Flashback on ECJ Cases C-369/04 (Hutchison 3G and Others) – Auctioning of the UMTS licences is not a taxable activity

On June 26, 2007, the ECJ issued its decision in the case C-369/04 (Hutchison 3G and Others).

Context: Sixth VAT Directive – Taxable transactions – Definition of ‘economic activity’ – Article 4(2) – Allocation of licences making it possible to use a defined part of the radio-frequency spectrum reserved for telecommunications services.

Article in the EU VAT Directive

Article 4(2) of the Sixth VAT Directive (Article 9(1) of the EU VAT Directive 2006/112/EC).

Article 9(1) (Taxable person)
1. ‘Taxable person’ shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.
Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as ‘economic activity’. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.

Facts

In spring 2000, the Secretary of State allocated the licences at issue in the main proceedings by public auction.
The undertakings which obtained those licences were those that bid the most money for the frequency lots offered, one of those lots being reserved for a new entrant in the market. As a result of the auction, the tenderers as a whole paid a total sum of GBP 22 477 400 000.
The auction was carried out in the name of the Secretary of State by the Radiocommunications Agency, which is an executive agency of the Department of Trade and Industry. No reference to VAT was made during the auction procedure.
The licences thus allocated will expire on 31 December 2021 unless revoked earlier by the Secretary of State or surrendered by the licensee.
As they consider that those allocations were subject to VAT and that the VAT was included in the amounts paid, the tendering companies sought to recover the sums which they claim to have paid as VAT under the national legislation which transposed Article 17 of the Sixth Directive. As their claims were rejected on the ground that the grant of the licences at issue in the main proceedings was not subject to VAT, they brought an action before the VAT and Duties Tribunal, London.

Questions

(1) In the circumstances set out in the Agreed Statement of Facts …, is the term “economic activity” for the purposes of Article 4(1) and (2) of the Sixth Directive to be interpreted as including the issuing of third-generation mobile telecommunications licences by the Secretary of State … by auction of rights to use telecommunications equipment in defined parts of the electromagnetic spectrum (“the activity”), and what considerations are relevant to that question?

(2) In the circumstances set out in the Agreed Statement of Facts what considerations are relevant to the question whether or not the Secretary of State, in conducting the activity, was acting as a “public authority” within the meaning of Article 4(5) of the Sixth Directive?

(3) In the circumstances set out in the Agreed Statement of Facts, can the activity be (i) in part an economic activity and in part not, and/or (ii) partly carried out by a body governed by public law acting as a public authority and partly not, with the result that the activity would be partly chargeable to VAT under the Sixth Directive and partly not?

(4) How likely and how close in time to the carrying out of an activity such as the activity does a “significant distortion of competition” within the meaning of the second subparagraph of Article 4(5) of the Sixth Directive have to be in order for the person carrying out that activity to be required by that subparagraph to be considered a taxable person in respect of that activity? To what extent, if any, does the principle of fiscal neutrality bear on that question?

(5) Does the word “telecommunications” in Annex D to the Sixth Directive (which is referred to in the third subparagraph of Article 4(5) of the Sixth Directive) include the issuing of third-generation mobile telecommunications licences by the Secretary of State auction of rights to use telecommunications equipment in defined parts of the electromagnetic spectrum, in the circumstances set out in the Agreed Statement of Facts?

(6) Where (i) a Member State chooses to implement Article 4(1) and (5) of the Sixth Directive by legislation conferring on a Government department (such as, in this case, the United Kingdom Treasury) a statutory power to make directions specifying which goods or services supplied by Government departments are to be treated as taxable supplies and (ii) that Government department makes, or purports to make, pursuant to that statutory power, directions specifying that certain supplies are taxable: is the principle set out in Case C-106/89 Marleasing [1990] ECR I-4135, paragraph 8, relevant to the interpretation of the domestic legislation and of those directions (and if so, how)?

AG Opinion

(1) In the circumstances of the main proceedings the auctioning by a State body of licences encompassing the right to use defined parts of the electro-magnetic spectrum to supply UMTS mobile communications services for a specified period of time is to be considered exploitation of intangible property for the purpose of obtaining income therefrom on a continuing basis and is therefore to be considered an economic activity for the purposes of Article 4(1) and (2) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment.

(2) As things stand at present, the term ‘telecommunications’ in point 1 of Annex D to the Sixth Directive does not include the auctioning of UMTS licences by the State.

(3) Activities pursued by bodies governed by public law under a special legal regime applicable to them are to be considered activities engaged in as public authorities within the meaning of the first subparagraph of Article 4(5) of the Sixth Directive. The exercise of public authority is not precluded by the fact that, in fulfilling the responsibilities exclusively allocated to it, the State makes use of a procedure derived from civil law or receives a high amount of revenue from its activity.

(4) A significant distortion of competition within the meaning of the second subparagraph of Article 4(5) of the Sixth Directive only exists where there is a real risk that treatment of the State as a non-taxable person has a materially adverse effect on the competitive position of present or potential providers of competing supplies. No such risk exists, in principle, where at the time of the transactions by the State, private-sector suppliers are precluded by the overall legal regime from bringing supplies onto the market that are in competition with State supplies.

(5) Where a Member State chooses to implement Articles 4(1) and 4(5) of the Sixth Directive by legislation conferring on a Government department a statutory power to make directions specifying which transactions by Government departments are to be treated as taxable transactions and where the Government department exercises that power, a national court applying that legislation is bound to interpret national law, so far as possible, in the light of the wording and the purpose of the Sixth Directive in order to achieve the result sought by the Directive and consequently comply with the third paragraph of Article 249 EC.

Decision

Article 4(1) and (2) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment is to be interpreted as meaning that the issuing of licences, such as third generation mobile telecommunications licences known as ‘UMTS’, by auction by the national regulatory authority responsible for spectrum assignment of the rights to use telecommunications equipment does not constitute an economic activity within the meaning of that provision and, consequently, does not fall within the scope of that directive.

Summary

Article 4(1) and (2) of the Sixth Directive must be interpreted as meaning that the issuance, by the national regulatory authority responsible for spectrum allocation, of licenses such as third-generation mobile telecommunications licences, known as ‘ UMTS’ licenses, through an auction of the rights to use telecommunications equipment, does not constitute an economic activity within the meaning of that provision and therefore does not fall within the scope of that directive.

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