CJEC, April 3, 1968, No 28-67

The court

By an order of 18 july 1967, received at the court on 31 july following, the bundesfinanzhof (federal finance court), under article 177 of the treaty establishing the eec, put to the court various preliminary questions concerning the interpretation of articles 95 and 97 of the said treaty.

The effects of the first paragraph of article 95 (questions 1 and 5)

(1) By the first part of question 1 the court is asked whether it ' maintains the judgment which it gave on 16 june 1966 in case 57-65 under the terms of which the first paragraph of article 95 produces direct effects and creates individual rights which national courts must protect '.

In the second part of the same question the court making the reference wishes to know whether article 95 ' can...confer upon individuals the right to require before national courts that, despite the as yet unamended terms of the law, they should be placed in the same position as if the member state had fulfilled the obligation which this article imposes on it with regard to legislation,...in other words ' whether ' the third paragraph of article 95 has created a breach in legislative sovereignty...in the field of internal taxation as well '.

A - The bundesfinanzhof states first of all that it finds no support in the provision in question for the interpretation given to the judgment of the court.

Whether or not this argument is well founded must be considered in the light of both the wording of article 95 and the character and spirit of the treaty establishing the eec. The objective of the eec treaty, which is to establish a common market the functioning of which is of direct concern to interested parties in the community, implies that this treaty is more than an agreement which merely creates mutual obligations between the contracting states. The community constitutes a new legal order, for the benefit of which the states have limited their sovereign rights, albeit within limited fields, and the subjects of which comprise not only the member states but also their nationals. Independently of the legislation of member states, community law therefore not only imposes obligations on individuals but is also intended to confer upon them rights which become part of their legal heritage. These rights arise not only where they are expressly granted by the treaty but also by reason of obligations which the treaty imposes in a clearly defined way upon individuals as well as upon the member states and upon the institutions of the community.

In this connexion it is necessary and sufficient that the very nature of the provision of the treaty in question should make it ideally adapted to produce direct effects on the legal relationship between member states and those subject to their jurisdiction. The first paragraph of article 95 contains a prohibition against discrimination, constituting a clear and unconditional obligation. This obligation is not qualified by any condition, or subject, in its implementation or effects, to the taking of any measure either by the institutions of the community or by the member states. This prohibition is therefore complete, legally perfect and consequently capable of producing direct effects on the legal relationships between member states and persons within their jurisdiction. The fact that this article describes the member states as being subject to the obligation of non-discrimination does not imply that individuals cannot directly benefit from it.

B - The bundesfinanzhof points out that this interpretation would result in the recognition of wider rights for individuals than those available to the community itself. It would oblige the national court to place the persons concerned in the same position as if the member state had already fulfilled the obligations imposed upon it by article 95, whereas the community can merely require the implementation of those obligations.

It is not possible to base an argument - contrary to the interpretation of article 95 as it follows from the judgment in case 57-65 - on a comparison of the rights conferred by this provision on individuals, on the one hand, and the powers conferred on the community institutions, on the other. Every time a rule of community law confers rights on individuals, those rights, without prejudice to the methods of recourse made available by the treaty, may be safeguarded by proceedings brought before the competent national courts. Such actions are different from the exercise of the powers conferred on the community authorities under the treaty, in particular by articles 95 and 97, together with articles 155 and 169. In fact proceedings by an individual are intended to protect individual rights in a specific case, whilst intervention by the community authorities has as its object the general and uniform observance of community law.

It thus appears that the guarantees given to individuals under the treaty to safeguard their individual rights and the powers granted to the community institutions with regard to the observance by the states of their obligations have different objects, aims and effects and a parallel may not be drawn between them.

C - With regard to the interpretation arising from the judgment in case 57-65 the bundesfinanzhof objects that it has resulted in a large number of applications to the national fiscal courts.

This argument is not by itself of such a nature as to call in question the correctness of that interpretation.

Furthermore a large proportion of the said applications appears to be based on the mistaken view, as will be shown in the consideration of question 2, that the effect which article 95 is acknowledged to have automatically extends to article 97.

D - The bundesfinanzhof further alleges that according to german law the fiscal courts do not have the power in this sphere to take decisions the effects of which extend beyond the particular case in question and that it is not ' the proper task of the german fiscal courts to make good by thousands of separate decisions provisions of tax law which have not been passed '; since calculation of the total internal taxation imposed on a domestic product is largely a matter of fact, the lower courts could in like cases give contradictory judgments without the bundesfinanzhof, the court of last instance, being in a position to harmonize those decisions. In a cumulative multi-stage tax system it is difficult to make ' an actual comparison of the tax imposed ', so that the obligations on member states under articles 95 and 97 can only be fulfilled by the action of the legislature. Finally, the implementation of article 95 by national courts might result in contradictory judgments being given by those courts, or by a ruling given by the court of justice under articles 169 et seq. Of the treaty.

These arguments as a whole, which are based on rules of national law, cannot prevail over the rules of law laid down by the treaty. It is clear from the fundamental principles of the treaty and the objectives which it is intended to attain that those provisions, so far as by their nature they are capable of doing so, enter into national legal systems without the assistance of any national measure. The complexity of given situations in a state cannot alter the legal nature of a directly applicable community provision, especially as the community rule must be applied with the same force in all member states.

In particular, the prohibition laid down by article 95 would lose the effect which it derives from the treaty if the force of this provision depended on national implementing measures not provided for in the treaty and without which the prohibition itself would have no effect.

Resort by the national courts to article 177 makes it possible for the court to ensure a uniform interpretation of the treaty and is capable of bringing about its identical application. The interpretation arising from the judgment in case 57-65 applies only to rates of taxation which the national legislature itself does not consider as ' average rates ' and with regard to which it has thus admitted that the difficulties indicated by the court making the reference do not exist. Furthermore article 95 does not restrict the powers of the competent national courts to apply, from among the various procedures available under national law, those which are appropriate for the purpose of protecting individual rights conferred by community law.

In particular, when internal taxation is incompatible with the first paragraph of article 95 only beyond a certain amount, it is for the national court to decide, according to the rules of its national law, whether this illegality affects the taxation as a whole or only so much of it as exceeds that amount.

For all those reasons, there are no grounds for giving a fresh interpretation of the first paragraph of article 95 of the treaty.

(2) The bundesfinanzhof's fifth question seeks to obtain a ruling from the court on what must be understood by ' internal taxation imposed... Indirectly on similar domestic products ' within the meaning of the first paragraph of article 95 of the treaty.

To the extent to which this question is put having regard to the possible application of article 97, it is pointless owing to the reply which is to be given to question 2.

Nevertheless, to the extent to which it relates to the direct application of article 95 alone, it should be observed that the terms ' directly or indirectly ', taking account of the general scheme of the said provision, must be widely interpreted.

The first paragraph of article 95 refers to all taxation which is actually and specifically imposed on the domestic product at all earlier stages of its manufacture and marketing or which corresponds to the stage at which the product is imported from other member states, it being nevertheless understood that the effect of this taxation diminishes in proportion as the previous stages of manufacture and of marketing become more remote and that this burden tends rapidly to become negligible. Consequently, when the member states calculate the taxation imposed indirectly on domestic products, they must observe the conditions and limitations emerging from these considerations.

The observance of these conditions and limitations, in accordance with what has been said above regarding the effects of the first paragraph of article 95, is subject to review by the competent national courts.

The effects of article 97 (questions 2 and 4)

In its second question, the bundesfinanzhof asks the court to rule whether article 97 ' accords to all citizens the right to cause the national court, by means of an application for the annulment of the tax assessment and in an individual case, to rule whether the average rate, fixed by the law, is compatible with the principles set out in article 95 '.

In addition, in its fourth question, the bundesfinanzhof asks the court to rule whether ' citizens continue to derive from article 97 the right to have an average rate reviewed by the national courts, even if the commission has fulfilled its obligation of ensuring that the treaty is observed or if the member state has modified the average rate in accordance with the requirement of the commission '.

The objective of article 97 is to empower member states which levy a turnover tax calculated on a cumulative multi-stage tax system to establish average rates without however permitting them to infringe the principles of articles 95 and 96.

Although the objectives of article 95 and 97 thus appear connected and guided by the same aims, article 97, which provides a rule peculiar to the complexities of the cumulative multi - stage tax system, must nevertheless be distinguished from article 95 both because of the characteristics peculiar to this system and because of the special methods provided for the implementation of the said article 97.

Since this provision gives the member states a discretion of which they may or may not avail themselves to have recourse to average rates, it implies, in the case of states which have used this power properly, the interposition between the rule of community law and its implementation of legal acts implying a discretion; this means that, in the present state of community law, such discretion excludes their choice and its consequences from any possibility of the direct applicability of the relevant provisions of article 97.

On the other hand both the fixing of groups of products and the establishment of average rates remain, in the absence of any community provision on the method of calculating them, at the discretion of the member state, exercised under the commission's supervision, and preclude the direct applicability of article 97.

In these circumstances article 97 cannot confer on individuals the individual rights referred to by the present question of the bundesfinanzhof. This conclusion is confirmed by the second paragraph of article 97 which requires the commission to address ' appropriate directives or decisions ' to a state establishing average rates which do not conform to the principles of article 95.

It is therefore apparent from the general scheme of article 97 that, where a member state operating the cumulative multi-stage tax system has elected to have recourse to the procedure of establishing average rates, the article does not create individual rights which national courts must protect.

The concept of average rates (question 3)

In its third question the bundesfinanzhof asks the court for a ruling as to ' what must be understood by average rates within the meaning of article 97 of the eec treaty ' and whether, ' having regard to the reply to this question... The disputed rate of turnover equalization tax of 4 per cent applicable to whole-milk powder constitute(s) an average rate '.

Under the first paragraph of article 97, it is for the member states to establish average rates, with the commission alone having power to intervene, pursuant to the provisions of the second paragraph of article 97, and in certain circumstances of article 169, against the failure to conform to the principles set out in article 95, without prejudice to the rights conferred by article 170 on the other member states.

In these circumstances it is not for the national courts to appraise whether average rates have been established in accordance with the principles of article 95, although it does not follow that those courts may not in any case be required to decide whether they are faced with an average rate coming under article 97 or with taxation coming under article 95.

The application of article 97 is subject to a double condition; first that the member state levies a turnover tax based on the cumulative multi-stage tax system and secondly that it has in fact exercised the power made available to it by the said provision and established average rates.

Consequently, in states which have exercised the power made available to them by article 97, rates are considered as ' average rates ' if they are established as such by the states in question, without prejudice to the operation of the second paragraph of that article.

The second part of the third question relates not to the interpretation but to the possible application of the treaty to a specific case and consequently falls outside the jurisdiction of the court within the framework of the procedure under article 177.

The costs incurred by the government of the federal republic of germany and by the commission of the european communities which have submitted their observations to the court are not recoverable. As these proceedings are, in so far as the parties to the main action are concerned, in the nature of a step in the action pending before the bundesfinanzhof, the decision on costs is a matter for that court.

The court

In answer to the questions referred to it by the bundesfinanzhof, by order of that court of 18 july 1967, hereby rules:

1. The first paragraph of article 95 produces direct effects and creates individual rights which national courts must protect;

2. By the expression ' internal taxation imposed directly or indirectly on similar domestic products ' the first paragraph of article 95 refers to all taxation which is actually and specifically imposed on the domestic product at all earlier stages of its manufacture and marketing or which correspond to the stage at which the product is imported from other member states;

3. The first paragraph of article 97, which applies where member states operating a turnover tax according to the cumulative multi-stage tax system have actually exercised the right therein granted to them and established average rates does not create individual rights which national courts must protect;

4. In states which have exercised the power made available to them by article 97, rates are considered as ' average rates ' if they are established as such by the states in question, without prejudice to the operation of the second paragraph of that article;

And declares:

It is for the court referring the matter to give a ruling on the costs of the present case.