1 Introduction â the Objectives of Article 110 TFEU
Over the past decades, one can appreciate that the underlying rationale of the Internal Market is to produce an economic union where goods move freely within the Unionâs borders. This involves eliminating all differences between individual economists capable of impairing the flow of factors, that is, preferences based on nationality, after becoming relevant. However, the objective of Article 110 TFEU is to prohibit discrimination based on nationality. It does not seem to aim at making taxation provisions identical, merely to cleanse them of discrimination. The consistent case law of the CJEU has noted that Member States can operate different systems of taxation to reflect different social and
Article 95 seeks to ensure, by means of the prohibition which it lays down, that an importing Member State does not, by means of internal taxation of imported products and similar domestic products, give domestic traders preferential treatment as compared with their competitors from other Member States who sell similar products on the market of that State.
This statement has been followed in several other cases. Also, one may have to examine the difference between this provisionâs first and second paragraphs. The first reads that âno Member State shall impose, directly or indirectly, on the products of other Member States any internal taxation of any kind in excess of that imposed directly or indirectly on similar domestic productsâ. The second paragraph reads that âfurthermore, no Member State shall impose on the products of other Member States any internal taxation of such a nature as to afford protection to other productsâ. The first difference between the two paragraphs is the use of âsimilarâ in the first paragraph and âother productsâ in the second paragraph. The scope of Article 110 TFEU paragraph 1 differs from that of Article 110 paragraph 2 in that the former is more narrow. This brings the question: what does comparable mean? From the Spirits case decided in 1980,2 the Court draws an indistinct line between âsimilar productsâ under the first paragraph and âother productsâ under the second.
2 The Context
Through protectionism, one can understand the difference between discrimination based on the productâs nature and discrimination based on the productâs nationality. Protectionism involves the latter and not the former.
What a Member State cannot do is make choices based on the nationality of the product or the producer. If a Member State says all foreign cheese is to be taxed at 15% and the domestic equivalent at 5%, there is discrimination based on nationality. On the other hand, suppose a Member State requires all the wine with a designated appellation, whatever its origin, to be considered a luxury product and is taxed at 100%. In contrast, the undesignated wine is taxed at 5%, and the system does not appear discriminatory. However, if there is no system of appellation for wines produced in the importing Member State, then the clear rule is that there cannot be discrimination based on nationality. Member States can discriminate between products, but this discrimination cannot affect or be based on the productâs nationality. Objective criteria must be used to differentiate products, and defining the product correctly is essential. The definition of a product has two competing aspects. If the product is narrowly defined, for example, only diesel cars instead of cars in general, it is relatively easy to claim discrimination. The product coverage of the discrimination is, by definition, narrow. This would mean the effect of the ruling striking down discriminatory legislation introduced.
On the other hand, an expansive definition of a product that is all cars rather than just diesel cars includes a wide product base, but discrimination across such a wide base is more difficult to prove. For example, the Italian VAT diesel cars3 is a typical case where the Commission argued that the Court should consider discrimination only concerning diesel cars. The Court did not follow the suggestion, arguing that the relative products were cars in general, i.e. both petrol and diesel. At that time, electric cars were not on the market. The choice of product was crucial. Had the Court followed the Commissionâs suggestion, there would have been no Italian products suffering the highest tax rate. This would have raised the question of the protection of Italian products. As it happened, by choosing the category of cars, Italian petrol cars were taxed
So, does the Court first examine the intention behind the national legislation and then select the products? This is also another contentious argument to make. One could conclude that a possible way of explaining the Courtâs diverging behaviour concerning product organisation is that, in some cases, the Court seems to say that everything is comparable. In contrast, in other cases, it is also a very close and objective distinction which could have been previously disregarded. So, how could one conclude what the Court would decide when interpreting Article 110 TFEU?
First, the Court looks to the intent underlying the statute. If the law discriminates between domestic and foreign products, the Court will strike down the law since it intends to protect domestic production. On the other hand, if the statute is not formally discriminatory and pursues a policy that does not discriminate between products based on nationality, then it will be upheld. However, one has to consider the following considerations. Suppose the law is formally non-discriminatory but is intended to operate politically so that only domestic products qualify for prevention and treatment. In that case, the Court may strike it down since the notion presumed is to intend to protect domestic production. Secondly, suppose the law is formally non-discriminatory but operates so that a significant amount of the foreign product is denied the full preferential tax treatment. In that case, the Court may also strike down the national legislation since there is evidence of the protection of domestic production. For example, if only the domestic product is in the low-tax band, and only the following products are in the high-tax band, the presumption of protection is the strongest. If a mixture of foreign and domestic production is in the lower band, and only the following goods are in the high end, then the presumption of protection is stronger but not as strong as in the previous case. If only domestic production is in the low-tax strength and the mixture of foreign and domestic is in the high-tax band, then the presumption of protectionism is weak. Finally, where even a mixture of both domestic and foreign goods appear in both categories, then there is probably no presumption of any protectionism.
Regarding the connection with the intended effect, the Court will strike down the tax if the law has a protectionist purpose. On the other hand, if the effect is protectionist but the purpose is not met, the Court may still uphold the law. What does one mean by protectionist or discriminatory law? The
3 The Nationality Hypothesis through the CJEUâs cases
A good way of examining the hypothesis that the Court of Justice strikes down any internal tax law that can be deemed protectionist is by comparing several similar cases and seeing each caseâs outcome.
3.1 Danish Fruit 4 v John Walker5
In Denmark, the production of grapes and grape wine is practically impossible. There is, however, a substantial production of fruit wine, mostly from apples. Danish legislation taxed grape wine of the table type at a rate of DKR 10.725 per litre and grape wine of the liquor type at DKR 19.93 per litre. Fruit wine of the table type was taxed at DKR 6.92, and fruit wine of the liquor type at DKR 11.02 per litre. The total consumption of grape wine of both types was much greater than the total consumption of food wine of both types; however, the consumption of food wine of the liquor type was almost all produced in Denmark, while consumption of the grape wine of the liquor type has decreased in absolute numbers. The European Commission brought an action against Denmark, arguing that the tax was discriminatory. Grape and fruit wine should be considered similar by the legislator and taxed similarly, even if the two are not similar. The Commission argued that the two types of wine were at least in competition and that the tax system afforded indirect protection to domestic production.
The Court did not completely follow the AGâs suggestion. In a rather short judgement, it was first noticed that the grape wine consumed in Denmark was completely imported while fruit wine of the liquor type was essentially domestic. Two-thirds of the fruit wine of the table type was domestically produced. It then pointed out that fruit wine of the table type has traditionally represented an essential market for domestic producers. It stated that to determine whether two products are similar, it is necessary to consider the objective characteristics of both categories of beverages, including their origin, method of manufacture, and other organoleptic properties. Then, they have to verify whether they meet the same consumer needs, keeping in mind that the test should not be assessed based on current consumer habits but rather take into account the prospective developments of these habits.
In the comparative case, a Danish court made a preliminary reference to the CJEU concerning the system of taxation and spirits in Denmark, particularly the Johnnie Walker case. In Denmark, spirits were taxed at a specific rate per litre of pure alcohol and an ad valorem duty. As one has already observed, the fruit wine of the liquor type was taxed according to different criteria, leading to an inferior global burden. Fruit wine of the liquor type is not considered spirit if the final alcoholic strength is less than 20%, even if ethyl alcohol was added to reach the desired strength. Walker, who exported whiskey to Denmark, argued that the taxation system was discriminatory. It favoured fruit liquors whose
In line with the Advocate Generalâs opinion, the Court denied that fruit wine and whiskey could be considered similar products. The Court pointed out that the physical characteristics and consumer needs should be given equal weight. The Court then stressed that the organoleptic qualities system of production, including fermentation and distillation, and consumersâ habits regarding alcohol level led to the conclusion that the two products were fundamentally different. The Court turned to the second paragraph of Article 110 and pointed out that about 72% of the domestic production of alcoholic beverages was in the same tax bracket as whiskey; hence, there was no protectionism in this case, and the tax regime was upheld.
3.2 Italian Sparkling Wines and Italian Marsala6 vs French Sweet Wines7
Marsala wine represented a large percentage of Italian wine production. According to the European Commission, it represented 90% of the total. The Italian system applied a manufacturing tax on domestic alcohol. In the Marsala case, the European Commission argued that the system protected the Marsala against similar competing liqueur wines imported from other Member States. Italy imposed this to help Marsala, an economically depressed region, improve economically. Italy argued that Marsala required a separate system of protection, which differentiated from any other one. In his opinion, the AG observed that the legislation was intended to encourage and protect the Marsala wine producers and that the criteria chosen by the legislator were non-objective. As a result, imported liquors were disadvantaged, with a substantial part of the domestic production taxed at a lower rate. The Court of Justice agreed with the opinion of the Advocate General. In the first place, it pointed out that only wines were similar products, which is the meaning of the first paragraph of Article 110 TFEU. It then turned to justifications brought by Italy. The Court argued that Italian law was designed in a way that would never consent to any foreign products to qualify for the designation of Marsala and, therefore, enjoy the reduced tax rate. The Italian text legislation was, therefore, clearly discriminatory.
The second challenge was requiring wines to be subjected to control guarantees equivalent to those required for national sweet wines. France justified the legislation by arguing that the production was carried out in regions with peculiar weather conditions where other agricultural products could not be produced, and the economy was largely dependent on that production. Both historical and technical significance justified the traditional requirement. Moreover, the legislation did not discriminate against other European products. For example, wine from other Member Statesâ regions that could qualify for the objective criteria could also qualify under French law. Hence, the benefits were not exclusively to domestically produced French wine.
The Court of Justice upheld the French legislation. Regarding the traditional customer requirement, the Court argued that the policy pursued by France was consistent with EU law, and two points are particularly important. First is the analysis by the Court that accepted the suggestion coming from the Advocate General and did not discuss whether or not the French requirement was justified by compelling reasons as long as it was not formally or practically discriminatory. Then, the Court rejected the second objection and argued that a Member State was free to require the legislation of other Member States, which permits verifying the compliance of a particular imported product with the requirements set out by the national legislation. The requirement was, therefore, not unnecessarily restrictive.
Hence, one can compare the French and Italian cases here. In the Marsala case, Italian law was discriminatory without objective grounds from a national perspective. Italian law wanted to protect Italian products as opposed to imported products. On the other hand, the French case did not seek to protect the domestic product but rather the disadvantaged product. This meant that French and imported disadvantaged products could enjoy the protection of
3.3 Belgian Beer8 and Wine v British Beer and Wine9
These two cases are very similar to each other. Both deal with the drinking habits of beer instead of wine in their respective countries. The UK and Belgium have temperate climates and produce more beer than wine. Both countries also have populations that enjoy drinking. There was a higher tax on imported wine than locally produced beer in the UK and Belgium. In the UK, it was clear that consumers would purchase the cheapest alcoholic drink. If the tax is at a lower rate, this means that in the UK, consumers will end up purchasing more domestically produced beer as opposed to imported wine. In fact, during the five years of its membership, the UK had a transitory period within which it was allowed to offer favourable treatment. However, when the UK continued offering favourable treatment to locally produced beer instead of imported wine, the Court found that this breached Article 110 TFEU.
In Belgium, where wine is not produced, but there is substantial beer production, wine was still subjected to a higher rate than beer. The Commission brought an action against Belgium, arguing that the tax was discriminatory because, as determined by the Court in the UK case, there was a competitive relationship between Beer and wine. The Commission took the view that once a competitive relationship has been shown, any difference in the rate of tax applied to the same taxable base is contrary to Article 110 TFUE. Belgium argued that, on the contrary, under the second paragraph of Article 110 TFUE, it is necessary to ascertain whether the difference in tax burdens will likely affect consumersâ choices. In this case, the difference in VAT rates was small and could not influence the consumerâs choice. In all the other cases, verifying the competitive relationship and actual protective effect is necessary. The Advocate General then addressed the question based on the decision of the Court, and the British case took the view that the most intense competitive relationship existed between the most commonly consumed and substantially cheaper wine and beer, which represented the wider market sector.
In this area, the Advocate General compared tax burden and used it to assess the incidence of the price index. He concluded that no protective effect was
In other words, the Belgian case was concluded differently from the British one, even though the facts were similar. The difference between the two seems to revolve around the tax system in the UK case. The UK did not deny that the system was originally designed to have a protective effect but tried to argue that there was no possibility of comparing the products. In the Belgian case, the VAT system was a general taxation system applicable to thousands of products. Coincidentally, it appeared to discriminate between foreign and domestic products somewhere over its application range. Certainly, such an effect was unintentional.
4 Conclusion
While the cases analysed above go back to the early years of the Internal Market, and they may be considered old cases, they are still highly relevant today. One would expect these judgments to remain important well into the next decade and beyond. These cases are only samples. One can also mention, for example, the Italian diesel car cases mentioned earlier in this paper and the Humblot judgment10 regarding car registration taxes, among others. The Court of Justice has mainly taken a protectionist approach in the sense that the Member States retain full freedom to impose any indirect tax they deem fit as long as the implementation of this tax is not done in such a way as to afford protection to domestically produced goods over goods imported from other Member States. Hence, one can conclude that Article 110 TFEU does present a strong element of protectionism in its implementation and ensures that Member States do not discriminate based on nationality when implementing rules and taxation. Unlike customs duties between Member States, which are
Bibliography
Bustin G., âFiscal Measures Affecting International Tradeâ; from Demaret (ed) Aides et Mesures de Sauvegarde en Droit International Economique, Fondation pour lâétude du droit et des usages du commerce international Liege, 1980 239â265.
Danusson et al. âDoes the European Court of Justice look for protectionist Motive under Article 95?â; 17 Legal Issues of Eur. Integration 67 (1990).
Easson A. âFiscal Discrimination: New Perspectives on Article 95 of the EEC Treatyâ, Common Market Law Review, 18 (1981) 521.
Evans A. âA Textbook on EU lawâ, Chapter 4 âInternal Taxationâ, Hart, Oxford, 1998.
Grabritz E. et al. âScope for Action by the EC Member States for the Improvement of Environmental Protection under EEC Law: The Example of Environmental Taxes and Subsidiesâ CMLR 26. 427â447.
Green N. et al., âThe Foundations of the Single Marketâ â Chapter 4 âInternal Taxationâ, OUP, Oxford, 1991.