On April 10, 2019 on the website of the Court of Justice of the European Union (CJEU) the opinion of Advocate General Hogan in the Case C-291/18, Grup Servicii Petroliere SA versus Agenţia Naţională de Administrare Fiscală — Direcţia Generală de Soluţionare a Contestaţiilor Agenţia Naţională de Administrare Fiscală — Direcţia Generală de Administrare a Marilor Contribuabili (ECLI:EU:C:2019:302) was published.
Is an offshore ‘jackup’ drilling rig ‘a vessel used for navigation on the high seas …’? This is the principal question which this Court is now required to answer following a reference from the Curtea de Apel Bucureşti (Court of Appeal, Bucharest, Romania).
The present request has been made in proceedings between Grup Servicii Petroliere SA (‘GSP’), a company with its head office in Romania, and the Romanian tax authorities in a case concerning the VAT-exempt supply of three offshore jackup drilling rigs to particular Maltese companies. In that context, the referring court wishes to know whether offshore jackup drilling rigs of this kind are covered by the exemption laid down in Article 148(c) read in conjunction with Article 148(a) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1, ‘the VAT Directive’).
The effect of these provisions is that Member States are required in particular to exempt the supply of vessels used for navigation on the high seas and carrying passengers for reward or used for the purpose of commercial, industrial or fishing activities. As I have just noted, the essential question for consideration is whether these particular drilling rigs come within this exemption. Before considering this question it is first necessary to set out the relevant provisions of public international law, European Union law and national law.
The main proceedings and the questions referred for a preliminary ruling
· In May 2008 GSP sold three offshore jackup drilling rigs, operating in the Black Sea (more precisely, according to the information contained in the request of the referring court, in Romanian territorial waters) to certain Maltese purchasers for the purpose of carrying out drilling activities. Jackup rigs, or self-elevating units, are mobile platforms which consist of a buoyant hull which has been fitted with several movable legs. The existence of the hull enables the drilling unit and all attached machinery to be transported to the proposed drilling site with its legs up and the hull floating on the water. When the rig arrives at the location, the legs are then extended (‘jacked’) into the water. The legs thus anchor the rig on to the sea-bed and the hull platform is then elevated well above the surface of the sea. When the rig is in this extended (or ‘jacked-up’) position it forms a static platform. It is not until the legs are withdrawn at the end of the drilling operation that the hull can float again.
· It appears from the case file sent to the Court that the three rigs at issue are not self-propelled, but manoeuvred by towing. This was confirmed at the hearing . While the Court was also informed at the hearing that the platform supports a crew, that there is a log book and that the platform can be manoeuvred by its engines to deal with ocean currents and sea drift, it would seem — although these are facts ultimately for the referring court to verify — that even when floating the platform is transported from location to location by a tugboat.
· On the occasion of that sale, GSP issued invoices, applying the VAT exemption scheme provided for by the national legislation (Article 143(1)(h) of the Tax Code) transposing Article 148(c) of the VAT Directive in respect of the supply of these platforms. After the sale, GSP continued to operate these platforms in the Black Sea pursuant to the terms of a bare boat charter.
· On 23 May 2016, following the adoption of a tax inspection report, the Romanian tax administration issued a VAT adjustment notice on the grounds that, although the drilling rigs could be considered as vessels within the meaning of the national legislation and are suitable for unlimited use at sea, they do not navigate during drilling activity but are rather in a parked position: their columns are in a low position and rest on the seabed in order to lift the pontoon (the floating part) above the sea, from a height of some 60 to 70 metres. For a supply of platforms to fall within the exemption provided for in Article 143(1)(h) of the Tax Code, it was necessary to establish that the vessel in question is navigating effectively and predominantly on the high seas. The Romanian tax administration considered, however, that the evidence showed that the actual and preponderant use of the platforms occurs when they are in a parked position for the purpose of drilling activity and not when they navigate, which is only an activity subsidiary to drilling.
· GSP submitted a complaint against this notice which was rejected by a decision of the Romanian national tax administration on 24 November 2016.
· The applicant appealed its opposition to the tax assessment notice, the tax inspection report and the decision on the complaint to the referring court.
The request for a preliminary ruling and the procedure before the court
· The referring court considers that it is necessary to clarify, first, whether the exemption laid down by Article 148(c), read in combination with Article 148(a) of the VAT Directive, applies to the supply of offshore jackup drilling rigs, i.e., whether such a platform falls within the concept of a ‘vessel’ as defined in that provision. Second, and if the answer to the former question is affirmative, the referring court wishes to know whether the exemption provided for in Article 148(c) read in combination with Article 148(a) of the VAT Directive is subject to the condition that the activity of navigation on the high seas is predominant as compared with that of drilling.
· Under those circumstances, the Curtea de Apel Bucureşti (Court of Appeal, Bucharest) has decided to stay the proceedings and to refer the following questions to the Court for a preliminary ruling:
‘(1) Must Article 148(c) of [the VAT Directive], in conjunction with Article 148(a) of that regulation, be interpreted as meaning that the exemption from value added tax applies, in some circumstances, to the sale of offshore jackup drilling rigs, that is to say, are offshore jackup drilling rigs covered by the term “vessels” within the meaning of that provision of EU law, given that, according to the title of Chapter 7 of that directive, that provision lays down rules governing “exemptions related to international transport”?
(2) If the answer to the first question is in the affirmative, must Article 148(c) of [the VAT Directive], in conjunction with Article 148(a) of that directive, be interpreted as meaning that an essential condition for applying the exemption from value added tax to an offshore jackup drilling rig, which has navigated into international waters, is that it must in fact be in a state of movement while it is being used (for commercial/industrial activities), floating or moving at sea from place to place, for a longer period than the period during which it is stationary or immobile, as a result of carrying out drilling activities at sea — that is to say, that navigation must in fact predominate via-à-vis drilling activities?’
· Written observations were submitted by Grup Servicii Petroliere, the Belgian, Italian and Romanian Governments and by the European Commission. In addition, Grup Servicii Petroliere, the Romanian Government and the European Commission presented oral arguments at the hearing on 28 February 2019.
The Advocate General proposes that the Court answers the questions asked by the Curtea de Apel Bucureşti (Court of Appeal, Bucharest, Romania) that Article 148(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, read in conjunction with Article 148(a) of that directive, must be interpreted as meaning that the exemption laid down in this first provision is not applicable to offshore jackup drilling rigs such as the ones at issue in the main proceedings.
From the analysis as made by the Advocate General
A. Preliminary observation
· It may first be observed that recital 3 of the VAT Directive specifies that the adoption of that directive has not in principle brought about any material changes in the existing legislation on the common system of VAT with the exception of a small number of substantive amendments listed exhaustively in the provisions governing transposition and the entry into force of the directive. Accordingly, this Directive may be regarded essentially as in the nature of a consolidating legislative measure.
· As none of the provisions governing transposition and entry into force of the VAT Directive, which are set out in Article 411 to 414 of that directive, refer to Article 148(a) or (c), the latter must be considered as having the same meaning as Article 15(4) of the Sixth Directive which was similarly worded. It follows, accordingly, that the existing case-law relating to Article 15(4) of the Sixth Directive must be taken into consideration to interpret Article 148(a) and (c) of the VAT Directive.
· Regarding Article 15(4) of the Sixth Directive, the Court has held that transactions covered by this provision are exempted because they are ‘equated with exports’. In other words, these transactions must be treated as if they have occurred outside EU territory.
· In its judgment of 3 September 2015, Fast Bunkering Klaipėda (C‑526/13, EU:C:2015:536, paragraph 26), the Court has confirmed that a transaction covered by Article 148(a) and (c) is exempted because such a transaction is equated with exports.
· It is in the light of this objective that the two questions raised may thus be examined.
B. As regards the two questions
· By its two questions, the referring court asks, in essence, whether Article 148(c) of the the VAT Directive, read in conjunction with Article 148(a) of that directive, must be interpreted as meaning that the exemption laid down in this first provision is applicable to offshore jackup drilling rigs.
· As a starting point, it must be recalled that under Article 148(c) of the VAT Directive, the supply of vessels referred to in point (a) of that article is VAT exempt. In order, therefore, to determine whether the supply of offshore jackup drilling rigs is covered by this exemption, it is necessary to determine, first, what is meant by the use of the word ‘vessel’ in Article 148(c) and, second, what characteristics a vessel must present in order to fall within the scope of Article 148(a) of the VAT Directive so that its supply can be exempted.
1. The common meaning of the terms ‘vessel’ and ‘navigation’
· Regarding the concept of what constitutes a vessel, much, of course, depends on the specific context of the provision in question.
· It is true that under international law, it is, perhaps, no surprise, for example, that the International Convention for the Prevention of Pollution from Ships (1973) (MARPOL) (as amended by the Protocol of 1978) (London) defined a ship as ‘a vessel of any type whatsoever operating in the marine environment and includes hydrofoil boats, air-cushion vehicles, submersibles, floating craft and fixed or floating platforms’. However, since this convention aims at preventing marine pollution, it is natural that it defined the concept of vessel very widely. In the light of that objective, it is essentially irrelevant whether that pollution came from a fixed platform supporting a drilling rig or from a conventional nautical vessel such as a ship or a boat. That is why, in essence, the MARPOL Convention includes in the definition of the term ‘ship’ fixed or floating platforms of this kind.
· Yet the wording of the present Article 148(a) and (c) of the VAT Directive is of some importance. The exemption, after all, is not simply in respect of ‘vessels’ simpliciter, but rather in respect of ‘vessels used for navigation on the high seas’. In this respect the directive employs the same venerable language of notable items of maritime legislation contained in the statute roll of some Member States. The phrase ‘… used for navigation on the high seas …’ is nevertheless an important and, to my mind, a decisive qualification of the word ‘vessel’.
· In ordinary language the word ‘vessel’ connotes a craft of some sort which is capable of doing something on the water involving the carriage of persons or goods, irrespective of whether this is done for reward or otherwise or just simply for recreational purposes. Therefore, I rather doubt if a rig of this kind can properly be described as a ‘vessel’ in this sense, since it neither carries persons or goods on the water: it is more in the nature of a large-scale man-made machine structure which, once moved, is affixed to the sea floor for drilling purposes. While it is true that, as the Court was informed at the hearing, there is a crew on board such a rig and that it has a log book, one might nonetheless observe that a jackup drilling rig seems to lack many of the standard features of a sailing vessel such as a bow or anchors or a rudder, although this is ultimately a matter for the national courts to verify in each case. Nor does it seem that they possess any conventional steering mechanism: it appears, for example, there is no wheel-house, albeit again that these details are matters for the national courts to verify. Moreover, as the Court was informed at the hearing, the rigs at issue in the present proceedings are furthermore in the nature of platforms which do not possess any means of self-propulsion.
· Yet even if I am wrong on this point and a ‘jackup’ drilling rig may nonetheless properly be regarded as a ‘vessel’, the fact that such a rig may (contrary to my own view) qualify as a ‘vessel’ simpliciter does not mean that it is a vessel ‘used for navigation on the high seas’ as required by Article 148(a) of the VAT Directive.
· It is true that in some of its language versions, Article 148(a) does not expressly mention the ‘used for navigation’ requirement. For example, the German version simply states that the vessel is required to be used on the high sea. Since, however, the objective of Article 148 is to exempt the supply of vessels taking place within the geographical scope of the VAT Directive, but which are intended to carry out economic activities outside of it, the application of that provision to a vessel requires, implicitly, but necessarily, that the former is at least navigated in order to leave the EU waters.
· It follows, therefore, that, even if a jackup drilling rig should be considered a ‘vessel’, in order to fall within the definition contained in Article 148(a) it must nonetheless be used for navigation on the high seas. Navigation is essentially the nautical art of seafaring. It implies that the location of the vessel can be determined and the future course of the vessel plotted by its navigator.
· So far as the term ‘the high seas’ is concerned, it is clear from Article 86 of the United Nations Convention on the Law of the Sea that international law regards the high seas as ‘all parts of the sea that are not included in the exclusive economic zone, in the territorial sea or in the internal waters of a State, or in the archipelagic waters of an archipelagic State’.
· Accordingly, the context of Article 148(a) and (c) necessarily assumes that the vessel in question must at least be capable of being navigated far from the coast. This in turn implies that the direction of the vessel can be plotted by the navigator and that the vessel is accordingly capable of self-propulsion. And whatever the nautical qualities of the drilling rigs in question, it is perfectly clear that these rigs are not used for navigation on the high seas, precisely because they do not possess any capacity for self-propulsion.
· It is, of course, true that these rigs are designed to withstand adverse weather conditions and, as was further confirmed at the hearing, they are capable of being transported on the high seas and have regularly operated in that capacity on the high seas. This, however, is not the same thing as saying that these drilling rigs ‘are used for navigation on the high seas’. Any other conclusion would, to my mind, amount to a distortion of language and would justly be viewed with some scepticism by the seafaring community.One could not, I think, in any realistic sense describe this rig as a ‘sea-going vessel’.
· One might, moreover, equally observe that any exemption from the scope of the VAT Directive must be strictly construed, and the case for bringing ‘jackup’ drilling rigs of this kind within the scope of the Article 148(c) exemption has not been clearly established.
· It follows, therefore, for these reasons that the Article 148(c) exemption does not apply to drilling rigs of this kind.
2. An Alternative Approach
· In any event, even if the commonly accepted meaning of the terms ‘vessel’ and ‘navigation’ is put aside, I nonetheless take the view that, in circumstances such as those of the case in the main proceedings, precisely the same conclusion, namely that the exemption laid down in Article 148(c) of the VAT directive is not applicable, can be arrived at by another way.
· It is true that if regard is had only to the objective pursued by Article 148(a) and (c) — which is to exempt certain transactions because they are ‘equated with exports’ or, more precisely, because they are related to supplies of goods or services intended for use outside the EU territory —, it must be admitted that such an objective implies that the word ‘vessel’ must be understood as referring to a craft capable of being moved outside EU waters, albeit necessarily on its own. Viewed further from this perspective, the word ‘navigation’ could be taken to refer to the movement that a vessel needs to perform in order to leave EU waters so as to carry out its activities outside of the scope of application of the VAT legislation.
· It must also be recalled, however, that Article 148(c) of the VAT directive requires in order for a supply of ships to be exempt that two other conditions, apart from being a vessel used for navigation, be met. First, the vessel must be intended to be assigned to one of the activities mentioned in Article 148 (a) of that directive. Second, as the Court has already ruled in the context of both the Sixth Directive and the VAT Directive in the case of both vessels carrying passengers for reward and vessels used for commercial or industrial activities that this exemption does not apply unless these activities take place on the high seas.
· Regarding the activities that a vessel must carry out in order that its supply be exempted, the referring Court underlined in its first question that Article 148 of the VAT directive is mentioned in Chapter 7 of that directive which is headed ‘Exemptions related to international transport’.
· However, as the heading of a chapter is chosen in view of the components of the principal provisions laid down in it, all provisions contained in a chapter do not necessarily have a scope of application limited to the subject mentioned in the heading of that chapter. In the case of Article 148(a), it flows from the wording of that provision itself that the activities covered are not limited simply to transportation, but include any commercial, fishing or industrial activities.
· There is, of course, no doubt that the carrying-out of offshore drilling by means of a drilling rig is one of the activities referred to in Article 148(a), as industrial activities includes drilling.
· Concerning the condition related to the high seas, the Romanian Government and the Commission claim that such condition implies that the vessel must be used on them whereas the Belgian and Italian Governments argue that a vessel only needs to be suitable to navigate on such waters, regardless of the time spent on the high seas. In their opinion, a vessel which carries out its activities in the territorial waters of one of the Member States could benefit from the exemption enshrined in Article 148(c) without being used on the high seas, as long as it could be moved there.
· As, however, I have already pointed out, transactions covered by Article 148(a) and (c) are exempted because they are related to goods or services purchased within EU territories but which are expected to be used outside those territories. This means, in other words, that the vessel in question must move from a place situated within EU waters to a place outside them, where the activities in question will be carried out. It is precisely for these reasons that I consider, contrary to the arguments put forward by the Belgian and Italian Governments, that it is not sufficient for a vessel to be suitable for being used on the high seas. In my view, the vessel needs to be mainly and effectively engaged in an activity conducted on the high seas.
3. The concept of the high seas in Article 148(a) of the VAT directive
· It is finally necessary to examine what is meant by the concept of ‘high seas’ in Article 148(a) of the VAT directive.
· Since the objective pursued by that article is to exempt transactions equated with exports, I consider that the concept of high seas must be understood as designating the water outside the territorial scope of the the VAT Directive.
· The territorial scope of that directive is determined in Article 5. According to that provision, the VAT Directive applies to transactions occurring within a part of the territory of one of the Members States ‘to which the Treaty establishing the European Community, which has been replaced since then by the Treaty on the Functioning of the European Union, in accordance with [Article 52 TEU and Articles 349 and 355 TFEU], is applicable with the exception of any territory referred to in Article 6 of this Directive’.
· In the absence, in the Treaty, of a definition of the notion of territory, the latter must be determined in accordance with the principles of public international law.
· In this respect, the Romanian Government and the Commission argued during the hearing that, when the Sixth VAT Directive was adopted, which already contained the exemption now provided for in Article 148(a), only the Convention on the Territorial Sea and the Contiguous Zone, signed at Geneva on 29 April 1958 (United Nations Treaty Series, Vol. 516, p. 205) was in force and that, therefore, the notions of ‘territories’ and ‘high seas’ should be interpreted in the light of this convention.
· One must, however, recall that the primacy of international agreements concluded by the European Union over instruments of secondary law means that those instruments must be interpreted, as from the date of the entry into force of these agreements, in a manner that is consistent with them. Consequently, in so far as Decision 98/392 entered into force on 13 July 1998, before the rigs at issue in the main proceedings were purchased, the territory of Member States had to be assessed in the light of the United Nations Convention on the Law of the Sea.
· According to Article 2 of the United Nations Convention on the Law of the Sea, the sovereignty of the coastal State extends to the territorial sea as well as to its bed and subsoil.
· In accordance with Article 3 of that convention, each State has the right to establish the breadth of its territorial sea up to a limit not exceeding 12 nautical miles, measured from baselines determined in accordance with this convention.
· Beyond this limit, the United Nations Convention on the Law of the Sea provides that each coastal State has sovereign rights on the exclusive economic zone and the continental shelf. These rights are, however, limited to activities laid down respectively in Articles 56 and 77 of the United Nations Convention on the Law of the Sea.
· Accordingly, in its judgment of 29 March 2007, Aktiebolaget NN (C‑111/05, EU:C:2007:195, paragraphs 59 and 60), the Court held that the ‘sovereignty of the coastal State over the exclusive economic zone and the continental shelf is merely functional and, as such, is limited to the right to exercise the activities of exploration and exploitation laid down in Articles 56 and 77 of the United Nations Convention on the Law of the Sea’.
· As the activity at issue in Aktiebolaget NN was the supplying and laying of an undersea cable, which was not included in the activities listed in Articles 56 and 77 of the United Nations Convention on the Law of the Sea, the Court ruled that this activity is not within the sovereignty of the coastal Member State and, thus, cannot be regarded as falling within the territorial scope of application of the common system of VAT.
· In the present case, although rigs enjoy the freedom of navigation referred to in Articles 58(1), 78 and 87 of the United Nations Convention on the Law of the Sea, it remains the case that the activity which they carry out is the exploration and exploitation of the natural resources of the subsoil of the ocean floor. This, however, is one of the activities to which Articles 56 and 77 of the United Nations Convention on the Law of the Sea refers as being subject to the sovereign rights of the coastal State.
· In contrast, therefore, with the activity at issue in Aktiebolaget NN, when a craft is performing drilling activities in the exclusive economic zone or in the continental shelf of a Member State, such activities are carried out within the territorial scope of application of the VAT Directive. Consequently, in order for its supply to be exempted under Article 148(c), read in conjunction with Article 148(a) of that directive, a rig may not carry out its activities either in the territorial sea, or in the exclusive economic zone, nor in the continental shelf of an EU Member State.
· In its request for a preliminary ruling, the referring court has indicated that the rigs at issue in the main proceedings were, when, purchased, performing drilling activity in Romanian territorial waters in the Black Sea and that they continued to perform those activities after the point when they were purchased.
· As all the parties agreed during the hearing, the Black Sea falls entirely under one or the other exclusive economic zone of its various coastal States. Accordingly, no part of the Black Sea can be considered as part of the high seas within the meaning of Article 148(c) of the VAT Directive. It follows, therefore, that even if (contrary to my own view) these rigs could be regarded as ‘vessels’ which were ‘used for navigation on the high seas’, their supply nonetheless cannot fall under Article 148(c), precisely because of the location where they carried out their activities immediately after they have been supplied.
· Contrary to the argument put forward by Grup servicii Petroliere, this conclusion is neither contradicted by the fact that these rigs could be moved in the future to the Mediterranean Sea or to the North Sea, nor by the principle of fiscal neutrality, understood here in the sense of equal treatment.
· Indeed, as a matter of principle, the use which needs to be taken into consideration to determine the applicable VAT rules, is that which will be directly carried out after the purchase of the goods or the supply of the services in question and not those that could hypothetically be carried out at some point in the future.
· Moreover, concerning the principle of tax neutrality, which precludes similar goods or services which are in competition with each other from being treated differently for VAT purposes, it must be recalled that the latter can only be invoked against national provisions.
· It is true that according to a particular line of case-law the principle of neutrality is the translation in the field of VAT of the principle of equal treatment, which implies that comparable situations must not be treated differently unless such treatment is objectively justified. The Court has, however, consistently held that the question whether or not situations are comparable must be determined in the light of the subject matter of the provisions in question and of the aim pursued by them, whilst account must be taken for that purpose of the principles and objectives of the field in question.
· As Article 148(c) of the VAT Directive exempts certain transactions because they are ‘equated with exports’, only vessels delivered within the territory of the Union with the intent of carrying out their activities outside of it before returning to their starting position can be considered to be in a comparable situation in the light of that objective. Therefore, the legislature may treat platforms differently without infringing the principle of equal treatment depending on whether or not they carry out their activities on the high seas.
· Similarly, I consider that the solution I have reached does not infringe the principle of equal treatment with regard to the provisions of Article 156 (d) of the VAT Directive. Indeed, I believe that this provision is not relevant in the present case, including in the view of the principle of fiscal neutrality. While Article 156 (d) states that the supply of goods which are intended to be admitted into territorial waters in order to be incorporated into drilling or production platforms, for purposes of the construction, repair, maintenance, alteration or fitting-out of such platforms, or to link such drilling or production platforms to the mainland may be VAT exempted, the wording of that article does not mention among the transactions covered the resale of drilling platforms.
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