C-308/01

GIL INSURANCE AND OTHERS

OPINION OF ADVOCATE GENERAL GEELHOED delivered on 18 September 2003 1

I — Introduction (Questions 3 and 4) and the consequences of non-notification of the relevant measure introducing the tax (Question 5).

1. In the present case the VAT and Duties Tribunal has referred to the Court five questions for a preliminary ruling. The first two questions relate to Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the 3. The context within which the last three Member States relating to turnover taxes questions were raised prompts a closer — Common system of value added tax: analysis of the scope of Articles 87 and 88 uniform basis of assessment (hereinafter as leges speciales aimed at the prevention 'the Sixth Directive'). 2 More specifically and elimination of distortions in competi- they concern the interpretation of Articles tion on the Community market in so far as 27 and 33 of that directive. they stem from State aid. For if the selective tax measures at issue in the main proceed- ings cannot be deemed to constitute State aid, the distortions to which they give rise may be eliminated only by application of the seldom applied Articles 96 and 97 EC which, in regard to Articles 87 and 88 EC, constitute the lex generalis. 2. The last three questions are founded on the supposition that a selective higher tax which exclusively applies to certain pre- cisely defined economic activities may lead to distortions in competition to which Articles 87 and 88 are applicable. More specifically, those questions concern the criterion in Article 87(1) EC concerning effect on trade between Member States 4. This problem area, which was also highlighted by the Commission in its written observations, confers on this case 1 — Original language: Dutch. greater legal importance than the questions 2 —OJ 1977 1. 145. p. 1 raised would appear at first sight to suggest.

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11. The reason given for the introduction 13. Article 27 of the Sixth Directive pro- of the higher rate was to preclude 'value- vides that the Council, acting unanimously shifting'. The authorities were of the view on a proposal from the Commission, may that suppliers of domestic appliances might authorise any Member State to introduce take advantage of the absence of VAT on special measures for derogation from the supplies of insurance by manipulating the provisions of this Directive, in order to prices attributed to the appliances them- simplify the procedure for charging the tax selves and to the corresponding insurance. or to prevent certain types of tax evasion or avoidance. Measures intended to simplify the procedure for charging the tax, except to a negligible extent, may not affect the amount of tax due at the final consumption stage.

16. The respondents in the main proceed- ings are the Commissioners of Customs & — the higher rate could be characterised Excise who are responsible for the admin- as a turnover tax of a type not istration, collection and repayment of permitted by Article 33 of the Sixth insurance premium tax ('IPT') and VAT in Directive; and the United Kingdom.

— the differential between the standard rate and the higher rate constituted 17. The applicants paid the higher rate of State aid under Article 87 EC, of which IPT in relation to insurance sold in connec- the European Commission had not tion with the sale or rental of domestic been informed as required by Article appliances. Following the judgment of the 88(3) EC. Court of Appeal in Lunn Poly, referred to in point 8 above, they claimed from the respondents repayment of the amounts paid by them. Those claims were rejected and they appealed to the VAT and Duties Tribunal, London. 19. The Commissioners of Customs & Excise disputed those assertions in the main proceedings. They accepted that an author- isation for a derogation under Article 27 of the Sixth Directive had not been sought or obtained and that the European Commis- sion had not been informed under Article 88(3) EC of the plan to introduce the higher 18. Before that tribunal, the applicants rate of insurance premium tax. They maintained that they were entitled to accepted that, if there were a breach of

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the Sixth Directive, then the applicants were part of an inseparable whole; and entitled to repayment of the whole of the where there was no tax evasion or tax they had paid but they argued that, if tax avoidance? the differential between the standard rate and the higher rate of IPT were an illegal State aid, then repayment of the differential was not the appropriate remedy.

4. Is Article 87(1) EC to be interpreted so Procedure before the Court that an aid is to be held to affect trade between Member States if as a result of that aid (1) traders in one Member State reduce the volumes of the goods they import from other Member States; or (2) a trader who rents domestic appliances to customers in one Mem- ber State has a number of its rental 21. Those questions were submitted in an contracts discontinued and disposes of order of 24 July 2001, which was received those appliances in another Member at the Court Registry on 6 August 2001. State; or (3) insurance companies in Written observations were submitted by the one Member State, which provide applicants in the main proceedings, the insurance connected with the sales of United Kingdom Government and the domestic appliances, are placed at a Commission. At the hearing on 19 June competitive disadvantage with compa- 2002 they further elucidated their views. At nies which sell direct insurance some of that hearing the Netherlands Government which are subsidiaries of companies in also put forward its views. other Member States?

IV — The first and second questions referred for a preliminary ruling

5. If, in the light of the answers to Questions 3 and 4, the higher rate of 22. The first two questions were raised in insurance premium tax constitutes a connection with the introduction of ITP. State aid within the meaning of Article That tax was introduced in 1994, at the 87(1) EC, is Article 88 EC to be original rate of 2.5%. In 1997 that rate was interpreted so that, where the Commis- increased to 4%. In 1999 it was again sion is not informed of any plans to increased to 5%. In 1997 a higher rate of grant such aid, the legislative measures ITP was also introduced. That rate, 17.5%, introducing the aid should be disap- has since remained unchanged. The higher plied and any tax paid under those rate was introduced in order to combat measures should be repaid?' 'value-shifting', a form of tax avoidance.

25. The initially rental-dominated market had certain specific characteristics. The rental agreements normally contained an obligation on the customer to maintain the equipment and a corresponding obligation on the rental company to service it. Both those aspects were reflected in the rental price. These arrangements were advanta- 24. In regard to relatively expensive house- geous to the supplier inasmuch as the hold appliances, such as audiovisual sys- equipment remained in a good state of tems, washing machines and such like, repair during the rental period, thus consumers have the choice of rental or enabling it to be rented out again after purchase. In the United Kingdom many expiry of the rental agreement. The advan- consumers initially preferred the rental tage for the consumer was that his enjoy- option. In the course of time that has ment of the equipment rented was assured. changed to a preference in favour of the purchase of appliances. 3This change in preference is linked with increasing pros- perity and the improved quality of pro- ducts. Developments on the market for television sets are an illustration of that. 26. Subsequently, suppliers introduced When at the beginning of the 1960s they analogous arrangements in connection with came onto the United Kingdom market in the sale of household appliances by offering large quantities, they were expensive in service contracts. These gave customers a relation to disposable income, technically certain security in regard to use of the unreliable and required regular repairs. equipment. Those contracts which were That was why consumers clearly opted for ancillary to the sales and purchase agree- rental. Subsequently, television sets became ments provided that suppliers were liable to relatively less expensive and their technical remedy any defects in the appliance sold on reliability improved drastically. As a result payment by the customer of a fixed or and owing to the development of consumer annual amount. credit as a sales promotion technique,

28. The applicants in the main proceedings also began to offer service contracts in the form of insurance contracts. Thus, Gran- ada, one of the larger suppliers of house- hold appliances in the United Kingdom, 31. The Commissioners of Customs & established the GIL undertaking in order to Excise recognised that this form of tax be able through it to offer insurance avoidance occasioned a loss of VAT rev- contracts to its rental customers and pur- enue. That prompted the United Kingdom chasers. In the case of rentals it was even a legislature to introduce a higher rate of IPT requirement that such a contract be taken at 17.5% applicable to what is known as out. If defects occurred in the appliance of connected insurance contracts, that is to say the insured person, GIL could ask Grana- where there is in some way a fixed relation- da's service department to carry out the ship between the insurer and the supplier of necessary repairs. The latter provided the the appliance concerned. necessary labour and spare parts.

32. The introduction of that higher rate had a significant effect on the market behaviour of the parties concerned. Most 29. In 1994 the majority, that is to say 85 suppliers reverted to offering normal service to 90%, of insurance contracts against contracts for the appliance supplied by mechanical defects in household appliances them. Where insurance contracts were still were sold through the intermediary of the taken out, direct insurance accounted for an

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appreciably greater market share. Insurers combat VAT avoidance. Since that was tied to suppliers terminated those settled not the purpose of the introduction of relationships. The applicants in the main the standard rate, those questions do proceedings were also compelled to adjust not concern that rate; their market behaviour accordingly.

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concerning goods and services and duction of higher-rate IPT runs counter higher-rate IPT applies only to certain to Article 27 of the Sixth Directive. economic transactions but the comple- mentarity between VAT and higher- rate IPT results in a general tax applicable to all transactions concern- ing household appliances to which VAT is also applicable; 35. The views of the United Kingdom Government and the Commission coincide, save in certain particular respects:

— IPT, at both the standard and higher rate, cannot be deemed to be a turn- — the purpose of Article 33 is to preclude over tax in breach of Article 33 of the the introduction of charges and taxes Sixth Directive; which by imposing a charge on the movement of goods and services in a manner comparable to a turnover tax jeopardise the functioning of the com- mon VAT system. The negation of the effect of Article 13B(a) of the Sixth Directive, which exempts insurance — IPT does not display certain essential services from VAT, is sufficient to characteristics, as laid down in the demonstrate that the proper function- Court's case-law. It is not of general ing of the common VAT system is application to transactions concerning being undermined; goods and services, nor is it charged at every stage of the production and distribution procedure. It applies only to insurance contracts and is charged only once;

— for the introduction of higher-rate IPT, — Article 33 of the Sixth Directive a measure intended to combat VAT expressly confers on the Member avoidance, the Sixth Directive makes States the competence to introduce or provision in Article 27 for an author- apply taxes on insurance contracts isation procedure. Since the United provided that they are not in the nature Kingdom Government did not seek or of a turnover tax, as they are not in the obtain such authorisation, the intro- present case;

38. Although it is in itself correct that the questions in the main proceedings are primarily raised in connection with the higher rate and although the United King- dom Government and the applicants are agreed that the higher rate was specifically intended to combat tax avoidance in respect of VAT in connection with service contracts in the form of insurance contracts ancillary Assessment to the rental and purchase of household appliances, the present case concerns a type of tax with two rates. It follows that in examining IPT against Article 33 of the Sixth Directive that tax must be considered as a whole in regard to all its character- istics. In that connection only two outcomes are possible: either IPT is a disguised VAT 36. Like the United Kingdom Government measure and therefore in breach of the and the Commission I choose to answer the Sixth Directive or it does not have the second question first. The reply thereto has characteristics of VAT and is therefore consequences for the reply to the first permitted. Both outcomes apply to stan- question. dard and higher-rate IPT.

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39. The question whether IPT must be and is charged at every stage of the deemed to be a turnover tax must be production and distribution process and is answered in light of the purpose of Article strictly proportional to the price of the 33 of the Sixth Directive. goods and services concerned and is calcu- lated on the added value subject to deduc- tion of input tax charged at the preceding stages.

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added value. It is charged once only on the Therefore, Article 33 does not preclude the insurance premium on conclusion of the application of IPT. insurance contract. Nor, in logic, can there be any right to deduction of input tax.

Applicability of Article 27 of the Sixth Directive 44. The applicants in the main proceedings have sought to suggest that IPT must nonetheless be deemed to be a turnover tax akin to VAT because, if that tax were applicable to insurance services, it could only be applied at a single stage, namely on conclusion of the insurance contract. That 46. By its first question the referring court argument fails because it confuses the legal seeks to ascertain whether prior to the characteristics of VAT, which provides for introduction of higher-rate IPT the proce- a tax on the added value at each stage of the dure under Article 27 ought to have been production chain, with the characteristics followed. of a specific chain which in the present case has only one link. In my view the Commis- sion is right to point out that the applicants' viewpoint would entail that all taxes on insurance services which are charged at a single stage only should be deemed to be turnover taxes.

47. Article 27 provides for the possibility that Member States, after approval by the Council, may introduce special measures for derogation from the provisions of the Sixth Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance. The applicants maintain that higher-rate IPT is such a measure derogating from the 45. Because IPT as a system does not have Directive, in particular Article 13B thereof, the characteristics of a turnover tax, this tax because it has the effect of negating the on insurance contracts, which as such is exemption from VAT under that article for expressly permitted by Article 33 of the insurance contracts for certain supplies of Sixth Directive, does not generally compro- insurance services, namely those to which mise the application of the VAT system. higher-rate IPT applies.

48. It follows from the reply to the second 50. The applicants have further pointed to question that I do not share this view of the the judgments in Belgium I 7 and Belgium matter. If IPT (or the higher rate thereof) is II. 8The facts underlying those cases how- not a turnover tax, the charge to that tax is ever differ from the present case. In the not in breach of the VAT exemption for former case Belgium based itself for the insurance services. In that case it cannot be purposes of the charge to VAT on the list regarded as a derogating measure. price of new cars in place of the price actually agreed. The Court held that to be contrary to the Sixth Directive. The Belgian legislature subsequently brought its legisla- tion into line but at the same time enacted a supplementary measure with a view to adjusting the scheme of the tax in such a way that nothing would change. Both were implemented by operating a certain method of computation. In the explanatory memor- andum to the measure it was stated in so many words that it was a corrective measure as a result of the Court's judgment and that there was a clear connection between the charge to VAT and the levying of the registration tax. The Court went on to hold in the judgment in Belgium II that the registration tax and the charge to VAT were closely interconnected. In the present 49. For the sake of completeness I would point out that although insurance services case IPT as a scheme of taxation is entirely are exempt from VAT they are not immune separate from VAT. That is not altered by from other indirect taxes. It is open to the the fact that the higher rate was introduced Member States to introduce their own in order to combat a specific form of VAT indirect taxes on insurance contracts. As avoidance. stated in connection with the previous question, that is expressly stated in Article 33 of the Sixth Directive. They are not allowed to do so only in the case of a turnover tax. Since they have competence to tax insurance contracts they are also free to determine a differentiated rate of such tax, so long of course as that does not conflict with the EC Treaty provisions on freedom of movement or would result in the grant of prohibited aid. That is not altered by the fact that the higher rate of IPT is the same as the VAT rate. In other words I see no reason why the United Kingdom should not be able to introduce a differentiation in order to eliminate a distortion occurring on 7 — Case 324/82 Commission v Belgium [1984] ECR 1861. its domestic market. 8 — Case 391/85 Commission v Belgium [1988] ECR 579.

52. A closer study of the order for reference and more specifically the arguments inferred by the referring tribunal from the judgment of the Court of Appeal in R v Commissioners of Customs & Excise ex parte Lunn Poly Limited and another, cited at point 8 hereof, persuades me that the doubts surrounding that issue merit further — The classic type of aid granting a attention. specific benefit or a specific fiscal derogation. The classic remedy pro- vided for in terms of 'eliminating the exceptional benefit' is for the Member State concerned to recover the amount of aid granted, together with interest, 53. If it should transpire that the relevant from the person concerned. An alter- facts warrant the conclusion that there is no native, though not available for bud- State aid the questions raised in the present getary reasons, is to generalise the aid; case acquire a certain hypothetical charac- ter. In that connection the question again arises as to whether they are on that ground admissible.

54. In what follows I shall first examine in — The second type of aid is where an abstracto the interrelationship between exceptional fiscal burden is imposed on Articles 96 and 97 EC, on the one hand, a part of a sector. In that case the aid is

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eliminated by eliminating the excep- of aid always constitute State aid within the tional fiscal burden. In that connection meaning of Article 87 EC. On that view the course of action decided upon Article 87 EC would acquire a broader could be to pay back to the under- material scope than is warranted by the taking concerned the specific charge scheme of the Treaty. paid in order in that way to restore competition with undertakings which were not subject to it. That is the solution proposed by the applicants. However, an alternative remedy would be to generalise the specific charge and thus recover the aid from all con- cerned. Concerning distortions

imbalances in cross-border economic rela- 63. The disappearance of the economic tions. internal borders also resulted in the occur- rence of imbalances at intermediate or sectoral levels. They are mostly traceable to disparities in (systems of) legislation. Thus, a fiscal system which in country A weighs relatively heavily on the factor of employment and in country B weighs heavily on the capital factor can have a serious effect on competitive conditions within the common market. Such generic distortions, which may in principle result from all public interventions which affect 61. Such imbalances could occur at various the market behaviour of undertakings, may levels as between the different economies. in the long run seriously disrupt the At macro level global distortions manifest allocation processes on the common market themselves for example in excessively high (functioning of the common market). With labour costs and price levels which are a view thereto Article 100 of the original discernible in a deficit on current account in EEC Treaty provided for the possibility of terms of the balance of payments. Where harmonisation of legislation. It is not only the opposite occurs there is an appreciable use of the harmonisation instrument that current account surplus with an over- has led within the common market to an strained labour market and the threat of unmistakable convergence in socioeco- price inflation. nomic, economic and fiscal legislation. That has also stemmed from independent initia- tives by national legislatures. That sponta- neous convergence has primarily occurred in the sphere of direct taxation where it has been difficult for the Community to activate its competence.

parts of sectors: these are referred to as of the EEC Treaty (now Articles 87, 88 and specific distortions. They stem from specific 89 EC) provided for a specific Community interventions by the authorities as a result competence. That specific competence is of the imposition of exceptional charges on characterised by more rigorous provisions, certain kinds of production or on certain more thorough supervisory machinery and undertakings or as a result of the grant of wide implementing and monitoring powers exceptional benefits. In regard to excep- for the Commission. tional burdens those are frequently inter- ventions by the authorities which are known in modern management terms as burdens imposed with a view to regulating conduct. They occur more and more frequently in environmental and planning policy. In a certain sense they are the mirror image of exceptional benefits or aid which seek to influence the conduct of market participants by means of incentives rather 66. The major differences between the than disincentives. machinery of Articles 96 and 97 EC, on the one hand, and Articles 87 to 89 EC, on the other, are a reflection of a diametrically opposed application in practice. The former provisions are more or less never applied whilst the latter form the basis of a comprehensive policy practice and more and more abundant and refined decisions by the Court.

69. Normally such exceptional measures seek to influence the behaviour of market participants in a targeted way. It follows 72. The major difference in legal conse- that the distortions which they create must quences attaching under the EC Treaty to not per se be judged negatively. distortions stemming, respectively, from exceptional burdens or from the grant of aid calls for a careful demarcation between the two types.

70. A selective tax on cars without a catalyser creates a distortion in competitive conditions on the relevant market with a view to having a negative effect on the production and sales of such cars. Such a distortion may be justified by environmen- tal policy objectives. Conversely, a specific 73. A connecting factor must always be grant of aid, for example in favour of sought in the specific source of the distor- certain investments in weaker regions, tion: is it a burden or the grant of aid? The creates a distortion to the detriment of notion that a distortion created by an more prosperous regions. That specific exceptional burden may be viewed as the distortion is justified by freely and generally grant of aid in favour of the economic accepted objectives of regional economic operators who continue to come within the policy. general rule is in principle incorrect on both

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75. From an economic point of view as well the reclassification as the grant of aid of a national measure which by its nature and purpose is general may have undesir- able consequences. That could mean that the level of burden for market participants coming under the general provision would have to be brought up ex tunc to the level of burden on market participants affected by the specific measure. Such a general change in levels of burden for a large group of market participants or wide categories of market sectors may be undesirable from an 77. That line of argument leads to the economic point of view. Moreover, an conclusion that a specific distortion created adjustment of that nature in respect of a by an exceptional burden can never be general measure incorrectly classified as regarded as the grant of aid in favour of the State aid would almost inevitably give rise market participants coming under the gen- to new general distortions on the common eral measure. In this connection two further market. Thus, one mischief would replace consequences must be considered: if the another. relevant distortion must be eliminated in

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the interest of the common market the difference in the basis of assessment as Community will have to eliminate the between IPT and VAT made it attractive to source of that distortion, namely the disguise the supply of certain services as exceptional burden; in that connection it services under an insurance contract. must make use of its competences under Articles 96 and 97 EC and not those under Articles 87 and 88 EC.

86. It follows from the foregoing that that specific tax measure can in no way con- stitute the grant of aid possibly requiring the United Kingdom Government to repeal ex tunc this specific tax measure which was lawfully adopted and is justified as to its purpose.

84. Higher-rate IPT is to be regarded as a specific tax restricted ratione materiae to certain types of insurance contract. From its purpose and effect, it is to be classified as a regulatory charge specifically disincentivis- 87. It further follows from the foregoing ing the conclusion of those contracts. It thus that the possible remedy under Articles 96 had the intended effect on market condi- and 97 EC must be directed to the cause of tions: the classic service contracts liable to the specific distortion, that is to say to the VAT returned and on the smaller market specific tax measure itself and not the for ancillary insurance contracts the pro- generally applicable rate of IPT in regard portion of direct insurances rose again. to which the higher rate constitutes a specific exception.

88. That leads me to the conclusion that, in the context of the facts underlying the main proceedings, Articles 87 and 88 EC are not applicable. Thus, Questions 3, 4 and 5 raised by the VAT and Duties Tribunal are 85. As is apparent from the proposed reply based on a manifestly incorrect view of to the first two questions, this intervention Community law. was not contrary to the Sixth Directive. So long as no counter measures were adopted by the Council on a proposal by the Commission, they must be regarded as lawful. The Commission's acquiescence indicates that the possible distortion in 89. In light of that view Questions 3, 4 and trade between the Member States stemming 5 do not require to be answered.

— Questions 3, 4 and 5: There is no need to reply to these questions since a specific tax measure under which a higher rate of tax restricted ratione materiae is introduced cannot be presumed to constitute the grant of aid measure within the meaning of Articles 87 and 88 EC. I-4801