Flashback on ECJ cases C-409/99 (Metropol and Stadler) – Deduction of input tax – Exclusions provided for under national law at the time of entry into force of the Directive

On January 8, 2002, the ECJ issued its decision in the case C-409/99 (Metropol and Stadler).

Context: Sixth VAT Directive – Article 17(6) and (7) – Right to deduct input VAT – Exclusions provided for under national laws at the date of entry into force of the directive – Exclusions for cyclical economic reasons – Consultation of the Advisory Committee on value added tax.

Article in the EU VAT Directive

Article 17(6) and 17(7) of the Sixth VAT Directive (Articles 176 and 177 of the EU VAT Directive 2006/112/EC).

Article 176 (Restrictions on the right of deduction)
The Council, acting unanimously on a proposal from the Commission, shall determine the expenditure in respect of which VAT shall not be deductible. VAT shall in no circumstances be deductible in respect of expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.
Pending the entry into force of the provisions referred to in the first paragraph, Member States may retain all the exclusions provided for under their national laws at 1 January 1979 or, in the case of the Member States which acceded to the Community after that date, on the date of their accession.

Article 177
After consulting the VAT Committee, each Member State may, for cyclical economic reasons, totally or partly exclude all or some capital goods or other goods from the system of deductions.
In order to maintain identical conditions of competition, Member States may, instead of refusing deduction, tax goods manufactured by the taxable person himself or goods which he has purchased within the Community, or imported, in such a way that the tax does not exceed the amount of VAT which would be charged on the acquisition of similar goods.

In its tax declarations for 1996 and 1997 Metropol applied to deduct the input VAT paid for the use of a Pontiac TransSport vehicle.
By assessment of 27 April 1998 the Finanzamt (Tax Office) assessed the VAT due for 1996 without deducting the input VAT paid for use of the vehicle. On the other hand, by assessment of 6 November 1998, for calculating the VAT due for 1997, it deducted the input VAT paid for the use of the vehicle.
By decision of 9 July 1998, the Finanzlandesdirektion für Steiermark dismissed as unfounded Metropol’s appeal against to the 1996 assessment. It observed that, while Pontiac TransSport vehicles had indeed been classified as minibuses and had consequently been eligible for deduction of VAT until the entry into force of the 1996 regulations, it was common ground that those vehicles did not fall within the definition of small buses laid down by that order. Consequently, being regarded since 15 February 1996 as cars, they were now excluded from the right to deduct. According to the Finanzlandesdirektion für Steiermark, this new state of the law was consistent with the second subparagraph of Article 17(6) of the Sixth Directive, since the definition in the 1996 regulations was based on case-law of the Verwaltungsgerichtshof from before 1995. The regulations merely corrected an overly liberal administrative practice.
By decision of 21 December 1998, the Finanzlandesdirektion für Steiermark, in the exercise of its supervisory power, of its own motion annulled the 1997 assessment on the ground that the deduction in question had been allowed contrary to the applicable legislation.
Metropol brought proceedings in the Verwaltungsgerichtshof against the decisions of the Finanzlandesdirektion für Steiermark of 9 July and 21 December 1998.
Mr Stadler applied, in his tax declarations for 1996, to deduct the input VAT paid for the use of a Fiat Ulysse vehicle. He claimed that the restrictions of the right to deduct input VAT paid for the use of minibuses introduced by the 1996 budgetary economy measures were contrary to the Sixth Directive.
By assessment of 1 December 1997, the Finanzamt refused to allow deduction of the input VAT paid for the use of Mr Stadler’s Fiat Ulysse vehicle.
By decision of 8 March 1999, the Finanzlandesdirektion für Vorarlberg dismissed Mr Stadler’s appeal against the assessment. In its decision it observed that the terms car and mixed vehicle used in Paragraph 12(2)(2)(b) of the UStG 1994 had been redefined by the 1996 regulations to reflect the case-law of the Verwaltungsgerichtshof. There had been no extension of the scope of the exclusions of the right to deduct VAT contrary to Article 17(6) of the Sixth Directive, because the 1996 regulations merely implemented that provision of the UStG 1994.
Mr Stadler brought proceedings in the Verwaltungsgerichtshof against that decision.
The Verwaltungsgerichtshof notes that since 1 January 1978 the VAT paid on the acquisition, hire or use of cars, mixed vehicles or motor cycles has in principle been excluded from the right to deduct in Austria.
However, neither the definition of cars and mixed vehicles nor the distinction between that category and that of lorries and minibuses, for which VAT may be deducted, follows from Paragraph 12(2)(2)(c) of the UStG 1972, which was applicable until 31 December 1994, or from Paragraph 12(2)(2)(b) of the UStG 1994, which replaced it from 1 January 1995.
In the 1987 circular addressed to the tax authorities, the Federal Minister for Finance set out the criteria by which a minibus could be distinguished from a car. That circular, which as a ministerial instruction was binding on the public authorities, formed the legal basis of a consistent administrative practice. If a motor vehicle satisfied the definition of a minibus in the 1987 circular and was used predominantly for business purposes, the tax authorities in practice systematically allowed the input VAT paid on that vehicle to be deducted.
According to the Verwaltungsgerichtshof, on the basis of that administrative practice, deduction of the input VAT paid on Pontiac TransSport and Fiat Ulysse vehicles, which were regarded as minibuses, was allowed until 15 February 1996. From that date it was excluded by the 1996 regulations, which define the characteristics of minibuses more strictly than the previous administrative practice did. It is not disputed in the main proceedings that those vehicles do not satisfy the new conditions.
The Verwaltungsgerichtshof states that the regulations classifying the vehicles for tax purposes are binding on the tax authorities and also on itself in the context of interpreting Paragraph 12(2)(2)(b) of the UStG 1994.
It states that the explanations in the Government proposal which led to the Strukturanpassungsgesetz 1996 show that that law was thought of as part of a consolidation programme intended to reduce the budget deficit and enable State debt to be repaid.

Questions

1. Is the second subparagraph of Article 17(6) 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 to be interpreted as precluding a Member State from excluding the right to deduct input tax in respect of certain vehicles after the entry into force of the directive, if before its entry into force input tax was deductible in respect of those vehicles by virtue of the administrative authorities’ actual practice?

2. If the answer to Question 1 is yes, is the first sentence of Article 17(7) 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 to be interpreted as authorising a Member State, without prior consultation as provided for in Article 29 of the directive, to extend the exclusions from the right to deduct input tax in the manner described in Question 1 for an indefinite period in order to consolidate its budget?

AG Opinion

First question: On the basis of the second subparagraph of Article 17(6) 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, a Member State is precluded from excluding the right to deduct VAT in respect of certain vehicles after the entry into force of the Directive, if at the time of its entry into force VAT was deductible under an established national administrative practice.

Second question: Article 17(7) of the Directive does not allow an exclusion from the right to deduct VAT to be introduced for cyclical economic reasons without prior consultation of the committee provided for in Article 29 of the Directive. Moreover, the limitation in Article 17(7) to exclusions for cyclical economic reasons entails that, as a matter of principle, the exclusions must apply for a specific period of time and, in any case, may not be structural in nature.

Decision

1. The second subparagraph of Article 17(6) 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 – precludes a Member State from excluding, after the entry into force of the Sixth Directive, expenditure relating to certain motor vehicles from the right to deduct value added tax where, at the date of entry into force of that directive, that expenditure gave rise to the right to deduct value added tax in accordance with a consistent practice of the public authorities of that State on the basis of a ministerial circular.

2. The first sentence of Article 17(7) of the Sixth Directive must be interpreted as not authorising a Member State to exclude goods from the system of deducting value added tax without first consulting the committee provided for in Article 29 of the directive. That provision also does not authorise a Member State to adopt measures excluding goods from the system of deducting value added tax which contain no indication as to their limitation in time and/or which form part of a package of structural adjustment measures whose aim is to reduce the budget deficit and allow State debt to be repaid.

Summary

Deduction of input tax – Exclusions provided for under national law at the time of entry into force of the Directive

It is not permitted for a Member State, after the entry into force of the Sixth Directive, to exclude expenditure on certain motor vehicles from the right to deduct VAT if, at the time of the entry into force of this Directive, such expenditure was subject to a right to deduct VAT under a established practice of the public authorities of this Member State, based on a ministerial decision.

A Member State may not exclude goods from the VAT deduction scheme without the prior consultation of the Committee referred to in Article 29 of the Sixth Directive. On the basis of this provision, a Member State may also not adopt measures to exclude goods from the VAT deduction scheme which do not contain further provisions on their limitation in time and/or which are part of a package of structural adjustment measures aimed at reducing the budget deficit and repayment of the national debt.

Source