Commission v Italy certain other countries, in particular those [1983] ECR 601, paragraph 21, the Court of the Community, and not in France?' added that the Member States are empowered 'to adopt, whilst observing the relevant directives, a higher rate of VAT on luxury products as opposed to domestic or 2. The question has been submitted to the imported products not having that quality, Court in connection with proceedings provided, however, that the criteria chosen brought by a private individual, Mr Feldain, to determine which category of product is the owner of a foreign car, against the to be more heavily taxed are not discrimi­ French tax authorities. Mr Feldain considers natory as against imported products similar that the system of annual taxation applied to to or in competition with domestic products luxury motor vehicles under Article 18 of in the manner contemplated by the second Law No 85-695 of 11 July 1985, which was paragraph of Article 95'. adopted following the Court's judgment of 9 May 1985 in Case 112/84 Humblot [1985] ECR 1367, at p. 1375, is still contrary to Article 95 of the Treaty. 6. More particularly with regard to the taxation of cars, the Court further stated very recently (judgment of 16 December 1986 in Case 200/85 Commission v Italy 3. Details of the system previously applied [1986] ECR 3953, at p. 3969) that 'in order and of the new legislation are set out in the to decide whether contested differential tax

arrangements are compatible with Article 95 'system of progressive taxation embodying of the Treaty it must be considered whether balanced differentials'. the differentiation is based on an objective criterion, whether it is directly or indirectly discriminatory and whether it is of such a 11. I — The Tribunal de grande instance, nature as to protect domestic products from Mulhouse, asks whether the new system is competing products imported from other compatible with Article 95 because, for Member States' (paragraph 9). In the same vehicles exceeding a given power rating for judgment the Court stated (at paragraphs 16 tax purposes, the amount of the tax and 20) that the competitive relationship increases exponentially according to that which must be taken into account in deter

13. The various coefficients were of road tax which increases progressively in determined not on an 'exponential' basis but amount depending on an objective criterion, according to a 'geometric progression' : each such as the power rating for tax purposes, level of taxation is arrived at by multiplying which may be determined in various ways'. the lower level by a given factor (called the 'common ratio' of the progression). In this case, that factor is not constant. It varies 8. 'Such a system of domestic taxation is, between 1.2 and 2.4 for the categories up to however, compatible with Article 95 only in 16 CV inclusive, and is 1.5 for the so far as it is free from any discriminatory categories above 16 CV.

10. It is therefore necessary to consider in the application of the tax 1 and in particular, the first place whether the new method of taxation now constitutes, as a whole, a 1 — Sec the judgment of 27 February 1980, supra, paragraph 7.

16. The immediately striking feature of that 22. Whereas the four steps between a 12 sequence is the variation in the number of CV car and a 16 CV car do not give rise to power ratings for tax purposes contained in any increase in tax, the same four steps the various tax bands. between a 16 CV car and a 20 CV car lead to a difference in taxation of 224%. 17. The inclusion of five power ratings in the 12 to 16 CV tax band, in particular, is rather surprising. According to the infor­ 23. It is clear that such a progression is not mation provided by the French authorities based on 'balanced tax differentials' in the in reply to a question put by the Court, 74 sense in which the Court used that car models come within that tax band. expression in Humblot. The effects of the exponential nature of the system are 18. The next three bands are each limited mitigated with respect to French cars at the to two power ratings. The 17 and 18 CV top of the range, thanks to the creation of band covers only two models of cars, the 19 the 'wide' tax band mentioned earlier, and 20 CV band ten models and the 21 and whereas they are accentuated by the return 22 CV band three models. to 'narrow' bands once the stage is reached where only foreign vehicles are affected. 2 — The car known as the '2 CV'is now rated as 3 CV for tax The only possible conclusion is that the purposes. method of classifying cars is not based on 3 — It seems that cars exist only with the following ratings: 23, 26, 27, 31, 32, 34, 39, 40 and 54 CV. in objective and neutral criterion as regards

competition between French and foreign mean of the speeds expressed in kilometres vehicles. per hour which would in theory be attained by the vehicle at an engine speed of 1 000 24. Must it be concluded from this that cars revolutions per minute for the various ratios of a power rating for tax purposes in excess of the forward gears of the gearbox'. of 16 CV (or whose cylinder capacity exceeds 3 litres), which all happen to be cars 28. It seems to me that the objective and of foreign manufacture, should escape any neutral character of such a formula would taxation or that they should be taxed at the be beyond doubt if it were applied outright rate laid down for the 12 to 16 CV band? I to all vehicles without distinction, whether do not think so. In my opinion those cars they were manufactured in France or should, until such time as the whole system abroad. The actual position, however, is is overhauled, be taxed as if there were that for vehicles whose power exceeds 100 further bands containing five power ratings kW, the value of K is subject to a ceiling of (17 to 21 CV, and so forth). 21, even if an objective valuation produces a higher figure. As we shall see in due course, very few French cars are affected by this 25. II — In the second part of its question, rule. the Tribunal de grande instance, Mulhouse, goes on to ask whether or not the formula according to which the power rating for tax 29. Since K is the denominator, the fact purposes is calculated is compatible with that it is subject to a ceiling entails an arti­ Article 95 of the Treaty. ficial increase of the power rating for tax purposes (P) whenever the real value of K 26. In the Humblot judgment the Court exceeds 21 kilometres per hour. conceded that the power rating for tax purposes could be regarded as an objective (a) The effect of the imposition of a ceiling on criterion on the basis of which the road tax the factor K could be increased progressively. 30. In its reply to the second question put 27. The Court stated, however, that 'the by the Court, the Agent for the French power rating for tax purposes . .. may be Government purported to justify the limi­ determined in various ways'. It did not tation of the factor K to 21 by the following therefore express any view regarding calcu­ argument: lation formulae of the type at present used in France. The French formula was laid 'In view of the need not to afford any down in an administrative circular of 23 abnormal advantage to certain sports December 1977 and is as follows: models or "top-of-the-range" models, whose real power and performance were M 8 very high and which might have appeared to P = m (0.0458 · Ş ) be relatively economical in terms of energy consumption when driven so that their full potential was not exploited, the value of the In that formula, P stands for the power parameter K was limited to 21 km/h for rating for tax purposes, m is 1 for petrol private vehicles whose real power exceeded and 0.7 for diesel fuel, C is the cylinder 100 kW.' capacity of the engine expressed in cubic centimetres. K is a parameter representing 31. In the light of the explanations provided the transmission of motion and is obtained at the hearing it appears that that statement by calculating 'the weighted arithmetic should be understood as follows:

33. However, vehicles of that kind, with a 36. On the other hand, the manner in large cylinder capacity, are capable of top which the power rating for tax purposes is speeds of 180 to 250 km/h. When they use calculated in France is open to the following their capacity to the full, their fuel criticisms: consumption is much higher (since air resistance, which must be overcome, increases in proportion to speed). In order 37. The official aim of introducing the to ensure that such vehicles, which are likely factor K in the formula for calculating the in practice to consume a great deal of fuel, power rating for tax purposes is to favour are not unjustly favoured, it is necessary, vehicles which consume relatively little fuel. beyond a certain threshold, to disregard the As we have seen, vehicles with a large gear ratios. That result can be arrived at by cylinder capacity but high gear ratios use freezing the coefficient K at 21 km/h for large amounts of fuel only at speeds in vehicles whose real engine power exceeds excess of 130 km/h. In France it is in any 100 kW. event prohibited to drive any faster than 130 km/h.

41. For his part, Mr Feldain, as indicated in the Report for the Hearing, has calculated that if the parameter K is limited to 21 45. I said just now that it was not km/h, any vehicle with a cylinder capacity reasonable for a car of 3 590 cc to be rated exceeding 3 109.7 cc will automatically be at 13 CV. Conversely, it seems to me given a power rating for tax purposes doubtful whether there is any justification exceeding 16 CV regardless of its fuel for giving it a rating of 21 CV. consumption characteristics. Only vehicles manufactured abroad have a cylinder capacity exceeding 3 109.7 cc. 46. It is difficult to understand why, starting at the threshold where the real value of K ceases to be applied, the auth­ orities do not simply adopt a method of 42. However, I do not find that argument classification based on cylinder capacity very convincing since the 17 CV rating has alone. to start somewhere and I do not see why the threshold should not be 3 109.7 cc. If the ceiling for K had been 20 km/h, the 47. I should not like to say whether it threshold for the 17 CV rating would have would be sufficient, by way of alternative, been 2 961.75 cc. That would not have to reduce the exponent of 1.48 for cars caused any French vehicle with a rating of whose coefficient K is affected by the 16 CV to be given a rating of 17 CV since ceiling. (The mere fact of reducing it from no French car has a cylinder capacity in 1.48 to 1.44, for example, would in itself excess of 2 664 cc. (Even the Peugeot 604, have the effect of reducing the power rating which is no longer manufactured, had a for tax purposes of such cars). What is capacity of only 2 849 cc). certain, in any event, is that the 'freezing' of one of the components of a mathematical formula should logically lead to a review of the other components of the formula, to 43. If the ceiling for the factor K had been ensure that their influence does not 22 km/h, the threshold would have been suddenly become disproportionate, 3 257.92 cc. Only one other foreign vehicle particularly where international competition (the Porsche 911) would possibly have been is involved and the change in the calculation able to 'drop' into the 16 CV rating, but in method affects mainly cars manufactured in order to be certain it would be necessary to other Member States. know the factor K for that vehicle.

or else 49. It thus appears that the disputed regu­ lations affect French cars only marginally. kl + k2 + 1.4 k3 K = if k4 is equal to 3.48 50. Unfortunately, a complete list of the foreign cars which are given a higher rating or exceeds 1.4 k3 as a result of this calculation method is not available. But it must be a long list since, 54. The change in the regulations thus according to the specialized press, German means that the factor K has, since 1983, manufacturers sell around 56 models whose been lower than its previous value: conse­ power exceeds 100 kW, British manufac­ quently, the power rating for tax purposes turers about 20 and Italian manufacturers of a vehicle equipped with a four-ratio about 34, whilst it seems that French manu­ automatic gearbox is increased. facturers produce only 8. 55. However, four-ratio automatic gear­ boxes are more economical as regards fuel 51. It is therefore appropriate to conclude consumption than three-ratio gearboxes. that the method of calculating the power Legislation whose purpose is to favour the rating for tax purposes of cars with a power most economical vehicles should therefore output of more than 100 kW is not neutral give vehicles equipped with such gearboxes from the point of view of competition and is a lower rating, not a higher one. of such a nature as indirectly to protect cars of that power output manufactured in France. 56. It appears, however, that in recent years four-ratio automatic gearboxes have also been introduced in vehicles manufactured in (b) Inclusion in the calculation of the various France (see the French Government's reply ratios of automatic gearboxes to the third question put by the Court).