CJEU consolidates functional approach to customs nomenclature interpretation (C-380/12)

In its Judgment of 23 January 2014 in case C-380/12 X, the Court of Justice of the European Union (CJEU) was presented with a request for a preliminary reference on the proper interpretation of certain headings of the applicable customs nomenclature.
 
The case is riddled with technical (biochemical) complications but, in my best understanding of it, the key issues focussed on whether certain washing processes altered or not the molecular structure of a specific type of earth used to decolour edible oils. In the end, the dispute was concerned with a reclassification of that type of (washed) decolourising earth from a heading applicable to natural clays [which included those that had been washed (even with chemical substances eliminating the impurities, without changing the structure of the product)] to a heading applicable to activated natural mineral products (such as activated carbons, which structure has been altered). The impact of such a reclassification based on the alteration of the natural molecular structure of the product was the application of a higher tariff of 5.7% in customs duties. And, consequently, it was litigated.
 
In its Judgment, the CJEU follows its standard approach to this type of (fiendish) issue and makes it clear that it is for domestic courts to reach the final decision on nomenclature classification, but it aims to provide some general criteria to guide their decision.
 
In my view, the indication towards the need for a functional approach, based on the intended use of the products (rather than simply following a strict consideration of the production or treatment processes) seems worth highlighting. Indeed, in its Judgment, the CJEU indicated that:
39 [...] the intended use of a product may also constitute an objective criterion for classification if it is inherent to the product, and that inherent character must be capable of being assessed on the basis of the product’s objective characteristics and properties (see [Case C-183/06 RUMA [2007] ECR I‑1559], paragraph 36; Case C‑123/09 Roeckl Sporthandschuhe [2010] ECR I‑4065, paragraph 28; and [C-568/11 Agroferm [2013] ECR I-0000], paragraph 41).
40 It is apparent from the order for reference that the treatment applied to the products at issue in the main proceedings, batches of decolourising earth, consists in effecting a structural replacement of calcium ions with hydrogen ions in order to increase their adsorption capacity, which makes them suitable for purifying and decolourising edible oils. It is, furthermore, apparent from the observations put forward by the Commission at the hearing – without being contradicted on the point – that that treatment rules out the possibility of decolourising earth for purposes other than the purification and decolouration of edible oils (C-380/12, paras 39-40, emphasis added).
That does not mean that the issue of the actual change of the molecular structure of the product becomes irrelevant. As the CJEU also indicated:
46 [...] the treatment at issue in the main proceedings involves the use of chemical substances, more specifically sulphuric acid, which it is nevertheless for the referring court to verify. Accordingly, assuming that treatment does entail the elimination of impurities, which it is also for the national court to verify in the light of the answer to the first question referred, the decisive criterion for determining whether, under Note 1 to Chapter 25 of the CN, the products at issue must remain classified under CN tariff heading 2508, is whether their structure is changed.
48 The [International Convention on the Harmonised Commodity Description and Coding System, concluded at Brussels on 14 June 1983] Explanatory Notes, [...] despite their lack of binding force, are an important means of ensuring the uniform application of the Common Customs Tariff and, as such, may be regarded as useful aids to its interpretation (Case C‑173/08 Kloosterboer Services [2009] ECR I-5347, paragraph 25, and Agroferm, paragraph 28).
49 In that regard, the HS Explanatory Notes relating to heading 3802 state that ‘[c]arbon and mineral substances are said to be activated when their superficial structure has been modified by appropriate treatment (with heat, chemicals, etc.) in order to make them suitable for certain purposes, such as decolourising, gas or moisture adsorption, catalysis, ion-exchange or filtering’. Those same notes state that heading 3802 does not cover ‘[n]aturally active mineral products (e.g., fuller’s earth), which have not undergone any treatment modifying their superficial structure (Chapter 25)’.
50 Consequently, as rightly pointed out by the Commission, Note 1 to Chapter 25 of the CN, interpreted in the light of the HS Explanatory Notes relating to heading 3802, rules out the possibility that products which have undergone treatment modifying their superficial structure may be classified under CN tariff heading 2508, with the result that they must be classified under CN tariff heading 3802 (C-380/12, paras 46-50, emphasis added).
 
In my view, and if I understood the (technical) reasoning properly, the emphasis on the functional (i.e. intended-use) approach can help overcome truly difficult technical considerations (such as to what extent has the structure actually been modified or not), because the ultimate objective of the treatment given to the decolourising earths was to increase their decolourising properties and made them useless otherwise. Consequently, the CJEU seems to be advocating (in rather convoluted and implicit terms) for an application of the same nomenclature classification to products which are aimed at the same use (i.e., truly competing products).
 
If that is correct, this seems the right approach in order to minimise competitive distortions resulting from the interpretation and application of customs rules. Hence, I think that the functional approach that the CJEU has continued to consolidate in its Judgment in X (decolourising earths) should be welcome, unless I have gotten lost at molecular level disquisitions...

#CJEU pushes for EU single fiscal territory in ban of Spanish 'cross-border' tax on unrealised capital gains (C-64/11 Commission v Spain)

In its Judgment of 25 April 2013 in case C-64/11 Commission v Spain (press release), the Court of Justice of the EU has pushed for the further consolidation of the EU single fiscal territory by preventing any discriminatory tax treatment between companies that transfer their place of residence inside a Member State (domestic transfer) and those that transfer it to another EU Member State (EU transfer).

In the case at hand, Spanish corporate taxation law makes unrealised capital gains form part of the basis of assessment for the tax year, where the place of residence or the assets of a company established in Spain are transferred to another Member State. This rule has been challenged by the Commission as a restriction of freedom of establishment in that it puts the companies which have exercised that freedom at a cash-flow disadvantage.


The CJEU has indeed found that the immediate taxation of unrealised capital gains on the transfer of the place of residence or of the assets of a company established in Spain to another Member State amounts to a restriction on the freedom of establishment since, in such cases, a company is penalised financially as compared with a similar company which carries out such transfers in Spanish territory--in respect of which capital gains generated as a result of such transactions do not form part of the basis of assessment for corporate taxation until the transactions are actually carried out.


The CJEU has struck down such restriction as disproportionate in considering that Spain could preserve its powers in taxation matters by means of measures which are less harmful to the freedom of establishment. The CJEU considers it possible, for example, to request payment of the tax debt following the transfer, at the point at which the capital gains would have been taxed if the company had not made that transfer outside of Spanish territory. Moreover, the mechanisms of mutual assistance which exist between the authorities of the Member States are sufficient to enable the Member State of origin to assess the veracity of declarations made by companies which opt to defer payment of the tax. Thus, the Court clearly finds that the right to the freedom of establishment does not preclude capital gains generated in a territory from being taxed, even if they have not yet been realised, but it does preclude a requirement that that tax be paid immediately.



In this Judgment, the CJEU is clearly pushing for a suppression of tax borders within the EU and for an effective treatment of corporate changes of residence within the single market as domestic transfers. The CJEU strongly relies on the effectiveness of the current mechanisms of administrative cooperation in the field of taxation (as sufficient to enable Member States to exercise effective monitoring of transferred companies). These cooperation mechanisms (timidly created in 1977 by Council Directive 77/799/EEC) were revamped in 2011 by means of Council Directive 2011/16/EU and its Implementing Regulation 1156/2012

Directive 2011/16 had to be transposed into national laws by 1 January 2013 but, as of today, several Member States have not yet communicated any implementing measures to the Commission--including Belgium, Czech Republic, Germany, Greece, Italy, Hungary, Poland and Portugal. This means that Member States need to get up to speed and effectively implement measures of administrative cooperation in tax matters if they want to keep (or improve) the effectiveness of their tax systems in the (growing) EU single fiscal territory.

As indicated in Directive 2011/16, Member States need to use their  'power to efficiently cooperate at international level to overcome the negative effects of an ever-increasing globalisation on the internal market'. Surely, developments and best practices generated in this inter-institutional cooperation setting will be relevant in the (likely?) future creation of a single EU tax authority.