CJEU on application of tax rate for selected beverages
The VAT Directive does not prevent member states from applying a reduced rate to selected goods and services. One of the possible criteria for classifying goods into reduced rates is the customs nomenclature. Member states may use other classifications at their discretion; however, the products classified into different categories according to the chosen criteria must be different.
In the light of judgments C-499/16 AZ and C-406/20 Phantasialand, the Court of Justice of the European Union (CJEU) dealt with the application of different VAT rates to the sale of beverages that are very similar at first sight. A Polish café operator applied a second reduced rate of VAT (5%) to the sale of hot chocolate made from milk and chocolate ingredients; the tax administrator, however, challenged this.
The tax administrator argued that a hot drink prepared for a customer upon their order is not the same supply as a drink sold in a retail outlet, to which the second reduced rate applies. The tax administrator thus argued that the drink in a café shall be subject to the 8% rate. The café operator appealed the decision on the grounds that the classification of beverages in annexes to the Polish VAT Act was unclear.
The CJEU pointed out that the VAT Directive does not prevent member states from applying reduced tax rates to selected goods and services. The customs nomenclature is one of the possible criteria for classifying goods into reduced rate categories. Member states may also use another classification at their discretion; however, products classified into different categories according to the chosen criteria must be different in the eyes of the average consumer. In the dispute at hand, the café operator argued that the drink sold in the café was fully interchangeable with a drink sold in a retail outlet and could therefore be classified under the Polish goods nomenclature in the category to which the second reduced rate of 5% applied.
The Court of Justice of the EU held that it was for the referring court to assess whether the beverages were interchangeable, i.e., had similar characteristics, main ingredients, consistency and appearance.
The court should also assess whether the two beverages satisfy the same consumer needs and whether the differences between them affect the average consumer's decision-making. The fact that the composition of a hot beverage intended for immediate consumption can be directly influenced by the customer, whereas the composition of a ready-to-drink beverage sold in a retail outlet is predetermined and the beverage is not intended for immediate consumption, may have a decisive influence on the customer's decision. Such consumer reasoning is sufficient to treat the beverages as not exactly the same and therefore subject to different VAT rates. Such treatment of the products does not violate the principle of fiscal neutrality.