C-251/88

3. The provisions for financing the Communities' budget from own resources did not come fully into force until 1980. One of the necessary steps was the intro- 2. Provision for the Communities' own duction of a uniform basis of assessment for resources was introduced by Council VAT own resources, which was effected by Decision of 21 April 1970 (Decision 70/243 the Sixth Directive (Council Directive on the replacement of financial contri- 77/388/EEC of 17 May 1977 on the butions from Member States by the harmonization of the laws of the Member States relating to turnover taxes — common Communities' own resources, Official system of value-added tax: uniform basis of Journal, English Special Edition 1970 (I), assessment, Official Journal 1977, L 145, p. 224). That decision, to which I shall refer p. 1). Article 2 of the directive provides that as the 'Own Resources Decision', provides any supply of goods or services effected for that agricultural levies and other charges consideration by a taxable person acting as (Article 2(a)) and Common Customs Tariff such shall be subject to VAT. Articles 13 to and other duties (Article 2(b)) constitute 16, however, provide for certain trans- own resources to be entered in the budget actions to be exempt. of the Communities. Since revenue from those sources is not sufficient to balance the budget, Article 4(1) provides that the Communities' own resources shall include also those accruing from value-added tax ('VAT') and obtained by applying a rate not exceeding a certain percentage to an 4. Under Article 28(3)(b), which occurs assessment basis which is determined in a in Title XVI — Transitional Provisions, uniform manner for Member States Member States may, during a transitional according to Community rules. The period, 'continue to exempt the activities set maximum percentage, initially set at 1%, out in Annex F under conditions existing in was increased in 1985 to 1.4% and fixed at the Member State concerned . . . '. The

'With regard to the transactions listed in Annex F to Directive 77/388/EEC which Member States continue to exempt pursuant 5. Council Regulation No 2892/77 lays to Article 28(3)(b) of the said directive, down detailed rules for the determination of Member States shall calculate the VAT own the basis of assessment for VAT own resources basis as if these transactions were resources (Official Journal 1977, L 336, taxed.' p. 8). Article 3(1) gives Member States a choice between two methods, 'method A' and 'method B'. In fact, it appears from the case file that all Member States have opted 7. The validity of Regulation No 2892/77, for 'method B', according to which the own which was initially limited to five years, was resources basis is calculated by dividing the extended by Council Regulation No total net VAT revenue collected by a 3550/82 (Official Journal 1982, L 373, Member State by the VAT rate, expressed p. 1) and by Council Regulation as a fraction, or, where several rates are No 3735/85 (Official Journal 1985, L 356, applied, by the average weighted VAT rate, p. 1). Council Regulation No 1553/89 on again expressed as a fraction (Article 6). the definitive uniform arrangements for the The result is to discount the impact of collection of own resources accruing from varying rates of VAT, and in effect to base VAT (Official Journal 1989, L 155, p. 9), VAT own resources on the turnover in all which applied from 1 January 1989 and transactions treated as subject to VAT. which largely superseded Regulation No 2892/77, provides for a single method of calculation of the VAT own resources basis corresponding to the old 'method B' (Article 3). The provisions which I have just cited from Articles 2(2) and 9(2) of Regu- lation No 2892/77 are reproduced in the 6. Crucial to this case are the provisions of 1989 Regulation (Articles 2(2) and 6(2)). Regulation N o 2892/77 concerning the transactions to be taken into account for the purpose of determining the basis of assessment. Article 2(1) of Regulation 8. Pursuant to Article 28(3)(b) and No 2892/77 provides that the VAT own Annex F of the Sixth Directive, the Federal resources basis shall be determined from the Republic exempts from VAT the telecom- taxable transactions referred to in Article 2 munications transactions of the Deutsche of the Sixth Directive, with the exception of Bundespost (German Federal Post Office). the transactions definitively exempted under The consequence of that exemption is that Articles 13 to 16 of that directive. Under the Bundespost cannot take advantage of Article 2(2), third indent, the transactions Article 17(2) of the Sixth Directive, which Member States continue to exempt according to which a taxable person is pursuant to Anicie 28(3)(b) of the Sixth entitled to deduct from the tax which he is Directive (i.e. those which are only transi- liable to pay the VAT paid or due in respect

11. As regards the general scheme of the 9. The dispute turns on the interpretation of legislation, the Federal Republic argues that the requirement in Article 9(2) of Regu- it is a fundamental principle of the VAT lation No 2892/77 that with regard to system, which finds expression in particular exempted Annex F transactions Member in Article 11 of the Sixth Directive, that States are to calculate the VAT own VAT is charged only on the net value of resources basis 'as if these transactions were goods or services at each stage of taxed'. In the Commission's view, that production or marketing, but not on the provision means that the entire value of the VAT already paid or to be paid at each relevant transactions is to be included in the stage. The Commission's method would basis of assessment, without any deduction involve the inclusion of an element of 'tax of input tax ('taxe en amont') implicitly on tax' in the own resources basis contrary contained in their value. In the view of the to the principle of net value. The Federal German Government, it means that the Republic also argues that that principle is transactions are to be treated in all relevant supported by the case-law of the Court, respects as if they were taxed; and if they notably the two Schul cases (Case 15/81 were taxed, a deduction of input tax would [1982] ECR 1409 and Case 47/84 [1985] be possible in accordance with Article 17(2) ECR 1491). of the Sixth Directive. Both parties rely on the wording of Article 9(2), on the general scheme and on the objectives of the Community legislation.

the supplier is not permitted to deduct the It thus appears that no firm conclusion can tax paid to his suppliers, and the tax is be drawn from the principle of net value. therefore passed on as a hidden charge in the selling price. The purchaser of such goods or services is also unable to deduct this hidden charge from his own tax burden, and the result is an accumulation of tax (or tax on tax) contrary to the principle of net value. The total VAT revenue accruing from 14. As regards the objectives of the such a chain of transactions will include an Community legislation, the Commission has element of tax on tax, and this element will sought to argue that the method of calcu- enter the own resources basis. Thus, lation applied by the Federal Republic precisely where there are exempt trans- permits the level of the rate of VAT to have actions, a hidden element of non-deductible direct repercussions on the basis of input tax can form part of the basis of assessment of VAT own resources, contrary assessment for VAT own resources. to the objective of neutrality pursued by the system of VAT own resources.

The Court therefore amount of the input tax, there can be no ruled that, at its present stage of develop- effect on the basis for assessment of VAT ment, Community law does not prevent the own resources, which will always consist of application of national legislation which, as the sum of the amount of the net purchase regards the calculation of VAT due on the value and the value added at the stage of sale of second-hand goods bought by the exempt transaction. That, of course, is undertakings from non-taxable individuals not surprising, since the method of calcu- with a view to resale, does not permit the lation used by the Federal Republic deduction of the amount of input tax incor- simulates the ordinary case of taxation, porated in the purchase price of the goods. under which, as the Commission itself

states, the rate of VAT cannot have reper- principle that the VAT own resources basis cussions on the basis of assessment. Indeed, is to be determined from the taxable trans- it is clear that it is the Commission's actions laid down in Article 2 of the Sixth method, rather than that of the Federal Directive, with the exception of the trans- Republic, which is incompatible with the actions definitively exempted under that objective of neutrality. Since under the directive. The transitional provisions of Commission's method the amount of input Anicie 28(3) of the Sixth Directive permit tax paid is included in the basis of Member States to continue to tax trans- assessment, and since that amount will vary actions which are otherwise definitively according to the rate of VAT charged, that exempt (Article 28(3)(a) and Annex E), to method permits an increase or decrease in exempt transactions which are otherwise the VAT rate to have a direct impact on the taxable (Article 28(3)(b) and Annex F), or basis of assessment and thus on the amount to grant the option of taxation to suppliers of own resources. of otherwise exempt transactions (Article 28(3)(c) and Annex G). Resort to those transitional provisions is clearly capable of distorting the uniform basis of assessment provided for in Article 2(1) of Regulation No 2892/77, unless a correction is made. It is, in my view, the function of Article 9(2) 16. That consideration, however, is not of Regulation No 2892/77 to make that decisive. The answer is to be found, in my correction. view, in consideration of the wider objectives of the Community legislation, and of the specific function of Article 9(2) of Regulation No 2892/77. The objective of Regulation No 2892/77, pursuant to the Own Resources Decision, is to give effect to a uniform basis of assessment for VAT own resources. Equally, one of the objectives of the Sixth Directive is to facilitate the deter- mination of that uniform basis of assessment by the adoption of common rules for the levying of VAT. Implicit in the notion of a 18. Thus, under the first and third indents uniform basis of assessment is the objective of Article 9(2), the transactions referred to of ensuring a fair and consistent appor- in Article 28(3)(a) and Annex E of the tionment of the burden of own resources Sixth Directive and in Article 28(3)(c) and between Member States or, to adopt the paragraph (1)(a) of Annex G respectively, words used by Advocate General Darmon in are to be treated for the purposes of the his Opinion in Case 107/84 Commission v calculation of the own resources basis as if Germany [1985] ECR 2655, of ensuring 'an they were exempted: this is consistent with equal system of contribution for the the definitive exemption of those trans- Member States' (at pp. 2659 and 2662). actions under the Sixth Directive and ensures that the own resources basis in respect of such transactions is calculated in the same way irrespective of whether Member States have made use of the tran- sitional provisions. Conversely, the second indent of Article 9(2), which is at issue in 17. It will be recalled that Article 2(1) of this case, provides that the transactions Regulation No 2892/77 lays down the basic referred to in Article 28(3)(b) and Annex F

19. The function of Article 9(2), second 21. But, even if the principle is difficult to indent, is thus to cancel out the effect of the achieve, this does not mean that it is transitional exemption of Annex F trans­ incorrect. In any event, it is in my view clear actions by restoring to the basis of that the method advocated by the assessment for VAT own resources the Commission cannot be accepted. That resources which would otherwise be lost as method does not permit any account to be a result of the exemption and to achieve a taken of the amount of tax paid by the result which is neutral as between Member Bundespost as part of the cost of acquisition States which opt for transitional exemption of goods and services. Since that amount, in and those which do not. To that end it is the absence of the right of deduction, is in only necessary to restore the amount which the normal course of events passed on to the would accrue to the basis of assessment if Bundesposťs customers, the Commission's the transactions in question were taxed. method must result in a substantially higher valuation of the relevant transactions than would occur if the transactions were taxable and the right of deduction did exist. The Commission's method thus goes further than is required for the purposes of restoring the uniform basis of assessment 20. However, if that principle is correct, the and, in so far as it in effect penalizes question remains how it is to be Member States which exercise the option of implemented. The difficulty is that since exemption under Article 28(3)(b) of the Article 9(2) refers to a hypothetical situation Sixth Directive, it is incompatible with the (i.e. the situation which would obtain if the objective of equality of treatment underlying transactions were taxed), no obviously the own resources legislation. correct method exists of calculating the amount which should be restored to the basis of assessment. Indeed, the difficulty in devising a method which will give rise to approximately the correct result is illustrated by the fact that the Federal Republic has at different times used three different methods 22. The method advocated by the Federal of calculation. From the case file it appears Republic, is, it is true, open to the objection that from 1980 to 1982 its practice was to that it assumes that if the telecommuni­ deduct from the value of the Bundesposťs cations transactions of the Bundespost were telecommunications transactions a flat-rate taxed, so that the Bundespost could exercise 13% which was deemed to represent the the right to deduct input tax, the turnover amount of input tax paid. In 1983 it for the transactions in question would be

25. Accordingly, I am of the opinion that the Court should dismiss the action and order the Commission to pay the costs.

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