The European Court of Justice (ECJ) (Third Chamber) ruled that, by applying a reduced rate of VAT to the commission received by auctioneers on sales by auction of works of art, antiques and collectors’ items imported under the arrangements for temporary importation, the UK had failed to fulfil its obligations under art. 2(1), 5(4)(c), 12(3) and 16(1) of Directive 77/388 (‘the sixth directive’).

Facts

In the UK, works of art were imported with a view to possible sale by auction under the procedure for temporary importation with total exemption from import duty. If, after sale by auction, the work was definitively imported into the European Community, VAT was calculated on the basis of the price obtained on the sale by auction, including the auctioneer's profit margin. That amount was then reduced in accordance with art. 11(B)(6) of the sixth directive in such a way that the effective tax rate was equal to five per cent of the applicable taxable amount. The Commission initiated the procedure for infringement provided for in art. 226 EC on the basis that the UK had failed to comply with its obligations not only under art. 28(1A) and 28C(E)(1) of the sixth directive, but also under art. 2(1), 5(4)(c), 12(3) and 26A.

Issue

Whether the auctioneer's profit margin on the sale of works of art imported under the arrangements for temporary importation had to be taxed as a transaction within the territory of the country in accordance with the conditions referred to in art. 16(1) of the sixth directive; and whether there had been infringements of art. 2(1), 5(4)(c) and 12(3).

Decision

The ECJ (Third Chamber) (ruling accordingly) said that art. 2 of the sixth directive distinguished two categories of transactions subject to VAT: transactions effected within the territory of the country and the importation of goods. It was apparent from art. 5(4)(c) that an auctioneer made a supply of goods when he transferred goods pursuant to a contract concluded between himself and the seller or purchaser under which commission was payable. Article 12(3) fixed a standard rate of VAT applicable to all taxable transactions which did not give rise to a reduced rate. In this case, the works of art imported with a view to sale by auction were placed under arrangements for temporary importation with total exemption from import duty upon entry into the Community, provided that their final destination was not known before the sale. When the goods were sold to a purchaser within the Community, importation was effected in the member state in the territory of which the goods were removed from those arrangements.

The sixth directive provided for two different tax arrangements to be applied to importation and sale by auction of works of art. First, as regards importation, which was subject to VAT under art. 2(2), 12(3)(c) and, by way of derogation, 11(B)(6) provided for a reduced rate of VAT to apply to the customs value of the imported goods. Secondly, as regards the sale by auction, the provisions of art. 26A(c) had the effect, in particular, of identifying in the overall value of the goods the auctioneer's commission when the auctioneer made a supply within the meaning of art. 5(4)(c). That commission thus constituted the taxable amount for the sale by auction, taxed at the standard rate provided for in art. 12(3)(a). Although the time of definitive importation of goods, placed under arrangements for temporary importation upon entry into the Community, was deferred pursuant to art. 7(3) to the time those arrangements ceased to be applicable to the goods, it followed from the derogation provided for in art. 16(1) that all transactions effected under those temporary arrangements must be taxed as if they had been effected within the territory of the country after the definitive importation of the goods. Consequently, in order to tax both the importation and the sale by auction in accordance with the conditions referred to in art. 16(1), it was necessary to draw a distinction between that part of the auction price which corresponded to the auctioneer's commission and that which corresponded to the customs value of the imported goods.

The former thus constituted the taxable amount for the sale by auction, calculated under art. 26A and levied at the standard rate laid down in art. 12(3)(a), while the latter corresponded to the customs value of the goods which was subject to VAT on imports and levied at an effective reduced rate applicable in the UK under art. 11(B)(6). That interpretation was in accordance with the objective of art. 16(1), which was to ensure, in particular, fiscal neutrality between transactions relating to goods placed under the arrangements for temporary importation and subsequently imported, on the one hand, and those concerning goods which were already within the territory of the Community, on the other. When a member state made use of the option available under art. 16(1) by taking special measures to exempt transactions relating to goods under the arrangements for temporary importation, it had to comply with all the conditions laid down by that provision. The last subparagraph of art. 16(1), which provided for the obligation to avoid double taxation, concerned the person liable to pay the tax due. According to the preceding subparagraph, by way of derogation from the first subparagraph of art. 21(1)(a), the person liable to pay the tax due on the transactions referred to in the first subparagraph of art. 16(1) was the person who caused the goods to cease to be covered by the arrangements or situations listed in that provision. In order to avoid any confusion as to the person liable to pay the tax, the sixth directive provided for the obligation to avoid double taxation, without that affecting in any way the rate applicable to the auctioneer's profit margin.

In those circumstances, having regard to the fact that the sale by auction of works of art under the arrangements for temporary importation, followed by importation into the territory of the member state concerned, had to be regarded as a transaction effected within the territory of the country and taxed as such, the Commission's complaint relating to an infringement of art. 16(1) was well founded. Since the sale by auction must therefore be classified as a transaction which took place within the territory of the country, art. 2(1), 5(4)(c) and 12(3) had also been infringed.

European Court of Justice (Third Chamber). Judgment delivered. 9 February 2006.