delivered on 28 March 1985 (*1)

Mr President,

Members of the Court,

1. By the present actions the Commission is seeking declarations that the Netherlands and Ireland have failed to fulfil their obligations under 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 (Official Journal, L 145 of 13 June 1977, p. 1). The Commission complains that after the entry into force of that directive they retained unaltered a tax system, applicable to transactions involving the sale of new goods where secondhand goods of the same kind are accepted in part exchange, whose effect is to reduce by an amount equal to the value of the goods accepted in part exchange the amount by reference to which VAT is charged on the sale of the new goods.

The contested national provisions are as follows:

Article 8 (3) of the Netherlands Law of 28 June 1968 on turnover tax provides that: ‘... where movable goods are sold in exchange for goods of the same kind, the value of the goods taken in part exchange shall not be included in the price’.

Section 10 (2) of the Irish Value Added Tax Act, 1972, as amended in 1978, reads as follows: ‘... the amount on which tax is chargeable shall be the total amount of money which might reasonably be expected to be charged if the consideration consisted entirely of an amount of money equal to the open market price: ... Provided that in computing the amount on which tax is chargeable as aforesaid a deduction may be made for the open market price of secondhand movable goods given in exchange or part exchange for goods, whether new or secondhand, of the same kind.’

2. Those two provisions thus have the same tax effect, namely to reduce the amount on which VAT is payable in respect of the sale of the new goods by the value of the goods taken in part exchange by the taxable person.

The Netherlands tax system makes no distinction according to whether the goods taken in part exchange have been used or are new. That was also originally the position in Ireland, but the amendment made to the legislation in 1978, that is to say before the delayed entry into force of the Sixth Directive on 1 January 1979, as provided for in the Ninth Council Directive, No 78/583 (Official Journal, L 194 of 19 July 1978, p. 16), restricted the scope of Article 10 (2) so that it applied only where secondhand goods were accepted in part exchange for new or secondhand goods. The Irish legislature thus took the steps which it considered necessary as a result of the adoption of the Sixth Directive, which applies only to transactions between taxable persons relating to new goods and not to the sale by a taxable person of secondhand goods taken in part exchange from a private individual for other secondhand goods or new goods.

3. In relation to secondhand goods, the first paragraph of Article 32 of the Sixth Directive provides for the adoption by the Council of a ‘taxation system to be applied to used goods, works of art, antiques and collectors' items’. The basic elements and principles of such a system were the subject of proposals made by the Commission both in the course of the adoption of the Sixth Directive itself (Proposal for a Sixth Directive, Doc. COM(73)950 final of 20 June 1973) and subsequently with a view to the adoption of the system referred to in that article (Proposal for a Seventh Directive, submitted to the Council on 11 January 1978, Official Journal, C 26 of 26 February 1978, p. 2). Since the Council did not set up that system by the date provided for, namely 31 December 1977, the matter is still governed, transitionally, by the second paragraph of Article 32, which provides: ‘Until this Community system becomes applicable, Member States applying a special system to these items at the time this directive comes into force may retain that system.’

That provision allows, on a transitional basis pending complete harmonization in the sphere of VAT, derogation from the common system established by the Sixth Directive, that is to say the coexistence of radically different systems in the Member States, such as:

—Taxation of the sale by a taxable person of secondhand goods bought from a private person without the possibility of tax deduction (double taxation);

—Special system for secondhand goods allowing, according to different methods, double taxation to be avoided.

I should point out that the Commission's complaint does not relate to transactions concerned solely with secondhand goods but to transactions in which a taxable person selling new goods accepts secondhand goods in part exchange. Since both tax systems and both the actions brought have the same object, I can consider them together.

In the light of all those preliminary considerations, it may be said that the central issue in this case is whether the second paragraph of Article 32 applies to a tax system concerning transactions of a mixed character in the sense that they involve both new and secondhand goods.

4. Before considering the substance of the case, it is necessary to deal with the submission put forward by the Netherlands in Case 16/84 that the Commission's action is inadmissible.

The Netherlands Government points out that, following the reasoned opinion delivered by the Commission and within the period of two months prescribed in that opinion, it had submitted to the Commission various examples of calculations intended to show that the system in force in the Netherlands arrived at the same result as the methods for calculating VAT on the sale of secondhand goods formulated by the Commission, in particular in its Proposal for a Seventh Directive. It clearly emerged from the meeting which the Netherlands officials had on this matter with officials of the Commission that the time-limit laid down in the reasoned opinion was to be suspended to allow time for the information submitted to be examined. In not keeping that promise and in not drawing the attention of the Netherlands to the risk of a misunderstanding, the Commission frustrated the legitimate expectations of the Netherlands Government, which could not be reproached for failing to comply with an opinion when it had reason to believe that the time-limit which the opinion laid down had been suspended.

That submission cannot be accepted. Article 169 of the EEC Treaty provides that Member States must comply with reasoned opinions ‘within the period laid down by the Commission’, which has a discretion in the matter. Consequently, the Netherlands Government should have requested an extension of the period laid down from the Commission itself, in whose discretion it is, as the Court has expressly recognized, ‘to decide whether such a request from a Member State is to be granted’ (Case 28/81, Commission v Italy, [1981] ECR 2577, at para. 6 on p. 2582). Any other solution, in particular one based on possible verbal undertakings given by officials of the Commission, must be left out of account by reason of the legal uncertainty which it would create.

The action for failure to fulfil obligations brought by the Commission against the Netherlands must therefore be declared admissible. I therefore come to the substance of the case.

5. According to the Commission, in providing that the taxable amount for new goods is to be arrived at after deducting the value of secondhand goods taken in part exchange, the aforesaid national provisions conflict with the definition contained in Article 11 A of the Sixth Directive, which is as follows:

‘(1) The taxable amount shall be: in respect of supplies of goods... everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser ... for such supplies’.

The Commission points out that in the case of the transaction under consideration the secondhand goods represent nothing other than a form of payment in kind partially covering the total purchase price of the new goods. The payment in kind and the payment of the balance in cash together constitute the consideration for the supply of the new goods. Under the aforesaid provisions of Article 11, it is therefore necessary to regard that consideration as the amount on which VAT should be charged in respect of the new goods.

According to the Commission, the reduction of the taxable amount has two consequences. In the first place, it reduces the basis on which the percentage of VAT funding the Community's own resources is chargeable and hence leads to a corresponding reduction in those resources. In the second place, it redistributes the tax burden between the purchaser of the new goods, who pays only part of the VAT thereon, and the purchaser of the goods taken in part exchange, who must pay the amount of the VAT which the purchaser of the new goods escapes. That redistribution thus operates to the detriment of the purchaser of the secondhand goods.

The Commission adds that it is not possible to justify the taxation system on the basis of Article 32 of the Sixth Directive because, although the transaction in question also involves secondhand goods, it mainly concerns, as is clearly apparent from the contested measures, the sale of new goods, and the trade-in of the secondhand goods is only ancillary thereto and intended to encourage the purchaser to proceed with the purchase. It is therefore not possible to compare the contested taxation system with those contemplated by the Commission in its Proposals for Sixth and Seventh Directives.

6. In contrast to the Commission, the Member States concerned maintain that there is no need to inquire whether the system of deduction provided for by their legislation is compatible with the aforementioned provisions of Article 11 of the Sixth Directive.

They consider that Article 32 of the Sixth Directive authorizes the retention of national systems relating to secondhand goods and applying when the Sixth Directive entered into force even if they do not accord with the other provisions of the directive. The taxation treatment of transactions relating to secondhand goods accepted in part exchange for new goods constitutes ‘a special system’ within the meaning of the second paragraph of Article 32.

The two Member States reject as formalistic the Commission's argument that the scope of Article 32 is restricted to transactions involving secondhand goods to the exclusion of mixed transactions involving both secondhand and new goods. In addition they consider that the mixed nature of the transaction is of no consequence, since the taxation system criticized by the Commission pursues the same objective and achieves the same result as the Commission's proposals. Thus the compatibility of the contested systems depends not on a strictly literal interpretation of Article 32 but on the reasons for the establishment of a special system for secondhand goods, the necessity of which was recognized by the Community legislature.

It is apparent from the statements of reasons in the Proposals for Sixth and Seventh Directives that the objective of such a system is to prevent secondhand goods which have already borne VAT when first marketed from being subject, on resale by a taxable person, to VAT partially based on the VAT previously paid. To that end the Commission contemplated various methods, in particular in its Proposal for a Seventh Directive, all of which were intended to allow deduction of that part of the VAT still included in the goods on their resale.

According to the two Member States, although the system of deduction established by the Netherlands and Irish legislation was not contemplated by the Commission in its proposals, it pursues the same objective and leads to a result in all respects identical to that obtained by means of the various methods put forward by the Commission. In addition the method adopted by the two Member States has no effect upon the Community's own resources or on the respective tax burdens of the purchasers in question.

Finally, the States emphasize the paradoxical consequences of repealing the contested national systems if the Commission's argument were to be accepted. The result would be to abolish two systems which substantially fall within the objectives announced by the Commission itself without its being possible to provide for their replacement, since Article 32 authorizes only the retention of existing systems. Consequently, the result would be that secondhand goods taken in part-exchange for new goods would be subject on resale to double taxation until the Community legislature adopted the Seventh Directive.

7. In view of the complexity of the arguments put forward by the parties, I shall endeavour, by repeating certain points, to define more precisely the issues raised in this case.

It is clear that, as Community law stands at present, the special taxation system for transactions relating to secondhand goods provided for in the first paragraph of Article 32 has yet to be established. Consequently, as a transitional measure, the special systems existing in the Member States on the entry into force of the Sixth Directive remain applicable.

As I have said, comparative law shows that the taxation treatment accorded by the Member States to secondhand goods consists either in applying to them the normal system for other goods, that is to say taxing secondhand goods on their resale without allowing any deduction of the residual tax, or in allowing such a deduction. Thus the second paragraph of Article 32 introduces an exception to all the principles governing the Community system of value added tax established by the Sixth Directive. It may be inferred from that that, where a Member State has a national system for secondhand goods, the only restriction in the absence of applicable Community rules is that there should be no interference with the system applicable to new goods which the Member States are required to adopt in implementation of the Sixth Directive.

The problem in this case is that the contested provisions apply to mixed transactions. In the Commission's view, the failure to fulfil obligations lies in the fact that the taxation system which the contested measures laid down reduces the taxable basis of the new goods, whereas in the view of the Member States the system of deduction does not affect the taxation of the new goods and is simply designed to eliminate the residual VAT still incorporated in the secondhand goods.

8. The need for special taxation treatment of secondhand goods arises from the special nature of the sales history of such goods. To describe the different stages thereof I shall take the case of a secondhand vehicle sold by its owner to a garage on the purchase of a new vehicle.

VAT has already been charged on the secondhand vehicle when it was sold as new by a taxable person to a private individual. When after using it for a certain time the individual decides to sell it to a garage, the so-called ‘residual’ part of the ‘original’ VAT remains incorporated in the value of the goods, as the Court emphasized in its judgment in Case 15/81 (Schul v Inspecteur der Invoerrechten en Accijnzen [1982] ECR 1409).

It is of little consequence in that respect that the garage could seek to recover the residual tax either by negotiating a reduction in the value attributed to the secondhand vehicle or by increasing the resale price of the secondhand vehicle by the amount of the residual tax. Such practices may sometimes get round difficulties arising from the residual VAT, but cannot under any circumstances eliminate it.

If the garage were unable to eliminate the residual tax, it would remain as a necessary part of the amount on which VAT was charged in respect of the secondhand vehicle, which the garage would intend to reintroduce into commercial circulation after renovating it if necessary. That position would involve, from a tax point of view, two equally unfortunate results:

—In the first place, it would mean double taxation of the secondhand vehicle in so far as the VAT chargeable on resale would be partly based on the residual VAT.

—Secondly, as a consequence of such double taxation, individual owners of secondhand goods would be discouraged from dealing with the trade since the Sixth Directive does not subject transactions between private persons to VAT.

They are the two reasons put forward by the Commission in its statement of reasons for its Proposals for Sixth and Seventh Directives which in its view make it necessary to set up a special tax system for secondhand goods. Consequently, to decide whether the national provisions in question are compatible it is necessary to see whether their result is to avoid double taxation. Thus to measure the real effect of the system of deduction in force in the two Member States it seems necessary to compare it with the taxation methods contemplated by the Commission in its Proposal for a Seventh Directive and in particular with the so-called ‘tax on tax’ and ‘base on base’ methods when they are applied to the kind of transactions in question, that is to say the case of a secondhand vehicle accepted in part exchange for a new vehicle and subsequently resold by the garage.

9. I must therefore undertake a comparative analysis of those three methods and compare them further with the situation which would result from a straightforward application of the Sixth Directive in the absence of a special system within the meaning of Article 32.

One observation is called for. On the very day of the hearing the Commission produced three tables supposedly describing three possible variations of the system which is applied in Ireland and could be applied in the Netherlands.

Since this is an action for a declaration that a taxation system which exists in positive law is incompatible with Community law, the Commission must describe how the system actually operates and not set out hypothetical variants.

In view of the belated production of that document, the two Member States were authorized to submit observations thereon after the hearing and they stated that none of the cases contemplated by the Commission corresponded to the real position in their countries.

I am thus led to consider the national systems as described by the defendants and observe that Ireland illustrated the way in which those systems operate with examples of calculations during the written procedure. I shall compare those systems (fourth method), on the one hand, with the system which would result from the application of the Sixth Directive in the absence of a special system for secondhand goods within the meaning of Article 32 (first method) and, on the other, with the methods contemplated by the Commission in its Proposal for a Seventh Directive (second and third methods).

In so doing I shall adopt the hypothetical circumstances assumed by the parties for the purposes of the argument, namely:

—Assumed rate of VAT: 10%;

—Secondhand vehicle traded in to a garage for IRL 5500, which includes residual VAT of IRL 500;

—The vehicle is traded in as part payment for a new vehicle with a gross value (including tax) of IRL 11000, of which 10% (that is to say IRL 1000) represents VAT;

—Subsequently sold after renovation at a profit of IRL 600.

On the other, the trade-in price including the residual VAT, that is to say IRL 5 500.

The difference, IRL600, constitutes the dealer's profit margin and the basis for the calculation of the VAT payable, which amounts to 10% of 600, that is to say IRL 60.

Here too the total amount of VAT received by the State amounts to IRL 1 060.

The resale price of the secondhand vehicle amounts, as in the previous case, to IRL 6160, but is made up as follows:

Purchase price inclusive of the residual VAT IRL 5500

Profit IRL 600

VAT on resale IRL 60.

Fourth method: System in force in the Netherlands and in Ireland

The method followed in the two Member States consists of two successive operations.

On the sale of the new vehicle and trade in of the secondhand vehicle the VAT which the garage will actually have to pay to the State is calculated by reference to a taxable amount which represents the difference between the sale price of the new vehicle exclusive of tax and the allowance on the trade-in exclusive of tax (in other words, after deduction of the residual VAT), that is to say 10% of (10000 — 5000 =) 5000, which equals IRL 500.

On the resale of the secondhand vehicle the taxable amount is the aforesaid net value of the trade-in plus the profit, that is to say5000 + 600 = 5600, giving VAT of IRL 560 and a resale price of IRL6 160.

The total VAT received by the State is 500 + 560, which again amounts to IRL 1 060.

10. Thus, compared with the two systems recommended by the Commission, the method applied by the two Member States affects neither the sale price of the new vehicle (IRL 11000) nor the resale price of the secondhand vehicle (IRL 6160) nor, therefore, the distribution of the tax burden between the purchaser of the new vehicle and the purchaser of the secondhand vehicle nor, finally, the total amount of VAT (IRL 1060) collected for the State by the taxable person. It is therefore completely neutral.

Like the other two methods, and in contrast to the position which would result from the application of the Sixth Directive in the absence of a special system within the meaning of Article 32, it avoids any double charge to VAT on the resale of the secondhand vehicle.

In the light of the foregoing the system applied in the two Member States may be regarded as a ‘special system’ for secondhand goods within the meaning of the second paragraph of Article 32 of the Sixth Directive since, although applicable to mix transactions, it affects neither the price nor the tax burden of the new goods. The fact that the system is neutral and that Article 32 may therefore be applied means that it is excluded from the scope of Article 11.

11. In view of all those considerations my opinion is:

That the action brought by the Commission should be dismissed; and

That the Commission should be ordered to pay the costs.

Table showing the taxation methods adopted by the parties to avoid double taxation of secondhand goods

Method

Transaction

“Tax on tax” system

“Base on base” system

System applied in the Netherlands and Ireland

Purchase price of secondhand vehicle including residual VAT

Residual VAT on the secondhand vehicle

Sale price of the new vehicle excluding VAT

Sale price of the new vehicle including VAT

VAT paid by the taxable person (garage)

II. Re-sale of the secondhand vehicle

VAT on net value

Residual VAT

Gross re-sale price

Gross purchase price

Deduction of residual VAT

VAT paid by the taxable person (garage)

Re-sale price

Total VAT paid to the State (I + II)

1 060

*1 Translated from the French.