‘Passing on’ occurs when the economic burden of a charge levied from a business is passed on that business’s customers, and possibly even further down the supply chain. The main issues at stake as regards passing on are whether it should be relevant to the calculation of payable damages, and whether downstream claimants should be able to bring an action in respect of an economic burden passed on to them.
The Court of Justice has largely left it to the national legal systems of the Member States to find proper solutions to the passing-on problem in the repayment of unlawfully levied charges. It has nevertheless scrutinised national approaches with increasing stringency.
In this paper, available here, the authors call for EU harmonisation of the legal issues triggered by passing on. To that end, the authors present two alternative models for harmonisation.
Section 2 describes existing EU rules on passing on.
Most European case law on passing on is concerned the duty of public authorities to reimburse unlawfully charged monies – particularly unlawful taxes and charges. Other areas where matters of passing on arose include damages actions against the EU institutions and damages actions brought by reason of an infringement of competition law.
At least as regards unlawfully levied charges, the Court of Justice has consistently held that EU law neither prevents nor requires national courts to take into account the fact that the burden of charges unlawfully levied under EU law may have been passed on. However, a passing on defence on the part of States will only be tolerated if:
(i) the charge was borne, in whole or in part, by someone other than the claimant. The Court has struck down a number of presumptions and rules of evidence intended to place upon the taxpayer the burden of establishing that the charges unduly paid have not been passed on to other persons, placing on the Member States the onus of proving the existence and extent of passing on.
(ii) reimbursement of the charge to the claimant constitutes unjust enrichment of the claimant. Passing on entails that any extra charges imposed by Member States are included in sale prices. Obviously, this might also cause a reduction in sales. These so-called turnover losses may be relevant to the assessment of the repayable amount. The court has held that reduced sales caused by the increase of selling prices resulting from an unlawful charge might exclude, in whole or in part, any unjust enrichment of the taxpayer which would otherwise have been caused by reimbursement.
The Court has also made clear that the right to reimbursement by reason of the levying of charges in breach of EU law extends to downstream claimants. However, the Court of Justice does not impose any particular requirements concerning the form of redress available or the rules governing against whom such redress is available. The Court does set two conditions for a Member State, having levied an unlawful charge, to oppose a claim for reimbursement brought by a downstream claimant. First, the claimant must be able, on the basis of national law, to bring a civil action against its supplier (normally the party who had first paid the unlawful charge) for recovery of the sum unduly paid. Second, it must not be virtually impossible or excessively difficult for the downstream claimant to obtain reimbursement in this way.
Sections 3 to 5 discuss Swedish and Norwegian rules on passing on.
Passing on was introduced into Sweden and Norway by the ECJ’s case law on tax matters. These sections describe a number of tax cases, the details of which need not concern us here. What is interesting is that, in the context of a common legal tradition where jurisdictions borrow freely from one another, Swedish and Norwegian courts arrived at strikingly different positions when starting from the same legal source – EU case law.
The Swedish fiscal authorities accepted to repay the erroneously exacted sums of VAT in the print shop cases, without any deduction by reason of (real or possible) passing on—while the Norwegian tax authorities resisted repayment of passed on amounts absent evidence of such passing on. Despite the different approaches, both are consistent with EU law, which illustrates how the Court of Justice leaves the Member States a wide margin of discretion to design their own approach to passing on.
Section 5 also covers passing on under EU in areas other than tax.
The Court of Justice has been confronted with the problem of passing on not only in actions for repayment of unlawful charges levied by Member States, but also in damages actions against the EU institutions under Article (now) 340(2) TFEU and in damages actions brought by reason of an infringement of competition law. The case law concerning damages from EU institutions is somewhat dated, the latest judgment being delivered in 1984, but the common thread is that the Court placed on the Council and the Commission the burden of proving passing on.
As regards competition, the EU Damages Directive endorsed the passing on defence. An award of damages for harm incurred in the form of an overcharge is to be reduced to the extent that such an overcharge has been passed on down the supply chain. However, the burden of proving that the overcharge was passed on shall be on the defendant. It should also be noted that the Directive empowers downstream customers to claim for damages passed onto them.
The authors note that the various EU approaches to passing on are substantially coherent, but there are significant differences as regards how much EU law constrains national law. Actions for damages at EU level are solely governed by EU law; in the competition field, there has been harmonisation of passing on related issues, and future case law will by and large be focused on details of how to interpret the rules stipulated in the Directive; while there has been no harmonisation as regards the repayment of unlawful charges, which are solely constrained by case law focusing on safeguarding rights conferred on individuals by EU law (i.e. applying the principle of effectiveness).
Section 6 considers options for harmonisation as regards unlawfully levied charges.
As is the case concerning competition claims, there are marked differences between the rules concerning passing in the Member States, which leads to legal uncertainty and ineffectiveness in the protection of individual rights. The authors argue that the legal rules governing passing on should be harmonised, to the benefit of legal certainty for any and all who find themselves in the unenviable situation of reclaiming a charge unlawfully levied from them. This has occurred for competition law, but not for the recovery of unlawfully levied charges.
The authors argue that the ‘compensatory’ approach adopted for competition damages is not necessarily the most suitable one for the restitution of unlawfully levied charges. Compensatory damages compensate for harm incurred by the claimant; by contrast, restitution is concerned with the reversal of a transfer of wealth. This difference has profound repercussions for the choice of a proper approach to passing on issues. In light of this, the authors advance two possibilities that ensure that Member States actually repay a charge or tax levied in breach of EU law. The first model, inspired by the US, allows Member State to invoke the defence of passing on if, and only if, this clearly facilitates distribution to indirect payers that actually have a claim for recovery. The second model would not permit passing on defences in the context of restitution claims, as is common in many EU Member States outside the scope of tax, while making the direct payer subsequently liable to distribute such portions of the award to their customers.
While this article obviously goes well beyond competition law, it provides a useful perspective on what ‘passing on’ is, and on the different ways in which it can be conceptualised.
I found the paper’s distinction between passing on in damages and restitution claims particularly useful. I wrote elsewhere that there are reasons to distinguish between public bodies acting in a public capacity and private defendants as regards the extent to which passing on defences should be available to them. This article convinced me that the distinction between damages and restitution could also be useful, since different rules may govern the ability to rely on passing on depending on whether the defence is invoked in the context of an action for compensation of a wrong or for restitution of unjust enrichment. I expect to see both dimensions being considered as EU member states develop their approaches to passing on in competition cases, which has already given rise to some interesting decisions.