Prohibition of discriminatory internal taxation

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Prohobition of discriminatory internal taxation Provisions in the E C Treaty establishing a Customs Union would have reduced effect if member states could legitimately discourage importation by imposing taxes on imported products once they have been imported. Consequently, Art. 90 states that member states shall not apply any internal taxation, direct or indirect, which will discriminate against products imported from other member states. Art 90(1]] applies to 'similar' products. The notion of 'similarity' has caused problems for the E C J; after all, it is not really the role of a law court to decide whether two products are similar or different. We will return to this point later. Art. 90(2]] catches products that are not necessarily similar, but are nonetheless in competition (beer and wine, for example]].

Note that, in general, it is not unlawful for a member state to impose taxation on any kind of goods in any amount it sees fit. What Art. 90 seeks to prevent is taxation that gives domestic produce a competitive advantage over imported produce.

It is generally straightforward to recognize direct discrimination. However, such discrimination cannot sometimes be concealed in, for example, measures for environmental protection. In the Regenerated oil case ( C-21/79]] the E C J held that a tax imposed by Italy on imported oil was unlawful. In its defence, Italy stated that it would tax domestic oil production as highly if the oil was not 'regenerated' (recycled]], in order to protect the environment, and there was no way to determine whether imported oil was regenerated or not. The E C J rejected this defence, and maintained that Italy should have been prepared to accept some form of certification from other member states that the oil was regenerated.

Indirect taxation is harder to spot, and more contentious. Consider the case of Humblot ( C-112/84]]. France, like most countries, imposed a system of taxation on car drivers in which the amount of the tax depended on the engine power. The purpose of this taxation is to encourage people to drive smaller cars (and, cynically, because owners of larger cars can afford to pay more tax]]. However, the most onerous band of taxation applied to some imported cars, but no cars produced in France, these all being of lower power. Thus the E C J ruled that this taxation scheme was unlawful, because it discriminated indirectly against imported cars. When France refined its taxation scheme, so that the band of highest taxation was divided into a number or smaller bands, it was again ruled unlawful by the E C J, because the band with the highest taxation, even though much narrower, included only imported cars. What this means, in effect, is that measures to encourage people to drive smaller cars will be unlawful if they have the indirect effect of discouraging people from buying imported cars.

However, Humblot notwithstanding, the E C J is not entirely against taxation measures that discriminate indirectly against imports if they pursue legitimate policy objectives. In Commission v Greece ( C-132/88]], a system of progressive taxation on cars was allowed, even though it did have the practical effect of discriminating against imports. What was the difference between the Greek taxation scheme and the French one, that led to one being declared lawful and the other unlawful? The most obvious distinction was the magnitude of the differential taxation -- even after the French had modified their scheme in an attempt to comply with the Humblot decision, the difference in taxation between imported and domestic cars was still very significant -- out of proportion to the difference in environmental impact of the different vehicles. In short, the E C J held that this taxation was a protectionist measure disguised as environmental protection.

Art. 90 does not apply to all products -- only those whose taxation would discriminate against imports. It follows, therefore, that if a state chooses to tax, say, cars more highly than sausages, this would not present a problem. However, Art. 90(2]] catches taxation of products that are in competition, and this has been held to mean that they fulfil the same need from the perspective of the consumer, that is, they are substitutable. In a way, Art. 90(1]] is a subset of Art. 90(2) -- anything that offends against 90(1) is likely to offend against 90(2]] as well. This is helpful because, in many cases it will obviously be difficult to determine whether two commodities are similar. It is slightly easier to determine whether they are substitutable, although still not straightforward. In the Wine Beer Case, the E C J had to rule on whether beer and wine were in sufficient competition that they should be taxed equivalently (it was held that they were, to the great relief of U K wine enthusiasts]]. However, the very need for the E C J to make such determinations can lead to situations that are bordering on farce. When the most senior judges in Europe have make an official pronouncement that fresh bananas are more similar to fresh apples than to dried bananas ( Commission v Italy C-184/85]] something has to be amiss; although I can't help feeling a certain morbid fascination with the case.

EU Law
UK LAW