Report for the Hearing delivered in Case 207/87
I — Facts and procedure before the national court
1. The plaintiff in the main proceedings, G. Weissgerber (hereinafter referred to as ‘the plaintiff’) is an insurance agent and finance negotiator. In 1978 and 1979 he introduced clients who were seeking credit to three German banks: the Vereinsbank in Heidelberg, the CC Bank and the AK Bank. To the Vereinsbank and the CC Bank, the plaintiff vouched for the solvency of the clients whom he introduced.
2. In return for the introductions the banks paid commission, part of which was paid to the plaintiff and pan of which was paid by the Vereinsbank and the CC Bank into a blocked account, in case the debts guaranteed were not paid. The credit statements sent to Mr Weissgerber by the banks did not make any mention of VAT.
3. From March 1979, the Vereinsbank, which paid most of the commission, reduced the commission paid. The plaintiff claims that the bank reduced the commission in anticipation of the exemption from turnover tax (hereinafter referred to as ‘VAT’) in favour of transactions consisting of the negotiation of credit. The defendant in the main action, the Finanzamt Neustadt an der Weinstraße, contends that the reduction was intended to cover loans which were not repaid by the plaintiffs clients.
4. In determining the basis of assessment for VAT for 1978 and 1979, the German tax authorities included in the taxable transactions the commissions referred to above, in accordance with the plaintiffs returns.
5. Article 13 B (d) (1) 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, hereinafter referred to as ‘the Sixth Directive’) provides for an exemption from VAT in respect of ‘the granting and the negotiation of credit and the management of credit by the person granting it’.
6. Article 1 of the Sixth Directive provides that it is to enter into force by 1 January 1978 at the latest. That time-limit was extended to 1 January 1979 by Article 1 of the Ninth Council Directive, 78/583/EEC, on the harmonization of the laws of the Member States relating to turnover taxes (Official Journal 1979, L 194, p. 16, hereinafter referred to as ‘the Ninth Directive’).
7. The Sixth Directive was not implemented by the Federal Republic of Germany until 1 January 1980, by the Law of 26 November 1979 (Bundesgesetzblatt I, p. 1953).
8. In its judgments of 19 January 1982 in Case 8/81 (Becker [1982] ECR 53) and 10 June 1982 in Case 255/81 (Grendel [1982] ECR 2301), the Court ruled that as from 1 January 1979 it was possible for the provision concerning the exemption from VAT to be relied upon by a credit negotiator where he had refrained from passing that tax on to persons following him in the chain of supply. In its judgment of 22 February 1984 in Case 70/83 (Kloppenburg [1984] ECR 1075), the Court reached the same conclusion in relation to transactions carried out between 1 January and 30 June 1978, the date on which the Ninth Directive was notified.
9. Following the first two judgments of the Court, the Federal Minister for Finance stated in a circular dated 27 June 1983 (Bundessteuerblatt I, p. 348) that credit negotiators were exempt from VAT on their commission for the 1979 calendar year if they relied upon the Sixth Directive in so far as they had not overtly or covertly passed on the VAT payable to their clients.
10. The plaintiff requested that his assessment for VAT for the first half of 1978 and for 1979 be amended as regards his credit negotiation transactions. The German tax authorities refused those requests but, as a result of an objection lodged by the plaintiff, granted him, on 11 July 1983, exemption from VAT for 1979, subject to verification.
11. The verification report of 16 October 1984 concluded that VAT had been passed on covertly, and on 9 April 1985 the German authorities reinstated the original assessment for 1979. After a fresh objection had been rejected, the applicant brought two actions, which were joined, against the notices charging VAT for 1978 and 1979 respectively.
12. In the main action the defendant, the Finanzamt Neustadt an der Weinstraße, stressed inter alia the fact that in spite of the circular of 27 June 1983 the Bundesfinanzhof had in several judgments refused credit negotiators the right to rely upon the exemption provided for by the Sixth Directive.
13. By an order of 15 June 1987, which was lodged at the Court Registry on 7 July 1987, the Finanzgericht Rheinland-Pfalz stayed the proceedings and referred to the Court the following questions:
‘1) In relation to transactions carried out between 1 January 1978 and 30 June 1978 and transactions carried out in 1979, may the provision contained in Article 13 B (d) (1) of the Sixth Directive (77/388/EEC) on turnover tax concerning the exemption from turnover tax of transactions consisting of the negotiation of credit be relied upon, in the absence of the implementation of that directive, by a credit negotiator if he did not pass that tax on to the persons receiving his services?
2) If Question 1 is answered in the affirmative, must the credit negotiator pay turnover tax if he “covertly” passed on the tax, or only if he “overtly” passed it on?
3) If turnover tax is also payable where the tax is passed on covertly, is it sufficient, for there to have been covert passing-on of turnover tax, that the credit negotiator, in agreeing his commission, expected that out of it he would have to pay turnover tax?’
14. Pursuant to Article 20 of the Protocol on the Statute of the Court, written observations were submitted by the defendant in the main proceedings, represented by Hans Langenbucher, Leitender Regierungsdirektor of the Finanzamt Neustadt, and by the Commission, represented by Føns Buhl and Götz zur Hausen, acting as Agents.
15. Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General, the Court decided to assign the case to the Sixth Chamber pursuant to Article 95 of the Rules of Procedure and to open the oral procedure without any preparatory inquiry.
II — Written observations
(a) The first question
1. Before the Court the Finanzamt states that it is withdrawing the argument based on the judgments of the Bundesfinanzhof. The circular issued by the Federal Finance Ministry on 27 June 1983, which is binding on the defendant by virtue of instructions from the central tax administration for the Land Rheinland-Pfalz, accepts that the judgments of the Court must be applied. On that basis the VAT paid for 1978 and 1979 has been refunded to credit negotiators in respect of whom it had been established that they had not passed on VAT to the persons following them in the chain of supply. However, it was necessary to ensure that a taxable person did not obtain an advantage over his co-contractor by being reimbursed VAT which he had passed on in the price.
2. The Commission refers to the previous judgments of the Court on the application of Article 13 B (d) (1) of the Sixth Directive. The German Government had assured the Commission that the inconsistent judgments of the Bundesfinanzhof had not affected the application of the circular of 27 June 1983 and that the circular was also applicable to the period from 1 January to 30 June 1978.
(b) The second question
3. The Finanzamt stresses that VAT is an indirect tax covered by Articles 98 and 99 of the Treaty, as was also the old German turnover tax, which was accepted as being passed on to the client but which until 31 December 1967 was collected under a system which prohibited the tax from being mentioned on an invoice.
4. The judgment of the Court of 5 May 1982 in Case 15/81 (Gaston Schul [1982] ECR 1409) also implies that the VAT already included in the price of a purchase not subject to VAT may be passed on covertly. That is in fact the case of the ‘residual part’ of the VAT which, according to the judgment, is to be taken into account for purposes of imposing VAT on the importation of products imported by a private person.
5. Equally, the restriction which the Court has imposed in its judgments on the exemption of credit negotiators from VAT by requiring the passing on of VAT cannot apply exclusively to cases in which VAT is passed on overtly, since in such cases it is clear that there can be no exemption.
6. Banks, which are themselves exempt from VAT and therefore are not entitled to deduct VAT paid, would have no reason to make overt reference to VAT on the credit statements which they send to credit negotiators. In view of the uncertainty prevailing in the periods in question, it would have been logical for the plaintiff at least to express a reservation as regards VAT by means of an appropriate clause. The plaintiff himself acknowledged in his tax returns for 1978 and 1979 that his transactions were subject to VAT.
7. Therefore the Finanzamt considers that the failure to pass on the tax could be proved only by a reduction in commissions, as compared with previous years, equal to the amount of VAT, or in the absence of such reduction by documents establishing an equivalent increase in profit or costs. The Finanzamt stresses that there was no change in the plaintiff's commissions between the two halves of 1978 and that it was not alleged that profit or costs had changed. The reduction in commission in March 1979 was not the result of any considerations connected with VAT but was owing to the fact that the credit negotiated by the plaintiff had given rise to a high rate of default and loss.
8. The Commission stresses that, according to Article 22 (3) (a) and (b) of the Sixth Directive, an invoice or other document serving as invoice must state the amount of VAT. That documentary evidence is one of the requirements for the exercise of the right to deduct VAT.
9. The Commission considers that the only way of determining whether or not VAT has been passed on is by means of a fiscal control, albeit carried out on the basis of simple rules: the credit negotiator must have invoiced VAT to his clients, paid the amount to the tax authorities and entered it in his tax declarations. The clients must have deducted VAT in accordance with the pro rata rule.
10. Lastly, the Commission points out that, according to the judgments of the Court (see judgments of 27 February 1980 in Case 68/79 Just [1980] ECR 501, and of 9 November 1983 in Case 199/82 San Giorgio [1983] ECR 3595), it is a matter for each national legal system to determine the conditions on which taxpayers may obtain the repayment of amounts unduly levied. Rules to prevent unjust enrichment must not, however, make it impossible in practice to exercise the right to repayment.
(c) The third question
11. The Finanzamt considers that this question involves speculation which, in the light of the consideration of the second question, is not justified in fact. The unanswerable question whether the credit negotiator subjectively expected to have to pay VAT is irrelevant.
12. The Commission refers to the objective requirements listed in its examination of the second question: the invoice, the declaration and deduction of VAT. If those requirements are not satisfied, it could logically be concluded that the plaintiff did not pass on the tax. In the Commission's view, the results of the control which was carried out by the tax authorities do not appear sufficiently clear to give an accurate answer to this question.
III — Suggested replies to the preliminary questions
1. The Finanzamt proposes that the following replies should be given: The first question: Yes. The second question: The passing on of tax can also be covert. The third question: The question is devoid of purpose in this case.
2. The Commission proposes that the questions should be answered as follows: The first question: It is possible for the provision concerning the exemption from turnover tax of transactions consisting of the negotiation of credit contained in Article 13 B (d) (1) 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, to be relied upon by a credit negotiator, where he refrained from passing that tax on to persons following him in the chain of supply, both in relation to transactions carried out in 1979 and in relation to transactions carried out between 1 January 1978 and 30 June 1978. The second and third questions: In order to pass on the tax, a person supplying services must first draw up an invoice or accounting document stating the amount of the tax; secondly, he must include that tax in his tax returns in such a way as to pay it to the State and, thirdly, the recipient of the service must be able to deduct the tax paid to the supplier on the basis of the invoice.
O. Due
Judge-Rapporteur
1 Language of the Case: German.