EUROPEAN TAX LAW February 16, 2004 Module 3: European Tax Law M.Sc. European Business Law EDHEC Business School, Nice.
<ul><li> Slide 1 </li> <li> EUROPEAN TAX LAW February 16, 2004 Module 3: European Tax Law M.Sc. European Business Law EDHEC Business School, Nice </li> <li> Slide 2 </li> <li> A. Pediaditaki, EDHEC, 16.2.20042 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 . </li> <li> Slide 3 </li> <li> A. Pediaditaki, EDHEC, 16.2.20043 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) </li> <li> Slide 4 </li> <li> A. Pediaditaki, EDHEC, 16.2.20044 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 </li> <li> Slide 5 </li> <li> A. Pediaditaki, EDHEC, 16.2.20045 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. </li> <li> Slide 6 </li> <li> A. Pediaditaki, EDHEC, 16.2.20046 Consequences of tax differences 1. Distortion of economic neutrality (influence to the decision where to trade - establish - work - invest) 2. Market fragmentation along national borders PARADOX: 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 the proper functioning of the common market and the EMU. </li> <li> Slide 7 </li> <li> A. Pediaditaki, EDHEC, 16.2.20047 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 </li> <li> Slide 8 </li> <li> A. Pediaditaki, EDHEC, 16.2.20048 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). </li> <li> Slide 9 </li> <li> A. Pediaditaki, EDHEC, 16.2.20049 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 ! </li> <li> Slide 10 </li> <li> A. Pediaditaki, EDHEC, 16.2.200410 EC Treaty provisions for tax harmonization Indirect taxation: Specific provisions are laid down in art. 90-93 EC. Direct taxation : Nothing specific in the Treaties The 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 ] </li> <li> Slide 11 </li> <li> A. Pediaditaki, EDHEC, 16.2.200411 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 </li> <li> Slide 12 </li> <li> A. Pediaditaki, EDHEC, 16.2.200412 Results in indirect taxation 1) 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. </li> <li> Slide 13 </li> <li> A. Pediaditaki, EDHEC, 16.2.200413 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) </li> <li> Slide 14 </li> <li> A. Pediaditaki, EDHEC, 16.2.200414 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] </li> <li> Slide 15 </li> <li> A. Pediaditaki, EDHEC, 16.2.200415 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) </li> <li> Slide 16 </li> <li> A. Pediaditaki, EDHEC, 16.2.200416 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 </li> <li> Slide 17 </li> <li> A. Pediaditaki, EDHEC, 16.2.200417 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). </li> <li> Slide 18 </li> <li> A. Pediaditaki, EDHEC, 16.2.200418 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. </li> <li> Slide 19 </li> <li> A. Pediaditaki, EDHEC, 16.2.200419 (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 </li> <li> Slide 20 </li> <li> A. Pediaditaki, EDHEC, 16.2.200420 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. </li> <li> Slide 21 </li> <li> A. Pediaditaki, EDHEC, 16.2.200421 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) </li> <li> Slide 22 </li> <li> A. Pediaditaki, EDHEC, 16.2.200422 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) </li> <li> Slide 23 </li> <li> A. Pediaditaki, EDHEC, 16.2.200423 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). </li> <li> Slide 24 </li> <li> A. Pediaditaki, EDHEC, 16.2.200424 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 MSs national is prevented or impeded from exercising a Treaty freedom? 2 different cases: inbound outbound </li> <li> Slide 25 </li> <li> A. Pediaditaki, EDHEC, 16.2.200425 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 </li> <li> Slide 26 </li> <li> A. Pediaditaki, EDHEC, 16.2.200426 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) </li> <li> Slide 27 </li> <li> A. Pediaditaki, EDHEC, 16.2.200427 II. Four fundamental freedoms (goods, persons, services, capital) Four freedoms characterise the internal market [art. 31(c) and 142] They encompass 2 principles: a) a right of cross-border circulation (market access) b) a prohibition of discrimination on grounds of nationality (market equality) </li> <li> Slide 28 </li> <li> A. Pediaditaki, EDHEC, 16.2.200428 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. </li> <li> Slide 29 </li> <li> A. Pediaditaki, EDHEC, 16.2.200429 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 rega...</li></ul>