By Maxime Lassalle
The case C-105/14 Ivo Taricco and Others delivered on 8 September 2015 is a new example of activism of the EU Court of Justice (CJEU). It draws consequences from Åkerberg Fransson C-617/10 (already commented on this blog here and here), but this time goes in another direction as it extends the obligation of Member States in the field of criminal law for a more effective penalisation at the expense of national criminal procedure. Once again the obligations related to VAT collection are at stake, as was the case in Åkerberg Fransson, however this time from the point of view of the protection of the financial interests of the Union. In this field, the Member States have indeed the duty to counter fraud affecting the financial interests of the Union (Article 325 (1) TFEU), the so-called “PIF fraud” (where PIF is a French acronym for ‘protection des intérêts financiers de l’Union’). In particular, they are required to “take the same measures to counter fraud affecting the financial interests of the Union as they take to counter fraud affecting their own financial interests” (Article 325 (2)). In this Grand Chamber ruling, the Court took an opportunity to clearly express its will to include VAT fraud in the definition of PIF fraud and to significantly extend the obligations of the Member States to effectively penalize such fraud. Given the difficulties related to the ongoing negotiations on the project of PIF Directive, this decision is very timely.
The facts of the case and the questions referred
Mr Taricco and several others defendants are prosecuted for having adopted a behaviour similar to carousel fraud, and this as members of a criminal organisation. The facts these persons are prosecuted for took place in the period from 2005 to 2009.
The criminal proceedings are still at the stage of the preliminary hearing, in Italy. The judge in charge of this has to determine whether there are grounds for committing the defendants for trial and has to fix a date for the trial. It is this judge who referred the case to the CJEU for a preliminary ruling.
Under the Italian provisions, the period for prosecuting carousel fraud is quite limited. The different tax offences will become time-barred on 8 February 2018 at the latest. This date takes into account the maximum possible extension of the statute of limitations period, including the different investigative measures which have interrupted that period.
The issue pointed out by the referring judge is that it is “certain” that a final judgement will not be rendered by February 2018 (§22). The referring judge considers that this case is not isolated but merely illustrates the general situation in Italy. Indeed, particularly with respect to economic offences, which by their very nature and complexity require extensive investigations, the time-limit will often hamper an effective criminal prosecution. In other words, the whole statute of limitations regime in Italy would become a “guarantee of impunity” for offenders in the field of white collar crime. This would be contrary to Italy’s obligations under EU law. According to the referring judge, this situation was created by Law No 251/2005 and the consecutive modification of Article 160 of the Italian Criminal Code. From then on interrupted statute of limitations periods could be extended only by one quarter while they used to be extended by half.
The referring judge considers that the Italian system “provides for the limitation period to be extended by only one quarter following interruption and, therefore, allows crimes to become time barred, resulting in impunity, even though criminal proceedings were brought in good time” (§27). He therefore asked the CJEU four questions about the compatibility of the Italian system with Italy’s commitments under EU law, considering in particular the obligation to protect competition, the prohibition against state aid, the exhaustive nature of the list of VAT exemptions, and the principle of sound public finances.
The reasoning of the CJEU
The CJEU’s reasoning mainly focuses on the third question, considering this to be the “essence” of Italian’s judge’s request, and reformulates the question as follows: “does a national rule such as that established by the provisions at issue [amount] to an impediment to the effective fight against VAT evasion in the Member State concerned, in a manner incompatible with Directive 2006/112 and, more generally, with EU law” (§34)?
In a first step, the Court refers to the general principle of EU law, reiterated in Åkerberg Fransson, that Member States are under a general obligation to take all legislative and administrative measure appropriate for ensuring the collection of all the VAT due on their territory and for fighting against tax evasion (§36). As a consequence, Member States should adopt “effective deterrent measures” that are the same as the measures they take to counter fraud affecting their own interests (§37). Moreover, the Court reminds that there is a direct link between the national collection of VAT and the availability to the EU budget of the corresponding VAT resources. As a consequence of these statements, even though the Member States have “freedom to choose the applicable penalties” between administrative and criminal penalties, the last ones may be necessary to “combat serious cases of VAT evasion in an effective and dissuasive manner” (§39). In addition, to underline the necessity to impose effective criminal penalties, the Court recalls the obligation for the Member States, under Article 2 (1) of the 1995 PIF Convention, to protect the financial interests of the EU by effective, proportionate and dissuasive criminal penalties and clearly includes VAT fraud in its definition of PIF fraud. This position of the Court is very meaningful as it takes place during the negotiations of the future PIF Directive
All these elements lead the Court to assert that national provisions should enable an effective and dissuasive penalization of VAT fraud. The Court, however, leaves it up to the referring court to assess whether (1) the Italian system has the effect of neutralizing this “effective and dissuasive penalization” in a “considerable number of cases” (§47) and (2) whether the discussed provisions apply to cases of VAT evasion in the same manner as they apply to fraud affecting the Italian Republic’s own financial interests. Should there be a difference, this discrimination would violate EU law (§48).
As to the consequences the referring judge should draw from the eventual incompatibility of the national provisions at issue with EU law, the CJEU holds that these national provisions should be disapplied. Yet at the same time, – and this is where the tricky part comes – the national court should ensure that its decision to put aside national law is compatible with the suspect’s fundamental rights. In particular, the national court should observe the principles of legality and proportionality of criminal offences and penalties enshrined in Article 49 of the Charter of Fundamental Rights of the European Union. In other words, the national judge has to strike a balance between the effectiveness of EU law and the individual’s fundamental right.
Interestingly, in the CJEU’s view, a disapplication of the Italian rules relating to the statute of limitations period would not infringe the suspect’s fundamental rights. Indeed, the disapplication of the Italian legislation would not modify the substance of tax offences at stake – in other words, the previsibility requirement of the legality principle would be met – and would not lead to a conviction for an act or omission that did not constitute an offence at the time when it was committed – so there would be no retroactive application of the criminal law (§54-57).
The Taricco judgment is highly relevant for several reasons. Firstly, the CJEU obviously took the opportunity of this case to clearly express that VAT fraud is an element of the broad concept of fraud against the financial interests of the European Union. Advocate General Kokott, in her opinion, very clearly explained the reason why VAT fraud should be considered as being in the scope of the 1995 PIF Convention, while the 1997 Explanatory Report of the Council of the EU on this Convention had stated exactly the opposite. The Advocate General’s opinion may be seen as an attempt to intervene in a much more recent controversy. As a matter of fact, he Commission issued in 2012 a proposal for a directive replacing the 1995 PIF Convention. While this proposal clearly included VAT fraud in its scope, the Member States took it out, among other reasons because it would extend the competences of the future European public prosecutor’s office. However, according to the Advocate General, to consider VAT fraud as being outside the scope of PIF fraud would be contrary to the Convention’s objective of vigorously combatting fraud affecting the European Union’s financial interests (§94-103 of the Opinion). The Court subscribed to this argument, without coming back to the position of the Council (§41). The Court’s viewpoint immediately created some anxiety among policy-makers, as a statement of the Luxembourg Presidency of the Council demonstrates. Against the backdrop of the ongoing negotiations, the statement of the Luxembourg Presidency thus raises the question whether the Council should keep insisting on the explicit exclusion of VAT fraud from the scope of the discussed Directive. It thus remains to be seen whether the CJEU’s ruling will have any impact on the ongoing negotiations and the scope of application of the future Directive.
Secondly, the consequences of the obligation of effective penalisation also need to be further developed. While the Advocate General made several propositions as to the method to reconcile Italian law and Italy’s EU obligations (§124-127), the Court simply asserted that Italian law should be disapplied “without having to request or await the prior repeal of those articles by way of legislation or any other constitutional procedure” (§49). This statement is very important for the very reason that such disapplication is contrary to the suspect’s fundamental rights as they are recognized by the Italian constitutional system. It is true that the case-law of the European Court of Human Rights (ECtHR) clearly states that Article 7 ECHR cannot be interpreted as prohibiting an extension of limitation periods where the relevant offences have never become subject to limitation (see ECtHR, Coëme and Others v. Belgium, nos. 32492/96, 32547/96, 32548/96, 33209/96 and 33210/96, § 149). However, the protection recognized by the ECHR is arguably only a minimal one. For instance, the Venice Commission, an organ of the Council of Europe whose purpose is to provide legal advice in the field on constitutional law, issued an Opinion no. 523/2009 on the retroactivity of statutes of limitations, making clear that other approaches were possible. As a matter of fact, the regulation of statute of limitations can be considered as a question of substantive criminal law and not of criminal procedure and, in such a situation, modifications cannot be applied retroactively. This so-called “substantive approach”, which is followed by the Italian Constitutional Court and for instance also recognized in Hungary, is clearly more protective than the minimal approach adopted by the ECtHR. Considering this, Taricco is about to create a conflict between European obligations and Italian fundamental principles. In the past, the Italian Constitutional Court made clear that supra-national law should not prevail without any limitation, and that the application of international obligations could not have the effect to breach the fundamental principles of the constitutional order or the fundamental rights of the individuals (this is called the “counter-limit doctrine”, developed for example in the “Granital case”, Sentenza n. 170, 5 June 1984). The Court of Appeals of Milan has already submitted a request for a preliminary ruling to the Italian Constitutional Court on 18 September 2015 about this precise question. By contrast, the Italian Corte di Cassazione has accepted to apply the rationale of Taricco in a very recent decision. Beyond the Italian specific case, such an opposition between national law providing more safeguards and European law was already addressed by the ECJ in the Melloni case (commented here). At that time, the principles of effectiveness and of primacy of EU law already prevailed. That case was related to the cooperation in criminal matters. With Taricco, this rationale is extended to the substantive competence of the EU in criminal matters.
As a conclusion, one can say that the CJEU did not only reply to the question raised by Advocate General Kokott whether “EU law require[s] the courts of the Member States to refrain from applying certain provisions of their national law on the limitation periods applicable to the prosecution of criminal offences in order to guarantee the effective punishment of tax offences” (§1 of the Opinion). The Court also replied to another sensitive question: Can EU law, in order to protect the EU’s financial interests, require the Member States to lower the level of protection of national fundamental principles down to the minimum European standard? The Court replied in the affirmative. EU effectiveness thus seems to take precedence over national fundamental rights…