Report for the Hearing in Case C-347/90

I — Facts and procedure

A — The relevant legal provisions 0

1. National legislation

1. The Cassa Nazionale di Previdenza ed Assistenza a favore degli Avvocati et dei Procuratori legali (Lawyers' National Provident Fund, hereinafter the ‘Provident Fund’) was created by Law No 6 of 8 January 1952 (Gazzetta Ufficiale della Repubblica Italiana — GURI — No 16 of 19 January 1952). AU avvocati and procuratori legali (hereinafter ‘lawyers’) in Italy are required to be members.

2. The contributions to the Provident Fund and the benefits that it provides are governed by Law No 576 of 20 September 1980 (Reform of the lawyers' provident scheme, GURI No 266 of 27 September 1980). Under that Law, the Provident Fund has two sources of revenue: (a) an ‘individual contribution’ (Article 10), proportional to the lawyer's net professional earnings for income tax purposes, fixed at 10% up to a certain limit, and 3% on income above that limit, a minimum contribution being payable by every member of the Provident Fund. (b) a ‘supplementary contribution’, referred to in the question submitted by the Milan magistrate and defined in Article 11 in the following terms: ‘Supplementary contribution — From the first day of January in the second year following the coming into force of the present Law, every person registered as an avvocato or procuratore, including praticanti procuratori affiliated to the Fund, shall apply a percentage increase to all earnings forming part of annual turnover for VAT purposes and shall pay the sum to the Fund, whether or not payment has in fact been made by the debtor. The increase may be passed on to the debtor. ... Every member of the Fund is required to make an annual payment, in respect of the contribution referred to in the first paragraph, of a minimum amount calculated by applying the percentage increase to a turnover equal to fifteen times the minimum contribution referred to in the second paragraph of Article 10 which is payable for the same year. The supplementary contribution referred to in the previous paragraphs shall also be paid by pensioners who continue to practice. Without prejudice to the provisions of the second paragraph of Article 13, the percentage increase applying when the present Law comes into force shall be 2%. The supplementary contribution shall be subject to neither income tax nor VAT and no account shall be taken of it in calculating professional earnings.’ Under Article 21 lawyers who withdraw from the Provident Fund without having acquired a right to a pension may obtain repayment of the contributions referred to in Article 10 (individual contribution in proportion to income), but not those paid as supplementary contributions.

2. Community provisions

3. Article 33 of the Sixth Council Directive 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 (77/388/EEC, OJ L 145, p. 1, hereinafter the ‘Sixth Directive’) states:

‘Without prejudice to other Community provisions, the provisions of this Directive shall not 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.’

B — The proceedings in the national court

4. Aldo Bozzi, the plaintiff in the proceedings before the national court, is an avvocato of the Milan Bar. Mr Bozzi brought an action against the Provident Fund before the Milan Magistrates' Court in order to obtain repayment of the sum of LIT 2280390 which he paid the defendant by way of supplementary contributions in accordance with Article 11 of Law No 576/1980. In support of his claim for repayment, Mr Bozzi alleged that the aforesaid provision of the Italian Law is contrary to Article 33 of the Sixth Directive, on the grounds that the supplementary contribution at issue constitutes a turnover tax prohibited by Article 33 of the Sixth Directive.

5. The Milan Magistrate's Court considered that the proceedings involved a question of interpretation of Community law and, by order of 14 December 1989, decided to stay the proceedings pending a preliminary ruling by the Court of Justice on the following question:

‘Is Article 33 of Council Directive 77/388/EEC of 17 May 1977 (the Sixth Directive) to be interpreted as excluding the application of rules in a Member State imposing on avvocati and procuratori legali supplementary contributions to the Lawyers' National Provident Fund based on the consideration payable by clients for their services, having regard to the fact that the consideration is already subject to VAT, where the supplementary contribution is to be included separately on every invoice together with the VAT payable by the client and serves a providential function solely on the basis of the principle of solidarity and for all contributing lawyers, but not with regard to the individual contributor since the contribution is not taken into account in determining the pension and cannot be reclaimed by each contributor in the event that entidement to a pension is not acquired?’

6. The order for reference was received at the Court Registry on 28 November 1990.

7. Pursuant to Article 20 of the Protocol on the Statute of the Court of Justice of the EEC, written observations were submitted by Mr Bozzi, the plaintiff in the main proceedings, of the Milan Bar, representing himself; by the Cassa Nazionale di Previdenza ed Assistenza a favore degli Avvocati e dei Procuratori legali, the defendant in the main proceedings, represented by V. Perrone, of the Milan Bar, and by M. de Stefano, of the Rome Bar; by the Italian Government, represented by F. Favara, acting as Agent; and by the Commission of the European Communities, represented by J. F. Bühl, Legal Adviser, and by E. Traversa, a member of its Legal Service, acting as Agents.

II — Written observations submitted to the Court

1. The plaintiff in the main proceedings observes at the outset that the Court of Justice has interpreted Article 33 of the Sixth Directive as meaning that as from the introduction of the common system of VAT Member States are no longer entitled to impose on the supply of goods, the provision of services or imports liable to VAT, other taxes, duties or charges which can be characterized as turnover taxes (judgment in Case 252/86 Bergandi v Directeur Générale [1988] ECR 1343). Therefore Article 33 allows a Member State to introduce or maintain ‘taxes, duties or charges’ only if they are not in the nature of turnover taxes. In the plaintiff's opinion, that judgment clarifies the scope of the limits placed on national legislators as a result of the coming into force of the VAT system of taxation, so that it is necessary to review its application with regard to the supplementary contribution established by Article 11 of Law No 576/1980. In that connection the plaintiff considers that, in order to understand the purpose of the law and the function and/or structure of the supplementary contributions established by Article 11 of Law No 576/1980, it should be recalled that Draft Law No 117 of the eighth legislature, on reform of the social security system applying to the legal profession, had prescribed the supplementary contribution as a form of levy based on the turnover achieved by a self-employed practitioner, but without the slightest correlation between contribution and pension. These features are specifically embodied in Article 11 of Law No 576/1980 in which there is ultimately no link between the supplementary contribution and the retirement benefit and the charge is based exclusively on the amount payable by the client for the professional services. It follows that it is immaterial, in the context of the application of the supplementary contribution, whether or not the person concerned is entitled to a pension, as is demonstrated, in the plaintiff's opinion, by the fact that even lawyers who are not affiliated to the Provident Fund, for whom there is no providential relationship, are obliged to add the supplementary contribution to the fees for services rendered and to pay it to the Provident Fund. The plaintiff further refers to Italian legislation and academic writings to argue that, apart from its formal designation as a ‘supplementary contribution’, the charge in question does not differ in any way from VAT which it thus simply replicates. The plaintiff also considers that the character of a turnover tax stemming from the characteristic structure of the levy in question cannot be excluded merely on the ground that Article 11 purports to assign it a providential function. The text of Law No 576/1980 does not bear out the view that the supplementary contribution has any providential function whatsoever. That function is not referred to in any of the articles dealing with the calculation or acquisition of pension rights mentioned in Article 1 of the Law. Unlike the individual (personal) contribution referred to in Article 10 of Law No 576/1980, the supplementary contribution is taken into account neither for the calculation of the basis for assessment of the pension nor for the award of the minimum pensions. The plaintiff therefore considers that since in itself the supplementary contribution does not serve any providential function, the legislature's reference to ‘contribution’ is arbitrary in so far as it ought to have referred to tax, and more specifically to a second levy of VAT. The plaintiff considers that there is definite confirmation that the charge in question does not have any providential function, despite its formal title, in Article 21 of Law No 576/1980, which excludes repayment of the sums paid as supplementary contributions even if the person concerned does not become entitled to a pension. The plaintiff concludes that the compulsory charge under Article 11 of Law No 576/1980, far from representing a providential contribution, constitutes a further charge levied on the same turnover, which is already subject to VAT. First, the structure of the two charges is altogether identical; secondly, it is plain that the new charge introduced by Article 11 has no providential function; Article 11 of Law No 576/1980 is therefore manifestly contrary to Article 33 of the Sixth Directive and the tax it creates is therefore unlawful. The plaintiff therefore suggests that the Court should answer the question as follows:

‘Article 33 of the Sixth Council Directive (77/388/EEC) of 17 May 1977 must be interpreted as excluding the application of rules in a Member State imposing on avvocati and procuratori legali a supplementary contribution of 2% of the fees for their professional activities for the benefit of the Cassa Nazionale di Previdenza ed Assistenza per gli Avvocati e Procuratori legali where: the basis of assessment of the supplementary contribution is the whole consideration payable for their professional services, which are already subject to value added tax; the supplementary contribution must be included in every invoice in addition to the VAT to be paid by the client; the supplementary contribution is devoid of any direct providential function for the lawyer who has paid it since no account is taken of it in calculating his pension and he cannot recover it if he does not become entitled to a pension.’

2. The Provident Fund, the defendant in the main proceedings, first observes that the present dispute was brought before the Milan Magistrate's Court by Mr Bozzi who is contesting the lawfulness of the supplementary contribution which he has already paid to the Provident Fund. The action is therefore not brought by a client who has received services and is refusing to pay the supplementary provident contribution or claiming repayment from the lawyer who provided the services. The Provident Fund has no direct or indirect relationship with the lawyer's client. The Provident Fund adds that in the present case only the lawyer is subject to the supplementary contribution and required to pay it to his Provident Fund whether or not the fee for professional services has been paid and the supplementary contribution (which can be passed on) has in fact been charged to and received from the client. The defendant explains that in Italy the Provident Fund is the ‘institution’ responsible, pursuant to the Community rules, for applying the legislation concerning social security for lawyers and legal trainees coming under the Community rules. The defendant further examines the method for calculating contributions for employed and self-employed persons and concludes in the first place that, whatever the method adopted for calculating social security contributions, no social security or social assistance benefits can exist in the absence of contributions (whether or not proportionate) paid by the person who is insuring (i. e. the employer) or by the person insured (selfemployed professional practitioner) and, in the second place that, whatever the method adopted for calculating lawyers' social security contributions, they alone pay the contributions to the welfare institution. The defendant also observes that a lawyer's contribution to his Provident Fund is based on the tax declarations he makes to the State tax authorities. The Provident Fund consequently is not concerned with the prior relations between the lawyer and his client. Similarly the lawyer's client has no connection with the Provident Fund. The defendant also states that, from the point of view of the particular relations between the lawyer and his Provident Fund, the two methods for calculating and levying the contributions, (a) according to the net taxable professional income declared for the purposes of the tax on the income of natural persons (individual personal contribution), and (b) according to the total turnover declared for the purposes of VAT (supplementary contribution), are both compatible with Article 33 of the Sixth Directive. The reasons militating in favour of compatibility apply equally to the two methods for calculating and levying contributions: every self-employed person and thus every lawyer in practice perforce must pay into a welfare fund if all the fundamental principles common to all social security systems are not to be called in question. In the defendant's opinion, Article 33 of the Sixth Directive cannot be intended to interfere with a lawyer's obligation to pay contributions which binds him to his Provident Fund; nor can that Community provision be intended to deprive pension and welfare funds of a flow of funds from affiliated persons or those who make contributions and receive benefits. Furthermore the defendant has sought an expert's report from P. Adonnino for the purpose of replying to the national court's question. In his report, Mr Adonnino first recalls that the reference in Article 33 of the Sixth Directive to the prohibition on maintaining or introducing taxes, duties or charges which can be characterized as turnover taxes must be understood as a prohibition on maintaining or introducing taxes, duties or charges which can be characterized as a tax on added value. In that connection he describes at length the characteristics and structure of value added taxes, namely normally general applicability, neutrality and transparency. In order to achieve those three characteristics, the tax has a particular structure which gives it its originality. According to his report, the supplementary contribution laid down in Article 11 of Law No 576/1980 does not have the characteristics and structure of a value added tax. It may be distinguished from VAT in two principal respects, the first of which concerns the basis of assessment. In principle, according to Mr Adonnino, it is envisaged that the amount of the supplementary contributions should be fixed as a percentage of the fees paid to the lawyers forming part of their annual turnover for VAT purposes. However two exceptions have been laid down. The first exception concerns professional associations and firms in respect of which it is laid down that the supplementary contribution is to be a percentage of the turnover of the association or firm equal to the proportion of the earnings attributable to the practitioner concerned. Consequently, in such a case, the assessment basis for the supplementary contribution is determined by factors which bear no relationship to what is actually paid by clients receiving professional services. The second exception concerns the members of the Fund whose supplementary contribution, calculated according to the consideration forming part of the annual turnover for value added tax purposes, is less than the minimum contribution due under the scales laid down by the Law; in such a situation they are required to pay the contribution at the minimum level calculated according to those scales. There too the amount of the supplementary contribution bears no relation whatsoever to the lawyer's turnover for VAT purposes. According to the expert's report commissioned by the defendant, another aspect distinguishes the supplementary contribution from VAT, namely that the lawyer merely has the option of passing the cost on to the client and is definitely not obliged to do so. The fact that the lawyer may choose whether or not to pass on the cost is evidence that the passing on mechanism is altogether unconnected to the structure of the supplementary contribution, and that the purpose of the contribution is not to subject the economic value of the professional services to a levy replicating VAT and determined according to the consideration paid but only to levy on lawyers, for the economic management of their Provident Fund, a supplementary contribution, so called because it is in addition to the ‘individual contributions’ and has features which are different from the individual contribution. The author of the expert's report concludes that the characteristics and structure of the supplementary contribution are different from VAT. The whole basis of assessment is different, passing the cost on is merely optional and not obligatory, and the contribution cannot in any event be recovered by clients, to whom the costs may have been passed on. Since the supplementary contribution cannot be characterized as a turnover tax, it follows that Article 33 of the Sixth Directive does not preclude the retention of that contribution and does not exclude the application in Italy of the rules imposing the supplementary contribution.

3. The Italian Government first observes that the ‘supplementary contribution’ is a social contribution paid into a provident fund whose aims are similar to those of an insurance company, and it is not a tax or any form of contribution for the benefit of the State or local authorities. Consequendy, the expression ‘taxes, duties or charges’ used in Article 33 of the Sixth Directive does not apply to the supplementary contribution in question. According to the Italian Government, the supplementary contribution cannot be characterized as a turnover tax; it is of quite a different nature and is also governed by different rules. There is no requirement for it to be passed on nor any mechanism for deductions (nor, therefore, neutrality); moreover, the basis for calculating the contribution does not consistently coincide with the basis of assessment for VAT (for professional associations and firms the amount of the supplementary contribution is expressed as a percentage of earnings). The Italian Government argues that the supplementary contribution does not in any way influence the provision of services within the Community (and therefore does not come within the scope of ‘harmonization’), and that the supplementary contribution is not of a fiscal nature and was laid down specifically to finance social funds. It considers that a Member State's choice of a given welfare system is altogether unrelated to Article 33 of the Sixth Directive and does not result in legal transformation of social contributions into fiscal charges. In conclusion the Italian Government requests the Court to declare that the supplementary contribution in Article 11 of Law No 576/1980 is not in the nature of a turnover tax and is, consequently, compatible with Article 33 of the Sixth Directive.

4. The Commission expounds the relevant national and Community legislative provisions and the case-law of the Court of Justice which, in the Commission's view, apply to the present case and considers that in order to assess whether the prohibition laid down in Article 33 of the Sixth Directive applies to the supplementary contribution at issue in the present case, it is essential to determine whether or not that contribution is in the nature of a turnover tax within the meaning of the Sixth Directive. The Commission refers to the Court's judgment in Joined Cases 93/88 and 94/88 Wisselink and Others v Staatssecretaris van Financiën [1989] ECR 2671 and argues that the mere fact that the charge in question is called a ‘contribution’ by the legislature does not in any way affect the applicability to it of Article 33 of the Sixth Directive. According to the Commission, the prohibition in Article 33 concerns ‘all taxes, duties or charges’ which are in the nature of turnover taxes; the use of several terms, such as ‘taxes’, ‘duties’ and ‘charges’, shows that the meaning of the concept cannot be dependent on national designations or criteria. The Commission observes in that connection that the national court is asking the Court not whether the ‘supplementary contribution’ is, under national law, in the form of a fiscal charge in the broad sense but to determine whether the prohibition on maintaining or introducing a charge in the nature of a turnover tax within the meaning of the Sixth Directive applies also to a charge having the objective features of the ‘supplementary contribution’. The Commission next states that the Court has held that Article 33 of the Sixth Directive seeks to prevent Member States from introducing or maintaining taxes, duties or charges which can be characterized as turnover taxes and which have the effect of compromising the functioning of the common system of VAT by harming the movement of goods and services and subjecting commercial transactions to treatment comparable to VAT (see judgments in Case 295/84 Rousseau Wilmot v Organic [1985] ECR 3759; Case 252/86 Bergandi [1988] ECR 1393; Joined Cases 93/88 and 94/88 Wisselink [1989] ECR 2671). According to the Commission, it is therefore necessary to determine first whether the characteristics of the supplementary contribution are such as to allow it to be described as a turnover tax within the meaning of Article 33 and, secondly whether that national charge is levied on goods and services in a manner comparable to VAT. In order to determine whether the supplementary contribution is in the nature of a turnover tax within the meaning of Article 33 of the Sixth Directive, the Commission considers it necessary to establish whether the following three conditions are satisfied: (b) is it exactly proportional to the price of the services in question, regardless of the number of transactions forming part of the provision of the services, even before the stage at which the tax is levied; and (c) does the tax have a direct effect on the price of the services and, as a result of the way it is passed on, is the burden of the tax ultimately borne by the consumer, namely, in this instance, the recipient of the lawyer's services. As regards the condition of generality, the Commission considers that this condition is satisfied since the supplementary contribution applies to the fees (the price) for all the services provided by the whole of a sector of economic operators. As regards the second condition, the Commission observes that the supplementary contribution is an ‘ad valorem’ tax, exacdy proportional — at 2% — to the price of the service rendered. As regards the passing on of the tax to the final price so that it is borne by the consumer, the Commission observes that Article 11 of Law No 576/1980 refers to a ‘percentage increase’ which every lawyer has to apply to the fees payable to him; that ‘percentage increase’ falls to be paid by the client who is expressly described in the Law as the ‘debtor’. The obligation placed on Italian lawyers to pay the supplementary contribution to the Provident Fund ‘whether or not (a) is the tax of a general nature; the payment has in fact been made by the debtor’ (client) is such, according to the Commission, that the contribution itself can always be passed on and is indeed passed on to the client. In conclusion the Commission considers that the lawyer is obliged to pass the supplementary contribution on to his client, in exactly the same manner as for VAT, and the whole of the corresponding burden is systematically passed on to the client when the lawyer draws up any invoice for any services rendered. On the question of whether the supplementary contribution is compatible with the Community rules, the Commission deduces from an analysis of the Italian legislation governing the supplementary contribution that there exists a direct link between value added tax and the supplementary contribution itself. The latter takes the form of an actual surtax added to VAT, governed, like all surtaxes added to other taxes, by the well known principle accessorium sequitur principale. The Commission points out that, according to Article 11 of Law No 576/1980, the 2% increase applies ‘to all fees forming part of annual turnover for VAT purposes’ and only to such fees; in the Commission's opinion the chargeable event and the basis of assessment for the two taxes are completely identical. According to the Commission the complementary and dependent relationship between the supplementary contribution and VAT leads in turn to interference with the functioning of the common system of VAT in at least two respects. The Commission first observes that the supplementary contribution, which has to be included in the lawyer's invoice, is collected by the lawyer at the same time as VAT at 19%. In that connection the Commission refers to Article 11 of Law No 576/1980 which provides that the supplementary contribution is not subject to VAT, thereby signifying that the Law excludes that tax from the basis of assessment for VAT. In the Commission's opinion such a provision is contrary to Article 11 A(2)(a) of the Sixth Directive. The Commission adds also that, in legal terms, to exclude the supplementary contribution from the basis of assessment for VAT compromises the functioning of the common system of VAT for the following reasons: (a) the ‘supplementary contribution’ is not collected in parallel with VAT but partly instead of it; (b) the VAT is not calculated on the total consideration (fees) actually received by the provider of services (the lawyer), including the supplementary contribution, but on the amount of the fees less the 2% paid by the client to the lawyer in respect of the supplementary contribution. In the Commission's opinion a second aspect of the rules on the supplementary contribution compromises the functioning of the common system of VAT: if the recipient of the lawyer's services is a taxable person for VAT purposes, he can deduct from the VAT for which he is liable the VAT paid on the contribution payable to the lawyer. On the other hand an economic operator who is a taxable person for VAT purposes cannot deduct the supplementary contribution for which he is legally the ‘debtor’ from the VAT payable by him. Accordingly, on the one hand, the supplementary contribution, which in the Commission's view has all the characteristics of a surtax on VAT, is connected to VAT by a relationship of absolute dependence and complementarity, and must be paid by the recipient of the lawyer's services at the same time as the VAT and on the same basis of assessment, and both appear on the same invoice. On the other hand, an economic operator who is a taxable person for VAT purposes and who benefits from the services of an Italian lawyer and is required to pay two turnover taxes which are linked by an ‘indissoluble and complementary relationship’ is denied the right to deduct the 2% supplementary contribution which is paid, the Commission states, in similar, if not identical, manner to VAT on the services rendered to him by a lawyer, that is to say by another taxable person for VAT purposes. In the Commission's opinion, such an arrangement infringes the fundamental principle of the neutrality of the common system of taxation of turnover as regards the number of transactions occurring in the production stages of the service preceding the stage at which tax is levied. The principle of neutrality which the system of deduction of input VAT seeks to ensure is precisely complemented by the prohibition on introducing turnover taxes other than VAT itself. The Commission therefore suggests that the following reply be given to the national court's question:

‘Article 33 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 must be interpreted as precluding a Member State from levying on the provision of services by avvocati and procuratori legali a charge such as the “supplementary contribution” which can be characterized as a tax on turnover’.

M.Diez de Velasco

Judge-Rapporteur

1 Language of the case: Italian.