Somewhat unusually, the European Court of Justice has ruled contrary to the findings of the Advocate General in a case concerning the legality of an Italian Tax which is partly based on turnover.

IRAP is an Italian tax levied on businesses. Very broadly, it is calculated on the margin between sales and product costs excluding certain costs, notably labour costs. An Italian Bank, the Banca Popolare di Cremona had argued that because the tax was so similar to VAT, it was illegal under the Sixth VAT Directive which prohibits Member States from introducing turnover taxes.

The Court examined IRAP by reference to the characteristics of a VAT system – its application to goods and services, its computation by reference to sales, its application at all stages of production and sales, and that ultimately the tax cost is borne by the consumer. The Court was not convinced that IRAP met all these characteristics. In particular, the computation of IRAP was on profit margins, not sales price. Furthermore, while the consumer might bear the cost of IRAP because businesses would seek to pass on the cost, there was not necessarily a direct link between the IRAP charge and the sales price.

It is therefore lawful for Member States to apply a tax with features similar to IRAP without being in contravention of Article 33. A finding otherwise would have been costly, not only for the Italian Government but also for other Member State governments. It could also have raised the spectre of other taxes being challenged a la IRAP; perhaps even a challenge to Stamp Duties here could have been shoehorned in?