EUROPEAN TAX LAW February 16, 2004 Module 3: European Tax Law M.Sc. European Business Law EDHEC Business School, Nice

EUROPEAN TAX LAW

February 16, 2004Module 3: European Tax Law

M.Sc. European Business LawEDHEC Business School, Nice

© A. Pediaditaki, EDHEC, 16.2.2004 2

Introduction

Article 2 of EC Treaty:

« The Community shall have as its task, by establishing a common market and an economic and monetary union and by implementing common policies or activities referred to in art. 3 and 4, to promote throughout the Community a harmonious, balanced and sustainable development of economic activities, a high level of employment and of social protection, equality between men and women, sustainable and non-inflationary growth, a high degree of competitiveness and convergence of economic performance, a high level of protection and improvement of the quality of the environment, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States ».


Requirements of common market

• Free movement of goods, services, persons and capital • Normal conditions of competition (« a level playing

field ») • Harmonization of national laws (as far as disparities

between national laws impede the functioning of the common market)


Requirements of common market

According to the jurisprudence of the ECJ:

« … a common market entails the elimination of all obstacles to intra-Community trade in order to merge the national markets into a single market bringing about conditions as close as possible to those of a genuine internal market »

Case 15/81, Gaston Schul, 1982


Fiscal obstacles to a common market

Examples:– fiscal burdens on the border crossing of goods, services, income or

capital– differential tax treatment of domestic and imported goods and services– substantial differences between national tax legislations– double taxation of the foreign-source income– differential tax treatment of residents vs. non-residents– preferential tax treatment of foreign investment vs. domestic

investment

etc….


Consequences of tax differences

1. Distortion of economic neutrality (influence to thedecision where to trade - establish - work - invest…)

2. Market fragmentation along national bordersPARADOX: one market but plurality of tax systems

Conclusion: A certain degree of tax harmonization or coordination (at least) between MS is a condition sine qua non for theproper functioning of the common market and the EMU.


Positive and negative integration: the distinction

POSITIVE INTEGRATION =harmonization at EC level (regulations and directives) >positive action (co-ordination, common policy-making,approximation of laws) >>> indirect taxation NEGATIVE INTEGRATION = harmonization through legally enforceable prohibitions on certain measures of MS, which violate the base of common market(distortion of competition, discriminatory measures) >>> direct taxation


Positive and negative integration: the interaction

EC fundamental principles and freedoms have great

consequences for tax sovereignty (part of national sovereignty).

The taxation is the most important instrument for national

economic and social policy.

Interaction between positive and negative harmonization=

as long as no positive integration has been achieved in a certain

matter, MS remain in principle free to regulate this matter in the

way they consider appropriate (except for matters exclusively

attributed to the EC, e.g. agricultural policies), but this freedom

is restricted by the negative integration, i.e. EC Treaty

prohibitions (ECJ case law).


Tax competition as harmonizing factor ?

TAX COMPETITION plays a principal role in direct tax

matters leads to more or less spontaneous harmonization

Example: if neighbouring MS featuring a comparable level

of economic opportunity, infrastructure, public services and

social security diverge significantly in tax burdens without

offering corresponding public service or economic opportu-

nity, then economic activity will move to more tax efficient

Member States.

>>> More convincing argument to national policy-makers

than the legal principles !


EC Treaty provisions for tax harmonization

• Indirect taxation: Specific provisions are laid down in art. 90-93 EC.

• Direct taxation : Nothing specific in the TreatiesThe only legal bases for harmonization of direct taxes:– a) general harmonization provisions (art. 94-95 EC)– b) possibly the art. 308 [ permits ‘appopriate measures ’ to be adopted « if

action by th e Community should prove necessary to attain, in the course of the operation of the common market, one of the objectives of Community and the Treaty has not provided the necessary powers » ]


The decision-making process and the instruments in the field of direct taxation

• Decision-making procedure for taxation: unanimous vote in the Council– preservation of national fiscal sovereignty – in combination with the principle of subsidiarity

==> reason for the slow evolution of legislation in

tax matters / inefficient decision-making process: bargaining process in the Council of Ministers

• Only binding instrument for harmonization of direct taxes: DIRECTIVE


Results in indirect taxation1) Community shall be based in Customs Union (art.23 EC):

• total prohibition of import and export duties and charges having an equivalent effect as a customs duty (art. 25)

• introduction of a common customs tariff at the outside borders of the Community (art. 26-27)

Community Customs Code [Regulations EEC 2913/92, 2454/93]

2) Art. 90-93 EC: harmonization of indirect taxes only in so far as it is necessary for the establishment and functioning of internal market

introduction of VAT system + excise duties

==> harmonization efforts in indirect tax area show that the EC ’s origin: establishment of a free trade area.


Small results in direct taxation

• Five directives:– 77/799/EEC (mutual administrative assistance -

exchange of information)– 90/434/EEC (Merger directive)– 90/435/EEC (Parent-subsidiary directive, as

amended by the Directive 2003/123/EC)– 2003/49/EC (interest and royalty payments

between associated companies)• 1 convention (arbitration convention in transfer

pricing cases)


Impact of Community Law on National Tax Law

According to the constant case law of the ECJ:

« Direct taxation falls within the competence of the Member States BUT the latter must none the less exercise that competence consistently with Community law and therefore avoid any overt or covert discrimination by reason of nationality »

[Schumacker, Wielockx, Futura participations, Royal Bank of Scotland cases,Gschwind]


Impact of Community Law on National Tax Law

Result: tax scales, taxation methods, taxable incomes are to be decided by the Member States.

The ECJ has distinguished :– the exercice of fiscal competence (with the

obligation to comply with EC law)– the allocation of fiscal competence (which is

prior to the exercise of the fiscal competence)

(Gilly, 1998)


Role of the European Court of Justice The European Community law is a separate legal system separate from international law and the legal systems of the Member States.

Since the creation of the European Communities, the Community law has required clarification by an independent and non political institution.

The Treaty assignes this role to the ECJ:

article 220 primary tasks:

- interpretation and

- uniform application of Community law


ECJ as a Tax Court?

• Decisive + increasing role in direct tax matters: ECJ has taken a very activist stand, in view of achieving the integration that has not been possible by way of legislation (because of the rule of unanimity)

• Case law since 1986 - more than 30 decisions • ECJ tells which rules constitute a violation of the

internal market, without being able to indicate the positive direction in which the MS should march

>>> imbalance between the power of the Court and the impact of the legislator (policy choices).


Exercice of MS fiscal competence

The ECJ case law defined the obligation to exercise the fiscal competence consistently with EC Law as the PROHIBITION in the field of:

- free movement of persons, services, capital

- freedom of establishement

of ANY DISCRIMINATION (1) or RESTRICTION (2), except if they are justified.


(1) Non-discrimination principle =

The MS may not impose discriminatory tax measures on nationals of other MS.

(2) Restriction-based or «barriers » principle=

The MS may not impose tax measures which constitute a barrier to the exercice of the EC Treaty freedoms or which make the exercise of there freedoms less attractive.

Non-discrimination principle vs. Restriction-based principle


I. Non-discrimination principle: the basic Community protection

• Article 12 EC: « Within the scope of application of the Treaty, and without prejudice to any special provisions contained therein, any discrimination on grounds of nationality shall be prohibited ».

• Great symbolic importance (association with notion of citizenship), not only a tool of economic integration.

• The core economic rights embodied in fundamental freedoms give specific expression to art. 12 within their respective spheres.

• Residual character of the principle: autonomous application only when the Treaty does not lay down a specific prohibition of discrimination.


Notion of discrimination

« It is settled law that discrimination arises through the application of :– different rules to comparable situations, or– the same rule to different situations »

(Schumacker, Wielockx, Asscher)

Attention!! Resident and non-resident taxpayers are NOT in a comparable situation: « The fact that a MS does not grant a non-resident certain tax benefits which it grants to residents, is not, as a rule, discriminatory, since those two categories are not in a comparable situation » (Schumacker)


• Prohibition of any OVERT discrimination by reason of nationality but also all COVERT forms of discrimination, which, by the application of other criteria of differentiation, lead in fact to the same result.

• 2 forms of discrimination:– concerning the person of the tax payer (e.g. higher

tax rate for foreign companies, Royal Bank of Scotland)

– concerning the persons in relation with the tax payer (e.g. non deduction of foreign losses, ICI)


• Prohibition of discrimination = obligation for a MS to accord the same domestic treatment to the non-nationals (eg. the same tax concession)

(Commission v. France, 1986)

• But it is NOT a general clause of equality --> it is not prohibited to accord preferential treatment to nationals of other MS (in comparison with MS nationals).


• Not application of the principle in PURELY INTERNAL CASES. It is established case-law that the Treaty does not apply in internal situations.

• But what about the situation where a MS’s national is prevented or impeded from exercising a Treaty freedom?

• 2 different cases: – inbound – outbound


• Eg. a) a MS ’s national has been abroad seeks to exercise his right of movement or investment into its territory. The ECJ brings such persons within the scope of the Treaty by equating them with nationals of other MS: they are to be regarded as « in a situation which may be regarded as equivalent to that of any person enjoying the rights and liberties guaranteed by the Treaty. (Asscher)

• Eg. b) a MS ’s rule restricts the exercise of a freedom by a national resident in its territory, e.g. outbound establishment. In that case (Daily Mail) the ECJ noted that the Treaty prohibited a MS from hindering the establishment in another MS of one of its nationals or of a company incorporated under its legislation. In recent cases (ICI, AMID, X&Y) the Court tends to use the notion of unequal treatment, avoiding the reference to nationality.

Inbound and outbound discrimination


Justifications of discrimination

(Such) a rule is considered discriminatory unless it is objectively justified : - by substantial objective differences other than nationality - application of principle of proportionality (= the rule should be appropriate and necessary in order to achieve the aim pursued)


II. Four fundamental freedoms (goods, persons, services, capital)

• Four freedoms characterise the internal market [art. 3§1(c) and 14§2]

• They encompass 2 principles:

– a) a right of cross-border circulation (market access)

– b) a prohibition of discrimination on grounds of nationality (market equality)


These principles are elaborated in following rules and provisions:

– art. 28-29: prohibition of all tariff barriers and equivalent restrictions on movement of goods;

– art. 39: prohibition of discrimination of restriction of free movement of workers;

– art. 43+48: prohibition of restriction of right of establishment of self-employed persons and companies;

– art. 49: prohibition of restrictions on freedom to enter, and to sojourn in order to provide cross-border services and to be treated as nationals;

– art. 56+58: prohibition of discrimination and restriction on free movement of capital and payments.


Freedom of movement of capital

Treaty of Maastricht (1992) introduced the article concerning

the freedom of capital and payments (now art. 58).

Notwithstanding the complete liberalization of capital

movements and payments (art. 56), the art. 58 retains for the

MS the right «to apply the relevant provisions of their tax law

which distinguish between tax-payers who are not in the same

situation with regard to their place of residence or with

regard to the place where their capital is invested » and « to

take all requisite measures to prevent infringements of

national law and regulations, in particular in the field of

taxation ».


Freedom of movement of capital

Result: art. 58 legitimates - to a certain extent - different tax treatment of resident and non-resident taxpayers and of domestic and foreign-source investment income.

BUT this treatment « shall not constitute a means of arbitrary discrimination or a disguised restriction on the freedom of movement and payments as defined in art. 56 ».


Discrimination vs. Restriction

• Discrimination = question of equalityVS.

• Restriction = question of obstacles


JUSTIFICATIONS for discriminations / restrictions

Once it appears that there is a discrimination, the emphasis shifts to the consideration of whether the MS in question can justify that infringement of the Treaty.

NB: Assuming that a justification is to be found to defend the refusal of same treatment, the principle of proportionality shall be applied: is the tax measure in question of such a nature as to ensure achievement of the aim in question and not go beyond what is necessary for that purpose???


Arguments of Member States

Common arguments of MS (as overriding reason in the general interest):

1. Cohesion of the tax system

2. Loss of tax revenue

3. Increasing the effectiveness of fiscal supervision

4. Preventing the risk of tax avoidance


1. Cohesion of the tax system

• Argument always invoked by the MS• only once accepted by the ECJ (Bachmann, 1992)• ...but systematically refused afterwards for 2 reasons:

– a) the cohesion of the tax system was realized, under a double tax convention, at the level of the global relationships between the 2 countries, which implied to waive the right to ensure it at individual level

(Wielockx - 1995, XY - 2002)

– b) because, the concerned national system did not fulfil the conditions imposed by the ECJ


The argument of cohesion of tax system can be invoked when:

a. One taxpayer only is concerned in company taxation, difficult to meet this criterion for group of companies, when parent and subsidiaries are concerned (ICI-1998, Metallgesellschaft-2001, Bosal-2003)

b. One taxation is concerned e.g. it is not possible to «compensate » corporation tax and income tax (Asscher - 1996, Baars - 2000, Verkooijen - 2000)

c. There is a direct link between a tax relief and a taxation (Danner, Bosal, Lankhorst-Hohorst - 2002, Skandia - 2003).


2. Loss of tax revenue

• « …aim of avoiding an erosion of the tax base going beyond the mere diminution of tax revenue »

• « … maintenance of inter-jurisdictional equity as reflected in the careful balance of negotiated treaties »

This argument was never accepted (ICI - 1998, St. Gobain - 1999,

Danner - 2002, Bosal - 2002,

Skandia- 2003)


3. Increasing the effectiveness of fiscal supervision

The ECJ accepts it in principle but it never accepted it in a specific case.Why? It considers that the Directive 77/799/EEC (mutual assistance between tax authorities) provides the adequate means

(Schumacker - 1995, Wielockx - 1995, Baxter -1999, Vestergaard - 1999,

Futura participations - 1999)


4. Prevention of risk of tax avoidance

• The ECJ accepts it in principle (ICI) BUT only when the national legislation in question has the specific purpose of preventing wholly artificial arrangements to cincumvent national tax laws.

• We cannot presume that in the following cases:– establishment of the subsidiary abroad (ICI, 1998)– the seat of the mother company has its seat abroad (Lankhorst-Hohorst, 2002)– the establishment of the mother company or of a subsidiary abroad (XY,

2002)


Other arguments rejected by the ECJ• The disadvantage is avoidable by the taxpayer (Commission vs. France)• …or compensated by other advantages also related to the cross-border

economic activity (De Groot, Verkooijen…)• The existence of lower rates in other MS (Eurowings, Asscher)• The harmonization has not been achieved (Decker, Terhoeve…)

• The absence of reciprocal treatment under a DTC; Treaty rights are unconditional and cannot be subject to the contents of a tax treaty (Avoir fiscal)

• Aims of purely economic nature, such as the intention to promote the economy of the country by encouraging investment in certain sectors (Verkoiijen, Decker, Kohll)


Double taxation conventions (DTC)

The starting point is that MS are competent to conclude tax treaties and free to select criteria for the allocation of tax jurisdiction. Nevertheless, the simple existence of a double taxation convention does not exempt the MS from complying to EC law : supremacy of EC law over DTC (between MS or between MS and 3rd countries) [Commission v. France, St. Gobain] Moreover, in view of the Community objective of elimination of double taxation, Community law is likely to supplement tax treaties (in particular concerning their personal scope, the prohibition of discrimination and the methods to avoid double taxation).


Conclusion

• General remarks

• Discussion

Documents

EUROPEAN TAX LAW February 16, 2004 Module 3: European Tax Law M.Sc. European Business Law EDHEC Business School, Nice