According to consistent case-law of the European Court of Justice, the scope of VAT is very wide, as in principle any transaction carried out in the framework of an economic activity is subject to the tax. As regards transactions made by public bodies (the State, regional and local governments and others) they will be subject to VAT, unless certain conditions are met (namely, that the body in question be governed by public law and that it act in its capacity as a public authority).

Even where these conditions are fulfilled, the Sixth VAT Directive calls for subjection to the tax of the transactions made by public bodies where a different VAT treatment would lead to significant distortions of competition.

Commenting with regard to its action against Ireland, the EC explained that:

"While, according to the Sixth VAT Directive, public bodies should be treated as taxable persons in a number of cases...under Irish VAT legislation public bodies are not deemed to be taxable persons even where the relevant criteria to this effect are fulfilled. Accordingly, when they engage in the supply of goods and services they neither charge VAT nor are they entitled to deduct the VAT incurred on their costs."

"The Commission issued...a Reasoned Opinion requesting that Ireland amend its legislation within two months of its receipt. Since Ireland has failed to do so, the Commission has decided that it will, in accordance with article 226 of the EC Treaty, refer the matter to the European Court of Justice."

"The Court of Justice (see Case C-430/04) has recently confirmed that the relevant provisions on public bodies in the Directive have "direct effect"; i.e. taxable persons in competition with public bodies which are not being treated as taxable persons are entitled to rely on those provisions before the national tax authorities."