CJEC, March 15, 1983, No 319-81

THE COURT

1 By application lodged at the court registry on 23 december 1981 the Commission of the European Communities brought an action before the court under article 169 of the eec treaty for a declaration that by applying to spirits in the case of value-added tax (vat) a system of differential taxation on the basis of designation of origin or provenance, the Italian Republic has failed to fulfil its obligations under article 95 of the eec treaty.

2 Apart from the standard rate of tax the italian system of vat provides for a reduced rate and two higher rates. The first higher rate, which was 18% when the action was brought, was increased to 20 % by decree-law no 697 of 1 october 1982 (gazzetta ufficiale della repubblica italiana no 273 of 4 october 1982). It is charged on a range of products which the italian legislature judges to be non-essential goods. The other higher rate, which is applied to products which the national legislature considers to be items of luxury or prestige, was 35% when the action was brought and increased to 38% by decree-law no 697 of 1 october 1982.

3 By decree-law no 58 of 4 march 1977 (gazzetta ufficiale della repubblica italiana no 70 of 14 march 1977), converted into law no 183 of 9 may 1977 (gazzetta ufficiale no 129 of 13 may 1977) and amended by decree-law no 697 of 1 october 1982 (gazzetta ufficiale no 273 of 4 october 1982), all spirits are taxed at the higher rates. However, a distinction is made between them inasmuch as gin and spirits having a designation of origin or provenance regulated or protected by specific measures in the territory in which they are produced are taxed at the rate of 35%, now 38%, whereas other spirits are taxed at the rate of 18%, now 20%.

4 As there are no rules in Italy protecting designations of origin or provenance as far as domestically-produced spirits (essentially those called ' ' grappa ' ') are concerned, the commission took the view that, by the indirect means of the criterion referred to above, that system introduced a sub-category of tax causing almost all spirits imported from other member states to be taxed more heavily than similar or competing domestic products.

5 Considering that the system was therefore contrary to article 95 of the eec treaty it instituted proceedings under article 169 of the treaty and on 2 february 1979 issued a reasoned opinion relating to the higher taxation of both gin and spirits having a designation of origin or provenance and produced in other member states. The opinion states that by maintaining that system of taxation in force, the Italian Republic has failed to fulfil its obligations under article 95 of the treaty and requests it to adopt the measures necessary to bring the alleged failure to an end.

6 As the Italian Republic failed to comply with that request the commission brought this action.

7 The commission, which is supported in its submissions by the united kingdom, contends in substance that the effect of the system of differential taxation is to tax almost all spirits imported from other member states more heavily than almost all italian-made spirits and thus to protect domestic production. Whilst it admits that member states may adopt different rates of taxation even for similar or competing products, provided that the conditions laid down by the court in its judgment of 14 january 1981 in case 46-80 (spa vinal v spa orbat (1981) ecr 77) are observed, the commission considers that the criteria selected by the italian government do not meet those conditions. It contends that the criterion relating to regulated designation of origin or provenance has the effect of preventing by definition almost all imported spirits from being taxed at the less high rate whilst it affords that advantage to almost all italian production whereas the fact that the designation of origin or provenance of spirits is protected by other member states does not make them sufficiently different from italian-made spirits to warrant different treatment. To support that contention the commission points out that the prices before tax of certain imported spirits and certain italian products are comparable. Such a comparison contradicts the italian government ' s statement that the products subject to the highest rate are consumed by customers who prefer luxury or prestige products and who have greater tax-paying capacity.

8 Throughout the administrative stage of these proceedings and before the court the government of the Italian Republic has continued to deny that it has failed to fulfil its obligations as alleged. It observes first of all that in a consistent line of decisions the court has held that even in the case of identical products member states are not prohibited from introducing systems of differential taxation based on objective criteria such as conditions of production or the raw materials used (judgments of 22 june 1976 in case 127-75 bobie (1976) ecr 1079; of 10 october 1978 in case 148-77 hansen (1978) ecr 1787; of 30 october 1980 in case 26-80 schneider (1980) ecr 3469; of 14 january 1981 in cases 140-79 chemial and 46-80 vinal (1981) ecr 1 and 77; and of 27 may 1981 in joined cases 142 and 143-80 essevi and salengo (1981) ecr 1413). It stresses in particular that in the judgments of 14 january 1981 in the chemial and vinal cases the court held that the application of a system of differential taxation cannot be considered to constitute indirect protection of domestic products within the meaning of the second paragraph of article 95 merely because the more heavily taxed product happens to be a product imported entirely from other member states.

9 According to the italian government, the higher taxation of gin and of spirits having a designation of origin or provenance, regulated or protected by specific measures in the territory in which they are produced, meets objective criteria. The highest rate of vat charged on such spirits reflects the legitimate concern, appropriate to any system of vat, to charge different rates of tax on essential or at any rate necessary consumer goods, non-essential goods and, lastly, luxury or prestige goods.

10 Spirits protected by a designation of origin or provenance belong, it is claimed, precisely by reason of that characteristic to the last category of goods which for that reason are particularly sought out by the more highly privileged social groups. Their higher taxation is therefore meant ' ' simply to tax more heavily, for reasons of distributive justice, a luxury commodity the consumption of which is in itself an indication of greater contributive capacity ' '. The system of taxation in question thereby meets the requirements of objectivity and neutrality which are necessary for justifying, with regard to article 95, differential taxation of similar or competing products.

11 As a point of fact the italian government further observes that domestically-produced gin, the volume of which is higher than that of imported products, is taxed at the highest rate for the same reasons. It also maintains that the higher taxation of spirits with a regulated designation of origin or provenance has not had the effect, prohibited by the second paragraph of article 95, of protecting other products. The figures produced on both sides show in fact that total imports into Italy from other member states, especially the united kingdom and france, of both gin and spirits having a designation of origin or provenance increased considerably between 1971 and 1981.

12 Before the various points of view put forward in this dispute are examined it should be mentioned that these proceedings, as is shown by the terms of the application and as was confirmed by the commission at the hearing, do not concern the taxation of gin but only the taxation of spirits having a designation of origin or provenance, regulated or protected by specific measures in the territory in which they are produced.

13 As far as those spirits are concerned, the government of the Italian Republic rightly recalls that in a consistent line of decisions the court has held that ' ' in its present stage of development community law does not restrict the freedom of each member state to lay down tax arrangements which differentiate between certain products on the basis of objective criteria... Such differentiation is compatible with community law if it pursues objectives of economic policy which are themselves compatible with the requirements of the treaty and its secondary legislation and if the detailed rules are such as to avoid any form of discrimination, direct or indirect, in regard to imports from other member states or any form of protection of competing domestic products ' ' (judgment of 27 may 1981 in joined cases 142 and 143-80 amministrazione delle finanze dello stato v essevi and salengo (1981) ecr 1413 at p. 1434).

14 Nor can it be denied that in the sphere of harmonized systems of value-added tax member states have the right to tax some consumer goods, particularly those regarded as luxury products, more heavily. However, the freedom which must therefore be left to member states in the field of domestic taxation cannot justify any departure from the fundamental principle of non-discrimination in taxation matters laid down in article 95 but must be exercised within the confines of that provision and observe the prohibitions contained therein.

15 An examination of the system of taxation in question leads to the conclusion that it does not meet those requirements.

16 As the court had repeatedly held inter alia in its judgments of 27 february 1980 in cases 160-79 commission v france, 169-78 commission v Italy and 171-78 commission v Denmark ((1980) ecr 347, 385 and 447), amongst all spirits there is an indeterminate number of beverages which must be regarded as similar products within the meaning of the first paragraph of article 95 and even where is it impossible to perceive a sufficient degree of similarity between the products concerned, there are nevertheless characteristics common to all those spirits which are sufficiently marked for it to be said that they are at least partly or potentially in competition. That is sufficient for it to be concluded that taxation of them must not have the effect of protecting domestic products. For that purpose it is necessary to take into consideration the potential market of the products in question in the absence of protectionist measures and to ignore comparisons of consumption and import figures.

17 As the products concerned are either similar to or in competition with one another - which brings them within the scope of the second paragraph of article 95 - a criterion for the charging of higher taxation, such as designation of origin or provenance which by definition cannot ever be fulfilled by domestic products similar to or in competition with products imported from other member states as described above, cannot be considered to be compatible with the prohibition of discrimination laid down in that provision. Such a system has the effect of excluding domestic products in advance from the heaviest taxation since they will never fulfil the conditions on which the higher rate is charged and it is entirely at the discretion of the national legislature, in choosing not to introduce a general system applicable to all spirits, to perpetuate that situation indefinitely regardless of similarities or differences in conditions of production, quality, price or competition between national products and those imported from other member states.

18 That discriminatory and in any event protective character in regard to domestic production is amply demonstrated by the fact shown by the statistical information provided by the defendant that in the period 1975 to 1981 at least 98.5% of imported spirits were taxed at the highest rate of 35% (in the estimate of the italian government, only 2 000 to 3 000 hectolitres of spirits taxed at the rate of 18% were imported by Italy as against total annual imports varying between 194 099 and 284 087 hectolitres) whilst in the same period more than 98.5% of italian-made spirits were taxed advantageously at 18% (the annual consumption of italian gin subject to the rate of 35% has been estimated to be approximately 4 000 hectolitres whereas total consumption of domestically-produced spirits varied between 266 978 and 368 644 hectolitres per year).

19 Furthermore, it must not be overlooked that, although some designations of origin or provenance may be such as to give the products profiting from them a reputation for quality, such designations do not thereby generally and automatically confer on the spirits to which they apply the character of consumer goods of luxury or prestige. That is particularly true when they do not have that character in the member state in which they originate.

20 If, however, the italian legislature ' s presumption that because a product has a designation of origin or provenance it must be one of luxury or prestige were ever to correspond in any given member state to previous habits of consumption (which it has not been possible to demonstrate), it must be remembered that the purpose of creating a common market in which goods move freely in undistorted conditions of competition in accordance with articles 2 and 3 of the treaty is to eliminate such entrenchment of habits of consumption by ensuring that all consumers have as far as possible equal access to all community products.

21 Finally, it must be emphasized that the considerations set out above by no means fetter the ability of member states to adopt, whilst observing the relevant directives, a higher rate of vat on luxury products as opposed to domestic or imported products not having that quality, provided, however, that the criteria chosen to determine which category of products is to be more heavily taxed are not discriminatory as against imported products similar to or in competition with domestic products in the manner contemplated by the second paragraph of article 95.

22 It follows from the foregoing considerations that by applying a differential system of taxation to spirits on the basis of the ciriterion of designation of origin or provenance, in pursuance of decree-law no 58 of 4 march 1977 on value-added tax, the Italian Republic has failed to fulfil its obligations under article 95 of the eec treaty as far as products imported from other member states are concerned.

On those grounds,

The court

Hereby:

1. Declares that by applying a differential system of taxation to spirits on the basis of the criterion of designation of origin or provenance, in pursuance of decree-law no 58 of 4 march 1977 on value-added tax, the Italian Republic has failed to fulfil its obligations under article 95 of the eec treaty as far as products imported from other member states are concerned;

2. Orders the defendant to pay the costs.