Ursula Becker v Finanzamt Münster-Innenstadt (8/81)

II —Written observations submitted to the Court

The Finanzamt Münster-Innenstadt, the defendant in the main action, takes the view that Article 13 B (d) 1 of Directive 77/388 does not fulfil the conditions which the Court of Justice laid down for the direct applicability of the provisions of a directive.(a) The introductory sentence of that provision, like Article 13 C (b) of the directive, confers on the Member Sutes a margin of discretion also as far as the exemption from tax of credit negotiation transactions is concerned.(b) Article 13 B (d) 1 of the directive must be considered in the context of the comprehensive system of value-added tax. In internal transactions one of the characteristics of the system is the indissoluble link between exemption and exclusion of the right to deduct. Under Article 17 (2) of the directive, deduction is in principle authorized only in so far as the goods and services are used for the purposes of a taxable transaction. In view of that link, exemption is in any case unfavourable for credit negotiators who supply their services exclusively to other taxable persons who fulfil the conditions for deduction. The same may be true for credit negotiators who partly supply their services to other taxable persons fulfilling the conditions for deduction. In certain exceptional cases exemption may even be unfavourable for credit negotiators who supply. their services exclusively to taxable persons who are not entitled to make a deduction, particularly where in the year of assessment 1979 investment gave rise to unusually high levels of input tax.(c) Another material link arises from the provisions relating to the adjustment of deductions contained in Article 20 (2) of the directive: where a credit negotiator has acquired capital goods during the years preceding the year of assessment 1979 and the period for the adjustment of the deduction has not yet expired, liability to tax might, depending on the circumstances of the individual case, be more favourable tor the credit negotiator than exemption.(d) There is also a material link with the provisions on the issue of invoices contained in Article 22 (3) of the directive: invoices relating to taxable supplies of services must state clearly the amount of value-added tax. Under Article 21 (1) (c) of the directive such a mention of the amount of tax gives rise in the case of exempt supplies of services to an independent liability to tax. Tax due under that provision may, according to Article 17 (2), under no circumstances be deducted as input tax by the recipient of the services supplied. Consequently, the retroactive grant of an exemption from value-added tax represents a considerable disadvantage for credit negotiators who have issued invoices stating clearly the amount of the tax.(e) The retroactive exemption of services supplied by a credit negotiator would have repercussions on all taxable persons who received his services during the year of assessment 1979. Those taxable persons would not be entitled to a deduction in respect thereof (Article 17 (2) of the directive) and would have to amend their own records and returns of tax.(f) The retroactive exemption of services supplied by a credit negotiator would also have repercussions, depending on the circumstances of the particular case, on taxable persons who carried out transactions benefiting the credit negotiator during the year of assessment 1979, for example where they waived the exemption under Article 13 C of the directive thinking that the credit negotiator would be entitled to the deduction.(g) It is desirable that the Court should take the opportunity which this case offers to define the limits of its case-law on the direct applicability of the provisions of a directive. It could do so in particular by expressly denying direct applicability to individual elements, in this case Article 13 B (d) 1, which cannot be divorced from a comprehensive system, in this case Directive 77/388.The Government of the Federal Republic of Germany is of the opinion that the provision in respect of which the Court's interpretation is requested imposes an obligation on the Member States alone and considers that in support of that view it can rely on the case-law of the Court of Justice. Admittedly, the Court has recognized that provisions of directives create rights in favour of individuals, but it lays down in this regard restrictive conditions which are not fulfilled in this case.(a) As far as terminology is concerned, it is not a question in this case of examining the “direct applicability” or “direct effect” of the directives. The crucial question is whether a provision of a directive creates rights for individuals upon which they may rely in proceedings before the national courts.In each case it must be examined whether, in the light of the restrictive conditions laid down in the case-law of the Court, a given provision of a directive confers personal rights. The Court of Justice has not stated that a directive is capable, in its entirety, of creating rights in favour of individuals.(b) According to the case-law of the Court, an obligation incumbent on the Member States creates personal rights which may be relied upon in proceedings before the national courts and which prevail over incompatible national law, if it is in the interests of the individual, it is no longer subject to postponement, it is clear and unconditional and is not contingent, in its execution or in its effects, upon the introduction of any measure, either by the institutions of the Community or by the Member States concerned. On this point the crucial question is whether or not the Member State has a margin of discretion in fulfilling the obligation.(c) Consequently, a directive cannot be “directly applicable”, as that would mean that the national courts must contribute without distinction to the implementation of all the provisions contained in a directive. The case-law of the Court indicates that the cooperation of the national courts in the implementation of Community law is required only for those rules which may be relied upon in legal proceedings. The distinction between directives and regulations has not therefore become of no account.(d) Moreover, the restrictive conditions do not depend on whether or not the Member State, after the expiry of the final period prescribed by the directive, has adopted legal rules in order to fulfil its obligations. The directive produces effects in favour of individuals only where the obligation, by its very nature, applies directly. The justification for the restrictive conditions governing the creation of personal rights arising from provisions which impose an obligation on a State lies in important reasons which must be respected. Those reasons make it impossible to endow Article 13 B (d) 1 of Directive 77/388 with the legal effect of enabling individuals to avail themselves of that provision in proceedings before national courts in order to make it prevail over national legal provisions which conflict with it.(e) If it were accepted that a provision of a directive which was not intended to serve the interests of an individual could be relied upon, the result would be that the Community would be entitled to impose obligations on an individual by a legal measure addressed to another person. This would be in conflict with the principle of the rule of law.An individual is entitled to expect that the provisions of a directive shall impose an obligation upon him only when the Member State has fulfilled its obligation to incorporate the directive into national law. Provisions of a directive do not therefore impose obligations on individuals. That must also be the position where the provision concerned produces effects which are in part favourable but are also in part unfavourable to them.(f) To acknowledge the existence of personal rights, even though the obligation arising from the directive is subject to a time-limit, would amount to compelling the State to comply with an obligation which has not yet acquired binding force.(g) If the provision in question of the directive leaves the Member State concerned a margin of discretion regarding its implementation, the existence of personal rights must be denied owing to the specific role the courts, including both the Court of Justice and the national courts, which is to uphold the law. It would be incompatible with that role if they were to assume the political discretion of the Member States. Justification for the exclusion of personal rights may also be found in the principle of legal certainty, which requires that the legal effects arising under a legal system should be clearly defined.(h) As regards Article 13 B (d) 1 of Directive 77/388, only one of the conditions required for the existence of personal rights is fulfilled: on the expiry of the period laid down by Directive 78/583, the obligation incumbent on the Member States is no longer subject to any time-limit.(i) The provision in question serves the interests of the individual where exemption from tax is favourable to the person who carried out the transactions, which appears to be so in the case of the plaintiff in the main action. However, exemption from tax does not always operate in favour of the individual. Exemption gives rise to serious disadvantages for credit negotiators who have supplied their services to a trader entitled to deduct input tax. In the case of credit negotiators who have supplied their services partly to persons entitled to deduct input tax and partly to persons who are not so entitled, the question whether or not exemption from tax is as a whole more favourable to them depends on the value-added during the year 1979 and on the percentage of their transactions carried out with persons entitled to deduct input tax. Exemption from tax may even have drawbacks for credit negotiators who in 1979 carried out transactions exclusively with persons who were not entitled to deduct input tax, if those negotiators had an unusually high level of intermediate consumption during 1979. Furthermore, the effect of conferring a tax exemption on credit negotiators would be to prevent the recipients of their services from deducting the input tax which became chargeable in the chain of transactions preceding the credit negotiation. In that respect also the contested provision imposes a burden on individuals. However, in the interests of the individual the directive may be relied upon only against the State.(j) The need for clear and unconditional rules overlaps with requirement that it must no longer be necessary to adopt further provisions, of Community or national law, inasmuch as the rules laid down by the directive must disclose unambiguously their legal effects without the need for adaptation of national law. In that regard the exemption from tax must not be considered in isolation. It is an integral part of a system of taxation within which the taxation of various persons is linked by a chain of transactions.Thus, if the credit negotiator's own transactions are taxable, that would mean that for the period of assessment concerned he has the right of deduction (Article 17 (2) of Directive 77/388), is not entitled to adjust the deduction in respect of capital goods acquired in earlier periods (inference a contrario from Article 20 of the directive), and rightly stated the turnover tax on his invoices (Article 22 (3) (b)). If the transactions of a credit negotiator are exempt from tax, then for the period of assessment concerned, he has no right of deduction (inference a contrario from Article 17 (2) (a) of the directive) unless the conditions for exemption laid down by Article 17 (3) (c) are fulfilled, he must adjust the deduction in respect of capital goods acquired in earlier periods (Article 20 (2)), and he has wrongly stated the turnover tax on his invoices, with the result that he is nevertheless liable for the tax mentioned (Article 21 (1) (c) of the directive).For those who utilize the services of the credit negotiator, the consequences vary according to whether the negotiator's transactions are taxable or are exempt. The same holds true for those following the credit negotiator in the chain of supply.It is particularly indicative of the uncertainty of the legal position that a credit negotiator cannot obtain exemption from tax by relying upon Article 13 B (d) 1 of the directive in so far as he followed the normal practices of mentioning the tax in his invoices.This “chain” of taxation arising from Directive 77/388 also characterized the German law on turnover tax in force in the year 1979. The application of Article 13 B (d) 1 would lead to further taxation of entire series of transactions. Taxpayers must not be held in uncertainty regarding the tax burden which they must expect to bear, as would be the case if the taxation of transactions arising from the negotiation of credit were to depend on a subsequent judgment of the Court.So long as the original national legislation purports to continue in force, it would be demanding too much of individuals, administrative authorities and national courts to take it upon themselves to disregard the national law and its penalties and to rely on personal rights arising from the directive.Consequently, in the absence of adaptation of the law of the Federal Republic of Germany in force in 1979, personal rights cannot arise under Article 13 B (d) 1 of Directive 77/388.(k) The Member States have a margin of discretion in connection with exemption from tax under the provision in question inasmuch as they may lay down conditions for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse. Exemption must be delimited in the national tax laws by additional rules going beyond the exempt transactions. Such rules cannot be regarded as having “direct effect”.By reason of the first sentence of Article 13 B (d) 1 of the directive, the uniform and precise definition required by the Court is missing.Moreover, under Article 13 C (b) of the directive the Member States may allow their taxpayers a right to opt for taxation inter alia in the case of credit negotiation transactions. The Member States may also restrict the scope of that right of option. They are to fix the details of its use. The Federal Republic of Germany has made use of the power thus conferred upon it and has inserted in the Umsatzsteuergesetz 1980 a new Article 9 on the waiver of exemptions.If a court were minded to apply the tax exemptions without awaiting the supplementäry legislation of the Member State, it would deprive that Member State of the opportunity to grant the right of option. To acknowledge the conferment of personal rights by Article 13 B (d) 1 of the directive would amount to the adoption of a political decision to abolish, at least provisionally, the discretion left by the Community to the national legislature, which is something which the courts have no power to do.The fact that the margin of discretion left to the Member States precludes the existence of personal rights arising under an obligation incumbent on a State does not mean that the State has failed to fulfil one of its obligations. It is for the Commission to inquire into that matter under Article 169 of the EEC Treaty. In the event, the Commission did in fact bring the matter before the Court (Case 132/79). The action was not pursued because the Federal Republic of Germany brought its law into conformity with the directive as from 1 January 1980.(1) The following answer should be given to the preliminary question put by the Finanzgericht Münster:Article 13 B (d) 1 of Directive 77/388 does not constitute a directly applicable provision in the Federal Republic of Germany upon which individuals may rely in proceedings before the national courts.The Government of the French Republic takes the view that a negative reply must be given to the question put to the Court by the Finanzgericht Münster.(a) According to the case-law of the Court, the principle that Community directives are directly applicable does not have general scope. The role of that principle is auxiliary and is intended only to ensure the “effectiveness” of the directives. It is limited to “specific circumstances” and is subject to conditions which depend on the extent to which the obligations imposed on the Member States are mandatory in nature. Where the provisions of the directive have been incorporated into the legal order of a Member State, judicial review based on the provisions of the directive is permissible only in so far as those provisions do not allow the Member States a margin of discretion. Such review is precluded where the directive leaves to the Member States powers or options. Where a Member State has failed to adopt, within the prescribed period, the measures needed for the implementation of a directive, only provisions containing “unconditional and sufficiently precise” obligations are capable of being directly applicable.(b) This caution which is evident in the Court's decisions is particularly justified in the field of taxation in which, apart from the sphere of customs duties, no provision is contained in the Treaty which is capable of direct effect in the internal legal order of the Member States.Whilst this field has in exceptional cases been the subject, of Community regulations, it is esentially, and particularly as far as turnover taxes are concerned, governed by national law. The provisions of Community law adopted on the basis of Article 99 of the EEC Treaty, and in particular the directives on value-added tax, seek to achieve progressively the greatest possible harmonization, but not to substitute for the national systems a new and comprehensive Community system of taxation.Under those circumstances, the directives on taxation, including Directive 77/388, include, in addition to certain precise and mandator) provisions whose uniform implementation must be ensured, provisions the conditions for the implementation of which are generally left to the discretion of the Member States and which, consequently, are not intended to receive uniform application. Such uniformity can clearly not be achieved by means of direct applicability, which cannot be justified by the need for the “effectiveness” of such provisions.(c) The purpose of Directive 77/388 is to “clarify” and “harmonize” a number of “concepts” common to the laws of the various Member Stati concerning, in particular, the scope of value-added tax. the conditions for ranking as a taxable person and the chargeability of the tax.Essentially, it contains provisions which, admittedly within defined limits, leave certain options to the Member States In particular, that is expressly stated to be the case as far as the definition of taxable transactions (Article 5 (3) and (5); Article 6 (3)), their place (Article 9 (3)), exemptions (Article 13) and transitional provisions (Article 28 (3)) are concerned. Whether or not they have been the subject of national implementing measures, the direct applicability of the abovementioned provisions of the directive cannot, having regard to the actual criteria enunciated in the case-law of the Court, be directly applicable before the courts of the Member States.More generally, it may be asked whether, in view of such a large number of options open to the Member States under the directive and their inseparability from the other provisions, the directive was not, in its entirety, incapable of being directly applicable in the Member States before the adoption of the necessary national legislative measures.In that regard the Court may not ignore the fact that the Council dismissed that possibility by necessary implication when it took the view, in adopting Directive 78/583 that, after the expiry of the period prescribed for the implementation of Directive 77/388, it could extend the period by one year.(d) In any event, neither Article 13 B (d) 1 of Directive 77/388 nor Article 13 C (b) can be regarded as having any direct effect. Under the latter provision, in the case of transactions involving the grant and the negotiation of credit the Member States may allow taxpayers a right of option for taxation, restrict the scope of the right of option and fix the details of its use. The wording of those provisions implies that if the principle that transactions carried out by credit negotiators shall be exempt (or carry an option) is to be observed, there is clearly an obligation on the Member States to lay down conditions for the “correct and straightforward application” of the measure and also, if necessary, to fix the details of the use of the option. Those are clearly not “unconditional” and “sufficiently precise” obligations within the meaning of the case-law of the Court.Those provisions of Directive 77/388 are not capable of being directly applicable and are comparable in that respect with the first paragraph of Article 11 of the Second Council Directive 67/228 of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes (Official Journal, English Special Edition 1967, p. 16), which lays down a principle of deduction coupled with derogations and exceptions which were expressly left to the discretion of the Member States and to which the Court refused to attribute any measure of direct applicability in its judgment of 1 February 1977 (Case 51/76 Verbond van Nederlandse Ondernemingen v Inspecteur der Invoerrechten en Accijnzen [1977] ECR 113).The Commission points out, in relation to the facts, that it hesitated for a long time before acceding to the wish expressed by the Member States that the period initially prescribed for the incorporation of Directive 77/388 into national law should be extended, and that it finally decided to propose an extension of one year only on the express condition that “this derogation shall not prejudice the effects of the provisions of Directive 77/388 which do not require the adoption of national implementing measures, if those effects have been produced before the date of notification” of Directive 78/583. That reservation concerning rights already acquired before 1 January 1978 was not adopted by the Council in the directive extending the period.Moreover, when the Federal Republic of Germany was unable, despite the assurances which it gave, to amend its tax legislation within the additional period granted to it, the Commission brought an action against it for failure to fulfil its obligations under the Treaty. That action was withdrawn following the adoption of the Law of 26 November 1979 on the new version of the Law on turnover tax.As far as the legal position is concerned, it is less a question of examining in general terms the legal status of a directive which has not been incorporated into national law within the periods prescribed than of resolving the specific question whether the plaintiff in the main action is entitled as from 1 January 1979 to avail herself, as against the national provisions in force in 1979, of that provision of the directive which lays down a mandatory exemption from turnover tax in respect of the negotiation of credit. The true perspective in this instance is not that of the “direct applicability” or “direct effect” of the directive but whether in relations between the citizen and the national authorities “reliance” may be placed on the legal effects of Article 13 B. That question must be answered in the affirmative.(a) Even when it submitted the proposal for Directive 78/583, the Commission thought it possible that Directive 77/388 could produce direct effects. The same view is to be found in the Commission's reply to Parliamentary Question No 615/78 by Mr Notenboom (Official Journal 1979, C 28, p. 9).(b) With particular regard to Article 13 B (d) 1 of Directive 77/388, a distinction must be drawn in relation to the exemptions provided for by Article 13 B between the actual obligation to exempt and measures which the Member States must take in order to ensure the correct application of such an exemption. In the case of the majority of the exemptions provided for by Article 13 B, and in any event in the case of the negotiation of credit, the obligation to exempt as such is unconditional. The margin of discretion which the introductory sentence leaves to the Member States is not of a general nature but is granted solely “for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse”. The provisions which are to be adopted by the Member States can only deal with ancillary measures, such as the need to keep separate accounts or additional requirements concerning declarations or preservation. Such ancillary provisions cannot alter the unconditional and mandatory nature of the exemptions.(c) A real margin of discretion is left to the Member States, as far as the nature and scope of an exemption is concerned, only in respect of the matter mentioned in Article 13 B (d) 6 (special investment funds). The management of special investment funds is to be exempt only “as defined by Member States”. Exemptions expressed in imprecise terms are also mentioned in Article 13 A (1) (m) and (n).(d) The Law of 26 November 1979 amending the Law on turnover tax demonstrates that the German authorities themselves have accepted that there is no discretion in connection with the exemption provided for by Article 13 B (d) 1. In accordance with the directive, Article 4 (8) (a) of the Law exempts the negotiation of credit from turnover tax without reserve or limitation. The German legislature did not think it at all necessary to adopt special provisions concerning the evidence to be produced in order to receive the tax exemption.(e) Article 13 B (d) 1 of Directive 77/388 also fulfils in other respects the requirements which the Court has stated, in a consistent line of decisions, to be the conditions for direct “reliance” upon a directive. The provision in question is concerned with the legal relations between an individual and a Member State during the period in which the directive should have been incorporated into national law. The plaintiff in the main action may not therefore be prevented from claiming in proceedings before the national courts an exemption from turnover tax which credit negotiators have enjoyed since 1 January 1979.