Place your bets, it's the ECJ turn

A legal mess reached the ECJ and now risks being one of the judgments that attracts more attention since the Marks & Spencer case. This attention is due to the possible introduction, for the first time in a tax case, of some sort of temporal limitations to the effects of a judgment. This case is also being closely followed by Hungary, another EU country that is facing large claims for similar refunds of its regional tax. To understand why is this tax case so high profile, it should be noted that according to the press the amount of taxes, which may be claimed back by various taxpayers, reaches the “symbolic amount” of EUR 120 billion!

All of this because Advocate General Stix-Hackl issued a second opinion on 14 March 2006, of in the case of Banca Popolare di Cremona (C-475/03) which concerns the compatibility of the Italian regional tax on productive activities (IRAP) with the Sixth VAT Directive.

In the second opinion, the new Advocate General followed the previous opinion of Advocate General Jacobs by concluding that the IRAP conflicted with the principles of the Sixth Directive. It should be noted that following the first opinion issued on 17 March 2005, several governments requested the ECJ to reopen the oral procedure. In fact, the new procedure focused in large extent on the issue of temporal limitation of an ECJ judgment.

The issue of limitation of effects is not limited to this particular case in Italy. Currently there is a German case which may be decided before the IRAP case and may set th ground for the position of the ECJ on this topic. The Meilicke case or if you prefer the German Manninen relates to German corporation tax credits for foreign dividends. As you may recall, in the Manninen case Finnish tax authorities were required to grant a tax credit to Finnish shareholders in receipt of dividends from EU (Swedish) resident companies in circumstances where a credit was available for Finnish dividends. As you may understand the chances of the Germans to avoid refunding taxes are very slim. Nevertheless, again in this case the tax authorities suggested that the estimated budgetary effect of a decision in favor of the taxpayer would amount to EUR 5 billion. In that case the Advocate General has indeed suggested that the temporal effect of the judgment should be limited to dividends paid after 6 June 2000 (i.e. the date the Verkooijen judgement was handed down).

As such where a judgment has a dramatic budgetary effect, a new line of defense that may be open to governments is to raise the possible temporal limitation of effects of ECJ decision! In essence, any sort of limitation has the efect of making more difficult for taxpayers to lodge successful repayment or damages claims.

In the IRAP case and according to the Advocate General Stix-Hackl three questions have to be answered before giving any limitation: (a) are there grounds for limiting the temporal effect of the judgment, (b) if so, from what date should it be possible to rely on the ruling and (c) should any exception be made in favour of claims raised before a certain date?

With regard to the first issue, it was said that good faith and the risk of serious budgetary difficulties set the case for awarding a limitation. Secondly the Advocate General considered that the ex futuro effect is the appropriate approach in the specific circumstances of this case. The Advocate General, from the various possibilities regarding the date as of which a limitation may take effect (i.e. ex tunc; ex nunc; new approach used on the Meilicke case; and setting a date in the future), proposed limiting the decision until the end of the tax period when the ECJ's judgment is delivered. This would ensure a smooth replacement of the IRAP Finally, in respect of the last issue, the Advocate General considers the date of delivery of Advocate General Jacobs's Opinion (17 March 2005) the least arbitrary and most objective date as to establish which claims should be paid or not.

As we all know the ECJ can only decide whether a provision is legal and not with what such provision should be replaced with. Therefore, by accepting the temporal limitation of effects of their decisions the ECJ will give one more step towards deviating attention from its negative integration that has battered the European tax systems since the Case Commission v France (‘Avoir Fiscal’) (C-270/83). Governments, companies, lawyers and academics will await anxiously the conclusion of this case. Will there be a limitation of the effects of the judgment for budgetary reasons?

Place your bets, it's the ECJ turn.

As a side note, this case has a curious background. Let's say that once upon a time Mr. X, Minister of Finance of a EU Member State decides to nominate a ministerial commission to study the possibility to introduce some sort of regional tax on productive activities. Bye the time the Commission presented its results, the Minister in question was relocated to another ministry, and therefore when the said regional tax was introduced Mr. X, was still part of the government (although not overseeing finance and tax issues). As in any case where a new tax is introduced, thorough notification procedures have to be complied in order to pass the scrutiny of the EU Commission. In this regard, the Government in question followed the procedures and received from the EU Commission a letter, which could be interpreted as an assurance that the so-called regional tax would be compatible with Community law. A couple of years passed and Mr. X was back to his law firm. Coincidence or not, a high profile case brought him recently to the ECJ to argue the case of the (in)compatibility of the so-called regional tax with EC Tax Law. Beware the reader that the law firm of the ex-minister was not advising the government but defending the plaintiff, i.e. arguing the incompatibility of the tax he oversaw the introduction (vide. Italian source).