The European Union and Direct Taxation

A Solution for a Difficult Relationship

Luca Cerioni

• Publisher: Routledge
• Year: 2015
• Print ISBN: 9780415730792
• eBook ISBN: 9781317817574
• Edition: 1
• Topic: Droit
• Subtopic: Droit financier

Within the European Union, direct taxation is an area which often provokes controversy due to tensions between the tax sovereignty of the individual Member States and the desire for an integrated internal market. This book offers a critical review of the legislative and case-law developments in this area at the EU level, and reviews the European Commission's proposed solutions in light of their concerns regarding the proper functioning of the EU's internal market.

Luca Cerioni set out a series of benchmarks determined from the objectives expressed by the European Commission, including: the elimination of double taxation and double non-taxation; the simplification of cross-border tax compliance; the reduction of abusive forum-shopping practices and general aggressive tax planning strategies; legal certainty for all businesses and individuals carrying on activities and receiving income in more than one EU Member State. Cerioni uses these benchmarks to ask which Directives and/or rulings have left legal uncertainty, and which have ended up creating or increasing the scope for aggressive tax planning. The book puts forward a comprehensive solution for a new optimal regime relating to tax residence, which would contribute to the EU project to the mutual benefit of Member States and taxpayers.

As a thorough and critical discussion of EU tax rules in force, and of the European Court's case law in direct taxation, this book will be of great use to academic researchers and students of EU law, tax practitioners, and policy-makers at the EU and national level.

Part 1
A review of legislative and case-law developments in the direct taxation area at EU level against the “benchmarks”: which shortcomings?

1
The ‘benchmarks’ for a critical review of legislative and case law developments at EU level in the area of direct taxation

A proposed framework

1.1 Direct taxation and the EU: a difficult relation

At the time of the drafting (1957) of the European Economic Community (EEC) Treaty – which was bound to become later the European Community (EC) Treaty in 1992 and the Treaty on the Functioning of the European Union (TFEU) in 2009 – the founders perceived that different tax provisions of Member States would adversely affect the functioning of the future single market based on the free movement of goods, persons, services and capital, the so-called ‘fundamental freedoms’. Consequently, they inserted, in the Treaty, specific provisions dealing with indirect taxation and a general provision concerning ‘the abolition of double taxation’, without distinction between direct and indirect taxation. The provisions concerning indirect taxation, included in the Treaty’s Chapter on ‘Competition, Taxation and State Aids’, were regarded as directly connected to an undistorted free movement of goods, and were aimed at preventing Member States from using indirect taxation for protecting domestic products vis-à-vis products imported from other Member States.

The general provision concerning ‘the abolition of double taxation’, originally found in Article 220 of the EEC Treaty (later Article 293 of the EC Treaty) and subsequently repealed from the TFEU, only committed Member States to enter into negotiations, ‘as far as necessary’, for removing what the Treaty’s drafters regarded as a tax obstacle – double taxation – to cross-border economic activity within the single market. Unlike the provisions concerning indirect taxation, this general provision could not, and did not, instigate a harmonisation process in the area of direct taxation, which latter, however, has not remained extraneous to the European integration process.

Ever since the early years of the EEC, the first reports and analysis highlighted that different corporate tax regimes from one Member State to another would adversely affect the functioning of the common market as regards investment decisions and competition. The 1962 Report of the Financial and Fiscal Committee, known as the ‘Neumark Report’, explained the findings of a group of experts who had been charged with the task to examine two issues: first, whether, and if so to what extent, the differences between the tax systems of Member States could create an impediment, even if only a partial one, to the creation of a common market having the purpose of ensuring conditions analogous to those of an internal market; and, secondly, whether, and to what extent, these differences could have been eliminated had they considerably affected the establishment and functioning of the common market. Although the Committee should have mainly dealt with indirect taxation, the Commission’s mandate also committed the report to investigate the economic effects of disparities amongst the national direct taxation systems.¹

The report at that time only considered the six states who were members of the EEC – France, Germany, Italy and the Benelux countries – and therefore analysed an overall legal environment which was much more homogeneous than the current one, since all these states had a civil law system. Nonetheless, the report found wide differences between the tax systems of these states and highlighted that these differences resulted from different social and historical conditions, as well as from the different characters of their inhabitants.² It considered the structural differences as between national direct taxation systems as justified by the different goals pursued by individual states in terms of social and economic policies and argued that, given the multiple factors lying behind these differences, any attempt at unifying completely the structures of national tax systems was undesirable and bound to fail.³

It also stressed that, to deter the delocalisation of profits in Member States applying the most favourable tax regimes, the transnational income, deriving from cross-border activities, should be shared as between Member States, by taking as a model the sharing formula of a German local business tax.⁴

In the first years of the single market, the risk of a tax-driven investment decision was thus already perceived as a distortion. The report submitted that a certain degree of approximation of national tax systems would be desirable for eliminating double taxation, and that an increasing cooperation as between national tax authorities would also be needed. In the Committee’s view, these should have been the first steps of a process of convergence, whose desired conclusion would be the introduction (for companies engaged in business activity in more than one Member State) of common rules on the taxable base and the carrying on of assessment procedures in only one country⁵ but, for the time being, the report only recommended a limited harmonisation of corporate income taxes of Member States and the adoption of reduced tax rates for distributed profits.

Finally, the report interpreted the ‘abolition of double taxation’ in Article 220 EEC Treaty as covering both international juridical and economic double taxation. International juridical double taxation refers to the taxation of the same taxpayer on the same income by two states, whereas international economic double taxation refers to the taxation of the same income in the hands of two different taxpayers by two different countries. With hindsight, the 1962 Neumark Report had already anticipated, in substance, the core issues that, in the following 60 years, were bound to mark the history of the EU intervention on the area of direct taxation, and that will be dealt with in Chapters 2, 3 and 4.

In the years following the Neumark Report, the Commission tried to start various programmes which were intended to develop the convergence lines indicated by the report as regards direct taxation too. In 1966, a report on European capital markets strengthened, with regard to the taxation of income from capital, what had already been concluded in the Neumark Report. The new report, which was written at a time when, owing to the incipient ending of the transitional period, the removal of restriction to the free movement of capital already suggested that different national laws on the taxation of capital income would risk causing revenue losses to Member States, analysed the distorting effects that different national taxation regimes would generate on the free movement of capital.

At the outset, this report defined a tax system as a ‘neutral’ one if affecting neither the location of direct investments nor the location of indirect investments and if, in the long run, the tax benefits granted would not affect the choice between different types of investments. Additionally, it stressed that the creation of a truly European capital market would require the elimination, in particular, of three tax obstacles: juridical and economic international double taxation, tax benefits granted to taxpayers for investments in their country of residence and differences in the tax treatment between resident and non-resident taxpayers.

In 1967, a Commission document, the ‘Programme for tax harmonisation’,⁶ set out the economic and social objectives to be pursued. In so doing, it stressed that undistorted market competition require that production costs and returns on investments should not be significantly affected by the different national taxation regimes, and that, in order to ensure the optimal utilisation of both productive factors and of financial resources, the choices concerning investment location and capital movement should be mainly driven by economic and social reasons, and not by tax reasons. Once again, the idea whereby tax systems should be as ‘neutral’ as possible – which had already been formulated in the report on European capital markets – was therefore stressed. Consistently, the document at stake – whilst acknowledging that tax systems should be structured in such a way as to allow companies to develop and to restructure – ultimately found that tax policies of Member States needed to be coordinated.

The conclusion of the ‘transitional phase’ of the single market (31 December 1969) marked a period of steady progress of harmonisation in the indirect taxation area; the introduction of the first VAT Directives was driven by a common perception amongst Member States that a uniform system of value added tax, rather than different turnover taxes applied in different jurisdictions, would facilitate the free movement of goods from one country to another under conditions of undistorted market competition. Further to the decision by the December 1969 European Council to proceed from the ‘common market’ to the ‘economic and monetary union’ phase, a new Committee was entrusted to examine the various aspects concerning the new phase of the European integration process, amongst which was the removal of tax obstacles preventing full market integration.

The report produced in 1970 by this Committee, known as the ‘Werner Report’, stressed the importance of quickly harmonising the area of indirect taxes – VAT and excise duties – but, with regard to direct taxation, only highlighted the desirability of a future coordination of those taxes which would be bound to have an impact on the free movement of capital and of corporate taxes. The ‘Werner Report’ formulated the case for introducing a ‘classical system’ of dividend taxation, without going further in recommending coordination of direct taxation systems.

Nonetheless, the Commission perceived that the objectives set out in the 1967 programme of tax harmonisation were still topical. In 1975, it submitted a proposal for a directive aimed at harmonising corporate tax rates within a range from 45 per cent to 55 per cent and at introducing an imputation system for dividend distributions – with the granting of a tax credit for the recipient – irrespective of the investor’s state of residence.⁷ However, this proposal was never analysed in depth, as Member States wanted to retain complete control over their choices in the direct taxation area, which they perceived as the area most related to their national sovereignty. The requirement of a unanimity agreement in the Council for introducing harmonising measures in the direct taxation...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Foreword
• Preface and Acknowledgments
• Updates
• Introduction
• PART I A review of legislative and case-law developments in the direct taxation area at EU level against the “benchmarks”: which shortcomings?
• PART II Meeting the “benchmarks”: a proposal for a new solution aimed at benefiting both the interest of taxpayers with cross-border economic links and Member States’ revenues
• Index