Will an ECJ decision bring financial ruin to cities and municipalities in Austria?

Austrian intervention in 1997 at the European Commission and a demand made by the Austrian High Court of Administration for a preliminary decision from the ECJ (case C 437/97) have started a process which could threaten financial ruin for Austrian cities and municipalities. Considering the increasing acceptance of populist and anti-EU slogans by the electorate in Austria this would undermine the European idea in this small alpine country.

The ECJ will have to decide whether the Austrian beverage tax is permissible under EU legislation. This is a local tax levied on alcoholic and non-alcoholic beverages sold in restaurants and other retail outlets yealding 5,6 Billion Austrian Schilling (400 Mio Euro). The beverage tax provides up to 20 % of the tax revenue of cities and municipalities, thus the extent of the most important public services are dependent on it. The importance of this tax may even better be understood when mentioning that the income from beverage tax equals e.g. all expenditure for kindergartens or local public transport.

According to the opinion from the Advocate-General (M Antonio Saggio) this local tax is covered by the 6th VAT Directive. It does not comply with the Excise-Duties-Directive. The Advocate-General claims that the beverage tax is not linked to the amount of alcohol in the beverage but rather to the price and that it has no special intention. The Advocate-General finds it unacceptable that the preservation of local financial autonomy or differentiating tax rates on the grounds of health policy could amount to a special intention.

The worst case scenario though, is the possible obligation of refund from the time since Austria joined the EU in 1995. This could mean 15 Billion Austrian Schilling (1,1 Billion Euro). Although, like every other indirect tax, also this one has been paid in reality by the consumer. As very few consumers will have kept their receipts they will not profit from the refund. In the end the payment would go to restaurant- and shop owners. This could be a case of illegal enrichment. The 15 Billion Austrian Schilling are an astronomic figure for cities and municipalities who are already kept on tight reins by the Maastricht criteria.

How much bona fide and trust in Commission statements
While negotiating Austria's accession to the EU, Commission officials and even the responsible Commissioners for taxation and budget declared that the Austrian beverage tax is permissible under EU legislation. Nobody doubted the Commission's statements and nobody ever thought of introducing a special reference to this tax into the accession treaty.

Austrian arguments not considered

Austrian legal representatives also find it strange that the submission fails to consider the arguments advanced on behalf of the Austrian State: for example, taxation of alcoholic beverages is permitted according to Art 3, 3rd para, 2nd sentence Excise-Duties-Directive or that the special intention of the tax is fulfilled by differentiating the tax rates for alcoholic (10%) and non-alcoholic (5%) beverages. Austria has also declared that the Excise-Duties-Directive, based on Art 93 EC (previously Art 99 EC), is not to be applied. Art 93 EC suggests provisions of tax harmonisation only if it is "necessary to ensure the establishment and the functioning of the Internal Market". The Austrian beverage tax does not hinder the functioning of the Internal Market at all (Neither discrimination against foreigners nor border adjustments are necessary when applying the tax).

ECJ decision is expected by the end of 1999 or beginning of 2000

Austria's cities and municipalities are caught between hope and despair: If the beverage tax is declared incompatible with community law, Austria's local authorities can expect an additional "Year-2000-problem": the Maastricht deficit of Austria's local and federal level may well go up by another 0,8% if the ECJ orders a retrospective effect.

There is still a small hope: the recently delivered reasoned opinion from the European Commission concerning the beverage tax, mentions as the single reason for the non-compliance of this tax the absence of a special intention. This could be easily corrected by earmarking the beverage tax for special services, like health services. A simple decision by the city council is necessary for this. Because of their financial autonomy cities and municipalities are entitled to earmark their local taxes. Legally, no other permission is necessary.

Subsidiarity and "trust into Europe"

For friends of the European idea in Austria the abolition of the beverage tax would mean a political defeat. For consumers the result would be negative: even though they had paid the tax which was included in the price, they would not be reimbursed in the end but would loose out on many public services. According to a survey taken in summer 1999 88% of Austrians do not believe that the abolition of the tax will lead to cheaper beverages and 79% of Austrians approve of the current taxation on beverages...


ÖGZ Download