Flashback on ECJ Cases – C-288/07 (Isle of Wight Council and Others) – Ruling on the meaning of significant distortion of competition

On September 16, 2008, the ECJ issued its Order in the case C-288/07 (Isle of Wight Council and Others).

Context: Sixth VAT Directive – Article 4(5) – Activities engaged in by bodies governed by public law – Provision of off-street car-parking facilities for which a charge is made – Distortions of competition – Meaning of ‘would lead to’ and ‘significant’

Article in the EU VAT Directive

Article 4(5) of the Sixth VAT Directive (Article 13 of the EU VAT Directive 2006/112/EC).

Article 13 (Public bodies)
1. States, regional and local government authorities and other bodies governed by public law shall not be regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with those activities or transactions.
However, when they engage in such activities or transactions, they shall be regarded as taxable persons in respect of those activities or transactions where their treatment as non-taxable persons would lead to significant distortions of competition.
In any event, bodies governed by public law shall be regarded as taxable persons in respect of the activities listed in Annex I, provided that those activities are not carried out on such a small scale as to be negligible.
2. Member States may regard activities, exempt under Articles 132, 135, 136 and 371, Articles 374 to 377, Article 378(2), Article 379(2) or Articles 380 to 390b, engaged in by bodies governed by public law as activities in which those bodies engage as public authorities.

Facts

The local authorities concerned provide off-street car-parking facilities. The private sector also provides like facilities.
Historically, the local authorities in the United Kingdom accepted that they were accountable for VAT on their revenue from the provision of off-street parking. However, following the decision in Case C‑446/98 Fazenda Pública [2000] ECR I‑11435, some 127 local authorities made claims for repayment of the VAT they had previously paid, taking the view by reason of the first subparagraph of Article 4(5) of the Sixth Directive that they should not have been accountable for that VAT. The total of the claims made for repayment amounts to GBP 129 million. As regards the total sum which could be reclaimed, it is stated in the order for reference that there are some 468 local authorities in the United Kingdom of Great Britain and Northern Ireland.
In the cases in the main proceedings, the claims amount to GBP 1.6 million. The referring court indicates that these cases are test cases as the local authorities concerned form a representative cross-section of all local authorities. The Isle of Wight Council, Mid-Suffolk District Council, South Tyneside Metropolitan Borough Council and West Berkshire District Council administer, respectively, an island, a rural area, an urban area and a provincial region.
Since the local authorities concerned concluded that under a correct interpretation of Community law they were not subject to VAT for the activities in question, they claimed repayment of the VAT previously paid. However, the Commissioners refused such repayment. Consequently, those local authorities appealed against the Commissioners’ decision to the VAT and Duties Tribunal, London. Having held that the question of the exemption from VAT of bodies governed by public law on the basis of the second subparagraph of Article 4(5) of the Sixth Directive must be dealt with separately for each of the local authorities concerned, that is on a ‘taxable person by taxable person’ basis, the VAT and Duties Tribunal, London, concluded that the exemption of those authorities from VAT did not lead to significant distortions of competition. Each of those authorities was thus exempt from VAT in respect of its revenue from the provision of off-street parking.
The Commissioners appealed against the decision of the VAT and Duties Tribunal, London, to the Chancery Division of the High Court of Justice of England and Wales. Their principal argument is that Article 4(5) of the Sixth Directive is of national scope which requires that there should be an investigation of the nationwide impact on the private sector generally of the exemption of local authorities from VAT on the provision of off-street parking. Their appeal also concerns the meaning of the words ‘would lead to’ and ‘significant’ in the passage comprised of the words ‘where treatment as non-taxable persons would lead to significant distortions of competition’ in the second subparagraph of Article 4(5) of the Sixth Directive.

Questions

Is the expression “distortions of competition” to be ascertained on a public body by public body basis such that, in the context of the present case, it should be determined by reference to the area or areas where the particular body in question provides off-street parking or by reference to the totality of the national territory of the Member States?

What is meant by the expression “would lead to”? In particular, what degree of probability or level of certainty is required for that condition to be satisfied?

What is meant by the word “significant”? In particular, does “significant” mean an effect on competition that is more than trivial or de minimis, a “material” effect or an “exceptional” effect?

AG Opinion

(1) The second subparagraph of Article 4(5) 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, must be interpreted as meaning that it is incumbent upon the Member States, within the framework of the discretion that is accorded to them for implementation of that provision, to determine on the basis of the activities concerned whether there would be a risk of distortion of competition if bodies governed by public law engaging in those activities as public authorities were not taxable persons for VAT purposes.

(2) The words ‘would lead to’ must be understood as including both actual competition and potential competition in so far as the possibility of the latter is real.

(3) The word ‘significant’ does not imply that the distortion of competition is trivial or exceptional, but that it is out of the ordinary. The interpretation of such a concept falls within the discretion of the Member States inasmuch as it can acquire its meaning only in the context in which it is applied, provided that that interpretation complies with the objectives, as have been specified, of Directive 77/388.

Decision

1. The second subparagraph of Article 4(5) 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 significant distortions of competition, to which the treatment as non-taxable persons of bodies governed by public law acting as public authorities would lead, must be evaluated by reference to the activity in question, as such, without such evaluation relating to any local market in particular.

2. The expression ‘would lead to’ is, for the purposes of the second subparagraph of Article 4(5) of Sixth Council Directive 77/388, to be interpreted as encompassing not only actual competition, but also potential competition, provided that the possibility of a private operator entering the relevant market is real, and not purely hypothetical.

3. The word ‘significant’ is, for the purposes of the second subparagraph of Article 4(5) of Sixth Council Directive 77/388, to be understood as meaning that the actual or potential distortions of competition must be more than negligible.

Order January 30, 2009

1. Paragraph 53 of the grounds of that judgment must read as follows:

‘Accordingly, the reply to the first question must be that the second subparagraph of Article 4(5) of the Sixth Directive is to be interpreted as meaning that the significant distortions of competition, to which the treatment as non-taxable persons of bodies governed by public law acting as public authorities would lead, must be evaluated by reference to the activity in question, as such, without such evaluation relating to any local market in particular.’

2. Point 1 of the operative part of that judgment must read as follows:

‘The second subparagraph of Article 4(5) 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 significant distortions of competition, to which the treatment as non-taxable persons of bodies governed by public law acting as public authorities would lead, must be evaluated by reference to the activity in question, as such, without such evaluation relating to any local market in particular.’

3. The original of this order shall be annexed to the original of the rectified judgment. A note of this order shall be made in the margin of the original of that judgment.

Personal comments/VATupdate

ECJ held that bodies governed by public law, even when they act as public authorities, are to be considered taxable persons where their treatment as non-taxable persons would lead to significant distortions of competition. The word ‘significant’ meaning that the actual or potential distortions of competition must be more than negligible.

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