C-172/96

COMMISSIONERS OF CUSTOMS AND EXCISE ν FIRST NATIONAL BANK OF CHICAGO

OPINION OF ADVOCATE GENERAL LENZ delivered on 16 September 1997

Table of Contents

A — Introduction I - 4390

I. Background to the main proceedings I - 4390

II. Questions referred by the High Court of Justice I - 4391

2.1 Comparison between commission and spread I - 4397

2.2 Case-law of the Court 1-4399

2.3 Necessity for a second transaction in order to obtain consideration I - 4402

2.4 Direct link between the service provided and the consideration received (individual valuation) I - 4403

2.5 Need for individual valuation (judgment in Glawe and the Fischer case) I - 4404

2.6 Comparison with typical cases of value added taxation I - 4407

2.1 Wording of Article 11 A(l)(b) I -4410

2.2 Value added tax as turnover tax I - 4410

* Original language: German.

I - 4389

OPINION OF MR LENZ — CASE C-172/96

2.3 Practical effects of the Bank's approach I - 4411 2.4 Examples proving the opposite I - 4411 2.5 Proposal for a Nineteenth VAT Directive I - 4411 2.6 Foreign exchange transactions as exchange transactions? I - 4412 C — Conclusion I - 4412

I - 4390

COMMISSIONERS OF CUSTOMS AND EXCISE ν FIRST NATIONAL BANK OF CHICAGO

exchange transactions conducted with coun­ foreign exchange as defined by the British terparties from outside the Community. Bankers' Association (as set out at paragraph According to that decision, the tax authority 1 of the Findings of Fact): took the view that the whole amount of input tax had diminished.

1. Do such foreign exchange transactions constitute the supply of goods or ser­ 5. The Bank appealed to the Value Added vices effected for consideration? Tax Tribunal, which considered the case on the agreed limited issue of whether or not the relevant foreign exchange transactions constituted supplies of goods or services for value added tax purposes. The Value Added 2. If there has been a supply of goods or Tax Tribunal allowed the appeal, whereupon services effected for consideration, what the Commissioners of Customs and Excise is the nature of the consideration in rela­ appealed on a point of law to the High tion to such transaction? Court of Justice. That court takes the view that it is material to this case to determine whether the foreign exchange transactions constitute a supply of goods or services effected for consideration within the mean­ III. The Bank 's foreign exchange transactions ing of the Sixth Directive.

II. Questions referred by the High Court of 7. The expression 'foreign exchange transac­ Justice tions' has been defined as follows by the British Bankers' Association:

9. The Bank is a 'market-maker'. It is willing 11. All three categories of customer enter at all times to provide and receive those cur- into essentially the same types of foreign rencies in which it specialises. It provides exchange transaction with confirmatory and receives currencies in transactions which documentation including similar infor- are commonly described as those of purchase mation. These foreign exchange transactions and sale. In common with other market- include 'spot' and 'forward' transactions. makers, the Bank will quote prices at which 65% of customer transactions entered into it is willing to trade as 'bid' or 'offer' prices. by the Bank are spot transactions, the The Bank's bid rate is the exchange rate at remaining 35% being forward transactions. which the Bank is willing to buy a currency. The Bank at any one specific time will bid, that is to say offer to buy, at one price expressed as a rate of exchange and at the same time will offer, that is to say offer to sell, the currency in the same denomination and the same amount at a slightly higher price. The difference between the two rates is known as the 'spread'.

12. A spot transaction is the purchase of one currency against the sale of another currency, with the delivery and sale normally being completed on the second following business day, which is known as the settlement date 10. The Bank's customers for its foreign or value date. Following agreement for a exchange transactions fall into three catego- spot transaction, the Bank will supply the ries. The first includes corporate customers other party to the transaction with docu- seeking to manage their foreign currency mentary confirmation of the terms of the

— the value date for settlement of the trans­ action;

13. A customer for a spot transaction may, for example, be a manufacturer in the United — the rate of exchange applicable to the States who has shipped a product manufac­ transaction; tured there to a customer in Germany and receives Deutsche Mark abroad as payment. As a rule, the customer will wish to exchange the Deutsche Mark for US dollars. H e will then telephone the Bank and ask for a price — the foreign currency and amount agreed to sell Deutsche Mark for US dollars for to be sold by the Bank to the customer; spot.

I - 4393

OPINION OF MR LENZ — CASE C-172/96

I - 4394

COMMISSIONERS OF CUSTOMS AND EXCISE ν FIRST NATIONAL BANK OF CHICAGO

rates will move against any position taken by actions under the heading B. Other exemp­ the Bank. The bid and offer rates quoted by tions: the Bank are liable to change rapidly in the course of a business day. Thus, for example, where the Bank has contracted to pay Deut­ sche Mark in a forward exchange contract against settlement by the Bank in dollars and the Deutsche Mark depreciates against the 'Without prejudice to other Community dollar, the Bank runs the risk of a loss provisions, Member States shall exempt the expressed in dollars. The Bank will therefore following under conditions which they shall seek to limit its potential risk by seeking lay down for the purpose of ensuring the counterparties at relevant rates, value dates correct and straightforward application of and amounts. A significant proportion of the exemptions and of preventing any pos­ these transactions will be initiated by other sible evasion, avoidance or abuse: financial institutions seeking the same pro­ tection for themselves.

19. In order to maintain and increase the Bank's goodwill in the foreign exchange (d) the following transactions: market, it publishes circulars and infor­ mation sheets which it circulates to its approved customers free of charge. For simi­ lar reasons, it offers free advice to its corpo­ rate and fund manager customers.

IV. Relevant provisions of the Sixth Directive 4. transactions, including negotiation, con­ cerning currency, bank notes and coins used as legal tender, with the exception of collec­ tors' items; ...

24. The wording of this question refers to Article 2 of the Sixth Directive, which pre­ scribes what activities are subject to value added tax. According to Article 2(1), the activities in question are supplies of goods or services effected for consideration within the territory of the country by a taxable person acting as such. The national court's first question seeks to ascertain whether the aforementioned foreign exchange transac­ tions of the Bank fall within the scope of the directive.

(c) any of the transactions exempted under Articles 13 Β a and d, paragraphs 1 to 5, when the customer is established outside the Community ...'.

2 — Article 13 C(b). 1. Tax exemptions under the Sixth Directive

I - 4396

COMMISSIONERS OF CUSTOMS AND EXCISE ν FIRST NATIONAL BANK OF CHICAGO

I - 4397

OPINION OF MR LENZ — CASE C-172/96

opinion, without doubt be supplying a ser- 31. The United Kingdom goes on to argue vice for consideration within the meaning of that if that bureau de change were now to the directive. At the hearing, the United decide no longer to charge commission, it Kingdom explained this using the example of would receive no consideration for exchang- a bureau de change. There is no difference in ing currencies and hence would not be sup- principle between a bureau de change and plying a service within the meaning of the the Bank, except that in the latter case the directive. foreign exchange transactions are bigger and more complex.

29. The United Kingdom contends that if the bureau de change or the Bank makes no 32. In such a case, the United Kingdom charge but seeks to make a profit by buying argues, the bureau de change — and also the and selling foreign exchange at different Bank in this case — would be working free rates, it does not receive any consideration of charge. In the Commission's contention, within the meaning of the directive. It does this is very improbable. The United King- not follow from the fact that over a given dom itself points out that the Bank and the period the Bank makes a profit from various bureau de change are seeking to make a foreign exchange transactions that it supplies profit even from these general foreign a service for consideration in the case of each exchange transactions. individual foreign exchange transaction.

34. Nothing changes where no commission is charged for this operation. It remains the case that the customer goes to the Bank or the bureau de change and asks for means of payment to be made available to him or her 36. In any event, the fact remains that the in a particular currency in return for means Bank has to set its rates in such a way that it of payment in another currency. Even in the receives payment for its service. This means event that the Bank charges no commission, that also where the Bank seeks to make a it operates for the customer and 'supplies' profit only through the purchase and sale of him with the means of payment by enabling foreign currencies, it does not work free of him or her to have recourse to a credit charge — contrary to the United Kingdom's opened at a bank in the currency 'supplied'. contention — but makes the customer pay Consequently the Bank again supplies a ser­ for its service and that payment takes the vice. Even if — as the United Kingdom form of a smaller amount of consideration argues — there is no consideration for that being paid for currencies purchased and a service, it nevertheless remains a service. It higher amount of consideration for curren­ may possibly no longer fall within the scope cies sold. of the Sixth Directive. In any event, the Bank tries to sell the means of payment at a some­ what higher rate or price than the one at which it purchases it.

2.2 Case-law of the Court

ation is satisfied can be ascertained from the pursuant to which there is reciprocal perfor- case-law of the Court, which has had to pro- mance. It appears from the information pro- nounce on this question on several occasions. vided by the national court that, in the Thus, in the judgment in Tolsma 4 the Court course of negotiations on a given exchange, held, referring to its judgments in Coöper- the customer and the Bank agree that the atieve Aardappelenbewaarplaats 5 and Natu- customer should place a specific amount of rally Yours Cosmetics, 6 that a provision of money in a particular currency in a precisely services is taxable only if there is a direct link specified account, whilst the Bank commits between the service provided and the consid- itself for its part to deposit a certain sum of eration received. 7 money in another currency in an account specified by the customer. Consequently, the customer and the Bank commit themselves to reciprocal performance.

38. The Court concluded from this that 'a supply of services is effected "for consider- ation" within the meaning of Article 2(1) of the Sixth Directive, and hence is taxable, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal perfor- 41. The question here is whether the remu- mance, the remuneration received by the neration received from the supplier of the provider of the service constituting the value service, here the Bank, constitutes the actual actually given in return for the service sup- value given in return for the service supplied plied to the recipient'. 8 to the recipient.

the musical service but on subjective motives 45. It remains to be noted therefore that, in which might bring feelings of sympathy into the case of the rates at which the Bank is play. prepared to purchase currencies from cus­ tomers and to sell currencies to customers, the spread resulting from the difference in rates constitutes the payment for the service supplied by the Bank. The Bank fixes the rates with that aim in mind. The United Kingdom itself confirmed at the hearing that where a charge is 'concealed' in the differ­ 43. In the instant case the situation is differ­ ence between the bid and the offer rate, but ent. It is the customer who approaches the is capable of being identified, a service is Bank and asks for a service, namely the effected for consideration. In this case the exchange of a foreign currency. According to charge is 'concealed' in the spread in so far as the Bank, the customer is aware that that ser­ it constitutes the payment for the service vice will not be performed free of charge. and, to that extent, constitutes a charge. This, moreover, is contested only by the Accordingly, the charge is also capable of United Kingdom, which considers that the being identified. spread between the bid and offer price does not constitute consideration for the service. O n the other hand, the United Kingdom also states that customers generally enquire at the Bank about the two rates, that is to say also about the spread. Customers therefore know by how much the selling price of foreign currencies exceeds the purchase price. Con­ sequently, customers know that they are paying for the service and are aware of how much they are paying. 46. For this reason, it is possible, as the Commission suggests, to divide the amount which the customer pays in a given currency to the Bank into

51. Consequently, the customer pays for the 48. The Commission disagrees. It takes the Bank's service in respect of each individual view that there is a market price whose value exchange via the spread fixed between the is between the bid and the offer price. bid and the offer price, with the result that whenever the customer makes an exchange transaction he receives less back from the Bank than he gave the Bank. It is irrelevant in this connection whether he may make ultimately a profit on a transaction as a result 49. To my mind, it is certainly conceivable of currency fluctuations occurring in the that there are other possibilities for deter- meantime. I shall explain this further mining the value of a given amount of below. 10 money in terms of a countervalue in another currency apart from the bid and offer prices fixed by the Bank for its customers. I would point out in this connection simply that the individual currencies are also traded on the stock exchange and that prices are fixed there. To what extent it is actually feasible to 2.3 Necessity for a second transaction in determine a countervalue in another cur- order to obtain consideration rency is a matter for the national court.

52. The United Kingdom goes on, however, 50. Even if it should not be feasible to deter- mine an exact countervalue on the basis of a to name other reasons why, in its view, the market price, this would not alter the fact Bank's receipts derived from the spread can- that the Bank's service is paid for through the spread. As has been made clear above, not be regarded as consideration for the indi- the Bank calculates its prices in such a man- vidual exchange. It argues first that the profit ner that its service is paid for in the case of from the different purchase and selling prices each transaction. This is because the spread is calculated for each exchange, which means is invariably not realised until the next trans- that on each transaction the customer 10 — See point 73, below.

53. As has already been made clear, however, in the case of every transaction the Bank purchases a particular currency. In so doing it 'supplies' less to the customer than it 55. It is clear from the parties' submissions receives from him. The Bank and the Com­ and from the order for reference that each of mission also agree that for each transaction the Bank's transactions is conducted in the the customer does not receive the full coun­ belief that it will yield an advantage for the t e r v a l u eof the sum exchanged by him on Bank. In addition, however, it emerges that it account of the spread. The Commission cites is not the Bank's practice to value each trans­ in this connection the Value Added Tax Tri­ action individually. In other words, the Bank bunal, which also assumed that the rate at calculates its profit over a particular period. which the Bank sells the currency to the cus­ The United Kingdom argues that this is too tomer includes the costs of the exchange, imprecise to ground the assumption that the that is to say the service. Bank's service is effected for consideration in the case of each individual transaction. It refers in this connection, inter alia, to the Opinion in Glawe. 1 2 The Advocate General stated in that case that gaming transactions are ill-suited to value added taxation. 1 3 Else­ where in the Opinion the Advocate General 2.4 Direct link between the service provided expressed the view that there may be some and the consideration received (individual theoretical difficulty in viewing, for example, valuation) a bookmaker's net winnings as the consider­ ation for services. 1 4 In the United King­ dom's view, those difficulties and the lack of suitability to value added taxation apply a fortiori in the present case of foreign exchange transactions, since here it is not only a question of consideration being 54. The United Kingdom submits, as an difficult to determine, but of no consider­ additional argument in support of its view ation at all. that the spread cannot constitute the consid­ eration for the service consisting of the exchange, that consideration within the meaning of the Sixth Directive must be 11 — Naturally Yours Cosmetics, cited in footnote 6, paragraph 11, and Coöperatieve Aardappelenbewaarplaats, cited in capable of being determined for each indi­ footnote 5, paragraph 12. vidual transaction. It refers in this connec­ 12 — Opinion in Case C-38/93 Glawe [1994] ECR I-1679, at I-1681. tion to the case-law of the Court, which has 13 — Opinion in Glawe, cited in footnote 12, point 16. held that in order for a service to be taxable, 14 — Opinion in Glawe, cited in footnote 12, point 22.

56. As has already been shown, it cannot be because, in order to determine how much considered here that there is no consider- profit the Bank has ultimately made, it is not ation for the service performed by the Bank sufficient to determine when which sum of in relation to foreign exchange transactions. money was exchanged at which rate, the Nevertheless, it cannot be denied that it is market situation at the relevant time must not entirely an easy matter to determine the also be taken into account and — in the case consideration. As the United Kingdom of forward transactions — regard has to be rightly submits, the Bank's receipts are the paid to the subsequent development of the outcome of its involvement in a series of market. For this reason, an individual valua- transactions, all of which are concluded at tion would only be possible after the event, different rates and under different market if at all. The Court does not have sufficient conditions. Even if foreign exchange transac- information in order to judge whether it tions are ill-suited to value added taxation, would be possible for the Bank to carry out this is perhaps the reason why they are such an individual valuation. It should be left exempt from tax under the Sixth Directive. to the national court to assess this if neces- However, even after the Opinion in Glawe, sary. those difficulties in determining the consider- ation do not lead to the conclusion that there is no consideration within the meaning of the directive and that foreign exchange trans- actions consequendy do not come within the scope of value added tax. It is worth empha- 2.5 Need for individual valuation (judgment sising here once again that the Bank fixes a in Glawe and the Fischer case) spread for each exchange. The spread is the difference between the rate agreed for the transaction and the offer price (or, if one exists, the market price). However, the Bank does not value each transaction individually and hence also does not value every spread. 58. It must be considered, however, in the The United Kingdom takes the view that this light of the judgment of the Court of Justice is too imprecise, since the customer is not in the Glawe case 15 whether such an indi- charged the spread. It further considers that vidual valuation is necessary for the purposes in principle the Bank's profit cannot be of charging value added tax. regarded as consideration for the purposes of the Sixth Directive.

compartment. If, following the payment of could not be regarded as forming part of the winnings, the reserve was no longer full, the consideration for the provision of the coins inserted by the players did not fall into machine to the players, nor as the price for the cash box but entered the reserve. The any other service provided to the players, 18 machines were required to be set in such a since it was mandatorily fixed in advance. way that they paid out as winnings at least Consequently, the taxable amount was the 60% of coins inserted by players (the stakes), takings of the operator of the gaming with the remainder, some 40%, being machine, that is to say the coins contained in retained in the cash box. the cash box. Consequently, in that case, too, each individual game was not evaluated in accordance with whether the gaming machine or the player had won, but the tak­ ings of the operator, calculated over a period of time, were regarded as the taxable amount. 60. The Court followed the proposal of the Advocate General and regarded the stakes as being divided into two parts: one served to replenish the reserve, and thus to pay out winnings, and the remainder entered the cash box. 1 6 63. These issues have also been raised in a case at present before the Court which is concerned with the taxation of a game amounting to the game of roulette. 19 Simi­ larly, players purchased chips which they could place on a table resembling a roulette 61. In his Opinion, the Advocate General table. Here too, it was possible for a player defined that remainder somewhat more pre­ to win several times his stake, the winnings cisely. H e considered that that remaining being paid out in chips after every game. portion was the price paid for the services Players wishing to discontinue the game provided by the operator. H e further could exchange their remaining chips for expressed the view that, over a given period, cash. the two components would correspond to the amounts collected respectively by the cash box and the reserve of the machine. 17

consideration for the organiser's service, i. e. the Bank into two components. As we have the price paid by players for the right to par- already seen, one component is the counter- ticipate in the game and obtain the chance of value of the amount of money provided by winning. That price, consisting in the advan- the Bank, whilst the second component is tage which the house reserved to itself by the consideration, that is, the price, for the virtue of the odds being in its favour, could service of making the exchange. In the cases be calculated precisely and was a standard of Glawe and Fischer, that component was percentage varying according to the version determined, respectively, by the statutory of roulette played. It was paid by each player percentage of winnings or by the odds deter- each time he placed a chip on the table. It mined by the house. In the present case, the would be perfectly possible for an organiser corresponding component is the spread. As to separate the two components by eliminat- in the case of Fischer, that component — the ing the advantage for the house and replacing spread — could also have taken the form of a it with a separate charge to cover his costs charge. It can therefore be considered, on the and provide him with a profit. 20 same lines as in Glawe and Fischer, that, in the case of each individual transaction, part of what the customer pays may also be regarded as the consideration for a service, and that that portion can be precisely deter- mined.

I - 4406

COMMISSIONERS OF CUSTOMS AND EXCISE ν FIRST NATIONAL BANK OF CHICAGO

22 — Opinion in Glawe, cited in footnote 12, point 22. 23 — Opinion in Fischer, cited in footnote 19, point 45.

I - 4407

OPINION OF MR LENZ — CASE C-172/96

71. I would further point out that, also in exchange transactions the exchange rate must typical service transactions, what is taxed is first be agreed, taking into account the situ- what the supplier obtains as consideration ation on the foreign exchange market, and for his service. As the Commission states, it that the exchange rate is then confirmed elec- is also compatible with the case — hardly tronically. The United Kingdom itself refers conceivable in practice — in which the Bank to buying and selling in connection with for- makes a loss over a given period and then eign exchange transactions, which points to has to pay no tax. the fact that more is being done than merely exchanging means of payment.

72. In a case in which a bank made both a charge and purchased and sold foreign cur- rencies at different rates, the consideration 2.8 Consideration in the event of losses on for the Bank's service would consist, not the part of the Bank only of the charge, but also of the spread, as the Commission rightly suggests.

75. Lastly, I would consider a further argu­ himself but as also providing a service to the ment put forward by the United Kingdom, other gamblers consisting in organising the which once again refers to the Opinion in gambling. The position is no different in Glawe. In that case, the Advocate General this case. The Bank will fix the rates for its stated that gambling for money in its sim­ foreign exchange transactions in such a way plest form does not give rise to consumption as to ensure that it obtains a profit from the of goods or services, even though it does transactions which it concludes, taken as a entail expenditure by gamblers. This would whole. The United Kingdom does not con­ be the case with a private bet, where both test this. O n this ground, it should be con­ gamblers place their stakes on the table. The sidered that the Bank's activities in connec­ placing of the bets, although it involves the tion with foreign exchange transactions outlay of money, does not constitute, the cannot be compared to gambling in a simple Advocate General considered, the consump­ form, which does not involve any consump­ tion of goods or services which is the taxable tion of services within the meaning of the event under the VAT system. 2 4 Referring to value added tax system. Moreover, The First that passage of the Opinion, the United N a t i o n a l B a n k takes this view. Kingdom submits that also in this case there is only a movement of money from the Bank to the customer and from the customer to the Bank. It cannot be concluded from this that there is a consumption of services within the meaning of the value added tax system.

78. Given that in the course of answering the first question referred for a preliminary ruling it was already necessary precisely to 80. As the Commission and the United determine the consideration, the second Kingdom rightly submit, Article 11 does not question has already been answered. How- support this argument. It provides merely ever it was not unnecessary to answer the that the taxable amount is everything second question — as The First National obtained by way of consideration. That can- Bank suggested —, since, in my view, it can- not be equated with 'everything which the not be proved that there is consideration provider of services receives'. Consequently, within the meaning of the Sixth Directive the amount of the consideration still has to without precisely defining that consider- be determined. ation.

2.2 Value added tax as turnover tax 2. Consideration of the counter-arguments

2.3 Practical effects of the Bank's approach charge was also levied. In this case too, there would be no reason for taxing the amount of money to be exchanged in addition to the charge. At the hearing, the Commission gave another example relating to the taxation of a service in general. The example was cleaning 82. This becomes clear if the approach advo­ a coat for a given price. In this case, too, it is cated by the Bank is taken a stage further. If clear that only the price of the cleaning and the Bank had to tax everything which it not the value of the coat plus the price of received from the customer — that is to say cleaning is taxed. the total amount of foreign currency — it would have to pay disproportionately high tax in relation to its earnings — which are constituted only by the spread. As I have already shown above, in the case of value added tax the price of a service, that is to say that which the provider receives, is taxed. The Bank's approach would therefore distort the value added tax system and, in this case, 2.5 Proposal for a Nineteenth VAT Direc­ would result in the Bank being able to claim tive a disproportionately high amount of input tax. 2 7

2.4 Examples proving the opposite

84. Lastly, the Commission refers to its pro­ posal for a Nineteenth Directive containing provisions on foreign exchange transactions, in which an approach was chosen whereby 83. The United Kingdom rightly points out only the charge or the costs demanded by that if the service consisting of the exchange the purchaser as payment for the service were to be paid for by a charge, it is clear were to be regarded as consideration, came that only that charge would be taxed and not to nought, not because of this approach but the charge together with the amount of for­ for other reasons. eign currency exchanged by the customer. The Commission takes a similar view, con­ structing an example in which in the context of one currency — i. e. notes to coin — a

(1) In relation to foreign exchange transactions as defined by the British Bankers' Association, 28 the Bank effects a service for consideration within the meaning of the Sixth Directive where that service is not paid for by a charge but by the spread between the bid and offer rates.

(2) The consideration for the service is what the Bank receives by way of spread between the bid and offer rates.

28 — See point 7, above.

I - 4412