Report for the Hearing in Case C-74/91

I — Background to the dispute and prelitigation procedure

A — The Community legislation

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 (OJ 1977 L 145, p. 1) (hereinafter ‘the Sixth Directive’) lays down a special scheme for travel agents in Article 26.

Pursuant to Article 26(1), Member States are to apply that taxation scheme to the operations of travel agents where they deal with customers in their own name and use the supplies and services of other taxable persons in the provision of travel facilities.

By virtue of Article 26(2), all transactions performed by travel agents in respect of a journey are to be treated as a single service supplied by the travel agents to the traveller. The taxable amount for such supplies of services comprises the travel agents' margin, that is to say the difference between the total amount to be paid by the traveller, exclusive of VAT, and the actual cost to the travel agent of supplies and services provided by other taxable persons where such transactions are for the direct benefit of the traveller.

Article 26(3) provides that if transactions entrusted by travel agents to other taxable persons are performed by such persons outside the Community, the travel agents' service shall be treated as an exempted intermediary activity under Article 15(14). Where such transactions are performed both inside and outside the Community, only that part of the travel agents' service relating to transactions outside the Community may be exempted.

Article 28 of the directive contains transitional provisions, some of which directly affect the special scheme for travel agencies. Thus, according to Article 28(3):

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

The list of transactions contained in Annex F includes, under point 27:

‘The services of travel agents referred to in Article 26, and those of travel agents acting in the name and on account of the traveller, for journeys within the Community.’

The Council, for whose intervention provision is made in Article 28(4) of the directive, has not yet decided to cancel the transitional provisions concerning the activities of travel agencies and they are therefore still in force.

B — The national legislation

In Germany, Paragraph 25 of the Law of 29 November 1979 on turnover tax (Umsatzsteuergesetz: UStG 1980), as amended by the Law of 20 December 1988, lays down the arrangements for the application of value added tax to travel agency services.

Pursuant to Paragraph 1(1), those arrangements concern ‘travel services provided by an undertaking which are not intended for the business of the recipient of the service, where the undertaking acts in its own name in its dealings with the recipient of the service and relies on others for the performance of the services’. A supply of services of that kind is regarded as ‘another service’ within the meaning of the German law, which, in the operations of undertakings which are subject to VAT, distinguishes between ‘supplies’ and ‘other services’.

Pursuant to Paragraph 1(3), the taxable amount for the ‘other service’ is the difference between the amount which the recipient of the service disburses to obtain service and the amount which the undertaking pays for the service from the intermediary, turnover tax not being included in that taxable amount.

However, Paragraph 1(2) provides that the ‘other service’ is exempt from tax where the services of intermediaries:

‘1. are performed outside the limits of the European Economic Community; 2. are international air or passenger vessel transport operations or 3. air or passenger-boat transport operations taking place entirely outside the territory which is subject to taxation.’

The same paragraph provides that, where the services performed by intermediaries comprise some which are exempt from tax and some which are subject to tax, only the part of the margin corresponding to the taxable operations is to be taxed.

Thus, under the German legislation, the exemption may relate to services in respect of operations carried out within the territory of the Community in the case of air or sea transport operations which are international or take place solely outside German tax territory.

C — Prelitigation Procedure

Considering that the method of calculating value added tax on travel agency services under the abovementioned legislation was incompatible with Article 26 of the Sixth Directive, that it gave rise to distortions of competition and had had a negative impact on the own resources of the Community deriving from VAT, on 10 October 1988 the Commission sent the German Government a letter before action, requesting it to submit its observations on the matter in accordance with Article 169 of the Treaty.

On 25 August 1989 the German authorities replied, informing the Commission of their intention to consult the trade associations concerned on the results of the proceedings of the VAT Advisory Committee, in which a majority of the delegations had expressed a preference for a simplified regime for the application of Article 26 of the Sixth Directive, consisting in full taxation of the margin for intra-Community flights (even where a flight passes over or makes an intermediate stop in the territory of nonmember countries) and full exemption for flights bound for nonmember countries (even if the flights pass over or make an intermediate stop in the territory of Member States).

On 29 December 1989, the Commission sent to the Federal Republic of Germany a reasoned opinion issued under Article 169 of the EEC Treaty, alleging that Germany had failed to fulfil its obligations under the Treaty.

On 27 February 1990, the German Government stated that it was endeavouring to complete the arrangements for a new tax scheme but was obliged to wait for the guidelines worked out by the VAT Advisory Committee to be definitively adopted and, on 10 April 1990, it expressed the view that the contested German legislation should be permitted under the transitional provisions contained in Article 28(3)(b) of the Sixth Directive and Points 17 and 27 of Annex F thereto.

II — Written procedure and forms of order sought by the parties

The Commission's application was received at the Court Registry on 22 February 1991.

Upon hearing the judgment of the Judge-Rapporteur and the views of the Advocate General, the Court decided to open the oral procedure without any preparatory inquiry. However, it put certain questions to the two parties.

The Commission claims that the Court should:

declare that, by applying to travel agents' margins a system of value added tax which is incompatible with Article 26 of the Sixth Directive, the Federal Republic of Germany has failed to fulfil its obligations under the EEC Treaty;

order the Federal Republic of Germany to pay the costs.

The Federal Republic of Germany contends that the Court should:

dismiss the application as unfounded;

order the applicant to pay the costs.

Ill — Pleas in law and arguments of the parties

A — The Commission's complaints

The Commission considers that the method of calculating value added tax laid down by German law for travel agencies is incompatible with the Sixth Directive.

According to Article 26(3) of the Sixth Directive, only travel to nonmember countries or, in the case of journeys undertaken both inside and outside the Community, only the part of the journey which occurs outside the Community is excluded from the calculation of the travel agents' margin, which constitutes the taxable amount.

It is of no importance in that respect that certain travel services are exempt, as such, from value added tax in Germany under other provisions of the Sixth Directive. The method of calculating travel agents' margins provided for in Article 26 of the Sixth Directive is, by comparison with the common system of value added tax, a special scheme which must be interpreted and applied restrictively by the Member States, they not being entitled to add conditions for which no provision has been made.

Since the German Law on turnover tax excludes from the calculation of travel agents' margins certain operations carried out within the Community, in the case of air or sea transport, the taxable amount of such agencies is abnormally reduced, which may give rise to distortions of competition in relation to agencies in other Member States and may have an adverse effect on the own resources of the Community derived from VAT.

B — The German Government's arguments

In its defence, the Federal Republic of Germany puts forward four arguments.

(1). The German Government contends in the first place that Article 26(3) of the Sixth Directive, which in its view must be analysed in the light of the case-law on the general provisions of the same directive relating to the place of taxable transactions (Articles 8 and 9), cannot be practically transposed into national law and must therefore be regarded as void. According to the case-law of the Court, the Sixth Directive does not prohibit a Member State from applying its value added tax legislation to a transport operation effected between two points within its national territory, even where a part of that journey is completed outside its national territory, provided that it does not encroach on the tax jurisdiction of other States (judgment in Case 283/84 Trans Tirreno Express [1986] ECR 231, Paragraph 21). But that does not mean that any obligation exists to subject to VAT transport operations carried out within their territory in respect of that part of the journey occurring in or above international waters (judgment in Case C-30/89 Commission v France [1990] ECR I-691, Paragraph 18). In practice, as proved by the discussions within the VAT Advisory Committee, which was called on to put forward a simplified taxation system, it is extremely difficult to comply with the requirements of Article 26(3) in order to determine the various parts of territories over which aircraft pass, in view of the unforeseeable manner in which air routes are used. The impossibility of implementing the provisions shows that they are void, in so far as they oblige the Member States to lay down taxation rules which cannot be implemented in practice. The German Government refers to the requirements of clarity and foreseeability which must be observed in Community regulations that are liable to entail financial consequences (see, most recently, Case C-30/89 Commission v France, above, Paragraph 23). It also refers to the principle of legal certainty recently confirmed by the Court (judgments in Cases C-120/88 Commission v Italy [1991] ECR I-621, Paragraph 11, C-119/89 Commission v Spain [1991] ECR I-641, Paragraph 10, and C-159/89 Commission v Greece [1991] ECR I-691, Paragraph 11). In any event, even where the legality of a Community provision is no longer open to review, a State may always contend that it is impossible effectively to implement it. As has already been emphasized, the route followed by any aircraft raises insurmountable problems regarding determination of the various parts of territory overflown by reason of the fact that air routes are often used in an unforeseeable manner which cannot be reconstructed. Contrary to the Commission's claims, most Member States have encountered very serious difficulties in applying the special scheme provided for in the Sixth Directive and that is precisely why the proposals for the adoption of a simplified system have been discussed within the VAT Advisory Committee.

(2). The German legislation criticized by the Commission is, in the defendant's view, merely the result of seeking a solution which can be applied in practice and reflects as closely as possible the legal concepts laid down in Article 26. The provisions of the German legislation are intended to avoid distortions of competition both as regards travel agencies in other Member States which still apply the transitional scheme provided for in Article 28 and in relation to travel agencies which have their own aircraft, whose business of providing travel facilities is exempt in respect of international air transport operations, and finally also in relation to individual travellers. The Federal Republic of Germany contends in particular that the travel agencies located in its territory are at a disadvantage by comparison with their main competitors in Denmark and the Netherlands and that the situations of travel agencies without their own aircraft, travel agencies with their own aircraft and individual travellers respectively are indeed comparable since in each instance air transport facilities are provided for travellers.

(3). Even if the contested provisions of the German law are incompatible with Article 26 of the Sixth Directive, they are, in the German Government's view, covered by Article 28(3)(b) of the Sixth Directive which, in conjunction with Point 27 of Annex F, allows continuing exemption of the services of travel agents for journeys within the Community. Those transitional provisions, which are still in force, are relied on by several Member States and no Community provision precludes the partial application thereof. It cannot be concluded that partial application is contrary to the principle of legal certainty, unless it is conceded that a partial derogation from the provisions of a directive is more detrimental to the uniform application of Community law than a full derogation.

(4). Finally, with respect to arrangements for sea voyages, the Federal Republic of Germany contends that transport services are as a general rule effected almost exclusively on the high seas, that is to say outside Community territory, the part effected within domestic waters being insignificant in relation to the entire distance covered. It therefore considers that such services should be exempted even for cruises between two ports situated in Member States. On that point, the VAT Advisory Committee has suggested a system which in one case, that of cruises between Community ports and ports in nonmember countries, envisages partial taxation of the margin under conditions which the German Government is unable to understand. In the other two cases, namely those of cruises between ports within the Community and cruises commencing in the Community and finishing in a nonmember country, the margin is, according to the Committee's proposals, to be taxed in its entirety or exempted in its entirety. The system is indeed simplified in those two cases, therefore, but the first case is unacceptable for the reasons already set out above.

C — The Commission's response to those arguments

(1). The Commission maintains in the first place that the objection of nullity raised by the Federal Republic of Germany with respect to Article 26 of the Sixth Directive is both inadmissible and unfounded. In the first place, according to case-law of the Court, a Member State cannot plead the unlawfulness of a directive addressed to it as a defence in an action for a declaration that it has failed to fulfil its obligations (see most recently the judgment in Case 226/87 Commission v Greece [1988] ECR 3611, Paragraphs 12 to 16). Secondly, the provisions at issue are sufficiently clear and precise to be applied and cannot therefore be regarded as void. It also states that the German legislation infringes those provisions even where the transport operation takes place entirely within the territory of the Community, that is to say even where there is no difficulty in identifying the separate parts of a journey.

(2). Secondly, the Commission states that the contested provisions are not justified by overriding reasons relating to competition. The fact that certain countries continue to apply a transitional system which may lead to distortions of competition cannot entitle the Federal Republic of Germany itself to create such distortions to the detriment of States which apply Article 26 of the Sixth Directive correctly. With respect to the position to tour operators with their own aircraft, whose business activities are not taxed under the special scheme for travel agencies, it cannot be validly compared with that of ordinary operators since the types of services provided are not the same. Similarly, the position of individual travellers is not comparable. As regard the views of the VAT Advisory Committee referred to by the Federal Republic of Germany, the Commission points out that that Committee is not empowered to authorize derogations from the provisions of the Sixth Directive which are at present in force. Finally, although it is aware of the problems raised by the application of the scheme for travel agents and although it intends to propose new rules in that area, the Commission is nevertheless still under an obligation to ensure that the law in force is correctly applied by the Member States.

(3). The Federal Republic of Germany cannot, in the Commission's view, rely upon the transitional provisions of Article 28 of the Sixth Directive, since it chose to apply the definitive scheme provided for in Article 26. Indeed, it is not possible for a Member State, in the absence of express provisions to that effect, to apply transitional provisions only partially. If that were not the case, the result would be very considerable legal uncertainty within the Community. The Commission also states that the German Government has not paid own resources under Council Regulation (EEC, EURATOM) No 1553/89 of 29 May 1989 (OJ 1989 L 155, p. 9), Article 2(2) of which provides that transactions which Member States continue to exempt pursuant to Article 28(3)(b) of the Sixth Directive must be taken into account in determining VAT resources. That fact would indicate that the Federal Republic of Germany did not originally envisage invoking the transitional provisions contained in Article 28 of the Sixth Directive.

(4). Finally, the position adopted by the VAT Advisory Committee concerning arrangements for sea voyages shows that for most Member States the breakdown to be made as between the intra-Community and extra-Community parts of journeys is not impossible to carry out. According to that Committee's recommendations, in fact, exemption should be granted, for cruises between ports both inside and outside the Community, only for the part corresponding to transport operations carried out outside the Community.

In response to the Commission's reference to the failure of the German authorities to pay VAT own resources for transactions covered by the transitional provisions, the German Government contends that it has always considered that it has complied, as far as was possible, with the legal requirements of Article 26 and cannot therefore be required to have recourse to the transitional provisions contained in Article 28. That fact does not preclude verifying whether the legal conditions of the transitional system are being fulfilled.

IV — Answers to the questions put by the Court

A — First question

The Commission of the European Communities and the Federal Republic of Germany are asked to inform the Court of what they understand by the expression ‘under conditions existing in the Member State’ used in Article 28(3)(b) of the Sixth Directive.

Answers

(1). The Commission considers that the provision in question embodies the idea of a ‘standstill’ which must be interpreted restrictively. Its application presupposes that: exemptions, strictly interpreted, are not exemptions accompanied by reimbursement of the tax paid at the previous stage, they being referred to in Article 28(2) and not Article 28(3)(b); the exemptions are those indicated as such in Annex F to the Sixth Directive; the exemptions already existed in the Member State when the Sixth Directive entered into force, which, as the Court has held, prevents both the introduction of new exemptions and any enlargement of the scope of existing exemptions. That provision cannot therefore be applied where a Member State has undertaken to amend — even partially — the rules in force. According to the Commission, the expression ‘a single service’ used in Article 26 of the Sixth Directive prohibits the subdivision of activities of travel agencies and the application to them of different tax schemes. The exemptions provided for in points 27 (services of travel agencies) and 17 (services connected with passenger transport) in Annex F cannot be invoked by the Federal Republic of Germany since it has adopted legislation implementing the special scheme under Article 26 of the Sixth Directive in respect of such services.

2. The Federal Republic of Germany considers that the term ‘conditions existing’ must be taken to mean the legal situation existing with respect to exemptions in the Member State at the date of entry into force of the Sixth Directive. In that connection, what is important is to determine whether or not the exemption was linked with a right to deduct input taxes, since the correct application of Article 28(3)(b) presupposes that the same type of exemption is to be maintained. The German Government states that it must be borne in mind that the VAT system incorporates two categories of exemption which differ according to the way they are applied: those which do not allow any deduction, the taxable person using goods and services for the requirements of the exempted operation not being authorized to deduct the input tax, those which, on the contrary, do not exclude the right to deduct that tax, the exempted operations not being subject to any tax in that case.

B — Second question

The parties are asked to clarify precisely, producing references to and the exact text of all the provisions involved:

1) the scheme for the levying of VAT on travel agencies which was in force in the Federal Republic of Germany before the implementation of the Sixth Directive;

2) the amendments made to that scheme after the implementation of the Sixth Directive;

3) a precise indication of the provisions of that legislation which the Commission alleges to have been infringed, in the version in force on the date serving as a point of reference for a finding of infringement;

4) the reasons for which the Commission is able to state, at page 11 of its application, that the Federal Republic of Germany ‘decided to apply to the operations of travel agencies the provisions of Article 36 of the Sixth VAT Directive, in other words to subject them to the harmonized Community system’.

Answers

Answers to question (b)(1)

According to the Commission, the operations of travel agencies, where they dealt with customers in their own name and used the supplies and services of other taxable persons, could not be regarded, in the Federal Republic of Germany, as a single service and were not subject to overall taxation of the margin but to taxation of the amount of each operation undertaken.

The services of providing accommodation, meals and tourist excursions were taxable if they took place within the country. Road and rail transport for passengers was subject to tax on the amount (margin included) corresponding to the part of the journey effected inside the country. International sea voyages were not subject to German tax law and international air travel was subject to a tax which was not collected.

Finally, the Commission states that the tax charged to travel agencies in respect of their business was deductible in an amount corresponding to the services taxed.

b) The Federal Republic of Germany also states that before 1 January 1980 there was no special scheme for travel agencies; tax was levied on each of the various travel facilities (transport, accommodation, meals) in accordance with the general provisions of the 1973 Law on turnover tax (UStG 1973).

Under that Law, only services provided in Germany were subject to tax, including the part of cross-frontier transport services effected within the country. International sea voyages were, however, always considered as voyages abroad and, in the case of cross-frontier air travel, the part of the journey occurring in Germany was the subject of a ministerial dispensation.

Finally, in all cases of dispensation or exemption, the right to deduct input tax was not excluded, which means that in such cases the price paid by the traveller contained absolutely no tax component.

Answers to question (b)(2)

a) According to the Commission, the German system for the taxation of travel agencies was extensively changed by Article 25 of the UStG 1980 after the implementation of the Sixth Directive. In the first place, the services of travel agencies are now treated as single services and the taxable amount now comprises only the travel agency's margin. Secondly, exceptions to those rules are laid down for certain operations, which give rise to an exemption for the corresponding portion of the margin (services provided outside the territory of the Community, international sea or air travel). Finally, amounts taxable in respect of services provided by third parties are not in principle deductible. However, by virtue of the combined effect of Articles 15 and 25 of the UStG 1980, air and sea travel, for which deduction of the tax paid at the previous stage is applicable, constitute an exception to that principle.

b) The Federal Republic of Germany also states that the Law of 29 November 1979 on turnover tax (UStG 1980) adopted the special scheme for travel agencies provided for in the Sixth Directive, consisting in taxation of the margin of the travel agent's overall service. But, in order to appraise the impact of this new system by comparison with that of the previous system, it is necessary, in the German Government's view, to consider separately the two components of the services involved in deterrnining the traveller's total expenses:

on the one hand, the services of third parties used by the travel agency, which are taxed in accordance with the general provisions of the UStG 1980;

on the other hand, the travel agency's margin, which is taxed according to the special scheme under Article 25 of that Law.

As regards the services of third parties, journeys made abroad and the foreign part of cross-frontier air travel are not subject to a tax (paragraph 1.1.1. and Article 3a.2.2. of the UStG 1980), and likewise the part of international sea travel effected within territorial waters (paragraph 7.3 of the UStDV 1980, which implements the Law) and the part of its national air journeys effected in Germany, to which a dispensation applies (paragraph 26.3.1 of the UStG 1980). Since the right to input tax for such transactions is not excluded (paragraphs 15.1 and 15.3 of the UStG 1980), those various services are not therefore, as in the past, subject to any tax.

The margin of travel agencies is also exempted for international air or sea travel taking place exclusively abroad (paragraph 25.2.2 and paragraph 25.2.3 of the UStG 1980) and that exemption likewise does not exclude deduction of input tax (paragraph 15.3.1(a) and 15.3.2(a) of the same Law).

Thus, in the relevant areas, the impact of the new scheme is exactly the same as that of the previous scheme since neither the services provided by third parties nor the service as a whole provided by the agency to the traveller are subject to any tax whatsoever.

Answers to question (b)(3)

a) The Commission states that the alleged infringement involves incorrect implementation of Article 26 of the Sixth Directive. Failing to treat travel agency services as a single service, the Federal Republic of Germany does not tax the margins in respect of certain transport services, they being exempted from all tax under paragraph 25 UStG 1980, the most recent version of which (1991) makes no change in that respect.

b) The Federal Republic of Germany also states that the content of paragraph 25.2.2 and paragraph 25.2.3, which give rise to the alleged infringement of which the Commission complains, was not modified by the UStG 1991.

Answer to question (b)(4)

According to the Commission, the German Government itself recognized, in a letter dated 30 April 1990, that Article 26 of the Sixth Directive was incorporated in German law by the introduction of paragraph 25 of the UStG 1980. The travaux préparatoires for that Law also clearly show the intention as to implementation, since the reasons referred to therein to justify the exceptions provided for bear no relation to maintenance of the existing system.

The Commission considers that, in order to introduce simplification measures, the Federal Republic of Germany could have had — but did not have — recourse to the procedure envisaged in Article 27 of the Sixth Directive. But it has no valid grounds for calling for maintenance of the existing scheme provided for by Article 28(b)(3).

b) The Federal Republic of Germany contests the Commission's statement, referring inter alia to its answers to question (b)(2).

C — Request for the production of documents

At the Court's request, the Commission of the European Communities and the Federal Republic of Germany produced the working documents for the 25th meeting of the VAT Advisory Committee of 10 and 11 April 1989.

F. Grévisse

Judge-Rapporteur

1 Language of the case: Portuguese.