OPINION OF ADVOCATE GENERAL
KOKOTT
delivered on 24 February 2005(1)
Case C-305/03
Commission of the European Communities
v
United Kingdom of Great Britain and Northern Ireland
(Value added tax – Reduced rate of tax – Importation of works of art, collectors' items and antiques – Public auction of goods subject to temporary importation arrangements – Auctioneer's margin)
I – Introduction
1. The centre of the European art trade is in the United Kingdom, especially London. (2) It is not uncommon for works of art, collectors’ items and antiques (referred to collectively below as ‘works of art’) to be brought into the United Kingdom from non-member countries temporarily for the sole purpose of being auctioned by an auction house and then exported to non-member countries again.
2. The import and supply of the goods remain free of value added tax if they are subjected to the special customs arrangements for the temporary importation of goods into the Community. Only if the items are definitively imported into the Community after the auction does value added tax become chargeable. The present proceedings for breach of Treaty obligations have their origin primarily in the lack of clarity as to the extent of those special arrangements for works of art temporarily imported.
3. In the United Kingdom the auction price including the auctioneer’s margin is taken as the taxable amount. That sum is reduced, in accordance with the special provisions for the import of works of art, in such a way that the value added tax is ultimately 5% of the price. One could also speak here of an effective tax rate of 5%.
4. In the Commission’s opinion, that practice infringes 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 (‘the Sixth Directive’). (3) The Commission tak tak es the view that the standard rate of tax of – in the United Kingdom – 17.5% applies to the auctioneer’s commission, since it is to be treated as part of the consideration for a supply of goods or services within the territory of the country. The reduced rate may be applied only to the import value, that is, the auction price less the auctioneer’s margin.
II – Legal context
A – Community law
1. Relevant provisions of the Sixth Directive
5. Under Article 2 the following are subject to value added tax:
‘1. the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;
2. the importation of goods’.
6. Under Article 5(4)(c) the ‘transfer of goods pursuant to a contract under which commission is payable on purchase or sale’ is also considered to be a supply.
7. A supply of services is defined in Article 6(1) as ‘any transaction which does not constitute a supply of goods within the meaning of Article 5’.
8. The importation of goods is defined in more detail in Article 7, as follows:
‘1. “Importation of goods” shall mean:
(a) the entry into the Community of goods which do not fulfil the conditions laid down in Articles 9 and 10 of the Treaty establishing the European Economic Community [now Articles 23 EC and 24 EC] or …
(b) the entry into the Community of goods from a third territory, other than the goods covered by (a).
2. The place of import of goods shall be the Member State within the territory of which the goods are when they enter the Community.
3. Notwithstanding paragraph 2, where goods referred to in paragraph 1(a) are, on entry into the Community, placed under one of the arrangements referred to in Article 16(1)(B)(a), (b), (c) and (d), under arrangements for temporary importation with total exemption from import duty or under external transit arrangements, the place of import of such goods shall be the Member State within the territory of which they cease to be covered by those arrangements.
Similarly, when goods referred to in paragraph 1(b) are placed, on entry into the Community, under one of the procedures referred to in Article 33a(1)(b) or (c), the place of import shall be the Member State within whose territory this procedure ceases to apply.’
9. Article 11(B)(1) of the Sixth Directive contains the following rules for the taxable amount in the case of importation:
‘The taxable amount shall be the value for customs purposes, determined in accordance with the Community provisions in force; this shall also apply for the import of goods referred to in Article 7(1)(b).’
10. For works of art, Article 11(B)(6) contains the following special provisions:
‘By way of derogation from paragraphs 1 to 4, Member States which, on 1 January 1993, did not avail themselves of the option provided for in the third subparagraph of Article 12(3)(a) may provide that for imports of the works of art, collectors’ items and antiques defined in Article 26a(A)(a), (b) and (c), the taxable amount shall be equal to a fraction of the amount determined in accordance with paragraphs 1 to 4.
That fraction shall be determined in such a way that the value added tax thus due on the import is, in any event, equal to at least 5% of the amount determined in accordance with paragraphs 1 to 4.’
11. With respect to rates of tax, Article 12(3) provides:
‘(a) The standard rate of value added tax shall be fixed by each Member State as a percentage of the taxable amount and shall be the same for the supply of goods and for the supply of services. …
…
Member States may also apply either one or two reduced rates. These rates shall be fixed as a percentage of the taxable amount, which may not be less than 5%, and shall apply only to supplies of the categories of goods and services specified in Annex H.
…
(c) Member States may provide that the reduced rate, or one of the reduced rates, which they apply in accordance with the third paragraph of (a) shall also apply to imports of works of art, collectors’ items and antiques as referred to in Article 26a(A)(a), (b) and (c).’
12. Article 16 of the Sixth Directive, in the version resulting from Article 28c (E), (4) provides as follows:
‘1. Without prejudice to other Community tax provisions, Member States may, subject to the consultations provided for in Article 29, take special measures designed to exempt all or some of the following transactions, provided that they are not aimed at final use and/or consumption and that the amount of value added tax due on cessation of the arrangements on situations referred to at A to E corresponds to the amount of tax which would have been due had each of these transactions been taxed within the territory of the country:
…
E. supplies:
– of goods referred to in Article 7(1)(a) still subject to arrangements for temporary importation with total exemption from import duty or to external transit arrangements,
…
as well as supplies of services relating to such supplies.
…
When the removal of goods from the arrangements or situations referred to in this paragraph gives rise to importation within the meaning of Article 7(3), the Member State of import shall take the measures necessary to avoid double taxation within the country.’
13. Article 26a (5) contains inter alia the following special arrangements for second-hand goods, works of art, collectors’ items and antiques:
‘A. Definitions
…
(e) taxable dealer shall mean a taxable person who, in the course of his economic activity, purchases or acquires for the purposes of his undertaking, or imports with a view to resale, second-hand goods and/or works of art, collectors’ items or antiques, whether that taxable person is acting for himself or on behalf of another person pursuant to a contract under which commission is payable on purchase or sale;
(f) organiser of a sale by public auction shall mean any taxable person who, in the course of his economic activity, offers goods for sale by public auction with a view to handing them over to the highest bidder;
(g) principal of an organiser of a sale by public auction shall mean any person who transmits goods to an organiser of a sale by public auction under a contract under which commission is payable on a sale subject to the following provisions:
– the organiser of the sale by public auction offers the goods for sale in his own name but on behalf of his principal,
– the organiser of the sale by public auction hands over the goods, in his own name but on behalf of his principal, to the highest bidder at the public auction.
…
C. Special arrangements for sales by public auction
1. By way of derogation from B, Member States may determine, in accordance with the following provisions, the taxable amount of supplies of second-hand goods, works of art, collectors’ items or antiques effected by an organiser of sales by public auction, acting in his own name, pursuant to a contract under which commission is payable on the sale of those goods by public auction, on behalf of:
…
2. The taxable amount of each supply of goods referred to in paragraph 1 shall be the total amount invoiced in accordance with paragraph 4 to the purchaser by the organiser of the sale by public auction, less:
– the net amount paid or to be paid by the organiser of the sale by public auction to his principal, determined in accordance with paragraph 3,
and
– the amount of the tax due by the organiser of the sale by public auction in respect of his supply.
3. The net amount paid or to be paid by the organiser of the sale by public auction to his principal shall be equal to the difference between:
– the price of the goods at public auction,
and
– the amount of the commission obtained or to be obtained by the organiser of the sale by public auction from his principal, under the contract whereby commission is payable on the sale.
…
7. The supply of goods to a taxable person who is an organiser of sales by public auction shall be regarded as being effected when the sale of those goods by public auction is itself effected.’
14. Finally, Article 28 contains the following transitional provisions:
‘1a. Until a date which may not be later than 30 June 1999, the United Kingdom of Great Britain and Northern Ireland may, for imports of works of art, collectors’ items or antiques which qualified for an exemption on 1 January 1993, apply Article 11(B)(6) in such a way that the value added tax due on importation is, in any event, equal to 2.5% of the amount determined in accordance with Article 11(B)(1) to (4).’
2. Provisions of customs law
15. Since Article 11(B)(1) refers, for determining the taxable amount on importation, to the customs value, Article 29 of the Customs Code (6) should also be mentioned; it reads, in extract, as follows:
‘1. The customs value of imported goods shall be the transaction value, that is, the price actually paid or payable for the goods when sold for export to the customs territory of the Community, adjusted, where necessary, in accordance with Articles 32 and 33 …
…
3. (a) The price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods and includes all payments made or to be made as a condition of sale of the imported goods by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller.’
16. Further rules on the inclusion of commissions in determining the customs value are contained in Articles 32 and 33 of the Customs Code:
‘Article 32
1. In determining the customs value under Article 29, there shall be added to the price actually paid or payable for the imported goods:
(a) the following, to the extent that they are incurred by the buyer but are not included in the price actually paid or payable for the goods:
(i) commissions and brokerage, except buying commissions,
…
4. In this Chapter, the term “buying commissions” means fees paid by an importer to his agent for the service of representing him in the purchase of the goods being valued.
Article 33
1. Provided that they are shown separately from the price actually paid or payable, the following shall not be included in the customs value:
…
(e) buying commissions;
…’
17. Articles 7 and 16 of the Sixth Directive refer, for the exemption from value added tax of goods temporarily imported into the Community, to the corresponding rules of customs law. For works of art imported for auction, the exemption from import duties is to be found in Article 576(3) of Regulation No 2454/93 implementing the Customs Code (‘the customs implementing regulation’): (7)
‘Total relief from import duties shall be granted for the following:
(a) works of art, collectors’ items and antiques as defined in “Annex I” of Directive 77/388/EEC, imported for the purposes of exhibition, with a view to possible sale;
(b) goods other than newly manufactured ones imported with a view to their sale by auction.’
18. Finally, Article 582(1) of the customs implementing regulation supplements that as follows:
‘Where goods placed under the arrangements in accordance with Article 576 are discharged by their entry for free circulation, the amount of the debt shall be determined on the basis of the elements of assessment appropriate to these goods at the moment of acceptance of the declaration for free circulation.’
B – National law
19. Under Article 3 of the Value Added Tax (Treatment of Transactions) Order 1995 (SI 1995/958) the transfer of ownership in secondhand goods temporarily imported from non-member countries with a view to sale by auction and in works of art temporarily imported for the purposes of exhibition with a view to possible sale is to be treated as neither a supply of goods nor a supply of services. The United Kingdom explains that by that provision it made use of the option of exemption in Article 16 of the Sixth Directive.
20. The Value Added Tax (Special Provisions) Order 1995 (SI 1995/1268) regulates, in Article 12, ‘margin’ taxation in the case of supplies of works of art, collectors’ items and antiques, (8) as provided for in Article 26a of the Sixth Directive.
III – Facts, pre-litigation procedure and forms of order sought
21. The transactions which, in the Commission’s view, the defendant’s authorities tax in a manner contrary to the Sixth Directive may be described as follows.
22. Auction houses established in the United Kingdom bring works of art from non-member countries into the country to be auctioned. The goods are exempted from import duties under the procedure for the temporary importation of goods into the Community in accordance with Article 137 et seq. of the Customs Code in conjunction with Article 576(3) of the customs implementing regulation. Under Article 16 of the Sixth Directive, no value added tax is chargeable either at this stage.
23. The works are auctioned while still in this state of customs and value added tax ‘quarantine’. Of the price achieved at the auction, the auctioneer retains a certain percentage (usually between 7% and 20%) as commission (‘seller’s commission’). In addition to the price, the buyer generally also has to pay a premium to the auctioneer (‘buyer’s premium’). In English case-law and legal writing, the auctioneer is therefore regarded as the agent of the seller until the hammer falls and thereafter as the agent of the buyer. (9)
24. If the work of art is not taken to a non-member country again after the auction, but imported definitively into the Community, the fiscal authorities charge value added tax on the importation. The taxable amount is the auction price (‘hammer price’) including the auctioneer’s commission. Formally, the standard rate of tax applies. However, the taxable amount is deemed to be reduced in accordance with Article 11(B)(6) of the Sixth Directive, so that the effective rate of tax is 5%.
25. Because of this practice, the Commission sent a first letter of formal notice to the United Kingdom on 17 March 1997. In that letter it complained of breach of Article 28(1a) and Article 28c(E)(1) (in other words, the new version of Article 16) of the Sixth Directive. It said that the reduced rate of tax of (then still) 2.5% on works of art imported temporarily and sold by auction should not be applied to the auctioneer’s profit margin.
26. After the United Kingdom Government had stated its position on 15 May 1997, the Commission, by letter of 10 August 1998, supplemented the first letter of formal notice by a more detailed legal analysis. It accused the United Kingdom of infringing, in addition to the provisions already mentioned, Articles 2(1), 5(4)(c), 12(3) and 26a of the Sixth Directive. It said that the United Kingdom tax authorities wrongly treated an auction as a single event, namely an importation. Rather, there was an importation followed by a supply within the country. Under Article 26a of the Sixth Directive, the auctioneer’s margin was part of the consideration for that supply and should thus be subject to the standard rate.
27. Since the Commission was not convinced by the United Kingdom’s reply of 12 October 1998, it sent a reasoned opinion on 3 August 2000, in which it argued essentially that the same provisions were being infringed as in the supplementary letter of formal notice. Only the complaint of an infringement of Article 28(1a) of the Sixth Directive was dropped, since the United Kingdom Government had stated, by letter of 16 November 1999, that the reduced rate for the import of works of art had been raised from 2.5% to 5%. The original complaint of infringement of Article 26a of the Sixth Directive was also not maintained in the reasoned opinion.
28. After the United Kingdom again confirmed its position by letter of 16 November 2000, the Commission on 16 July 2003 brought an action under Article 226 EC. It claims that the Court should:
1. declare that, by applying a reduced rate of value added tax to the commission paid to auctioneers on the sale by auction of works of art, antiques and collectors’ items imported under temporary importation arrangements, the United Kingdom has failed to fulfil its obligations under Articles 2(1), 5(4)(c), 12(3) and 16(1) of the Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes;
2. order the United Kingdom to pay the costs.
29. The United Kingdom contends that the Court should:
1. dismiss the action;
2. order the Commission to pay the costs.
30. After the close of the written procedure, the Court put questions to the parties, which they answered by letters of 19 November 2004. The hearing took place on 16 December 2004.
IV – Submissions of the parties
31. The Commission stresses that the application of the temporary importation procedure cannot lead to more favourable tax treatment than an importation followed by a sale by auction. Under Article 16(1) of the Sixth Directive the exemption is subject to the condition that on a subsequent definitive importation the same amount of tax is payable as on the taxation of transactions within the country.
32. The tax reduction for the import of works of art must be restricted to the value of the goods before auction, that is, the amount resulting from the proceeds of auction less the auctioneer’s margin. The standard rate of tax is to be applied to his commission.
33. The United Kingdom Government takes the view, on the other hand, that there is no supply within the country, but a ‘sale for export’ to the customs territory of the Community, (10) since the auction takes place before the (definitive) importation into the Community.
34. The Commission’s approach is not consistent with Article 11(B)(1) of the Sixth Directive in conjunction with Article 29(1) of the Customs Code. Under those provisions, the taxation is determined by the transaction value including the auctioneer’s commission. Moreover, under Article 11(B)(3)(b), the premium must also be included when ascertaining the import value. It would lead to double taxation if the commission were taken into account in connection with the taxation of a supply of goods within the country even though it had already been taxed as part of the import value.
35. The United Kingdom’s taxation practice constitutes a special measure permitted under Article 16(1) of the Sixth Directive. The United Kingdom thereby complies in particular with the obligation under the final indent of Article 16(1)(E) to avoid double taxation. The provision moreover concerns only the charging of value added tax on import, not the taxation as a supply of goods within the country allegedly required.
V – Legal assessment
A – Preliminary observation on the subject-matter of the action
36. The classification for tax purposes of the auction transactions at issue depends essentially on whether the auctioneer sells the works of art in his own name or in someone else’s name, as the parties confirmed in their answers to the Court’s questions.
37. Only if the auctioneer acts in his own name does he make a supply of goods within the meaning of Article 4 of the Sixth Directive. The taxable supply then normally consists in the transfer of the ‘right to dispose of tangible property as owner’ (Article 2(1) in conjunction with Article 5 of the Sixth Directive). Under Article 5(4)(c) of the Sixth Directive, a transfer of goods pursuant to a contract under which commission is payable is treated as a supply. That is logical, because the seller transfers the goods to the agent for him to sell them in his own name to a third party, even though he is not their owner.
38. Article 26a(C) of the Sixth Directive gives the Member States the option, in cases where the auctioneer acts in his own name, to charge value added tax on his margin only and not on the full auction price.
39. On the other hand, if the auctioneer acts in someone else’s name the supply relationship comes into being directly between the seller of the goods (the auctioneer’s principal) and the buyer. In that case the auctioneer does not have to pay any value added tax on the supply; only the seller may have to (if he sells the work of art in connection with his economic activity, for instance as an art dealer). The auctioneer is, however, taxable on the service supplied by him. The taxable amount is the corresponding consideration which the auctioneer receives in the form of the commission. The result is that, when he acts in someone else’s name, it is mostly only the auctioneer’s margin which is taxed.
40. In this situation Article 26a(C) of the Sixth Directive does not apply, as the wording of the first subparagraph shows. Nor is there any need to apply a special rule to the auctioneer’s transaction, since even under the general rules he only has to pay tax on his margin, as the consideration for the service he provides. There is also no place for the application of Article 5(4) of the Sixth Directive.
41. Whether the auctioneer acts in his own name or in someone else’s name depends on the specific contractual relations between the persons involved. According to the United Kingdom Government, national law allows for both those alternatives. The Commission agrees. In its view, however, the auctioneer usually acts as an ‘undisclosed agent’ (better formulated as ‘agent of an undisclosed principal’), that is, an agent who does not disclose who his principal is.
42. In the case of undisclosed agency, the auctioneer acts in his own name, in the view of both parties. That is not precluded by a possible assumption by buyers that the auctioneer is in fact acting for an unidentified principal. That view is convincing, at least as far as questions of value added tax are concerned, as it makes it possible to ascertain the taxable person without difficulty. The civil law relationships between the persons concerned may perhaps have to be judged differently.
43. What form the contracts take in a particular case and which kinds of contract are predominantly chosen in the United Kingdom may be left on one side. It is clear in any event that the present infringement proceedings concern only the case of an auctioneer acting in his own name.
44. Throughout these proceedings the Commission has concentrated on that variant alone and assumed that there is a supply by the auctioneer. That may be seen, for instance, in the fact that it complained in the reasoned opinion of a breach of Article 26a of the Sixth Directive and still claims that there is an infringement of Article 5(4) of the Sixth Directive. Both those provisions apply – as explained – only if the auctioneer acts in his own name.
45. Only in point 15 of the reply does the Commission state that it is immaterial for the present case whether the auctioneer’s supply is to be characterised as a supply of services or as a supply within the meaning of Article 26a of the Sixth Directive. Since both kinds of supply must be taken into account when applying Article 16 of the Sixth Directive, the Commission says that its reasoning remains the same.
46. It might indeed be true that supplies of services by the auctioneer (when auctioning in someone else’s name) or supplies of goods in his own name are to be assessed in the same way in the context of Article 16 of the Sixth Directive. However, until the reply the Commission made no mention at all of any taxation contrary to the directive of the auctioneer’s supply as a supply of services. If the Commission’s intention in the passage cited was to put forward such a claim, it would be inadmissible, since the subject-matter of an action may no longer be altered or extended at this stage of the proceedings. (11)
47. Accordingly, it need be assessed below only whether the United Kingdom has infringed the Treaty by taxing auctions of temporarily imported works of art, where the auctioneer acts in his own name, in a way which is not consistent with the Sixth Directive.
B – Admissibility
48. In the rejoinder and at the hearing the United Kingdom Government accused the Commission of changing its position in the reply from what it was in the reasoned opinion and the application.
49. It submits that the Commission originally complained that the auctioneer’s commission was included in the tax basis for value added tax on importation and not taxed as consideration for a supply within the country. In the reply, on the other hand, the Commission conceded that the commission was to be regarded as part of the import value. At the same time, as an inadmissible new complaint, the Commission alleged that there was an incorrect method of calculating the value added tax on importation.
50. It is settled case-law that the subject-matter of an action for failure to fulfil obligations is delimited by the pre-litigation procedure, so that an action may be restricted in comparison with the reasoned opinion but may no longer be expanded. (12) It is all the more inadmissible to put forward new claims in the reply.
51. The Commission complained in substance throughout the pre-litigation and judicial procedure that the auctioneer’s commission is not taxed at the standard rate, although it is a supply within the country. The converse of that argument is the Commission’s demand that the reduced rate of tax on the importation of works of art should be applied only to the auction price less the margin. (13)
52. In the reply, the Commission counters the United Kingdom Government’s objection that the Commission’s view of the law leads to double taxation of the margin, once when value added tax on importation is charged and again as consideration for a supply within the country. In that connection, it merely explains what already followed from its previous submissions, namely that it demands that the basis of assessment should be divided into two parts, to each of which a different rate of tax is to be applied. It cannot be seen how that explanation is supposed to contradict the previous arguments.
53. The United Kingdom Government’s complaint that the Commission changed its position in the course of the procedure and introduced new claims must therefore be rejected.
C – Merits of the claim
54. The origin of the present proceedings is to be found primarily in the uncertainty as to the extent of the special system for works of art which are imported temporarily in order to be sold at auction. This special system should first be explained briefly.
1. The special system for works of art imported with a view to auction
55. The value added tax system which the Sixth Directive provides for works of art imported for sale by auction is exceptional in three respects.
56. Firstly, when goods are introduced into the territory of the Community, the Member States can under Article 16(1)(E) of the Sixth Directive exempt them from the value added tax which would in principle arise on importation under Article 2(2) in conjunction with Article 7. The value added tax treatment is linked here with the customs rules for temporary importation.
57. The reason for the exemption from customs duty and value added tax is that it is not yet clear before the action whether the works of art will remain in the Community or be exported again to non-member countries. In the event of re-export, the temporary import is intended to be fiscally neutral, so that auctions in the Community do not become more expensive and European locations are not disadvantaged in international competition.
58. The second special rule intervenes if the works of art do not leave the customs and tax territory of the Community again after the auction, but are definitively imported. In that case, under Article 12(3)(a) and (c) of the Sixth Directive, a reduced rate of tax is applied. In Member States in which – as in the United Kingdom – no reduced rate applied to the import of works of art on the material date of 1 January 1993, the same result is achieved by a deemed reduction of the taxable amount under Article 11(B)(6) of the Sixth Directive.
59. Thirdly and finally, Article 26a of the Sixth Directive gives Member States the option, in the case of trade (including sales by auction) in secondhand goods, works of art, collectors’ items and antiques, of taxing only the re-seller’s or auctioneer’s margin. The value of the goods themselves thus remains exempt from tax. Each item has already been taxed once, on the first acquisition by a final consumer. Without the margin taxation system, there would be a risk of double taxation where the same item, after being acquired and used by a final consumer, is reintroduced to economic circulation and sold again by a taxable person. (14)
60. The parties ultimately agree that the system of margin taxation does not produce any difficulties in the present case. In the opinion of the United Kingdom Government, there are no difficulties simply because no supply takes place within the country which could be subjected to margin taxation. Although the Commission takes a different view on this point, it too considers that the application of Article 26a of the Sixth Directive is unproblematic.
2. Summary of the disputed provisions
61. The parties are in dispute essentially over whether the auctioneer’s margin, where works of art are auctioned while they are still under the temporary importation arrangements, is to be taxed at the standard rate as a supply within the country. The Commission concentrates here on the infringement of Article 16(1) of the Sixth Directive.
62. It also claims infringement of Articles 2(1), 5(4)(c) and 12(3) of the Sixth Directive. Before I examine more closely whether the contested tax practice is in breach of Article 16(1), I should discuss what importance the other provisions adduced have for the present dispute.
– Article 2(1) of the Sixth Directive
63. Under Article 2(1) of the Sixth Directive, supplies of goods within the territory of the country effected by a taxable person acting as such are subject to value added tax. Article 3(2) of the Sixth Directive explains in more detail what is to be understood by the ‘territory of the country’, namely in particular the territory of the Member States which is the area of application of the EC Treaty. In accordance with the wording of those provisions, there could be a supply within the country, since the works of art are physically within the territory of the Community at the time of auction.
64. The auctioneer’s supply would then not be exempt from tax under Article 14(1)(i) of the Sixth Directive. That exemption relates to supplies of services in connection with the importation of goods where the value of the services is included in the taxable amount in accordance with Article 11(B)(3)(b) of the Sixth Directive. A possible example would be the performance of import formalities. The organisation of the auction is not, however, immediately connected with the importation but with the supply of goods.
65. There is doubt as to whether there is a supply of goods within the country, however, because the goods are indeed in the territory of the Community but de jure have not yet been (definitively) imported while they are being auctioned. This discrepancy between the actual and the legal (in customs law) position is possible because of the special arrangements for temporary importation.
66. The consequences for the charging of value added tax of the application of those special customs arrangements are regulated exhaustively in the special provision in Article 16. That provision suggests, on the one hand, that in the absence of a definitive importation one cannot speak of a supply of goods within the country. However, it also requires, on the other, that transactions during the temporary importation arrangements are to be equated with transactions within the country. Whether there is a breach of Article 2(1) of the Sixth Directive thus depends ultimately on the conditions laid down by Article 16 for such an equation.
– Article 5(4)(c) of the Sixth Directive
67. Nor may an infringement of Article 5(4)(c) of the Sixth Directive be ascertained in isolation from Article 16. Article 5(4)(c) says that the transfer of goods from a principal to an agent and the onward transfer from the latter to the buyer are each to be classified as a supply of goods within the meaning of the directive.
68. A condition for the existence of a taxable transaction under Article 5 is, however, that the scope of the Sixth Directive under Article 2(1) is involved in the first place because the supply is effected within the country. That depends – as already stated – on what consequences of value added tax law follow under Article 16 from the application of the temporary importation procedure.
– Article 12(3) of the Sixth Directive
69. Article 12(3) of the Sixth Directive fixes the minimum standard rate of value added tax to be applied, and contains detailed provisions on the amount and conditions of application of reduced rates of tax. The Commission adduces this provision because the United Kingdom allegedly does not apply the standard rate to the auctioneer’s commission in the circumstances of the present case.
70. On this point, it may be stated at once that the complaint is not justified. It is indeed correct that only an effective rate of 5% is applied to the import value including the auctioneer’s commission. That result is, however, achieved by the deemed reduction of the taxable amount under Article 11(B)(6) of the Sixth Directive. Value added tax is then charged on the adjusted amount at the standard rate, not at a reduced rate.
71. It may perhaps be doubtful whether, in respect of the supply by the auctioneer, the United Kingdom ought not to make the full value of the consideration the taxable amount in accordance with Article 11(A)(1)(a) of the Sixth Directive, without extending to it the correction mechanism under Article 11(B)(6) for the import of works of art. But since the Commission has not argued that there is any breach of Article 11 of the Sixth Directive, there is no need to look into a possible infringement of that provision.
3. Infringement of Article 16(1) of the Sixth Directive
72. Article 16(1) of the Sixth Directive provides that Member States may exempt transactions concerning temporarily imported goods from value added tax. It must be ensured that when they subsequently cease to be under the special arrangements and are definitively imported the same amount of value added tax is charged as would have been payable in the case of transactions within the country.
73. In the Commission’s opinion, that condition is not satisfied in the case of taxation in the United Kingdom. It supports that argument with a comparative view, as required by Article 16(1). The auction of works of art which have been imported temporarily and are not imported definitively until after the auction is compared by the Commission with the following case: the works of art are definitively imported straight away and hence auctioned within the country when already in free circulation there.
74. In the comparable case, it submits, value added tax is payable first on importation at the effective rate of 5%. Value added tax is then due on the supply by the auctioneer, his margin forming the basis of assessment in accordance with Article 26a of the Sixth Directive. The margin would be taxable at the standard rate of 17.5% value added tax. The taxation practice in the United Kingdom with respect to works of art which are first imported provisionally and subsequently auctioned and then imported definitively does not lead to the same amount of tax as in the comparable case, since the auctioneer’s margin is subject only to an effective rate of tax of 5%.
75. To arrive at the same level of tax in both cases, in the Commission’s view, the following procedure should be adopted: the basis of assessment (the auction price) is divided into two parts: the auctioneer’s margin which is to be taxed at the standard rate, and the price less the margin which corresponds to the import value. The reduced rate of 5% is to be applied only to that deemed import value.
76. Against that opinion of the Commission, the United Kingdom Government raises a number of objections, to be examined below.
– Optional nature of the special system
77. To begin with, the United Kingdom Government points to the optional nature of the first part of Article 16(1), which gives Member States the possibility of taking special measures to exempt the transactions concerned. Under the original version of Article 16 (15) the United Kingdom practice had been regarded as such an acceptable special measure. It says that the minor amendments to the wording made to Article 16 by Directive 95/7 (16) made no difference in that respect.
78. It is true that Article 16 is not mandatory, in that it leaves it open to the Member States to take special measures with respect to goods subject to the temporary importation arrangements. The use of the term ‘special measures’ makes it clear, moreover, that Article 16 authorises the Member States to diverge from the general rules of the Sixth Directive.
79. However, if a Member State makes use of that option, it must comply with the mandatory conditions laid down by Article 16 for the form of the special measures, as the Commission rightly contended. In particular, there is a duty to tax the goods, after the cessation of the special arrangements, to the same extent as corresponding transactions within the country.
80. It cannot be seen why the United Kingdom practice should be more likely to be permissible under the earlier wording of Article 16(1) of the Sixth Directive than under the present wording. That may be left open, however, since what matters in the present case is the current legal position.
– Determination of the basis of assessment and avoidance of double taxation
81. Next, the United Kingdom Government emphasises that the final indent of Article 16(1) of the Sixth Directive obliges the Member States to take measures to avoid double taxation when goods leave the temporary importation arrangements and are imported definitively. It says that, since the auctioneer’s margin is a component of the import value under Article 11(B)(1) of the Sixth Directive in conjunction with Article 29 of the Customs Code, value added tax on importation must be charged on it. To tax the margin a second time, as a supply of goods within the country, is incompatible with the prohibition of double taxation.
82. The United Kingdom Government is correct in stating that the prohibition of double taxation in the final indent of Article 16(1) is binding on the Member States when they design special measures. It is also correct that at least the seller’s commission is part of the customs value under Article 29 of the Customs Code. The customs debt is determined, under Article 582(1) of the customs implementing regulation, by the basis of assessment at the time of the declaration for free circulation. At that time the transaction value to be adduced for the application of Article 29 of the Customs Code is known. It includes the seller’s commission.
83. Not clear, on the other hand, is the classification of the buyer’s premium. This could be a buying commission within the meaning of Article 32(1)(a)(i) and (4) and Article 33(1)(e) of the Customs Code, which is not part of the customs value. That would be the case if the premium were to be regarded as remuneration for services of the auctioneer for the benefit of the buyer. That view is supported in particular by the fact that in English legal writing the auctioneer is regarded as also being an agent of the buyer. (17) The United Kingdom Government does not accept, however, that the premium is a buying commission for the purposes of customs law.
84. The question as to the classification of the premium may be left unanswered, however, if in divergence from Article 11(B)(1) of the Sixth Directive the customs value is not to be adduced unrestrictedly in the present case for determining the import value for the purposes of value added tax law. The reference in Article 11(B)(1) of the Sixth Directive to the customs value as the basis of assessment of the import value cannot be interpreted in isolation from Article 16(1) of that directive. In so far as a different basis of assessment for the value added tax on importation results from that more specific provision for the temporary importation procedure, that provision takes priority.
85. Under Article 16, two objectives must be achieved: firstly, the application of the temporary importation arrangements is to be neutral from the point of view of tax law if the work of art is later imported. That is to be ensured by means of the (subsequent) equation with transactions within the country. Secondly, double taxation is to be avoided. One could sum that up shortly by saying that the application of the temporary importation procedure must not lead either to better or to worse treatment in comparison with immediate importation without the temporary arrangements being interposed.
86. The method used in the United Kingdom achieves only the second objective. It misses the first one. While the auctioneer’s margin would be taxable at the standard rate in the case of goods in free circulation, the value added tax under the United Kingdom model is only 5% when works of art under the temporary import arrangements are auctioned. The special system applied by the United Kingdom thus leads overall to more favourable treatment. In other words, one can save tax if one first imports a work of art temporarily and auctions it instead of definitively importing it straight away and then auctioning it. But that is precisely the effect which is supposed to be excluded under Article 16(1) of the Sixth Directive.
87. The position adopted by the Commission ensures that both objectives are achieved. By splitting the basis of assessment into two parts and applying different rates of tax to those two parts, equivalence with supplies within the country after importation is largely guaranteed and double taxation excluded.
88. The method recommended by the Commission is not, however, in harmony with the rules for determining the import value under Article 11(B)(1) of the Sixth Directive. Thus it requires in particular that the single transaction value in customs law is divided into two components for charging value added tax. But there is no other way to be seen of satisfying all the requirements of Article 16(1) of the Sixth Directive otherwise. In the end this atypical method of calculating value added tax is the only possible answer to the atypical situation which derives from the suspension of the duty to pay value added tax during temporary importation.
89. Moreover, this method limits the scope of the special rules for works of art, and thereby takes account of the exceptional character of those rules described above. In particular, the effective reduced rate of tax on importation is not applied to added value given to the work of art by the auctioneer’s supply, admittedly before definitive import but nevertheless already within the territory of the Community. Instead, its application is limited to the value which the goods (were deemed to have) had when crossing the frontier.
– Effects on competition
90. The United Kingdom Government furthermore contests the Commission’s complaint that the practice in the United Kingdom creates competitive advantages for local auction houses. It says that it is open to the other Member States to apply equivalent rules. If the taxation of transactions concerning works of art temporarily imported and auctioned is compared with the corresponding auction transactions within the country, the latter are even in a better position. Value added tax is chargeable only on the margin, while the value of the goods as a rule does not have to be taxed. With imported works of art, on the other hand, the value itself must also be taxed, albeit at a lower (effective) rate.
91. Special provisions under Article 16 of the Sixth Directive can indeed be introduced by any Member State. But the same conditions apply in such a case to all Member States, in particular the principle of the fiscal neutrality of the exemption in favour of works of art imported temporarily. If a Member State gives preference to auction transactions concerning such works of art in breach of Article 16, that comprises an unlawful competitive advantage for auction houses established in that Member State. Other Member States cannot grant that advantage without likewise infringing Community law.
92. The fact that, under Article 26a(C), in the United Kingdom only the margin is subject to value added tax in the case of auctions of works of art within the country does not justify the United Kingdom taxation practice in relation to the auction of temporarily imported works of art. The aim of Article 16(1) is not to guarantee the same tax burden for works of art imported from non-member countries and works of art situated within the country. The United Kingdom Government is comparing two situations which are not comparable.
93. The purpose of Article 16 is rather that when the temporary importation procedure is applied no different tax burden occurs than when the goods are imported directly, without the temporary system being interposed. That aim is largely achieved by the Commission with its method.
94. Slight differences in taxation in those two cases may appear, however. If an auction house definitively imports a work of art before it is auctioned, not afterwards, then it is not possible, for ascertaining the tax basis for value added tax on importation, to fall back on the transaction value (less the auctioneer’s margin). That value is not known until after the auction. Instead, the import value must be ascertained by using the deductive method provided for in Article 31 of the Customs Code. There is no guarantee that in each of those cases precisely the same basis of assessment will be taken. However, these possible differences in taxation cannot be avoided.
– Lack of predictability of the value added tax payable
95. At the hearing the representative of the United Kingdom, finally, also pointed out that, using the Commission’s method of calculation, the buyer is not able to predict the tax burden when he makes his bid.
96. The amount of the seller’s commission is indeed often treated confidentially. With some auction houses it seems to depend in particular on how large the principal’s total transactions are. The buyer does not therefore know exactly how large a proportion of the auction price the commission is and what amount is thus subject to the higher standard rate of tax.
97. The same problem exists quite generally, however, with the application of margin taxation. Even if no value added tax on importation is due, without knowing the amount of the seller’s commission the buyer is not to know how much value added tax will be payable. That objection cannot thus call into question the taxation of the margin at the standard rate, as required by the Commission.
98. The Commission has thus shown that the taxation practice in the United Kingdom in relation to the auctioning in the auctioneer’s own name of works of art imported temporarily infringes Article 16(1) of the Sixth Directive. Since that provision requires the auctioneer’s margin to be treated as a supply of services within the country, there is also an infringement of Articles 2(1) and 5(4)(c) of the Sixth Directive.
99. Article 12(3) of the Sixth Directive is not infringed, on the other hand, since in the United Kingdom a reduced rate of tax is – at least formally – not applied to the transactions at issue, and the reduction is instead achieved by an adjustment of the taxable amount under Article 11(B)(6) of the Sixth Directive. The rejection of that part of the claim is of purely subordinate importance, however, as the application of the incorrect rate of tax, or the incorrect determination of the taxable amount, is ultimately a consequence of the incorrect application of Article 16(1) of the Sixth Directive.
VI – Costs
100. Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party’s pleadings. Since the Commission has applied for costs and the United Kingdom has to a very great extent been unsuccessful, it must be ordered to pay the costs.
VII – Conclusion
In conclusion, I propose that the Court should rule as follows:
1. The United Kingdom, by applying a reduced rate of value added tax to the commission paid to auctioneers on the sale by auction in the auctioneer’s own name of works of art, antiques and collectors’ items which have been imported under temporary importation arrangements, has failed to fulfil its obligations under Articles 2(1), 5(4)(c) and 16(1) 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.
2. The remainder of the action is dismissed.
3. The United Kingdom is to pay the costs.
1 – Original language: German.
2 – According to a Commission report of 1999, nearly 50% of intra-Community transactions are carried out there. If one considers only transactions at auctions of works of art, the United Kingdom share is as much as 60% approximately (see Report from the Commission to the Council on the examination of the impact of the relevant provisions of Council Directive 94/5/EC on the competitiveness of the Community art market compared to third countries’ art markets, 28 April 1999, COM (1999) 185 fin., p. 6 et seq.).
3 – OJ 1977 L 145, p. 1.
4 – Article 28c was inserted by Council Directive 95/7/EC of 10 April 1995 amending Directive 77/388/EEC and introducing new simplification measures with regard to value added tax – scope of certain exemptions and practical arrangements for implementing them (OJ 1995 L 102, p. 18).
5 – Inserted by Council Directive 94/5/EC of 14 February 1994 supplementing the common system of value added tax and amending Directive 77/388/EEC – Special arrangements applicable to second-hand goods, works of art, collectors’ items and antiques (OJ 1994 L 60, p. 16).
6 – Council Regulation (EEC) No 2913/92 of 12 October 1992 establishing the Community Customs Code (OJ 1992 L 302, p. 1).
7 – Commission Regulation (EEC) No 2454/93 of 2 July 1993 laying down provisions for the implementation of Council Regulation (EEC) No 2913/92 establishing the Community Customs Code (OJ 1993 L 253, p. 1), in the version of Commission Regulation (EC) No 993/2001 of 4 May 2001 (OJ 2001 L 141, p. 1).
8 – See also the explanations in HM Customs and Excise, Notice 718, Margin schemes for second-hand goods, works of art, antiques and collectors’ items (May 2003) .
9 – See Chitty on Contract, Volume II (ed. Beale and others), 99th edition, London 2004, 31-014; Beatson, Anson’s Law of Contract, 28th edition, Oxford 2002, p. 672.
10 – This term is somewhat misleading in the present context. There is normally a sale for export to the Community where goods are sold in a non-member country in order to be exported from there to the Community. The United Kingdom also uses the expression here, because the goods are not yet definitively imported at the time of sale. However, they are also no longer in a non-member country from which they could still be exported.
11 – Case C‑96/95 Commission v Germany [1997] ECR I‑1653, paragraph 23; Case C‑152/98 Commission v Netherlands [2001] ECR I‑3463, paragraph 23; and Case C‑350/02 Commission v Netherlands [2004] ECR I‑0000, paragraph 20.
12 – See the references in note 11.
13 – The Commission’s position on the extent to which the auctioneer’s margin should be included in the customs value is admittedly not entirely clear. See, for instance, point 41 of the application: ‘That is true notwithstanding the general rules of customs valuation laid down in Articles 29 and 144 of the Customs Code and the general rule laid down in Article 11(B)(1) of the Sixth Directive. Article 16(1) of the Sixth Directive imposes the overriding requirement that the tax due on importation must correspond to the amount of tax which would have been due had the sale at auction been taxed within Community territory.’
14 – See the Commission’s observations in its proposal for Directive 94/5, COM (88) 846 fin, p. 3. This problem had already been addressed by the Court in Case 16/84 Commission v Netherlands [1985] ECR 2355, paragraph 14 et seq.
15 – In its original version Article 16(1) read: ‘Without prejudice to other Community provisions, Member States may, subject to the consultations provided for in Article 29, take special measures designed to relieve from value added tax all or some of the following transactions, provided that they are not aimed at final use and/or consumption and that the amount of value added tax charged at entry for home use corresponds to the amount of the tax which should have been charged had each of these transactions been taxed on import or within the territory of the country’.
16 – Cited in note 4.
17 – On this point, see point 23 above.
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