C-38/93

'1. In the case of gaming machines offering the possibility of winning, is the taxable amount for the purposes of Article 11 A(l)(a) of the Sixth Directive the total The background to the case stakes inserted without deduction of the winnings automatically paid out to players?

* Original language: English. 3. The plaintiff in the main proceedings 1 — Sixth Council Directive 77/388/EEC of 17 May 1977 on the (hereafter 'Glawe') is a firm which installs harmonization of the laws of the Member Sutes relating to and operates gaming machines in bars and turnover taxes — Common system of value-added tax: uni- form basis of assessment (OJ 1977 L 145, p. 1). restaurants. The machines are activated b y

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means of the insertion of one or more coins. was made after 25 October 1990 are required Once they have been activated by the inser- to pay out only 60% of the amounts inserted tion of the appropriate stake, the machines after deduction of the VAT payable on those are available to be played for a certain period amounts. The operator is required to fill the of time. During that period, coins may be reserve when the machine is first put into paid out as winnings to successful players. service, and whenever opening the machine The amount of winnings, if any, paid out in he is required to replenish the reserve so as the course of an individual game depends to ensure that cash is available to be paid out upon the luck (and possibly the skill) of the as winnings. player concerned.

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The provisions of the Sixth Directive obtained by the supplier from the pur- chaser, the customer or a third party for such supplies ...;

8. By Article 2 of the Sixth Directive:

'The following shall be subject to value- (3) The taxable amount shall not include: added tax:

(1) the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;

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might seem to be confirmed by Article 33 of 10. It seems to me that it is defensible to the Sixth Directive, which reads as follows: interpret the Sixth Directive as permitting the imposition of VAT on the operation of gaming machines. It is clear that the provi- sion allows a Member State to exclude at least some gambling activities from the scope of the exemption, since Member States are expressly permitted to subject the exemption 'Without prejudice to other Community to 'limitations'. Moreover, no bounds are provisions, the provisions of this Directive expressly set to the range of gambling activ- shall not prevent a Member State from main- ities which may be excluded. It might how- taining or introducing taxes on insurance ever be doubted whether a Member State contracts, taxes on betting and gambling, would be entitled to impose VAT on all excise duties, stamp duties, and, more gener- forms of gambling. ally, any taxes, duties or charges which can- not be characterized as turnover taxes' [my emphasis] .

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have a discretion rather than an obligation to poses of Article HA(l)(a) of the directive impose VAT. The German Government constitutes the total stakes inserted into the attempts to argue that, since skill is involved gaming machine by players. in playing the machines, their use cannot be regarded as gambling, and that the use of gaming machines is accordingly not an activ- ity falling within Article 13B(f). In my view such a conclusion is plainly wrong, since it depends upon the fallacious assumption that skill cannot be involved in gambling. The fact that the machines offer players the opportunity of winning back a sum greater than the stakes inserted, and that, even in the 15. The German Government proposes an case of a skilled player, the outcome depends affirmative reply to that question, whereas at least in part upon chance is sufficient to Glawe and the United Kingdom consider characterize the use of such machines as that the taxable amount should be limited to gambling. the total stakes less the winnings paid out, i.e. the amounts actually emptied from the machine by the operator. The Commission, although agreeing with the German Govern- ment that the taxable amount comprises the total stakes inserted, suggests that the win- nings should be treated as expenditure on which tax is deductible under Article 17(2) 13. I conclude, therefore, that under Arti- of the directive, applied by analogy. Arti- cle 13B(f) of the Sixth Directive Member cle 17(2) provides that: States have the power, but not the obligation, to impose VAT on the use of gaming machines offering the possibility of winning. In what follows, I shall refer to such a gam- ing machine simply as a 'machine'. It is clear that, when a player makes use of such a machine, there is a supply of services made by the operator to the player. ' In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay: Question 1

16. As already stated, the underlying prob- lem in this case is that gaming transactions are ill-suited to value added taxation. This was recognized by the Commission in its Proposal for the Sixth Directive, which pro- vided for unqualified exemption of 'gaming and lotteries' (Article 14(B)(k) of the Pro- 18. However, that view is inconsistent with posal); the Explanatory Memorandum to the the commercial reality of the transaction and Proposal stated: 'The exemption under para- with the aims and basic principles of the graph (k) of gaming and lotteries is based on directive. VAT is intended to be charged in purely practical considerations. Such activi- proportion to the actual turnover which a ties are in effect ill-suited to taxation on a trader earns from his supplies of goods and value-added basis and are better dealt with services after deduction of tax on the cost by means of special taxes.' 3 In the absence of components thereof: see Article 2 of the First complete exemption under the adopted text Directive. 4 As Glawe and the United King- of the directive, the Court must seek an dom observe, for all practical purposes the interpretation which is consistent with the operator's turnover consists in the amounts aims and principles of the common VAT sys- he is able to remove from the machine, and tem. not in the total amounts inserted by players. Otherwise one would arrive at the surprising result that the machine operator refunds the larger part of his turnover to his customers. Such an analysis would be possible, although implausible, if the refunds could be regarded as 'discounts' or 'rebates' for the purposes of Article 11A(3)(b) so that the taxable amount were reduced accordingly. However, for the 17. The simplicity of the German Govern- reasons given below (at paragraph 31 et seq.) ment's analysis is attractive at first sight. The they cannot be so regarded. Such a view amount 'obtained' by the supplier from the might also be possible if the winnings paid player is the stake inserted into the machine. out could, as the Commission suggests, be When the player insens the stake he parts

21. Commercial gambling is different in so far as the person organizing the gambling arranges matters in such a way that on aver- age his winnings are sufficient to meet his costs in organizing the gambling and to pro- vide him with a reasonable profit. For exam- 19. In my view the consideration which the ple, a bookmaker will set the odds for bets operator obtains for his services for the pur- on horse races at a level intended to ensure poses of Article HA(l)(a) is limited to the that he makes an overall profit on bets amounts which he empties from the placed. To that extent the person organizing machine. That is apparent from an analysis the gambling may perhaps be regarded as not of the transactions in issue and of other only taking part in the gambling himself but forms of gambling. also providing a service to the other gam- blers consisting in organizing the gambling. On that view his reward for that service would not, however, be the total amount of the bets placed by gamblers. As already stated, the placing of bets and payment of winnings form the nucleus of the gambling 20. Whilst gambling for money entails activity. The service provided by the orga- expenditure by gamblers, it does not in its nizer consists in providing the framework simplest form give rise to consumption of within which that activity can take place, his goods or services. Suppose, for example, that reward for that service being the surplus of A enters into a private bet with B, both plac- winnings which he arranges for himself, ing their respective bets on the table. A wins together with any specific commission which the bet and collects the money on the table. he may charge.

23. It seems to me that the difficulties inher- ent in applying VAT to betting and gaming 25. The German Government's point that transactions apply with less force to transac- the property in the stakes inserted passes to tions involving gaming machines. That is the operator is not conclusive. That is simply perhaps why most Member States permitting a reflection of the way in which the game is the operation of such machines choose not arranged. Coins inserted into the machine to exempt the proceeds from VAT. Gaming enter either the cash box or the reserve. machines such as those concerned here are Coins entering the cash box become the specifically designed to provide the operator property of the operator because they form with a predictable return. From the way in part of his takings. Coins entering the which the machine is set, he knows within a reserve become the property of the operator few percentage points the return which he because it is he who initially fills the reserve. can expect. The certainty for the operator is By doing so he places at the players' disposal such that his takings may be regarded less as the money in the reserve needed for the winnings than as a fee for his service consist- operation of the machine and, when coins ing in the provision of the machine. More- enter the reserve, is merely being reimbursed over, the amount of that fee is easily deter- in respect of winnings paid out. The money mined since it corresponds to the money which enters the reserve cannot therefore be emptied from the cash box. regarded as payment for goods or services or

29. In view of the reasoning underlying my proposed reply to Question 1, this question does not strictly speaking arise. There is no question of deducting winnings or of setting off losses and winnings. The stakes inserted form part of the operator's turnover for VAT 27. By its second question the national court purposes only to the extent to which they asks whether, if the winnings must be are included in the takings which he empties deducted in calculating the taxable amount, from the cash box. The remaining propor- the principle of individual taxation permits tion of the stakes, and the winnings paid out, their deduction only to the extent of the are simply part of the gambling process as in individual stake for each game. the case of a private bet. As the United King- dom points out, each stake must be regarded as consisting of two components. One com- ponent is the price paid for the services pro- vided by the operator (including the VAT payable on that amount). The remainder of the stake may be regarded as an amount con- tributed to the common pool available to be 28. The premise underlying this question paid out as winnings. Over a given period, seems to be that, notwithstanding the nega- those components will correspond to the tive reply to Question 1, it is the total stakes amounts collected respectively by the cash inserted into the machine which in principle box and the reserve of the machine.

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3 1 . B y its third question the national court asks whether winnings paid out constitute 34. The impossibility of applying any sensi- ' r e b a t e s ' for the purposes of Arti- ble notion of 'rebate' to the refunds made to cle HA(3)(li) of the Sixth Directive. In view players, which account for approxi- of m y proposed reply to Question 1, this mately 60% of the stakes inserted, demon- q u e s t i o n does not arise since the amounts strates the artificiality of treating the entire p a i d o u t as winnings do not form part of the stakes as the operator's turnover. It thus pro- consideratoli obtained by the operator. I vides further support for the view which I s h a l l H e w e r consider it briefly. have taken on Question 1.

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Conclusion

35. I am accordingly of the opinion that the questions referred by the Finanzgericht Hamburg should be answered as follows:

Article HA(l)(a) of the Sixth VAT Directive must be interpreted as meaning that, where a Member State subjects to VAT supplies of services consisting in the making available of gaming machines offering the possibility of winning money, the taxable amount in respect of such supplies over a given period does not include that pro- portion of the total stakes inserted which corresponds to the winnings paid out to successful players during that period.