Report for the Hearing delivered in Case C-30/89

I — Summary of the facts

1. Article 2(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: Article 3(1) provides: Article 9(2)(b) provides: Article 28(3)(b) provides: Point 17 of Annex F, which is entitled ‘Transactions referred to in Article 28(3)(b)’, includes ‘passenger transport’ and states that

‘The following shall be subject to value-added tax: the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such’.

‘For the purposes of this directive, the “territory of the country” shall be the area of application of the Treaty establishing the European Economic Community as stipulated in respect of each Member State in Article 227’.

‘the place where transport services are supplied shall be the place where transport takes place, having regard to the distances covered’.

‘During the transitional period referred to in paragraph 4, Member States may continue to exempt the activities set out in Annex F under conditions existing in the Member State concerned’.

‘the transport of goods such as luggage or motor vehicles accompanying passengers and the supply of services related to the transport of passengers, shall only be exempted in so far as the transport of the passengers themselves is exempt’.

2. Article 2(1) of Council Regulation (EEC, Euratom, ECSC) No 2892/77 of 19 December 1977 implementing in respect of own resources accruing from value-added tax the Decision of 21 April 1970 on the replacement of financial contributions from Member States by the Communities' own resources (Official Journal 1977, L 336, p. 8) provides that The third indent of Article 2(2) of Regulation No 2892/77 provides: Article 9(2) of Regulation No 2892/77 provides: Finally, Article 11 of Council Regulation (EEC, Euratom, ECSC) No 2891/77 of 19 December 1977 implementing the Decision of 21 April 1970 on the replacement of financial contributions from Member States by the Communities' own resources (Official Journal 1977, L 336, p. 1) provides:

‘the VAT own resources basis shall be determined from the taxable transactions referred to in Article 2 of Directive 77/388, with the exception of transactions exempted under Articles 13 to 16 of the said directive’.

‘Forthe purposes of applying paragraph (1) hereof, the following shall be taken into account for determining VAT own resources: ...transactions which Member States continue to exempt pursuant to Article 28(3)(b) of Directive 77/388...’.

‘For the purposes of applying the second, third and fourth indents of Article 2(2) ... with regard to the transactions listed in Annex F to Directive 77/388 which Member States continue to exempt pursuant to Article 28(3)(b) of the said directive, Member States shall calculate the VAT own resources basis as if these transactions were taxed ... ’.

‘Any delay in making the entry in the account referred to in Article 9(1) shall give rise to the payment of interest by the Member State concerned at a rate equal to the highest rate of discount ruling in the Member State on the due date. That rate shall be increased by 0.25 of a percentage point for each month of delay. The increased rate shall be applied to the entire period of delay’.

3. Under Article 262, II, 11o of the code general des impôts (General Tax Code) in force in the French Republic are exempt from VAT from 1 January 1979.

‘transport operations between mainland France and the departments of Corsica in respect of that part of the journey occurring outside the mainland territory’

4. The Commission took the view that it was clear from the provisions of the Sixth Directive, in particular Articles 3 and 9, that transport by sea and air, where the places of departure and arrival are situated within French territory, is to be regarded as carried out entirely within France and thus subject to VAT in so far as there is no place of call in another country, regardless of whether or not the transport involves a journey in or above international waters. Although the French Republic may, on the basis of Article 28(3)(b) and point 17 of Annex F to the Sixth Directive, continue to exempt transport between mainland France and the departments of Corsica from VAT in respect of the part of the journey taking place outside the mainland territory, the French Republic must, in the Commission's view, compensate for that exemption in relation to VAT own resources by including in the VAT own resources basis, pursuant to Article 9(2) of Regulation No 2892/77, the turnover corresponding to the whole of the transport in question, including the part relating to journeys in or above international waters between mainland France and Corsica. In consequence, the Commission, by letter dated 29 July 1986, requested the French Government to carry out the necessary calculations in order to determine the own resources due to the Communities for the years 1980 to 1985 and to make them available to the Commission before 31 October 1986. The French Government was also informed that interest provided for by Article 11 of Regulation No 2891/77 would be due from that date.

5. On 20 October 1986 the French Government replied that the Court (in its judgment of 23 January 1986 in Case 283/84 Trans Tirreno Express v Ufficio Provinciale [1986] ECR 231) simply authorized the Member States, without placing any obligation upon them, to tax the international part of a transport operation carried out from one point to another in the same national territory, so that the Member States had a choice between taxing and not taxing. Moreover, France is not in a position to accept the Proposal for a Nineteenth Council Directive on the harmonization of the laws of the Member States relating to turnover taxes, amending Directive 77/388 — Common system of value-added tax (COM(84) 648 final, Official Journal 1984, C 347, p. 5), made by the Commission with the object of harmonization, in so far as it seeks to amend Article 9(2) (b) of the Sixth Directive by adding to the present wording of that provision: In those circumstances the non-taxation of part of the transport between mainland France and Corsica carried out in international waters or in the airspace above depends on Article 9(2)(b) and not on the transitional measures provided for by Article 28(3)(b) of the Sixth Directive. In consequence, the part of the transport between mainland France and Corsica in or over international waters does not have to be included in VAT own resources.

‘a journey by sea or air shall be deemed to take place entirely within a country where the place of departure and the place of arrival are in that country, provided there is no stop in another country’.

6. By letter dated 6 May 1987 the Commission gave notice pursuant to Article 169 of the EEC Treaty to the Government of the French Republic requiring it to submit its observations on the failure of which it complained within a period of two months. In reply to the arguments put forward by the French Republic, the Commission conceded that it was true that in the aforementioned judgment in the Trans Tirreno Express case the Court had not settled the question whether the imposition of VAT on the entire journey was mandatory since in that case it was sufficient to hold that VAT might be imposed. On the other hand, it was incorrect to contend that in the Proposal for a Nineteenth VAT Directive the Commission had proposed an amendment to Article 9(2)(b) of the Sixth Directive. In fact, it was simply a detail which the Commission considers useful in order to clarify the scope of the provision in question. In the Commission's view, the essential aim of the Sixth Directive was to harmonize the Community provisions on VAT in order that taxation might be subject to identical rules in all Member States when it is established that the transport operation is carried out between two points situated in a single Member State regardless of the question whether the transport takes place partly in or over international waters. Those considerations explain why at the 16th meeting of the Consultative Committee on VAT of 30 November 1983 a very large majority of delegations agreed that transport by sea or air, the place of departure and arrival of which are situated in the same Member State and which take place partly in international water or over the territory of another Member State, should be regarded as being carried out entirely within the Member State concerned.

7. The French Government replied on 7 July 1987 that the term ‘place’ in Article 9(2)(b) of the Sixth Directive had a geographical meaning enabling a service to be localized in order to attribute taxation of an economic activity carried out in that place to the country which exercises its territorial sovereignty there. The high seas and international airspace are not part of the territory of a Member State, so that in the case of transport between mainland France and Corsica the part of the journey carried out in or above international waters does not take place in France. In addition, contrary to the Commission's assertions, the Proposal for a Nineteenth Directive contains not a simple clarification but on the contrary an amendment of Article 9(2)(b) of the Sixth Directive. Finally, the guidelines laid down at the 16th meeting of the Consultative Committee on VAT had a practical origin and it is not possible to attribute to them any legal nature.

8. On 7 April 1988 the Commission delivered a reasoned opinion, pursuant to the first paragraph of Article 169 of the EEC Treaty, finding that, by failing to comply with the obligation to calculate unpaid own resources for the years 1980 to 1985 and for subsequent years, by failing to comply with the obligation to send a copy of those calculations to the Commission, by failing to comply with the obligation to make available to the Commission a sum equivalent to the own resources in question, by exempting from value-added tax, in breach of the Sixth Directive on Value-Added Tax, the international part of transpon operations between mainland France and the départements of Corsica, and by failing to comply with the obligation to pay interest for late payment on those sums until the date they are made available to the Commission under Article 11 of Regulation No 2891/77 and with effect from the dates indicated by the Commission, France has failed to fulfil its obligations under the EEC Treaty. Pursuant to the second paragraph of Article 169 of the EEC Treaty the Commission requested the French Government to take the measures needed to comply with that opinion within a period of two months.

9. In its letter of 22 November 1988 the French Republic maintained its position.

II — Written procedure and conclusions of the parties

1. By application lodged at the Court Registry on 3 February 1989 the Commission brought an action under the second paragraph of Article 169 of the EEC Treaty for a declaration that the French Republic had failed to fulfil its obligations under Articles 2, 3 and 9 of the Sixth Directive, Articles 2 an 9 of Regulation No 2892/77 and Article 11 of Regulation No 2891/77.

2. By order of 21 June 1989 the Kingdom of Spain was allowed to intervene in support of the contentions of the French Republic.

3. 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.

4. The Commission, the applicant, claims that the Court should: (i) declare that, by failing to comply with the obligation to calculate unpaid own resources for the years 1980 to 1985 and for subsequent years, by failing to comply with the obligation to send a copy of those calculations to the Commission, by failing to comply with the obligation to make available to the Commission a sum equivalent to the own resources in question by exempting from value-added tax, in breach of the Sixth Directive on Value-Added Tax, the international part of transport operations between mainland France and the départements of Corsica, and by failing to comply with the obligation to pay interest for late payment on those sums until the date they are made available to the Commission under Article 11 of Regulation No 2891/77 and with effect from the dates indicated by the Commission, France has failed to fulfil its obligations under the EEC Treaty; (ii) order France to pay the costs.

5. The Government of the French Republic, the defendant, contends that the Court should: (i) dismiss the Commission's application; (ii) order the defendant to pay the costs.

6. The Government of the Kingdom of Spain, the intervener, contends that the Court should: (i) dismiss the Commission's application for failure to fulfil obligations against the French Republic; (ii) order the Commission to pay the costs, including the costs of the intervention.

III — Submissions and arguments of the parties

1. The Commission states, that although the French Republic may, pursuant to Article 28(3)(b), continue to exempt from value-added tax the part of transport operations carried out in or above the international waters between mainland France and Corsica, with the result that if it makes use of that power of exemption it must, pursuant to Regulation No 2892/77, compensate the Community budget for the loss of value-added tax resources resulting from the exemption, the Sixth Directive does not, however, allow France to exempt from value-added tax transport operations between its mainland territory and Corsica as far as concerns the part of the journey outside the mainland. In the Commission's opinion, sea and air transport, where the departure and arrival places are situated within French territory and there is no stop in another country, are to be regarded as carried out entirely within France and in consequence subject to value-added tax. In support of its argument, the Commission states that it follows from Article 3 of the Sixth Directive, which defines ‘the territory of the country’ for the purposes of Article 2, that the uniform basis for assessment for the purposes of the application of the Sixth Directive must cover the whole of the journey in the present case. The interpretation of Article 9, which determines the place of taxable transactions, as far as concerns in particular transpon services, depends entirely on the scope of Articles 2 and 3 of the Sixth Directive. The Commission considers that its view is supported by the case-law of the Court. In its judgment of 4 July 1985 in Case 168/84 Berkholz v Finanzamt Hamburg-Mitte-Altstadt [1985] ECR 2251, the Court held that ‘the Sixth Directive by no means requires services supplied on the high seas, or, more generally, outside the sovereign territory of the State having jurisdiction over the vessel, to be exempted from tax irrespective of the place where those services are deemed to be supplied — the place where the supplier has established his business or some other fixed establishment’ (paragraph 16). In the aforementioned judgment in the Trans Tirreno Express case the Court subsequently held that ‘although ... the territorial scope of the Sixth Directive corresponds to that of the EEC Treaty as defined for each Member State in Article 227, and although the rules laid down in the directive therefore have binding and mandatory force throughout the national territory of the Member States, the directive, and in particular Article 9(2)(b) thereof, in no way restricts the freedom of the Member States to extend the scope of their tax legislation beyond their normal territorial limits, so long as they do not encroach on the jurisdiction of other States’ (paragraph 20). Moreover, in his Opinion in the latter case Advocate General Sir Gordon Slynn asserted that since the essential aim of the directive was to harmonize Community rules dealing with VAT, once it is found that the transport is between two points in one Member State the tax ought to be charged in the same way in all Member States on the whole of the transport even if part of it is through international waters. The Commission adds that its view was also implicitly approved by the Member States in so far as during the negotiations for the accession of Portugal to the Community the Portuguese Republic obtained, by the addition of point 15 to Article 15 of the Sixth Directive, a derogation from the VAT scheme whereby it ‘may treat sea and air transport between the islands making up the autonomous regions of the Azores and Madeira and between those regions and the mainland in the same way as international transport’ (see Annex I, Section V, point 2, of the Act concerning the conditions of accession of the Kingdom of Spain and the Portuguese Republic and the adjustments to the Treaties, Official Journal L 302, 15.11.1985, p. 23). In order to avoid that derogation from giving Portugal an advantage in respect of the payment of own resources over other Member States, Article 374 of the Treaty of Accession provides that the derogation shall not affect the amount of duties due as VAT own resources. In the Commission's view, the fact that that derogation was conceded to Portugal shows that transport, such as that between the Azores and Madeira and the mainland, although carried out almost entirely in international waters, would normally have been deemed to be transport ‘within the territory of the country’ for the purposes of Articles 2 and 3 of the Sixth Directive. Moreover, the Commission rejects the argument of the French Republic that the Commission's suggestion in its Proposal for a Nineteenth Council Directive to add to Article 9(2)(b) of the Sixth Directive a specific provision covering sea or air transport would constitute, in the present state of Community law, a substantial amendment of the territoriality rules applicable to such transport. In the Commission's view, that proposal is not an amendment of the present rules but simply a clarification of the present situation. The Commission concludes from the aforegoing that when, as in the present case, there is an infringement of the Sixth Directive because the French Republic wrongly exempted from liability to VAT transport between mainland France and Corsica as regards the part of the transport carried out in or over international waters and the VAT resources basis is thereby reduced, it follows from the provisions of Regulation No 2892/77 that the Community must be credited with the equivalent of the amount of own resources due by reason of that infringement for the period extending from the commencement of the infringement to the time it was terminated. Otherwise, the Community would suffer a financial loss and at the same time the infringement would cause a financial loss to the other Member States, thus violating the principle of equality of treatment. The Commission adds that, according to the case-law of the Court (see the judgments of 20 March 1986 in Case 303/84 Commission v Federal Republic of Germany [1986] ECR 1171, of 18 December 1986 in Case 93/85 Commission v United Kingdom [1986] ECR 4011, and of 17 September 1987 in Case 70/86 Commission v Greece [1987] ECR 3545), interest is payable, by virtue of Article 11 of Regulation No 2891/77, in respect of any delay in crediting to the Commission's account own resources the determination of which is the responsibility of the Member States. In that respect, the Commission states that it granted the French Government sufficient time to end the infringement and expressly drew its attention to the fact that from 31 October 1986 interest would be payable.

2. The Government of the French Republic takes the view that the exemption from VAT of transport between mainland France and Corsica for the pan of the transpon by sea or air in or above international waters is consistent with the provisions of Article 9(2)(b) of the Sixth Directive. In consequence, it considers that the Commission is not justified in requiring from the French Republic compensation for VAT own resources pursuant to Regulation No 2892/77 for the part of journeys taking place outside mainland territory since the Member States are liable to effect such compensation only in respect of the part of transport exempted under Article 28(3)(b) of the Sixth Directive. In support of its argument, the Government of the French Republic states first of all that the principle of the territoriality of VAT under which VAT can be charged only on activities taking place on the national territory precludes the taxation of transport carried out in international waters or the airspace above. According to the principles of international law, the sovereignty of a State extends over the whole of the terrestrial territory, including waterways and inland waters and territorial sea and the whole of the airspace above the State's terrestrial and sea territory, excluding, however, international waters and the airspace above. Those principles have in no way been affected by Community law and Article 3(1) of the Sixth Directive expressly confirmed the principle of the territoriality of VAT so that international waters do not come within the territorial scope of the EEC Treaty. In addition, since the term ‘place’ used in Article 9(2)(b) of the Sixth Directive has a geographical meaning enabling a transport operation to be determined to take place within the territory of the Member State in which it is effected and since international waters are not part of the territory of the State concerned, it follows that VAT is not applicable to transport services effected in international air or sea space and that accordingly the non-taxation of that part of the transport in no way falls under the transitional provisions of Article 28(3) of the Sixth Directive, which give Member States the option of exempting certain specific transactions. The Government of the French Republic adds that Community law, as it stands at present, contains no mandatory rule for the taxation of transport activities carried out in or above international waters. In that respect, it states first of all that it was for practical reasons and not because it recognized a legal basis for that rule that at the 16th meeting of the Consultative Committee on VAT a very large majority of the delegations agreed that sea or air transport which took place partly in or above international waters should be deemed to be effected within the country. The proposed amendment of Article 9(2)(b) of the Sixth Directive in the Proposal for a Nineteenth Directive is not merely a clarification, as the Commission claims, but a substantial amendment of the VAT territoriality rules, which thus confirms the validity of the French argument that the Community law at present in force does not make transport effected in international waters or in the airspace above subject to taxation. In addition, the Government of the French Republic maintains that it follows from the decisions of the Court (the aforementioned judgments in the Berkholz and Trans Tirreno Express cases) that Community law, as it stands at present, lays down no obligation but simply provides an option for the Member States, which they may or may not exercise at their discretion, to tax transport services effected in part outside national territory between two points within the national territory. The Government of the French Republic points out that when in the aforementioned judgment in the Trans Tirreno Express case the Court stated that the system of the Sixth Directive necessarily applies to the whole of the national territory of the Member States, it expressly reaffirmed the principle of the territoriality of VAT, and that the Court held that Article 9(2) (b) ‘in no way restricts’ the freedom to levy VAT on the activities in question, which tends to confirm the view that the rule is that transport activities carried on outside the territory of a Member State are not taxed. The Government of the French Republic adds that the Opinion of Advocate General Sir Gordon Slynn in the Trans Tirreno Express case, cited by the Commission, in which the Advocate General stated that it would be extraordinary if the method of assessment of tax differed according to whether transport was by land or by sea between the same two points in a Member State does not reflect Community law as it stands at present and is moreover irrelevant to the present case since it would be impossible to go to Corsica overland. Finally, the Government of the French Republic maintains that the obligation placed on Portugal, following the authorization for that country to treat sea and air transport between the Portuguese mainland and the Azores and Madeira in the same way as international transport, to make good the loss of VAT in relation to own resources in accordance with Article 374 of the Act of Accession cannot be relied on by the Commission in support of its case. That rule, which constitutes a derogation from the principle laid down in Article 2 of Regulation No 2892/77 according to which transactions exempted under Articles 13 to 16 of the Sixth Directive are normally excluded from the VAT own resources basis, is, according to the Court (judgment of 28 April 1988 in Joined Cases 31 and 35/86 LAISA and Another v Council [1988] ECR 2285, paragraph 15), a specific provision intended to resolve the difficulties which accession entails either for the Community or for the applicant State and cannot in any event call in question the ordinary law in relation to VAT vis-à-vis other Member States. The Government of the French Republic accordingly concludes that transport operations by sea or air between mainland France and Corsica fall outside the territorial scope of VAT and do not give rise to any compensatory payment in relation to VAT own resources in the absence of express provisions to that effect in the Community law in force.

3. The Government of the Kingdom of Spain starts by observing that in the system of the Sixth Directive, Articles 2 and 3 expressly lay down the principle of the territoriality of VAT and that, according to the case-law of the Court (the aforementioned judgments in the Berkholz and Trans Tirreno Express cases and the judgment of 15 March 1989 in Case 51/88 Hamann v Finanzamt Hamburg-Eimsbüttel [1989] ECR 767), the object of Article 9 is the rational delimitation of the spheres of application of the laws of the Member States in relation to VAT in order to determine uniformly the place at which services are effected for tax purposes. The Government of the Kingdom of Spain adds that the present case concerns the interpretation of Article 9(2)(b) of the Sixth Directive and the question whether transport carried out in international waters or airspace must be deemed to be effected wholly within the country if the places of departure and arrival are within the same country and no stop is made in another State. The Government of the Kingdom of Spain is of the opinion that the answer to that question must be in the negative. In that respect, it is clear from the aforementioned judgment in the Trans Tirreno Express case that Article 9(2) (b) simply allows Member States to subject transport carried out partly outside their national territory to VAT. In a case such as the present, the levying of VAT is simply an option which each Member State is free to exercise at its discretion and not an obligation whose nonobservance might be the subject of an action for failure to fulfil obligations.

F. A. Schockweiler

Judge-Rapporteur

1 Language of the case: French.