Flashback on ECJ Cases – C-440/12 (Metropol Spielstätten) – Regulation of a Member State subjecting the operation of low-price slot machines to VAT and special tax cumulatively

On October 24, 2013, the ECJ issued its decision in the case C-440/12 (Metropol Spielstätten).

Context: Taxation – VAT – Betting and gaming – Legislation of a Member State under which VAT and a special tax are to be levied cumulatively on the operation of low-prize slot machines – Whether permissible – Basis of assessment – Whether the taxable person can pass on the VAT

Article in the EU VAT Directive

Articles 1(2), 73, 135(1)(i), 401 of the EU VAT Directive 2006/112/EC

Article 1 (Subject Matter and Scope)

2. The principle of the common system of VAT entails the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, however many transactions take place in the production and distribution process before the stage at which the tax is charged.

Article 73 (Taxable amount)

In respect of the supply of goods or services, other than as referred to in Articles 74 to 77, the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply.

Article 135 (Exemption)

1. Member States shall exempt the following transactions:

(i) betting, lotteries and other forms of gambling, subject to the conditions and limitations laid down by each Member State;

Article 401 (Other Taxes, Duties and Charges)

Without prejudice to other provisions of Community law, this Directive shall not prevent a Member State from maintaining or introducing taxes on insurance contracts, taxes on betting and gambling, excise duties, stamp duties or, more generally, any taxes, duties or charges which cannot be characterised as turnover taxes, provided that the collecting of those taxes, duties or charges does not give rise, in trade between Member States, to formalities connected with the crossing of frontiers.

Facts

During the 2010 financial year, Metropol operated gaming machines in seven gaming halls in the Länder of Hamburg, Schleswig-Holstein and Mecklenburg-Western Pomerania. Pursuant to the local legislation of the municipalities concerned in Schleswig‑Holstein and Mecklenburg-Western Pomerania and to a Law of the Land of Hamburg, the operation of such machines is subject to an entertainment tax which is calculated using rates and bases of assessment which differ from municipality to municipality.
The balance of cash box contents for each gaming machine (‘the cash receipts’) – that is to say, the money inserted by players less the money paid out as winnings, plus withdrawals less replenishment of machines – was noted by Metropol each month using an electronic monitoring device. Besides the cash box, the gaming machines are fitted with a ‘hopper’, that is to say, a device for holding and dispensing coins. The hopper has one drawer for 20-centime coins and another drawer for 2-euro coins and is filled by the operator whenever the machine is going to be put into operation. All 20-centime and 2-euro coins inserted by players fall into the hopper until it is full and any surplus is then automatically diverted into the cash box. Other coins inserted and any notes always pass directly into the cash box, the contents of which are counted electronically. Any changes in the contents of the hopper are recorded by the monitoring device and are also taken into account when it comes to calculating the cash receipts.
The gaming machines have a money counter and a ‘points’ counter. Any money inserted into the machine creates an initial credit on the money counter. The conversion of money to points is recorded by the machine as a ‘stake’, while the conversion of points to money is recorded as ‘winnings’, with one point being equivalent to one centime. Points enable the player to start the game. At any time, the player can convert the number of points awarded and recorded on the points counter into a sum of money recorded on the money counter, which can be paid out at any time.
A twofold limitation is placed on any conversion of cash on the money counter to points on the points counter (a ‘stake’ for the purposes of the SpielV): it cannot exceed 20 centimes every 5 seconds, or EUR 80 every hour, after winnings have been deducted. In the event that the EUR 80 limit is reached during a given hour, no further transfers from the money counter to the points counter may be made for the remainder of that hour (‘transfer break’). Changes made to the number of points on the points counter (in layman’s terms: stakes, losses or winnings) are unregulated by legislation.
The yearly total of monthly cash receipts from all Metropol’s gaming machines in the 2010 financial year (‘gross cash’) amounted to EUR 1 018 041.78. On the basis of the standard German VAT rate of 19%, Metropol used that figure to calculate a taxable amount for VAT of EUR 855 497.29 (‘net cash’, 100/119 of EUR 1 018 041.78) and turnover on the operation of gaming machines totalling EUR 162 544.49, representing almost the entirety of the VAT owed. The VAT chargeable on all the other taxable transactions carried out by Metropol is EUR 1 790.20. As Metropol had paid input VAT in the amount of EUR 69 355.76, the Finanzamt, by an assessment notice of 29 March 2012, set the amount of VAT still owed at EUR 94 978.93.
Metropol has brought an action contesting that notice before the Finanzgericht Hamburg (Finance Court, Hamburg), the referring court, on the view that the methods used to tax gaming machine turnover are contrary to EU law and, in particular, contrary to the principles of proportionality, pass-through and VAT neutrality. Accordingly, Metropol claims that the Finanzgericht Hamburg should amend the VAT assessment notice for the 2010 financial year by reducing the amount of VAT still owed from EUR 94 978.93 to EUR 1 790.20. The Finanzamt contends that the action should be dismissed.
With regard to that action, the Finanzgericht Hamburg points out, first, that, in other fields, a tax which is sufficiently distinct from VAT may be levied alongside VAT.
Secondly, the Finanzgericht Hamburg finds that, pursuant to the first sentence of Article 1(2) of the VAT Directive, VAT must be exactly proportional to the price of the services supplied. It is true that, in Case C‑38/93 Glawe [1994] ECR I‑1679, the Court ruled that the taxable amount for the slot machines at issue in that case, which were set in such a way as to pay out as winnings a certain percentage of the stakes inserted, did not include the statutorily prescribed proportion of the total stakes inserted which corresponds to the winnings paid out to the players. On the basis of that case-law, it became common practice in Germany to take as the taxable amount not the total of all stakes inserted but only the contents of the cash box, generally over the period of one calendar month. However, the monthly cash receipts depend on the winnings and losses of the various players, with the result that there is then no correlation between the VAT which can be charged and the stake paid by the individual player.
In addition, the Finanzgericht Hamburg states that the minimum win ratio of 60% which was in force in Germany until the end of 2005 was replaced in 2006 by limits on stakes and losses over a given period of time. From a technical point of view, ‘hoppers’, which are a new development in gaming machines, admittedly perform in principle the same function as the old ‘reserve compartments’ did in Glawe, but operators are able to access the contents of ‘hoppers’ at any time.
Thirdly, the Finanzgericht Hamburg expresses doubts regarding the interpretation of paragraph 24 of the judgment in Joined Cases C‑338/97, C‑344/97 and C‑390/97 Pelzl and Others [1999] ECR I‑3319 and paragraphs 28, 31, 34 and 37 of the judgment in Case C‑475/03 Banca popolare di Cremona [2006] ECR I‑9373, according to which it is a characteristic of VAT that it can be passed on to the final consumer. It is not clear from those judgments whether the possibility of passing on VAT is simply a typical characteristic of VAT or whether it is a precondition for charging VAT. If prices are subject to restrictions, as in the case before the referring court, a trader cannot increase the price of the supply of services and pass the VAT on to the consumer if, by its calculations, it has already reached the upper end of the maximum price range permitted.
Fourthly, the Finanzgericht Hamburg states that, in Germany, betting and gaming are governed by two different legal regimes. Thus, casino operators must possess a licence, and stakes and winnings are in principle unlimited. Under the Laws of the Länder of Hamburg, Schleswig-Holstein and Mecklenburg-Western Pomerania on casinos, those operators must pay a special casino tax, set in such a way as to cream off most of their profits. By contrast, the establishment of gaming halls is, in principle, unrestricted, albeit subject to official supervision and legally regulated. As a general rule, gaming hall operators are subject to a special local entertainment tax.
As the VAT exemption previously granted to casinos was repealed in 2006, such establishments then became liable to pay VAT, which was offset against the casino tax (since the casino tax was higher than the VAT). According to the Finanzgericht Hamburg, the system of taxation thus provided for could enable the principle of fiscal neutrality to be undermined, as a Member State could introduce, for two comparable groups of taxable persons, a special national tax which cannot be characterised as turnover tax while making provision, applicable to only one of those groups, for VAT to be offset against that special tax. However, that did not happen in the case currently before it.
Lastly, according to the Finanzgericht Hamburg, the legislation at issue in the case before it does not give persons liable for VAT an incentive to ensure that proper invoices are drawn up in respect of transactions from which they derive proceeds, since, if invoices are lacking or contain irregularities, those persons may well be denied the right to deduct the input VAT paid, but as the – then higher – VAT chargeable can be offset against the casino tax, this will have no economic effect as far as they are concerned.

Questions

Is Article 401 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, read in combination with Article 135(1)(i) of that directive, to be interpreted as meaning that value added tax and a national special tax on games of chance may be levied only as alternatives, and not cumulatively?

Only if the answer to Question 1 is in the affirmative:

If, under national provisions, both value added tax and a special tax are levied on games of chance, does this mean that value added tax is not levied or that the special tax is not levied, or does the decision as to which of the two taxes may not be levied depend on national law?
Are the first sentence of Article 1(2) and Article 73 of Directive 2006/112 to be interpreted as precluding a national provision or practice whereby, in the operation of gaming machines offering the possibility of winning, the content of the machine’s cash box (‘electronically counted cash box’) serves as a basis of assessment after a certain period of time?

Only if the answer to Question 3 is in the affirmative:

How is the basis of assessment otherwise to be determined?
Are the first sentence of Article 1(2) and Article 73 of Directive 2006/112 to be interpreted as meaning that the levying of VAT is subject to the condition that the trader can pass the value added tax on to the recipient of the supply? If so, what is to be understood by the ability to pass on the tax? In particular, is the legal permissibility of a correspondingly higher price for the product or service an attribute of the ability to pass that tax on?

Only if in answer to Question 5 the legal permissibility of a higher price is a precondition:

Are the first sentence of Article 1(2) and Article 73 of Directive 2006/112 to be interpreted as meaning that provisions which limit the consideration for goods or services subject to value added tax are to be applied in accordance with European Union law in such a way that value added tax is understood not to be included in the consideration set but to be in addition to it, even where, according to their wording, the national provisions governing consideration do not expressly so provide?

Only if the answer to Question 5 is in the affirmative and the answers to Questions 6 and 3 are in the negative:

In the present case, is no value added tax to be levied on the total turnover of the gaming machines, or is it to be levied only on the part that cannot be passed on, and how is that part to be determined: for example, on the turnover at which the stake per game could not be increased, or on the turnover at which the contents of the cash box per hour could not be increased?
Is Article 1(2) of Directive 2006/112 to he interpreted as precluding a national regulation on an unharmonised tax under which the value added tax owed is set in full against that tax?

Only if the answer to Question 8 is in the affirmative:

Does the setting of value added tax against a national, unharmonised tax in the case of traders liable to pay the latter tax have the effect that value added tax may not be levied on their competitors who, though not subject to this unharmonised tax, are subject to another special tax and for whom there is no provision for such offsetting?

AG Opinion

None

Decision

1. Article 401 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, read in conjunction with Article 135(1)(i) thereof, must be interpreted as meaning that value added tax and a special national tax on games of chance may be levied cumulatively, provided that the special national tax cannot be characterised as a tax on turnover.

2. The first sentence of Article 1(2) and Article 73 of Directive 2006/112 must be interpreted as not precluding a national provision or practice whereby, in the operation of gaming machines offering the possibility of winnings, the amount of the cash receipts from those machines is used after a set interval as the basis of assessment.

3. Article 1(2) of Directive 2006/112 must be interpreted as not precluding a national system regulating an unharmonised tax, under which the value added tax owed is to be set in full against that tax.

Summary

Regulation of a Member State subjecting the operation of low-price slot machines to VAT and special tax cumulatively

The VAT and a national special tax on games of chance may be levied cumulatively on the basis of Article 401 of the VAT Directive, provided that the latter tax does not have the character of a turnover tax.

The first sentence of Article 1(2) and 73 of the VAT Directive must be interpreted as not precluding a national provision or practice according to which, in the operation of money-making slot machines, cash receipts for a specific period are used as the taxable amount.

Article 1(2) of the VAT Directive must be interpreted as not precluding national legislation of a non-harmonized tax under which the VAT due is deducted in full from that first tax.

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