All right and welcome to the second clip with regards to financial restrictions on the free movement of goods where we will have a closer look at taxation, indirect taxation. So basically taxation that leads to an increase of the cost price of a good. It's important to look at that because It is something that on the one hand looks a lot like a charge having equivalent effect that we have just seen in the previous video was prohibited under article 30. But it is not. And actually, and that we will show in this video, we will see that the ground rule here is not a prohibition but a permission. So that means that indirect taxation is in principle allowed, at least if it fulfils a couple of criteria.
And it's those criteria that we will go through in this particular clip. At the end of the clip, I will also address the interaction between Article 30 on the one hand and Article 110 TFU that covers these taxes on the other hand. Back to basics.
One of the basic underlying premises of the European integration process is the so-called principle of fiscal autonomy. So that basically means that the European integration process, of course, there has been a lot of work on European integration when it comes to different tax systems or different elements of tax systems, which is way outside of the scope of this course. But one of the underpinning principles was this principle of fiscal autonomy.
basically the idea that member states can more or less decide their own tax system. And where we've said that member states have these two options to deal with international trade, being import duties and being non-pecuniary measures, so quantitative measures with regards to the free movement of goods quota, They have also a lot of other opportunities to deal with other elements of the economy and that will more or less depend a lot on what type of government is there. So, basically the decisions on whether to impose an eco-tax or not, or to impose taxation, the increase or to lower taxation on profit that enterprises make in a particular state.
That's basically all for a member state to decide. So that basically means that if a member state decides to tax products, the most famous products that are taxed in this way are obviously alcohol and tobacco, soft drinks in some countries, cars that might be taxed in a way to compensate for their impact on the environment, for example. Those kind of things. that these tax rules are basically allowed as long as they are neutral.
So that means that basically these taxes are allowed, and that is also clear from Article 110 TFU, as long as they are imposed in a neutral manner. So that means that as long as they are imposed without discrimination to any imported product. So that's the main underlying principle.
So it's different than article 30. Article 30 starts from something that is not allowed. Article 110 basically starts from the premise that it is allowed. Well, what is a tax? That is something that was made clear in the Cofruta case. I have to look up the definition on that specifically.
And the court said in Cofruta A charge is an internal tax if it relates to a general system of internal dues applied systematically to categories of products in accordance with objective criteria irrespective of the origin of the product. So there is that neutrality element. So it must not deal with the origin of the product. It must be based on a set of objective criteria.
that is applied systematically to products or category of products where this as i said in the previous clip where this where this links in with the definition of a charge having equivalent effect is on that element for the sole reason that a good cross is a frontier that is not the case with a tax a tax is imposed to all products and the Tax is imposed to achieve some objective that the government wants to achieve, but that objective may not be propagating domestically produced products over imported products. So that is also where Article 110 comes in. And Article 110 contains a number of rules for these different tax systems. Article 110 basically kicks in in a situation, you should use article 110 in situations where you are confronted with a situation where apparently there are different tax rates applying to products that come from outside a member state and products that are domestically produced.
If both sets of products are subject to the same tax rate. rate, then there's nothing wrong. Then it is fine.
Then it is allowed under Article 110. It is where the stack differences differ, where alarm bells could go ringing, but they don't have to because it can still be okay. But then you would have to work through the system of Article 110. Article 110 makes a distinction between Two situations. Article 110 deals with the situation where products are similar.
So where different tax rates are imposed on products that differ with regards to, or that are similar but the tax rates differ. The second situation in article 110 is the situation where goods are not similar. but they are competing with each other.
So these goods are in competition with each other, and then the rules are a bit different. That is the systematics of Article 110. The court does something else to that, and that is complicated. What the court does as a first step, so as a preliminary step, being confronted with... differentiating tax rates between products that may or may not lead to a violation of that neutrality that is prescribed by the definition of what a neutral tax is. The court starts looking for an obvious reason as to why that differentiation is there.
So before they dive into Article 110, they will actually look at the situation. They will say they take a step back. And they will look at the situation and they will say, OK, is this a situation that where we understand why there are different tax rates? If the answer to that question is yes, we understand why that is the case, because that might be for ecological reasons or that might be in order to combat gambling addiction. to name an example from case law, then the court is okay with that and the court will no longer go into into article 110. If the court does not find an overarching reason as to why there is a differentiating tax rates between these types of products, these two products, then the court will dive into article 110. So, Article 110.1 basically says what needs to happen if products are similar.
But in order to find out whether that applies, you will first have to find out whether these products are similar. In old days, the court would use a system that was devised by the United Nations, and that still exists, that would basically give... a number to each category of products and then basically they would say okay if it falls within the same number then the products are similar it's similar to the tarik database where you can look up external tariffs that that are payable to goods moving into the european union Nowadays, the court uses a much more elaborate test where that nomenclature, that database can still be a part of it.
But the court also looks at much more objective criteria to decide whether products are similar or not to say, OK, are they the same consistency? Are they the same ingredients? There is ample explanation in the case law, mostly when it deals with alcoholic beverages, where the court looks at, well, is the alcohol content the same?
Did the alcohol actually get into, or was the alcohol content established by the same method? Was it through distillation, or was it through fermentation, for example, or fermentation alone? Those kind of things. So there's a set of...
of objective criteria that the court uses to compare whether one product is similar to another product. If that is the case, then the tax rate between those two similar products should be non-discriminatory. So that means that it might not be directly discriminatory. So the discrimination may not stem from the fact that the imported products have to pay a higher or that a higher tax is payable on imported products for the sole reason that they are imported that would bring it up to par with article 30 and that would most certainly not be allowed so that is not allowed if there is direct discrimination it has to be taken away by the member state imposing the tax If it's an indirect discrimination, that can also happen.
So that it is, the goal of the tax is not to discriminate between imported products and domestically produced products. But the effect of that tax may be exactly that. Because of the fact that a good is taxed in a certain way might lead to the conclusion that the that only hurts imported products. That might be for the sole reason that a good might not be domestically produced or might be domestically produced much less than it is imported.
So that a certain tax measure hits mostly imported products rather than domestic products. That's what we call indirect discrimination. That is also not allowed but there the court gives the possibility to the member state to objectively justify.
So that means that the Member State may put forward good reasons as to why it believes that it should impose the tax in the way it does. For certain health reasons or again for ecological reasons. There's a famous case on the import of cars, on the tax on the import on cars, both domestically produced and imported. But mostly hitting imported cars. This is an old case, so this stems from the day that car brands were still domestically produced.
And this is a French case, where France produced only cars with a lighter engine, and all the cars with a heavier engine that was more highly taxed were imported from Germany, mostly. So this was an indirect discrimination. The goal was not to discriminate against German cars, but the effect was that the tax measure did hurt imported German cars harder than it did domestically produced French cars. And then there's an opportunity for the member states to bring forward a justification as to why this is.
And the court may or may not accept that. In the case of the French cars, the court did not accept that. That explanation.
And if the explanation is not accepted, then again, the discrimination or the discriminatory effect must be taken away by the member state, most notably by lowering the tax rate. When it is justified, then obviously it's still allowed. So for Article 110.1, this is a bit circular.
So the court will start with looking for a justification and overriding justification. And if it finds that overriding justification, it will not even dive into Article 110 to begin with. If that apparent justification is not there for the differentiating tax rates, then the court will dive in to Article 110.1, will decide on similarity. And if there is similarity, will then go indeed to see whether there is direct discrimination, which is always not allowed, or to see whether there is indirect discrimination, which is also not allowed, but may be justified by the member state. What happens if goods are not similar?
Well, then there's a second stage in Article 110. It's also the second section of Article 110 that provides for rules for goods that are not similar, but that are in competition with each other. And Article 110.2 says that goods that are in competition with each other, the tax may not have a protective effect for the domestically produced good. Now, in order to decide... Well, you first have set the step that goods are not similar.
So you've decided that these two goods, where two different tax rates apply, are not similar, do not fall within the same group. Well, then you would have to ask yourself the question whether they relate, whether the trade in these goods is related to each other, to decide whether these goods compete with each other. And how that is done is through what is called cross-elasticity. And if you took economics in high school, you probably know what that means.
If not, this is very briefly what it means. It means cross-elasticity is something you can calculate. And that means that if you increase the price of a certain good, and if consumers switch to other goods to compensate for that price increase for that certain good, then that good is probably in competition with those other goods that... that consumers switch to. If they don't switch, despite of the price increase, then this good is probably not in competition with any other goods.
So that is how cross-elasticity works. There is a famous Commission versus UK case on the question whether beer and wine in the UK were competing with each other. The conclusion of that case was indeed that the lower end of the wine market was in competition with the beer market in the United Kingdom.
If you decide that goods are in competition, or if you've calculated, you don't have to do these calculations by yourself, by the way, but if one of the economists you hired decides that indeed these goods are in competition with each other, then you'll have to decide whether there is protective effect. Well, in that Commission versus UK case, wine was taxed something like 10 times higher than beer. And the court indeed found that there was a protective effect, so that that was so high that it would deter consumers from buying wine and would lead them to the domestically produced beer, hence protecting their own beer market.
The rule is less strict though than it is with article 110. That means that you don't have to apply the same tax rate to these products. There might be good reasons as to why you have differing. tax rates.
I mean, alcohol content in wine is higher than it is in beer. That might be a reason to change your tax systems, but you have to take the protective effect away. So if it is covered by Article 110.2, then the protective effect must be taken away if it's there. If goods are so dissimilar that they are not even in competition with each other, say dog food and lawnmowers, for example, well, then the principle of fiscal autonomy. indicates that indeed member states can take their own decision with regards to differing tax rates.
So to recap a little bit, general rule is internal taxation is allowed. It is allowed as long as it's neutral, so as long as it's not discriminatory on similar products, or both directly and indirectly. Indirectly can be justified, and it is not protective towards goods that are in competition with each other.
I promised you to also look into the interaction between article 30 and article 110. So what happens now if a tax is imposed? Fine, a neutral tax is imposed both on domestically produced products and imported products. But through some devious way of how the tax system might work in that particular member state, domestic producers might be able to get that tax back through a tax rebate at the end of the year. So they fill in their tax form and they will get whatever tax they paid back. The court has ruled on these situations and you can have two eventualities.
You can have first the most drastic eventuality where the domestic producers would have their complete tax rebated. So they would have their complete amount of tax given back to them. by the tax authority of that member state.
The court then says, if that is the case, then basically the domestic producers have paid zero, nothing, whereas the importers have paid this so-called tax. That is no longer a tax, according to us, the court, but that is a charge having equivalent effect under Article 30 that can no longer be justified, or that cannot be justified on the basis of Article 30. The second eventuality is not the complete amount of money that is rebated, but only a part of it. So the domestic producers pay less than the importers.
The court has said, well, we'll deal with that under Article 110. But then you're probably dealing with similar products. And then you are particularly also dealing with a direct discrimination, where that discrimination then also has to be taken away. So that is how Article 30 and Article 110 interact. All right, so that is with regards to financial restrictions. This is more or less a static element of EU internal market law.
Because of the abolition of internal borders, customs duties charges having equivalent effect have become rare. Taxes are more prevalent, of course. If you want to import a car in the Netherlands, for example, you will have to pay an amount of taxes. on that car in order to be able to import it. So taxes are still there.
But this is this is less at the forefront than other freedoms we're going to look at and also less at the forefront than the other part of free movement of goods that we'll move to next, which is the quantitative restrictions on the free movement of goods. So see you in the next video.