31/8/07 eu-israel Trade in the Automobile Sector: Is Israel's High Taxation of Cars Legal under the Association Agreement? Arie Reich

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EU-Israel Trade in the Automobile Sector: Is Israel's High Taxation of Cars Legal under the Association Agreement?
Arie Reich*

I. Introduction

In all my courses on International Trade Law or on EU-Israel relations that I have taught over the last sixteen years or so, whenever I reach the subject of the free trade area between Israel and the EC and the guarantee of duty-free treatment of goods, I always have the same experience. When told that all manufactured goods made in the EC and imported into Israel are exempt from custom duties under the Association Agreement, my students will always ask me: "How can you say that? Surely you must know that there is a very high duty of over 100% on all imported cars, including those from the EC!" In view of the importance of cars and the considerable financial burden that their high prices put on practically every Israeli, by posing this question my students are not only asking for information on some of the finer details of the Association Agreement, but are in effect expressing their mistrust in the very essence of my claim about free trade between Israel and the EC (or with any of Israel's other free trade partners). My attempts to explain that cars from the EC are really exempt from custom duties, and are only subject to Purchase Tax and Value Added Tax (VAT) and that the latter do not amount to "charges having equivalent effect" to custom duties since they are imposed on locally-made and imported cares alike, are usually met with laughter. The reason is simple: everybody knows that there is virtually no car manufacturing in Israel, and thus the only ones who pay the high purchase tax are the importers. I usually persist with my thesis claiming that since there is no discrimination involved, and since the purchase tax cannot be claimed to protect the domestic industry, one must conclude that the high purchase tax on cars is perfectly legal under the Association Agreement.

Now, however, I would like to question this proposition. I would like to suggest that perhaps my students' intuitive reaction is the more correct one. Indeed, how can a tax that in practice is imposed only on imports and which by virtue of its extremely high levels clearly has a significant impact on trade volumes, be said to be compatible with free trade? Isn't it an obstacle to the free movement of goods that should have been removed by over thirty years of economic integration between Israel and the EU? In this paper I would like to examine this question both from a legal point of view, mainly in light of case law of the European Court of Justice (the ECJ) and possible interpretations of the existing Association Agreement, as well as from an efficiency perspective. Within the latter perspective we will ask ourselves what the costs and benefits of the current policy are, and whether it is justified from a normative standpoint.
II. Background: Israel's Purchase Tax on Automobiles

Cars that are commercially imported into Israel are subject to several taxes. Cars originating from countries with which Israel has no free trade agreement are subject to a customs duty at the rate of 7% ad valorem. Cars made in and imported from countries which have concluded free trade agreements with Israel (such as the EC, EFTA, USA, Canada, Turkey and Mexico) are not subject to any customs duty. However, they, and all other imported cars, are subject to a purchase tax which until 2005 amounted to 95% on private vehicles and 75% on commercial vehicles. In addition they are subject to VAT, which currently stands at 15.5% (and formerly was as high as 18%), and a port fee of 1.02%. In 2005, the Israeli Government initiated a reform program aimed at reducing the purchase tax on cars and equalizing the rates that apply to private and commercial vehicles. Accordingly, at present (2007) the rate of purchase tax for private vehicles is 84% and for commercial vehicles it is 72%. In 2010, the target date of the reform, the rates for all types of cars are planned to converge at 72%.1

The purchase tax is imposed by the Minister of Finance pursuant to the Purchase Tax Law (Goods and Services), 1952.2 The types of products that are subject to the tax and its rates are determined by decrees issued by the Minister, usually on an annual basis, based on the authorization found in Article 3 of this law. The purchase tax is imposed on the so-called "normal value" of the car, determined according to the provisions of the Customs Ordinance, which is made up of the ex-factory price of the car, plus freight and insurance costs until the Israeli port (know as CIF price), plus the port fee (1.02%) and other port expenses, and plus the customs duty (7%) if it applies. Some credits are then allowed if the car has certain safety components, such as airbags. In addition to the purchase tax, the importer must also pay the VAT (15.5%) which is assessed on the normal value, plus the customs duty (if applicable) and plus the purchase tax. Thus, in effect, the total tax burden for private cars from the EU at importation is close to 140% on the ex-factory price of the car.3 There are also significant rates of purchase tax on spare parts and accessories for cars.
Purchase tax is imposed on goods imported into Israel by virtue of their import, and on goods produced locally by virtue of their first sale. The tax is collected by the Israel customs authorities, which are in charge of the collection of all other import taxes, such as customs duties, anti-dumping duties, countervailing duties, and safeguard charges. The liability and rates of the purchase tax is imposed by the same legislative means as custom duties, namely the "Decree on Customs Duties, Exemptions and Purchase Tax on Goods" (צו תעריף המכס והפטורים ומס קניה על טובין), the law provides that the Customs Duties and Excise Law, 1949 will apply to decrees pursuant to the Purchase Tax Law,4 and the value of the goods for the purpose of determining the amount of liability is also to be assessed as it is for customs duties purposes.5 Thus, for all intents and purposes it is treated just like a customs duty and goods cannot be brought into free circulation in Israel until the purchase tax and all other import taxes have been paid or guaranteed. While purchase tax on local production is only due at the time of sale by the producer to the first buyer, importers are required to pay the tax before the goods are released from the custody of the custom authorities (Art. 5).
The cumulative effect of all these taxes is that the effective tax burden imposed on cars in Israel is one the highest in the world (Israel Tax Authority, 2005). It can amount to over 140% of the car's net price,6 compared to up to 40% in Europe.7 This heavy burden has significant economic, social and environmental implications: (1) The purchase of a new car becomes a major expense and outside the reach of a large part of the population. Figure I below shows that the number of cars in Israel per inhabitant is significantly lower than in other countries with similar GDP;

(2) It hampers the ability of a car owner to change his car to a newer and safer model. Cars in Israel are kept and driven for a longer time than in other developed countries,8 and the older car fleet on Israeli roads means less car safety and more air-pollution. A public commission on road safety in Israel, appointed by the Minister of Transportation and headed by the distinguished economist Dr. Jacob Sheinin, found in 2005 that the relatively high age of cars in Israel is one of the reasons for the high accident rate (Sheinin, 2005).9 The commission therefore recommended changes in the purchase tax system in order to bring down the average age of cars in Israel and increase their safety. As for air-pollution, according to figures of Israel's Ministry of Environmental Protection, old cars are today the main source of this pollution, much more than their relative portion in the car fleet. This stems from the fact that they were built according to old technologies and as they grow older they pollute even more. For instance, the emission of nitrogen oxides of cars manufactured before 1992 are about seven times higher than cars manufactured after 1992, and the emission of carbon monoxide about five times higher (Ministry of Environmental Protection, 2007).

(3) Finally, the high prices of cars also create strong incentives for car thefts. Such thefts are proportionally more common in Israel than in any other Western country, reaching about 33,000 thefts annually, with about 15,000 taken apart for spare parts.10 The annual loss to the economy is estimated at over $200 million. As a result of this and the high car prices, insurance rates have also skyrocketed, falling outside the reach of many families.

Figure 1

GDP* for a person, in PPP**

*Gross Domestic Product

**Purchasing Power Parities

Source: Israel's Central Bureau of Statistics; Figures are for 2003.

III. The Israel-EC Association Agreement: The Relevant Provisions
The Israel-EC Association Agreement was signed in 1995 and came into full force after ratification in all Member States in 2000.11 It replaced a prior free trade agreement signed in 1975. Its stated aim is to further integrate Israel's economy into the European economy, and "to promote the harmonious development of economic relations between the Community and Israel and thus to foster in the Community and in Israel the advance of economic activity, the improvement of living and employment conditions, and increased productivity and financial stability" (Article 1.2). It reinforces the free trade area in goods that was already in place between the two countries and expands and strengthens it in various aspects. It also establishes a binding dispute resolution mechanism, which did not exist in the previous agreement. This mechanism enables a party to the Agreement (i.e., either Israel or the EC) to bring a dispute relating to the interpretation or application of the agreement before a panel of arbitrators, which may render a binding decision (Article 75).
The provisions that are relevant to our discussion of the taxation of car imports from the EU are mainly Articles 8, 16 and 18. Article 8 of the Agreement provides:

Customs duties on imports and exports, and any charges having equivalent effect, shall be prohibited between the Community and Israel. This shall also apply to customs duties of a fiscal nature.

This provision is almost identical word for word to EC Treaty Article 25, which applies to the free movement of goods between EC Member States. It prohibits not only the application of any custom duties on imports or on exports, but also any "charges having equivalent effect", i.e., equivalent effect to the effect of a custom duty. Thus, in order to determine whether a certain charge falls within this prohibition, one must determine what the effect of a custom duty is and whether the effect of the charge in question is somehow equivalent to this.
The next relevant provision is Article 16 of the Association Agreement which provides:

Quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between the Community and Israel.

This provision is identical to EC Treaty Article 28, which imposes the same prohibition as between EC Member States. It applies to quantitative restrictions, such as quotas, as well as all measures having equivalent effect to that of a quantitative restriction.
Finally, a provision which may be of relevance is Article 19 of the Association Agreement, which provides:

“The Parties shall refrain from any measure or practice of an internal fiscal nature establishing, whether directly or indirectly, discrimination between the products of one Party and like products originating in the territory of the other Party.”

This provision is somewhat similar to EC Treaty Article 90, which prohibits any Member State from imposing on products of other Member States any internal taxation in excess of that imposed directly or indirectly on similar products, or any internal taxation which affords indirect protection to other products. While the wording of the two provisions is different ("taxation" versus "fiscal measure or practice"; and "discrimination" versus "in excess of" and "indirect protection"), the essence of the two provisions is quite the same: to prohibit internal tax measures which do not amount to "measures of equivalent effect" but which nevertheless result in discrimination of imported products and thereby protection of the domestic industry.

  1. Is Israel's Purchase Tax on Automobiles Legal Under the Association Agreement?

1. The Objective of the Association Agreement: Free Movement of Goods

As we have seen, the EU-Israel Association Agreement aims to reinforce the free trade area between the parties, to expand trade in goods and services and to further integrate Israel's economy into the European economy (Preamble and Article 1 of the Agreement). It aims to achieve free movement of goods between the parties, as is evidenced from the heading of Title II ("Free Movement of Goods"), under which all of the provisions cited above are found. For that purpose, the Agreement requires the elimination of all custom duties and quantitative restrictions on trade between the parties, so that there will be no obstacles to the free flow of industrial goods between Israel and the EC.

However, it is a well known fact in international trade that movement of goods can be obstructed not just by custom duties and quotas, but also by less explicit and more indirect types of trade barriers. While the name of the measures may differ, and sometimes also the manner in which they are imposed and function, their trade distorting effect is often equivalent to that of traditional trade barriers. If such measures were to be allowed, it would be easy to circumvent the agreements and to block imports by all kind of measures with different names. In order to prevent this, international trade agreements therefore often prohibit also all other types of measures if their effect is equivalent to that of custom duties or quotas. That is indeed what the EU-Israel Association Agreement has done in Article 8 and 16.
2. How to Interpret "Charges of Equivalent Effect"?

What exactly is the meaning of "charges having equivalent effect" as referred to in Article 8? Since this term is found also in the EC Treaty (Article 25) and has been subject to many judgments of the European Court of Justice (the "Court"), we can find guidance in these decisions. Of course, the Court does not bind Israel in its decisions, and the judgments in questions were given in relation to the EC Treaty and not the Association Agreement. It is also true, that generally the aim of the EC Treaty - namely, full economic integration between the Member States of the EU into one single common market - is much more ambitious than that of the Association Agreement between Israel and the EU. Considering that according to the Vienna Convention on the Law of Treaties, a treaty "shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose" (Article 31(1)), the somewhat different objects and purposes of the two agreements may therefore sometimes lead to different interpretations of the same terms as they appear in the two treaties. However, in relation to the correct interpretation of the term "charge of equivalent effect" the respective objects and purposes of the treaties are not so much different: both treaties aim to establish a free trade area between their respective parties (it should be noted that such an area is one of the components of the common market established in the EU) and to achieve free movement of goods (as evident from the identical headings in both treaties12). Moreover, when the Association Agreement was concluded in 1995 between Israel and the EU, there was already a well-established jurisprudence on the exact meaning and scope of the term "charges of equivalent effect", both by the Court and by other judicial bodies and one can safely assume that both parties were aware of this jurisprudence. Thus, in the absence of any reservation by any of the parties to the contrary, it is reasonable to conclude that when using this term in their agreement the parties intended to adopt it in accordance with its ordinary and well-established meaning.

3. The Case Law of the European Court of Justice

In Case 77/72 Capolongo v. Maya13 the Court held that a "charge having an equivalent effect" includes any tax demanded at the time of, or by reason of, importation and which results in the same restrictive consequences on the free movement of goods as a customs duty by altering the cost price of that product. When such a tax, even if not at a significant rate, is imposed specifically on an imported product, to the exclusion of the similar domestic product, it alters the competitive conditions between these two competing products to the benefit of the domestic product, and it can easily be understood why the Court saw such a tax as having equivalent effect to a customs duty. But when no similar domestic product exists, and the tax cannot be seen as protecting or benefiting the domestic production of such a similar product, can one still consider a tax as having equivalent effect to a customs duty on the mere account of its obstructing the free movement of goods?

This question was addressed by the Court in several cases. In Case 24/68 Commission v. Italy (Re Statistical Levy)14 the Court held:

"…any pecuniary charge, however small and whatever its designation and mode of application, which is imposed unilaterally on domestic or foreign goods by reason of the fact that they cross a frontier, and which is not a customs duty in a real sense, constitutes a charge of equivalent effect even if it is not imposed for the benefit of the state, is not discriminatory or protective in effect, and if the product on which the charge is imposed is not in competition with any domestic product."

A similar ruling was handed down in Case 2 & 3/69 Sociaal Fonds voor de Diamantarbeiders v. Brachfeld.15 There the Court held that taxes of equivalent effect include all charges levied on goods solely because they cross the frontier from one state into another, irrespective of the purpose for which the charge is levied. It was also held that in order to breach the prohibition against charges having equivalent effect, the charge need not be introduced for protectionist reason. The case dealt with a Belgian law that required all persons importing uncut diamonds to pay a "contribution" to a social fund for diamond workers. Similar to the situation in our case, there was no local production of uncut diamonds in Belgium. Thus, the charge could not be claimed to grant protection to the domestic manufacturer of such diamonds, and in fact the Court acknowledged that it may have been levied for a most worthy purpose (to provide a social fund for workers in the diamond industry). Nevertheless, the Court found that the contribution amounted to a "charge of equivalent effect" and was thus prohibited under the Treaty. In reaching its decision the Court looked at the effect of the measure and held that any pecuniary charge imposed on goods by reason of the fact that they cross frontiers is an obstacle to the free movement of goods.

While the Court did not explain why this was so, the reason seems to be self-apparent according to simple economic logic: when a product costs more, it will usually be consumed less. The circumstances where demand is completely rigid and unaffected by price are rare, and the higher the tax is, the more unlikely it is that the consumption will remain unaffected. Thus, while this type of tax does not divert consumption from imported goods to domestically produced goods – as most customs duties do – it does reduce consumption as a whole, and hence the volume of imports.

4. Applying the Court's Case Law on Charges of Equivalent Effect to Israel's Purchase Tax

When applying this ruling to our case, we note that the Israeli purchase tax is imposed at the border by reason of the fact that the cars have been imported into Israel. We also note that because of its extremely high rate, the purchase tax has a significant negative impact on the number of cars imported. In other words, if the tax was lowered or eliminated, clearly there would be more cars imported to Israel from the EU. One can therefore conclude that the purchase tax constitutes an obstacle to the free movement of goods between the two countries. This conclusion is also supported by the analysis of Dr. Nellie Munin, Israel's former Minister of Economic Affairs to the EU and a specialist on international trade law.16

5. Should the Fact that the Purchase Tax Formally Applies also to Domestic Goods Change this Conclusion?
An argument may be made, that the Brachfeld ruling is not applicable to Israel's purchase tax because this tax is not imposed only by reason of the fact that the cars cross a border, but would also be imposed on locally manufactured cars (if there were any). I would reject this argument for several reasons: Firstly, the existence of a trade barrier should be determined according to the actual commercial reality of the situation, and not according to its legal form. One of the central features of modern economic law is the preference of substance over form and of economic and commercial essence over legal formalism. Given that there are virtually no cars manufactured in Israel,17 the imposition of the purchase tax on locally manufactured cars is "on paper" only and does not represent any actual commercial reality. The reality is that the purchase tax is imposed only on imported cars and it is imposed not by virtue of the fact that they are "sold" in Israel, but by virtue of the fact that they are imported into Israel.

Secondly, the Purchase Tax Law has two different "triggers": one is importation (i.e., goods crossing the frontier) and the other is sale, as provided in Article 2 of the Purchase Tax Law:

"Purchase tax (hereafter – the tax) shall be imposed on the importation and on the sale of goods subject to the tax…" (emphasis added – A.R.)
The Law clearly provides for two different tracks of tax liability. One track applies to imported goods and another one applies to domestically produced goods. Importers cannot postpone payment of the "purchase" tax until the imported goods are purchased by their customers, like their competitors, the local producers, can. The importers, who are subject to the first track of the law, the "import track", must pay the tax first in order to release the goods from the custody of the customs authorities, even if the goods will then lay in stock for several months. In contrast, the local producers, who are subject to the second track of the law, the "sale track", can postpone the payment until 30 days after the month in which the goods were sold to their customers.
There are also many other differences between the "import track" and the "sale track". For instance, under the "sale track" that applies to domestic products, the calculation of the tax is done according to the method set out in Articles 4-4A of the Law, whereas under the "import track" the calculation is done according to a different method, set out in Article 4B of the Law. This provision refers to certain provisions of the Customs Ordinance, which set out the method of customs valuation. In addition, importation is subject to a special system called TAMA, which prescribes a higher basis of tax liability for imported products than the price at the time of importation. This system does not apply to locally made products.

The fact that these are two completely different tracks was acknowledged by Israel's Supreme Court in the matter of Tal-Ron Industries v. Minister of Finance.18 In that matter the petitioners, importers of car batteries, complained that they were subject to discrimination in relation to the local producers of batteries, because they were subject to the provisions of the Customs Ordinance, whereas the local producers were subject to the provisions of the Purchase Tax Law. Under the former, an importer of batteries who wishes the manufacturer to exchange a defective battery, has only six months to get a refund of the purchase tax, while under the latter a local producer has three years to do the same. To this the Supreme Court responded:

There can be no doubt that there is a difference between the importers and the local manufacturers in the matter of Purchase Tax. This difference, to the extent that it exists, stems from the relevant laws that apply to every one of the parties.
The Court considered itself unable to intervene in this matter given that it is regulated by law and that it is for the legislator to make any changes if he deems them necessary.
Other differences between the two tracks will be discussed below in connection with the problem of fiscal discrimination under Article 19 of the Association Agreement. For our purposes it is sufficient to note that there are two different tracks and to note that imported cars are taxed under the import track, thus fulfilling the requirement that they are taxed by reason of the fact that they cross a border.
6. The Purchase Tax under Article 19: Fiscal Discrimination
An alternative venue for challenging the Purchase Tax is under Article 19 of the Association Agreement, which prohibits "any measure or practice of an internal fiscal nature establishing, whether directly or indirectly, discrimination between the products of one Party and like products originating in the territory of the other Party." The European Court of Justice has held that the prohibition of customs duties and charges having equivalent effect and the prohibition of discriminatory internal taxation are mutually exclusive.19 Often, however, the line between a charge and a genuine internal tax is hard to draw, so in case of doubt it is safer to invoke both and let the court or tribunal define which one applies to the case at hand.
As has already been pointed out above, the Purchase Tax Law sets out two different tracks for the imposition of the purchase tax, one for importation and for local sales. While the nominal rate of the tax is usually the same, one can point to several instances where these different tracks create directly or indirectly, discrimination between Israeli products and like products originating in the EU:

  1. Tax Base; For Israeli products the tax is calculated on the "wholesale price" (Article 4-4A), which usually is the price paid to the local manufacturer. For imported products, the tax is calculated on the price paid to the foreign manufacturer, plus international freight and freight insurance (CIF price), plus port taxes and expenses, and plus custom duties (Article 4B together with Articles 129-134A of the Customs Ordinance). Naturally, this leads to a higher tax rate than if the tax was paid only on the price paid to the manufacturer. Also, importation is often subject to a special system called TAMA, whereby a certain percentage is added to the actual import price for the sake of calculating the tax liability.20 This system does not apply to locally made products. In a Trade Policy Review on Israel, the GATT Secretariat wrote about this system: "It appears that the system used to calculate the taxable value discriminates against imports."21

  2. Time of Payment; Importers must pay the tax at the time when the goods are released from the custody of the customs authorities (Article 5(d)), while the local producers are only liable to pay it 30 days after the month in which the goods are sold (Article 5(a) and 5A). As a result, importers may have to finance the purchase tax from their own pockets, while local producers may pay it from proceeds of the sale.

  3. Deduction of Tax Paid on Components; Local producers of goods are entitled to deduct from their purchase tax liability any purchase tax paid on the raw-material or any component used to produce the final good. Importers are not entitled to do so, even if the imported product incorporates components manufactured in Israel on which purchase tax has been paid (Dorot, 2006). Cars imported into Israel from the EU often incorporate components made in Israel,22 but this does not entitle them to a reduction of the purchase tax.

  4. Tax Refund for Products Returned to Manufacturer; A local producer can demand refund of purchase tax for defective or non-conforming goods returned to manufacturer during a period of three years within purchase (Article 27(a)). An importer, in contrast, may demand such refund only during a period of six months following importation. 23

In this context, we should note the judgment of the European Court of Justice in Iannelli v. Meroni24 where it was held that in order to apply the prohibition on discriminatory taxation (Art. 90 of the EC Treaty), not only the rate of direct or indirect internal taxation on domestic and imported products, but also the basis of assessment and the detailed rules for levying the tax must be taken into consideration. Based on the above, it would seem therefore that the Israeli purchase tax is also in breach of Article 19 of the Association Agreement.

7. The Case of the Danish Registration Tax: Is it Relevant?

In Denmark there is no purchase tax on automobiles. There is however a registration duty levied only upon first registration of a motor vehicle within Danish territory. The rates are very high and can reach a level of about 170% of the price of the car.25 Denmark is similar to Israel in that it does not have a domestic production of cars. This high tax has until now survived several attempts to challenge it before the European Court of Justice. Can one conclude from this that Israel's high purchase tax is also legal under the Association Agreement?

The first time the Danish registration tax was challenged was in 1988 by the Commission, which invoked only Article 90 (ex 95) (internal discriminatory taxation).26 The Court held that where there is no similar or competing domestic production there can be no discrimination, and therefore this provision cannot be invoked. Hence, the Commission's challenge against the registration tax on new vehicles was dismissed. The Court indicated however that if the challenge had been based on Article 28 (ex 30) (prohibition against quantitative restrictions to trade and measures of equivalent effect), due to the extremely high level of the tax the challenge may have been successful. The Commission never returned to the Court on this issue.

However, for used vehicles the Court found the tax in breach of Article 90. The basis for this finding was that Denmark based its tax on used cars on an estimated value which was higher than the real value of the car, with the result that imported used cars were taxed more heavily than used car sold on the domestic market. While no tax was imposed on the sale of used cars within the Danish market which had already been registered in the past, the Court found that the residual tax on used vehicles must be lower than the high rate imposed on imported cars, thus creating discrimination between used cars already inside Denmark and used cars imported there from other Member States. The Court therefore found that Denmark had failed to fulfill its obligations under Article 90 of the Treaty.

The second time the issue was raised was in a preliminary reference by a Danish court. Here the Court's previous obiter dictum on the possibility of challenging the tax under Article 28 was raised.27 The Danish court asked the European Court of Justice whether an indirect tax, such as the Danish registration tax could be considered a measure having an equivalent effect to a quantitative restriction on imports and for that reason prohibited under Article 28. In its judgment the Court noted that since the Danish registration tax was not imposed by reason of the vehicle crossing the frontier of Denmark, but upon first registration of the car, it cannot be considered a charge having equivalent effect to a customs duty falling under Article 25, but rather an internal tax that falls under Article 90.28 The Court then repeated its conclusion of Commission v. Denmark according to which in the absence of any domestic production of cars, the Danish registration tax cannot be considered to be in violation of Article 90. This provision prohibits imposition of taxes on imported products in excess of that imposed "on similar domestic products"; since there are no similar domestic products, the provision has not been violated! As for a possible violation of Article 28, the Court did not rule out the possibility that a tax or any other internal fiscal measure could fall under this prohibition if it impeded the free movement of goods. The Court said:

40. It is true, as [the claimant] pointed out, that the Court held in… Commission v. Denmark that it is not permissible for the Member States to impose on products which, in the absence of comparable domestic production, escape the application of the prohibitions contained in Article 90 EC charges of such an amount that the free movement of goods within the common market would be impeded as far as those goods were concerned.

41. It is however sufficient in that regard to state that, in any event, the figures communicated by the national court as to the number of new vehicles registered in Denmark, and thus imported into that Member State, do not in any way show that the free movement of that type of goods between Denmark and the other Member States is impeded.
In other words, since it was found that the number of motor vehicles per inhabitant in Denmark is at the same level as in other countries of the OECD, there is no evidence that the Danish registration tax impedes the free movement of goods.
Based on the above, we can conclude that the case of the Danish registration tax cannot be seen as blocking the possibility of challenging Israel's purchase tax on cars, for the following reasons: 1. The Israeli purchase tax is imposed by reason of the vehicle crossing the frontier, and the payment of the tax is a condition for releasing the car from the custody of the import authorities. The tax can therefore be considered a charge of equivalent effect; 2. Contrary to the situation in Denmark, in Israel the number of motor vehicles per inhabitant is considerably lower than that in other countries of comparable economic development. The purchase tax can therefore be considered, alternatively, as a measure of equivalent effect to a quantitative restriction; 3. Alternatively, and contrary to the situation in Denmark, one could compare the conditions and terms of the imposition of the Israeli purchase tax on domestic producers versus importers, and find significant elements of discrimination.

Bar-Shai, A., "Israeli Automobile Industry? Is there such a Thing?" Motocar 12.8.04, http://www.motocar.co.il/news/new.aspx?0r9VQ=GJHG&pn6Vq=E

Dorot, A. (2006), Customs & International Trade Laws, Ramat Gan: Association of Chambers of Commerce (Hebrew), 245-264.

General Agreement on Tariffs and Trade (1995), Trade Policy Review: Israel Geneva, Vol. I (Report by the GATT Secretariat) 77-79.

Gutman, L. (2007) "Israel: Record Holder of Car Thefts in the West", 10.7.07 http://cars.walla.co.il/?w=/4705/1134847#section1

Israel Tax Authority (2005), "Changing the System of Purchase Tax Imposed on Motor Vehicles in Israel" Journalist Briefing with Ethan Rob, Director of the Israel Tax Authority, 13 September 2005; available at: http://www.mof.gov.il/taxes/misui_rehev2005.ppt#256,1,
Munin, N. (2006), "The Car Taxation Method in Israel: A Violation of International Trade Agreements", 11.1.2006 (Hebrew), available at: www.psakdin.co.il .
Sheinin, J. (2005), The Commission for the Preparation of a Multi-Annual Plan for Road Safety: The Main Part of the Plan, presented to the Minister of Transportation, Mr, Meir Sheetreet on July 4, 2005, 61-62.

World Trade Organization (2005), Trade Policy Review: Report by the Secretariat: Israel Geneva, WT/TPR/S/157, 22 December 2005, 28-29.

* Professor and Vice Dean of the Faculty of Law, Bar Ilan University; President of the Israeli Association for the Study of European Integration. E-mail: reicha@mail.biu.ac.il

1 Recently, there have been newspaper reports on plans by the Ministry of Finance to continue the reduction of the purchase tax after 2010, so that in 2013 the rate will reach 60% (TheMarker, August 15, 2007.

2 Sefer Hachukim 1952, 344. In 1952, when originally adopted, the name of the law was The Qualified Tax and Luxuries Tax Law. In 1954 it was renamed as The Purchase Tax Law, and in 1962 it got its present name.

3 Assume the ex-factory price of a car is EUR10,, 000 and the freight and insurance is EUR2,000. Then the port fee is EUR 122.4, and the purchase tax is EUR10,183 (12,122.4 x 84%). The VAT will be EUR 3,457 (15.5% x (12,122.4 + 10,183)). The total tax burden is therefore EUR 13,762 (122.4 + 10,183 + 3,457). This amounts to 137.62% of the ex-factory price. For cars from countries with no FTA, such as Japan and Korea, the amount is of course higher.

4 The Purchase Tax Law, Art. 3(b).

5 Ibid., Art. 4B(a). This provision refers to articles 129-134A of the Customs Ordinance, which are the provisions that determine how the value of goods for custom purposes is to be assessed.

6 Israel Tax Authority (2005). For example, for a new Honda Civic from Japan for which the consumer is required to pay NIS 133,000, no less than NIS 72,712 goes to the treasury for taxes, and only NIS 60,288 goes to the seller (based on 2005 rates). For cars from Europe, which are exempt from the 7% custom duty, the tax ratio is a bit lower.

7 Except for Denmark where there is a registration tax of up to 180%. For a discussion of the legality of the Danish tax, see below section IV:7.

8According to Sheinin Commission (p. 61), the average age of cars in Israel is 7.7 years, compared to 5.5 years and less in EU countries.

9 According to figures of the National Authority of Road Safety, the percentage of model 1999 cars found to have dangerous defects was more than double that of model 2005 cars (www. ________).

10 Lior Gutman, "Israel: Record Holder of Car Thefts in the West", http://cars.walla.co.il/?w=/4705/1134847#section1 . Based on figures of Israel's Police, the Special Unit for Car Thefts.

11 "The Euro-Mediterranean Agreement Establishing an Association between the European Communities and their Member States of the one part, and the State of Israel of the other part", Official Journal L 147, June 21, 2000, p. 0003-0171..

12 The heading of Title II of the Association Agreement, where Article 8 is found, is "Free Movement of Goods", and the heading of Title I of Part Three of the EC Treaty, where Article 25 is found, is also "Free Movement of Goods".

13 Case 77/72 Capolongo v. Maya, [1973] ECR 611.

14 Case 24/68 Commission v. Italy (Re Statistical Levy) [1969] ECR 193; [1971] C.M.L.R. 611.

15 Case 2 & 3/69 Sociaal Fonds voor de Diamantarbeiders, Antwerp v. S.A. Ch. Brachfeld & Sons 40 C.M.L.R. 335 [1969].

16 Munin 2006.

17 In the 60s and 70s there was some production of cars in Israel under the protection of high tariffs, but it has mostly been closed down. At the present, there is some assembly of buses, as well as assembly of some terrain vehicles, but no full-blown manufacturing, and nothing in the area of regular private cars. According to figures of the Central Bureau of statistics, less than one pro mil of the cars in Israel were produced locally. The few cars that are assembled in Israel are mostly sold to the Government (in particularly, the army), so the purchase tax does not have any significant impact, the money going out from one of the government's "pocket" and coming back into another.

18 H.C.J. 7685/00 Tal-Ron Industries v. Minister of Finance (not published) Tak-El 2001(3)37

19 Case 77/76 Fratelli Cucchi v. Avez SpA [1977] ECR 987.

20 The exact percentage whereby the price is marked up is determined by the Minister of Finance for different sectors and products (Article 4B(a) of the Purchase Tax Law). TAMA rates are calculated on the basis of actual wholesale price mark-up for a random sample of registered and non-registered importers. For a discussion and critique of the TAMA system, see GATT (1995) and WTO (2005).

21 GATT (1995), p. 77.

22 In 2003 Israel exported about $150 million of car components. Many of the Israeli car importers also manufacture and sell to their respective car producer in Europe components that are incorporated into the cars that are then sold all over the world, including in Israel (Bar Shai, 2004).

23 Article 29C of the Purchase Tax Law imposes several provisions of the Customs Ordinance on the liability of purchase tax, one of which is Article 150(2). This provision sets a time limit of six months to get a refund of purchase tax for defective products imported into Israel (Dorot, 2006 and the Tal-Ron decision, supra note Error: Reference source not found).

24 Case 74/76 Iannelli v. Meroni [1977] ECR 557.

25 For the first portion of the price of the car, the rate is 105%, and for the remainder of the price 180%. The amount of the first portion is fixed annually and in 1999 it was DK 52,800 (approximately US$ 9,600.)

26 Case C-47/88 Commission v. Denmark [1990] ECR I-4509.

27 Case C-383/01 De Danske Bilimportører v Skatteministeriet, Told- og Skattestyrelsen [2003] ECR I-6065.

28 Ibid., paras. 34-35.

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