C-338/98

COMMISSION v MOTHERLANDS

OPINION OF ADVOCATE GENERAL STIX-HACKL delivered on 31 May 2001 1

I — Subject of the proceedings icle 4(4) of the Sixth Directive excludes from the tax, amongst others, persons who are bound to their employer by a contract of employment. 1. In the present action, the Commission seeks a declaration that, by providing that an employer who is a taxable person for the purpose of value added tax ('VAT') may deduct part of an allowance paid to an employee for business use of a private vehicle, the Kingdom of the Netherlands 3. Article 5(1) of the Sixth Directive has failed to fulfil its obligations under defines a supply of goods as the transfer Article 17(2)(a) and Article 18(l)(a) of of the right to dispose of tangible property Sixth Council Directive 77/388/EEC of as owner. 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes ·— Common system of value added tax: uniform basis of assess- ment ('the Sixth Directive').2 4. Article 17(2)(a) reads:

II — Legal framework '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: A — Community law

2. The concept of independence used in the definition of a taxable person in Art- (a) value added tax due or paid in respect of goods or services supplied or to be 1 — Original language: German. supplied to him by another taxable 2 —OJ 1977 L 145, p. 1. person'.

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7. Article 22(3)(a) and (c) read: 'Without prejudice to Article 15(2) and (5) of the [Law on Turnover Tax 1968], where an employee uses a car belonging to him in connection with his employer's business '(a) Every taxable person shall issue an and receives an allowance from his invoice, or other document serving as employer for that purpose, a percentage invoice in respect of all goods and of the allowance, fixed by the Minister, services supplied by him to another may be deducted by the employer in so fai- taxable person, and shall keep a copy as the allowance does not fall within thereof. income for income tax purposes.'

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11. The Netherlands Government explains that a fixed rate was chosen in order to 14. The deduction of VAT in relation to the avoid the practical difficulties involved in allowance is verified by means of the calculating exact amounts. Account is accounts of the employer, who is obliged taken of fixed costs, for example general by a series of provisions of general tax law depreciation, insurance, motor vehicle tax, and income tax law to keep separate garaging and bodywork maintenance, and accounts for the allowance. The supporting also of journey costs, namely depreciation documents need not be in any particular related to the use of the vehicle and the form. However, they have to contain infor- costs of fuel, oil, tyres and repairs. mation as to the business trips undertaken,

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the places visited by the employee and the the Netherlands before the Court by appli- distances travelled (periodic notification by cation dated 11 September 1998, regis- employees). tered at the Court Registry on 14 Septem- ber 1998. By order of 3 May 1999, the President of the Court granted the United Kingdom of Great Britain and Northern Ireland leave to intervene in support of the Kingdom of the Netherlands.

III — Pre-litigation procedure and proce- dure before the Court

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IV — Analysis of the pleas in law raised by goods or services affected by it are made the Commission neither for business purposes nor to tra- ders, but are made to a final consumer, namely, the employee as the owner of a vehicle, which he uses also, or even mainly, for private purposes. 18. While the first plea in law concerns Article 17(2) of the Sixth Directive, and therefore the conditions for existence of the right to deduct input tax, the second plea relates to Article 18(1) of the Sixth Direc- tive and therefore the conditions for exer- cise of that right. The deductible part of the allowance is therefore not tax on a transaction between taxable persons, but corresponds to the VAT on supplies of goods or services to a final consumer.

A — First plea in law: Breach of Arti- cle 17(2) (a) of the Sixth Directive

20. The Netherlands Government justifies the availability of a deduction on the basis that the VAT system is meant to give relief to every taxable person in order to ensure Arguments of the parties and of the inter- that all economic activities, whatever their vener purpose or results, are taxed in a wholly neutral way. 3

19. The Commission proceeds on the basis of the fundamental consideration that the system of input tax deductions in principle applies only to supplies of goods or services by one taxable person to another taxable In the present case, the reimbursement of person. This is also clearly stated in Arti- the expenses borne by the employee in cle 17(2)(a) of the Sixth Directive. respect of the vehicle relates exclusively to transactions which serve the employer and therefore affect the ultimate price of the product or the service. Accordingly, the corresponding portion of the VAT has to be deductible. Article 23 of the Turnover Tax Implemen- tation Regulations 1968 is not compatible 3 — Judgment in Case 268/83 Rompelman [1985| ECR 655, with that system, because the supplies of paragraph 19.

21. In this connection, the Commission points to the clear and unambiguous word- ing of Article 17 of the Sixth Directive. In its view, moreover, tax law requires gen- erally that its field of application and other 22. The Netherlands Government, in con- rules be clearly defined, as it would other- trast, regards the judgment in Intiem as wise be applied differently in the Member confirmation that, in interpreting Arti- States. cle 17(2) of the Sixth Directive, economic reality is to be given priority. What is decisive is that the employees uses his private vehicle for the purposes of the employer's business. Otherwise, economic- ally identical situations would be treated differently, which would run counter to the The Commission also founds its submis- case-law of the Court 6 and lead to distor- sions on the judgment in Intiem, 4in which tions of competition between undertakings. the Court upheld a trader's ability, provided for by a national provision, to deduct VAT charged to him from the VAT payable by him. In this connection, the Commission refers to three essential differences between the Netherlands legislation at issue and what are, in its opinion, the essential conditions which the Court considered 23. On this point, the Commission explains had to be met in order for a national that the situations in the present case and in provision relating to deductibility to be Intiem are indeed economically similar, but compatible with the Sixth Directive. First, must be distinguished for the purposes of there is in the present proceedings no tax law. Moreover, tax law must generally agreement between the taxable employer

Finally, the Commission rejects the view of According to the United Kingdom Govern- the United Kingdom Government that ment, economic reality must be the guide: excluding any reimbursement of expenses in reality the business obtains the fuel means that even fuel which employees use through its employee, who for his part acts on behalf of the business, without the to fill up vehicles that are not suitable at all ownership of the vehicle used playing any for private use would have to be treated as role. supplied to final consumers.

26. Generally, the Commission counters As regards invoicing the taxable employer the views of the United Kingdom Govern- directly, the United Kingdom Government ment and of the Netherlands Government describes the practice, widespread in the with the final argument that they amount United Kingdom, whereby employees are to a contra legem interpretation of Arti- granted mileage allowances. This practice cle 17(2) of the Sixth Directive.

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Analysis employee and whether, even if it is, a deduction may be allowed.

31. The question then arises whether this 7 —Judgment in Case 89/81 Hong Kong Trade [1982] ECR chain is broken by the activity of the 1277, paragraph 9.

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35. Irrespective of that, the fact that the common system of VAT is 'the result of a employee receives the services or goods gradual harmonisation of national legisla- with the intention of using them at least in tion' 9and that this harmonisation 'is still part for business purposes, that is to say for only partial'. 10 the taxable employer, is not decisive either under the Sixth Directive. Admittedly, the VAT system is based on the principle that it is not the third party supplier who is to bear the tax burden but the person whose need is satisfied, that is to say, the final consumer. Yet this — general — principle can be observed only to the extent that it is given effect in Community law. This prin- ciple is, however, not fully upheld in 38. In order for double taxation to be Community law, as is shown, for example, entirely eliminated, action by the Commu- by the legal position in respect of so-called nity legislature is therefore needed — as in occasional traders who are not taxable other cases. 11Until then, however, Arti- persons even though they are third party cle 17(2)(a) of the Sixth Directive is to be suppliers. applied in its existing form, that is to say with the possibility of double taxation. 12

36. As regards the submission that there is a risk of double taxation, it is true that the VAT system has the objective of avoiding double taxation, as the Netherlands Gov- 39. Community law as currently in force ernment rightly emphasises. However, this therefore does not allow for a deduction does not mean that the Sixth Directive does such as that provided for by the Nether- not in specific cases none the less tolerate lands legislation. For the sake of complete- double taxation. The VAT that is not ness, however, it must be pointed out that deductible then becomes a cost factor. there are tax arrangements that would make a deduction possible, for example acquisition in the name and on the account of the employer.

40. If the Netherlands legislation under consideration here is compared with the criteria developed in the case-law, what emerges, however, is the following. First, a deduction of input tax is granted without any need for an agreement between the 42. It must as a matter of principle further employer and the taxable supplier. Also, be found that a literal interpretation of the supplies of goods are not effected on the Article 17(2)(a) of the Sixth Directive is account of the employer. The documents consistent with an interpretation based on filed by the Netherlands Government prove its legislative history. There is no express moreover that the goods and services reference to 'another trader' in either the supplied to the employee are not used corresponding provision previously con- exclusively for business purposes; instead, tained in the Second Directive (Article 11) they serve private purposes too. Nor, or in the proposal of the Commission for finally, is it necessary in order for input the subsequent Article 17(2) of the Sixth tax to be deducted under the Netherlands Directive. legislation that the employer receive an invoice by which VAT is charged to him.

43. However, as the Court held in Genius 41. Lastly, it is necessary to rebut the view Holding, the Council, in drafting Arti- of the Netherlands Government, based on cle 17(2)(a) of the Sixth Directive, departed the judgment in Madgett and Baldwin, that both from the wording of Article 11(1) (a) in interpreting Article 17(2) of the Sixth of the Second Directive and from that of Directive economic reality is to be given Article 17(2)(a) of the Commission's pro- precedence over the wording of the provi- posal. 15 sion. 14 — Madgett and Baldtuin (cited in footnote 61, paragraph 21. 15 —Judgment in Case C-342/87 Genius Holding [1989] ECR 13 — In this regard, see point 21. 4227, paragraph 12.

The Commission refers moreover to the danger of abuse which could result from 46. It follows from all the foregoing con- the particular features of those rules. siderations that the Netherlands legislation concerning deduction of part of the allow- ance infringes Article 17(2) of the Sixth Directive. For that reason, the Commis- sion's first plea in law is well founded. 48. The Netherlands Government rejects this allegation, arguing in particular that the maximum limit of the mileage allow- ance constitutes protection against abuse. It submits, furthermore, that the reference in Article 18(1)(a) of the Sixth Directive to B — Second plea in law: Breach of Arti- Article 22(3) thereof does not mean that cle 18(1)(a) of the Sixth Directive the invoice must be issued by one taxable person to another taxable person. Rather, it is apparent from Article 22(3)(c) that docu- ments other than invoices are permissible in order to prove that an item of expenditure has in fact been incurred for the purposes of Arguments of the parties and of the inter- the business. vener

47. According to the Commission, the national legislation is incompatible with The Netherlands Government further emphasises that the (only) function of the invoice is evidential. The right to a deduc- 16 — Judgment in Case C-43/96 Commission v France |1998| tion of input tax also exists where there is ECR I-3903, paragraph 16, concerning the interpretation of Article 17(6) oí the Sixth Directive. no invoice. Thus, Article 18(3) of the Sixth

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COMMISSION v NETHERLANDS

right is exercised is irrelevant if it has not V — Costs even arisen. The Member States cannot, by determining 'conditions and procedures' within the meaning of Article 18(3) of the Sixth Directive, alter the requirements for 54. Under Article 69(2) of the Rules of the existence of the right to deduct input Procedure, the unsuccessful party is to pay tax. the costs if they have been applied for in the successful party's pleadings. As the King- dom of the Netherlands has been unsuc- cessful, it should be ordered to pay the costs. Under Article 69(4) of the Rules of Procedure, Member States which intervene in the proceedings are to bear their own 53. Thus, the Commission's second plea in costs. Therefore, the United Kingdom law is also well founded. should bear its own costs.

VI — Conclusion

55. I accordingly propose that the Court should:

(1) declare that by providing, in breach of Article 17(2)(a) and Article 18(1)(a) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, that an employer who is a taxable person for the purposes of VAT may deduct part of an allowance paid to an employee for business use of a private motor vehicle, the Kingdom of the Netherlands has failed to fulfil its obligations under the Treaty;