Report for the Hearing delivered in Case 252/86
I — Facts and procedure
1. Article 2 of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value-added tax: uniform basis of assessment (Official Journal 1977 L 145, p. 1) provides that the supply of goods and services for consideration within the territory of the country by a taxable person acting as such is to be subject to VAT. Article 13 B (f) provides that the Member States shall, under conditions which they are to lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse, exempt betting, lotteries and other forms of gambling, subject to conditions and limitations laid down by each Member State. According to Article 33, the provisions of the Sixth Directive are not to prevent a Member State from maintaining or introducing taxes on insurance contracts, taxes on betting and gambling, excise duties, stamp duties and, more generally, any taxes, duties or charges which cannot be characterized as turnover taxes.
2. On 23 December 1983, the Commission brought an action against the French Republic for failure to fulfil its obligations (Case 287/83, Official Journal 1984, C 16, p. 12) on the ground that the maintenance of a general exemption from VAT for operating receipts from all automatic machines subject to entertainments tax was incompatible with Article 13 B (f) of the Sixth Directive. By Article 16 of the Loi de finances (Finance Law) for 1985 (Law No 84-1208 of 29 December 1984, Journal Officiel de la République Française (JORF), p. 4060), France imposed VAT on operating receipts from automatic machines and Case 287/83 was removed from the Register by Order of the Court of 16 January 1985.
3. In addition to VAT, which has been levied since 1 July 1985, automatic games machines are subject to two specific taxes in France, namely entertainments tax, the amount of which varies according to the size of the population of the municipality concerned, and a tax known as the State tax. The State tax on automatic machines is the subject of Article 564 septies and Article 564 octies of the Code general des impôts (General Tax Code, hereinafter referred to as ‘the CG’). Article 564 septies introduced a tax on automatic machines installed in public places which provide visual or aural entertainment, a game or an amusement, at an annual rate per machine of FF 500 for the machines designated in the fourth and fifth paragraphs of Article 1560-II of the CGI (small non-electric games of skill in which the only automatic devices, of a purely mechanical nature, consist of dispensers of balls and score recorders, and automatic games consisting solely of small-scale vehicles or models of animals in or on which children sit), and for automatic sound-reproduction devices, of FF 1500 for machines other than those mentioned above, or FF 1000 if they were first put into service more than three years earlier. Automatic machines brought into service in the second half of a year are taxed at half-rate. The charge of FF 5000 for machines that operate solely on the basis of chance and, in particular give prizes of entertainment tokens or more games free of charge was repealed by Law No 83-628 of 12 July 1983 (JORF p. 2154), which prohibits in particular the importation, manufacture, possession, installation and operation of machines of that type. Under Article 564 octies, the tax is payable by the operator of the machine when making the annual return in respect of machines in operation, and must be paid within six months of the making of that return and no later than 31 December of the relevant year. Article 35-1 of the Finance Law for 1987 (Law No 86-1317 of 30 December 1986, JORF 1986, p. 15820) repealed Article 564 septies and octies of the CGI.
4. On 2 July 1985, the Centre des impôts (tax office) at Saint-Lô addressed to Mr Bergandi, a trader and automatic games machines operator, a claim for the payment of FF 111000 for the annual tax on automatic machines for 1985, which in this case related to machines brought into service on 1 January 1985, even though the operation of those machines became subject to VAT as from 1 July 1985.
5. The Director of Fiscal Services of La Manche, by decision of 31 December 1985, rejected an application for reduction of the tax demand by half in respect of the second half of 1985 and Mr Bergandi brought an action against him on 28 February 1986 before the Tribunal de grande instance (Regional Court), Coutances, the competent court for matters concerning taxes classified as indirect taxes and charges treated as such, seeking an order that the tax authorities should grant him an exemption in the principal sum of FF 38000 in respect of the penalties relating thereto, and should reimburse to him the sums already paid.
6. Considering that the dispute involved the interpretation of certain provisions of Community law, the Tribunal de grande instance, Coutances, decided to stay the proceedings until the Court of Justice had given a ruling under Article 177 of the EEC Treaty on the following questions:
‘(1) Must Article 33 of Directive 77/388/EEC (the Sixth VAT Directive) be interpreted as prohibiting Member States from continuing to levy turnover taxes on the supply of goods or the provision of services once such activities become liable to VAT?
2) Must the concept of turnover taxes or any taxes, duties or charges which may be characterized as turnover taxes referred to in Article 33 of the Sixth VAT Directive be interpreted as applying to taxes levied on operating receipts, regardless of whether tax is charged on the basis of actual revenue or on an approximate basis where it is difficult to arrive at an exact determination of actual revenue?
3) More particularly, does the concept of turnover taxes or any taxes, duties or charges which may be characterized as turnover taxes referred to in Article 33 of the Sixth VAT Directive include an annual, flat-rate fiscal charge levied on all automatic machines installed in public places and providing visual or aural entertainment, a game or an amusement, introduced for the purpose of replacing a tax on the turnover of the operator on the machine and which is broadly adjusted to take account of the profitability of each type of machine and, indirectly, of the operator's receipts?
4) If the replies to Questions 1 and 3 are in the affirmative, does the prohibition of the cumulative levying of VAT and other turnover taxes on the same revenue or turnover mean that where VAT is applied for the first time at the beginning of the second half of a year and the turnover taxes levied in addition to VAT must be paid in a single instalment at the beginning of the calendar year (unless deferred payment has been permitted), one half of the sums due in respect of the taxes in the nature of turnover taxes for the year in which VAT was first applied must, in consequence of the introduction of VAT, be reimbursed or not demanded?
5) Must Article 95 of the EEC Treaty be interpreted as prohibiting the levying on operating receipts of tax at a rate three times higher on products that are principally of foreign origin than on similar products that are principally of domestic manufacture? Must that discrimination be regarded as even more serious when the operating receipts concerned are liable both to VAT and to indirect taxation of another kind?
6) Must Article 30 of the EEC Treaty be interpreted as meaning that it is an infringement thereof to make revenue from the operation of certain products liable to VAT pursuant to Community legislation without abolishing existing taxes on such revenue even though certain of the products operated are no longer manufactured in the Member State levying the various taxes concerned and where, in any event, the cumulative levying of such taxes may result in a reduction in imports of such products from the rest of the Community?’
7) The judgment of the Tribunal de grande instance, Coutances, was received at the Court Registry on 1 October 1986.
8) Pursuant to Article 20 of the Protocol on the Statute of the Court of Justice of the EEC, written observations were submitted on 23 December 1986 by the Commission of the European Communities, represented by its Legal Adviser, Johannes Føns Buhl, on 24 December 1986 by the Government of the Federal Republic of Germany, represented by Martin Seidel, Ministerialrat in the Federal Ministry of the Economy, on 30 December by the Government of the French Republic, represented by Régis de Gouttes, Assistant Director of Legal Affairs in the Ministry of Foreign Affairs, and on 2 January 1987 by Gabriel Bergandi, the plaintiff in the main proceedings, represented by Robert Collin and Richard Milchior, of the Paris Bar.
9) Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General, the Court decided to open the oral procedure without any preparatory inquiry.
II — Written observations submitted to the Court
1. Gabriel Bergandi, the plaintiff in the main proceedings, after explaining that the machines in question are small, purely mechanical games of skill, automatic devices in the form of small-scale vehicles in which children sit, automatic sound-reproduction devices and electric games of skill, and after describing the background to the introduction of the contested legislation, states that the questions submitted to the Court raise three legal problems: the lawfulness, in the light of the interpretation of Article 33 of the Sixth Directive, of the overlapping of VAT and other taxes, the interpretation of Article 95 of the EEC Treaty and the interpretation of Article 30 thereof. A — As regards the problem of overlapping, he points out that the First VAT Directive introduced a harmonized system of turnover taxes designed to ensure that economic operators in the Community bear fiscal charges calculated on equal bases with a view to the unity of the common market and to avoiding discrimination. The principle that there should be no overlapping as between taxes in the nature of turnover taxes and VAT is of fundamental importance and requires a definition of turnover tax which applies throughout the Community. (a) The prohibition of overlapping laid down in Article 33 of the Sixth Directive is unconditional and sufficiently precise to be applied directly by the national courts. Article 33 does not allow overlapping between VAT and other taxes except where the other taxes, duties or charges cannot be characterized as turnover taxes. Mr Bergandi therefore proposes that the answer to the first question should be that: ‘Article 33 of the Sixth VAT Directive does not prohibit the imposition upon supplies of goods or the provision of services of taxes, duties and charges other than VAT, in so far as VAT was introduced subject to the condition that such other levies should not be taxes, duties or charges which can be characterized as turnover taxes. More particularly, taxes on insurance contracts, taxes on betting and gambling, excise duties and stamp duties, provided that they cannot be characterized as turnover taxes within the meaning of Article 33 of the Sixth Directive, may be charged on the supply of goods or the provision of services in addition to VAT’. (b) The applicability of the prohibition of overlapping depends upon the definition of the concept contained in Article 33 of charges which cannot be characterized as turnover taxes. That concept undoubtedly has a Community meaning. A Member State cannot, by virtue of the features of its tax system or the term used to described a tax, remove a tax from the scope of that prohibition. The very wording of Article 33 expressly refers to all taxes and charges which can be characterized as turnover taxes. Moreover, VAT is a tax whose characteristics are harmonized at Community level and part of VAT revenue is paid into the Community budget. It may be inferred from the judgment of the Court of 8 July 1986 in Case 73/85 (Kerrutt v Finanzamt Mönchengladbach-Mitte [1986] ECR 2219) on the classification of a German duty as a stamp duty within the meaning of Article 33 that each of the terms used in that provision must be taken to have a Community definition. A comparision of the term ‘betting and lotteries’ appearing in Article 13 B (f) and the term ‘betting and gambling’ in Article 33 shows that the latter term cannot refer to games of skill for the entertainment of children and adults. Likewise, the State tax on jukeboxes is not a tax on betting and gambling. In order to define taxes which can be characterized as turnover taxes, it is necessary to recall the fundamental distinction between income tax, tax on capital and taxes on consumption, including indirect taxes and taxes on turnover. Indirect taxes may be defined as real taxes levied on a product or service, without any distinction being made as to the identity of the person legally or actually required to pay the tax, the rate of which will, in most cases, be specific and proportional to the quantity of the taxable thing. Turnover taxes are synthetic taxes, charged ad valorem, which may be indirectly personalized and of which the basis of assessment is an economic and accounting factor, namely the turnover. Turnover taxes, which may be collected at the various stages of sale or provision of services, are intended to be levied on turnover in such a manner that they are proportional to business output and catch a proportion of the gross proceeds of the economic activities concerned. The evaluation of the taxable thing, namely turnover, may be carried out on a real basis, as in the case of VAT, by an index-related method, using apparent, tangible and invariable factors, or on a flat-rate basis. The classification advocated here essentially coincides with that of the French administration, which distinguishes between the category of special taxes, including certain customs duties and indirect taxes properly so called, and the category of ad valorem taxes, being essentially taxes on turnover. It has the advantage over that of the French administration that it does not include among indirect taxes certain taxes collected on an ad valorem basis. In its judgment of 27 November 1985 in Case 295/84 (Rousseau Wilmot SA v Organic [1985] ECR 3759), the Court held that Article 33, seen in the context of the process of harmonization of turnover taxes and the adoption of a common VAT system, is designed to prevent that common system from being compromised by fiscal measures of a Member State taxing the movement of goods and services in a manner comparable to the way in which VAT is levied. It cannot be inferred from that judgment that Article 33 prohibits only the overlapping with VAT of taxes which display exactly the same characteristics as VAT or that only a proportional and deductible tax, like VAT, can be characterized as a turnover tax. Turnover taxes may be imposed on a turnover evaluated in different ways and may not always be deductible, in so far as a flat-rate system, for example, may be operated. The essential feature which those taxes have in common with VAT relates to their impact, whether direct or indirect, on the consumer. The State tax levied on automatic machines is payable by the operator and is connected with the use of the machine and the duration of such use; it is possible to transfer the tax paid in respect of a machine withdrawn from use to a new machine brought into service and the tax is adjusted according to the type of machine or its age, in other words according to its yield, and all these facts prove that it is the use, and therefore the output of the machine, which is subject to the tax. The second and third questions could therefore be answered as follows: ‘The concept of turnover taxes or taxes which may be characterized as turnover taxes contained in Article 33 of the Sixth VAT Directive must be interpreted as applying to taxes levied on operating receipts regardless of whether tax is charged on the basis of actual revenue or on an approximate basis where it is difficult to arrive at an exact determination of actual revenue. The foregoing might apply, for example, to a tax, fixed annually, paid by the operator and adjusted according to criteria enabling account to be taken of the profitability of the different kinds of machines whose operation is subject to the tax and thus indirectly fixed according to different criteria relating to the receipts obtained by the operator’. (c) The prohibition of overlapping became immediately applicable when VAT came into force and the portion of the tax relating to the part of the year in which VAT was levied should be reimbursed or set off by way of relief. The following answer should be given to the fourth question: ‘Where VAT is levied for the first time in midyear and not as from 1 January, the prohibition of the overlapping of VAT with other taxes related to turnover laid down in Article 33 of the Sixth VAT Directive takes effect upon the introduction of VAT. From that time and regardless of the date and procedures for the payment of the other taxes which can be characterized as turnover taxes collected previously, the Member State must, in consequence of the introduction of VAT, reimburse or not demand payment of the sums relating to the part of the year during which VAT was first applied’. B — The problem of application of Article 95 of the EEC Treaty should be examined in the light of the fact that certain products, namely American billiards and table football machines, are for the most part manufactured in France, whereas pinball, electronic billiards and video games are all imported. The Court has always adopted a wide definition of similarity, taking as its criterion not strict identity but rather analogy and comparability in use. All the machines concerned, with the exception of jukeboxes, fall within the same Common Customs Tariff heading and are specifically intended for recreation and entertainment purposes. Even if it were not conceded that they are similar, it would have to be acknowledged that those products are in a competitive relationship, even though it might be partial, indirect or potential. An analysis of the categories covered by Article 564 septies of the CGI shows that the operation of products of foreign origin is taxed at a rate three times higher than that applied to national products which are similar to or compete with them. Since the dispute with which the main proceedings are concerned does not relate directly to the entertainments tax, it is unnecessary to consider the question whether discrimination is made worse by the overlapping of the contested tax with VAT and another charge. It is for the national court to consider whether the overlapping of several taxes, even if only one is discriminatory, may, for economic reasons, aggravate discrimination. It is therefore proposed that the fifth question should be answered as follows: ‘Article 95 of the EEC Treaty must be interpreted as prohibiting the imposition of a tax which is de facto based on operating receipts at a higher rate on products that are principally or entirely of foreign origin than on similar or competing products that are principally of domestic manufacture. The overlapping of a discriminatory tax within the meaning of Article 95 of the Treaty and another tax, even if the latter is not discriminatory, may nevertheless have the effect of aggravating the consequences of such discrimination. ’ C — With respect to the free movement of goods, the Court recognized in its judgment of 7 May 1985 (Case 18/84 Commission v French Republic [1985] ECR 1339) that a fiscal measure may also fall within the scope of Article 30. Separate pieces of tax legislation each clearly constitute a set of rules within the meaning of the case-law concerning Article 30. Even if it were possible that each piece of legislation, considered separately, did not hinder Community trade, their combined effect might be different. The statistics for imports of automatic machines show that the overlapping of taxes has the effect of reducing imports of Community origin. Mr Bergandi therefore proposes that the following answer should be given to the sixth question : ‘Article 30 of the EEC Treaty must be interpreted as meaning that it is an infringement thereof to make certain products liable to VAT without abolishing the existing taxes charged on the operating receipts from products which are subject to VAT, so that the free movement of goods of Community origin is thus hindered, and that is the case even if the overlapping of taxes may in itself be lawful under the other Community provisions. Regard must also be had to the fact that certain of the products which are affected by that hindrance are not manufactured in the territory of the Member State responsible for the overlapping of taxes whereas national products are manufactured within that territory which in the consumer's eyes compete with the imported products ’.
2. The Government of the French Republic observes that in its judgment of 17 November 1985 in Case 295/84, cited above, the Court held that the prohibition of overlapping of taxes contained in Article 33 was intended to ensure that the functioning of the common VAT system was not compromised by fiscal measures applied by a Member State to the movement of goods and services which had an effect on commercial transactions comparable to that of VAT. However, that provision does not prevent the Member States from maintaining taxes based on the activities of undertakings which do not relate directly to the price of goods or services. The tax on automatic machines is unrelated to their purchase price and is not intended to represent a levy of any kind, real or flat-rate, on turnover. The tax becomes due when the annual return is made in respect of the machine regardless of whether the machine is actually in service. It should therefore be stated in reply to the first three questions that: In view of that answer, the fourth question becomes devoid of purpose. In any event, the flat-rate nature of the tax precludes any partial reimbursement. On the other hand, the tax ceases to be payable in respect of machines brought into service after VAT began to be levied. The existence of several rates is accounted for by the differing uses of the machines: a reduced rate for machines designed for children, a higher rate for machines of which the installation is prohibited and a medium rate in other cases. It is apparent from the parliamentary debates prior to the inclusion of Article 564 septies in the CGI that operating turnover was not taken into account and that the profitability of the machines was no more than a secondary concern. There is no discrimination against machines manufactured in other Member States: the rate of FF 500 applies equally to machines produced in France and to imported machines; the rate of FF 5000 applied to machines which have been prohibited in the meantime; the rate of FF 1500 applies to machines intended for a different group of users. The possibility of that rate being reduced for machines put into service more than three years previously is explained by the need to ensure a certain availability of entertainment facilities in small municipalities. The following answer should therefore be given to the fifth question: As regards the problem of the free movement of goods, the Court has recognized that the scope of Article 30, however wide it may be, does not extend to the barriers covered by other provisions of the Treaty, such as those of a fiscal nature or those having equivalent effect referred to in Articles 9 to 16 and 95 of the Treaty. It may therefore be stated in reply to the sixth question that:
‘The application of Article 33 of Council Directive 77/388/EEC, known as the Sixth VAT Directive, does not prevent the levying by a Member State of a tax such as that introduced by Article 564 septies of the French Code general des impôts, in so far as the latter is not a tax on turnover’.
‘The said tax is not contrary to Article 95 of the EEC Treaty’.
‘The said tax is not contrary to Article 30 of the EEC Treaty’.
3. The Government of the Federal Republic of Germany points out in the first place that it does not make any difference whether the interpretation of Article 33 is focused on the concept of turnover tax or on that of a tax which can be characterized as a turnover tax. The latter concept may be wider in scope as far as its description is concerned but not as regards its purpose or nature. Neither of those concepts has so far been defined in general terms in Community law and it is not necessary for the Court to give an exhaustive definition in the present case. It is sufficient to say that turnover taxes are characterized inter alia by their general scope, which covers more than a few categories of goods and services, whereas Community VAT, which Article 33 protects against competing taxes, is a general tax on consumption. (a) The first question mentions ‘taxes on turnover’, whereas Article 33 of the Sixth Directive refers to ‘turnover taxes’. Not every tax which, in one way or another, relates to turnover, has the character of a turnover tax. For example, Article 33 classifies taxes on insurance contracts as taxes which cannot be characterized as turnover taxes, although that tax is levied on turnover and comes within the scope of the common system of VAT. The answer to be given to the first question should be that: ‘Article 33 prohibits the levying of a charge which can be characterized as a turnover tax. However, it does not prohibit the levying of every charge which is related, in one way or another, to turnover’. (b) The second question relates, in the French original, to ‘taxe sur le chiffre d'affaires’ or ‘taxe ayant le caractère de taxe sur le chiffre d'affaires’. Turnover tax covers supplies of goods and the provision of services for consideration by a taxable person and imports of goods. The remuneration received in respect thereof does not constitute the subject-matter of the tax but merely the basis of assessment for it; however, that remuneration will often be in the nature of operating receipts. The answer to be given to the second question should therefore be: ‘Taxes levied on operating receipts cannot be characterized as turnover taxes. It is not, however, contrary to the character of a tax based on turnover for the remuneration on the basis of which the tax is assessed to be constituted by an undertaking's operating receipts. ’ (c) The legislature's intention to replace a turnover tax is not relevant to classification of the new tax in the light of Article 33. All that is relevant is that the tax should objectively be in the nature of a tax on turnover, which is not the case as regards the contested State tax, which does not fulfil the criterion of generality. The third question should therefore be answered in the negative. In view of the answer given to the third question, it is unnecessary to answer the fourth question.
4. The Commission examines in turn the questions relating to Article 33 of the Sixth Directive and those relating to Articles 95 and 30 of the Treaty. (a) The purpose of tax harmonization is to avoid distortions of competition which might hinder the free movement of goods or access to the provision of services within the Community. The turnover taxes referred to in Article 33 of the Sixth Directive are taxes levied on goods and services, whether they are cumulative multistage taxes or taxes levied at only one stage in the production and marketing chain. According to the purpose of Article 33, as stated by the Court in its judgment of 27 November 1985 in Case 295/84, cited above, the decisive criterion for the classification of a tax on turnover within the meaning of the Community directives is whether the chargeable event is the sale of goods or provision of a service, in other words whether the taxable thing is the price of the transaction, and it is not necessary for there to be a formal shifting of the tax in the VAT sense. In the abovementioned judgment the Court conceded that an annual tax based on turnover, whose purpose was to maintain a social fund, did not constitute a turnover tax. In the present case the chargeable event is not the sale of goods or provision of a service. The two taxes in question are based on the operation of machines and the annual amounts charged thereon are calculated according to rates based on the probable financial yield of the machine, as determined by the place where it is operated, and the quality or novelty of the machine. The taxes are levied on a final use meeting certain needs which the legislature did not intend to encourage, in the same way as excise duties. In Case 295/84 the Court, aligning itself with the Commission in that regard, acknowledged that if a tax is to be permitted under Article 33, it must not be levied on transactions which are subject to VAT or upset the normal functioning of the common system. The purpose of a tax is of no importance, provided that the policies pursued by the taxation are legitimate and compatible with Community law and that the tax is not used to promote national production, thus creating a distortion of competition jeopardizing the free movement of goods or services. It is therefore appropriate to give the following answers to the first three questions: ‘An annual tax, periodical charge or other form of levy collected on the basis of the probable annual yield of a machine is compatible with Article 33 of the Sixth Directive, in so far as it does not have the effect of impeding the free movement of goods or hindering access to the provision of services within the Community. The concept of “taxes, duties or charges wich cannot be classified as turnover taxes” contained in Article 33 of the Sixth Directive must be interpreted as including a tax calculated on the basis of probable annual or periodic yield, but not levied on the price of transactions in such a manner that the tax is passed on in the price of the goods or service. Provided that the policies pursued by a tax levied on automatic entertainment machines operated in public places are lawful and compatible with Community law, the fact that the foreseeable periodic yield is the basis of the tax does not automatically mean that the tax is incompatible with the prohibition of taxes on turnover laid down in Article 33 of the Sixth VAT Directive.’ Since the answers to the first and third question are in the negative, the fourth question becomes devoid of purpose. (b) As regards Article 95 of the EEC Treaty, it should be noted that the French legislation is not concerned with the machines as such but with the operation of them. The only way of showing that the tax is a tax on automatic machines which may be caught by Article 95 is to prove that the machine is in fact taxed as the physical equipment by means of which the service is provided. At the present stage of tax harmonization, the Member States are free to pursue national policies by means of differing tax rates, provided that those policies are lawful and compatible with Community law and that the benefit of the reduced rates is extended to similar or competing products, as is the case of the tax at issue here. The answer to the fifth question should therefore be that: ‘Under Article 95 of the Treaty, a Member State remains free, at the present stage of tax harmonization, to pursue national policies by means of differing rates of tax, provided that those policies are lawful and that the benefit of the reduced rates is extended to similar or competing imported products. ’ (c) Article 30 of the Treaty, which has direct effect, covers all measures which impede imports. As the Court has stated, the barriers of a fiscal nature and of equivalent effect referred to in Articles 9 and 12 and Article 95 of the Treaty do not fall within the prohibition laid down in Article 30. The following answer should therefore be given to the sixth question: ‘Article 30 of the EEC Treaty is not applicable to the present case’.
F. Schockweiler
Judge-Rapporteur
1 Language of the Case: French.