Tax Avoidance and European Law

Redesigning Sovereignty Through Multilateral Regulation

Mihaela Tofan

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000634686
• Edition: 1
• Topic: Law
• Subtopic: Tax Law
• Index: Law

Tax law is one of the legal fields with the most subtle influence on European integration and EU law. The European economic cooperation project emerged with the customs union, essentially a tax law concept, and evolved alongside other topics of tax harmonization. Still, the existence of the EU tax law is disputed. The research on the topic is significant, as the integration of national economies and markets has increased substantially, both within the EU and globally. This has put a strain on domestic tax rules, which are subject to the demands of the international taxation requirements.

This book explores the relationship between tax avoidance regulation and sovereignty within the European Union, analyzing the impact of the effective regulatory methods for limiting and eliminating aggressive tax planning by multinational companies. Focusing on analyzing good practice in fiscal regulation efficiency and the results generated by the tax jurisprudence both at national and European level, its main objective is to present the argument for inter-dependency between taxation and the current changes in the concept of sovereignty. It highlights where fiscal regulation has led to uniform, yet flexible, solutions for the actual fight against companies' abusive fiscal conduct, when taking advantage of tax competition.

This text will be of value to academics, researchers, and advanced students in tax law and tax avoidance regulation and their intersection with sovereignty in the context of the European Union.

1 Introduction

DOI: 10.4324/9781003309970-1

All over the European Union (EU) and beyond, the everyday life routine for citizens has reached a general unprecedented level of globalization, described in patterns that largely rely on the continuous and significant efforts of public authorities. Mankind enjoys the personal comfort of individual featured living conditions, and equally has relatively high expectations to benefit from the social amenities and the collective facilities, derived from high quality public services, amenities and infrastructure. Only a small part of these functionalities is private, though their majority is provided by public services and the use of public goods, which indirectly, implies a large amount of money collected to the state budget. In other words, the citizens and residents’ current everyday living is influenced in a decisive way by the quality of the public facilities offered by the public authorities, which is largely dependent on the amount of public spending. Sure enough, the state budget is a limited resource, so the public spending and the revenues must be balanced. Consequently, supplying a certain level of living for the citizens depends critically on the state budget’s level of income, and that brings our analysis to tax regulatory policy, the most convenient tool to optimize public revenues.

Taxation is considered a field of precise knowledge and technicalities,¹ although everybody pays taxes, and the concept has been present in regulatory systems since the construction of the first form of public authorities. Both legal field of expertise and public finance competencies are needed when using the conventional approach towards taxation and the “three Rs” (Revenue, Redistribution and Regulation) have to be addressed.²

1 The Quote Investigator ran an investigation on Albert Einstein’s comment on filing tax returns, proving that the great mathematician said that filling the tax revenue form “is too difficult for a mathematician, it takes a philosopher” (https://quoteinvestigator.com/2011/04/15/einsotein-taxes-too-difficult/, retrieved on June 15, 2020). My opinion is that the required abilities are best fulfilled by a professional of law, mainly because of the dimension of effects of the tax specific regulation for all legal and natural persons, and secondly because the legitimacy of the taxation is governed by a complicated mixture of rules of law, soft law, and jurisprudential twists, both domestic and international. 2 As Avi-Yonah has noted, the “three Rs” mesh surprisingly neatly with the three major taxes in most countries: the value-added tax (VAT) for revenue, the personal income tax (PIT) for redistribution, and the corporate income tax (CIT) for regulation. For details, see Reuven S. Avi-Yonah, The three goals of taxation, Tax Law Review, 60(1), 1–28, 2006.

Considering that in their desire for large budgets, governments manifest the tendency to tax everything,³ their mission is more challenging in the context of global trade, because in cross-border transactions the competition for taxing all the revenue is tight. At least four scenarios are possible when looking for the right taxation principle:

1. taxation at source of the money jurisdiction
2. taxation at the residence jurisdiction of the parties
3. taxation at source jurisdiction of the income
4. taxation at the investor’s residence jurisdiction, when borrowed capital is used

3 Charles Kettering’s quotation “Thinking is one thing no one has ever been able to tax” is referred by Henry Ejdelbaum, available at: www.aims.co.uk/%C2%93thinking-is-one-thing-no-one-has-ever-been-able-to-tax-%C2%94-charles-kettering/#, retrieved on August 17, 2020.

In such situations, possible double taxation situations may be addressed either by unilateral provisions, included in the domestic law of the interested countries, or by the application of the provisions included in double tax treaties. Still, neither unilateral provisions, nor double-tax treaties, are sufficient to prevent and, if needed, to eliminate the fiscal treatment colliding with the principle of tax neutrality.⁴ There are particular situations when the valid connection that exists between the feature of a particular transaction and a precise state regulation (usually called nexus) requires the application of international law; for the European legal order, the legitimacy of the nexus should be analyzed directly, through the application of primary and secondary law, or indirectly, through the case-law of the Court of Justice of the European Union.⁵

4 Jason Furman, The concept of neutrality in tax policy, available at: www.brookings.edu/wp-content/uploads/2016/06/0415_tax-_neutrality_furman-1.pdf, retrieved on April 14, 2020. 5 Antonio Calisto Pato, Cross-border direct tax issues of investment funds from the perspective of European law, EC Tax Review, 5, 2008.

Tax law is one of the legal fields with the most subtle influence on European integration and EU law. The European economic cooperation project emerged with the custom union, essentially a tax law concept, and evolved together with other topics of tax harmonization.

Still, the existence of the EU tax law is disputed⁶ and it is described as the reflection of two characteristics that have negative impact on the proper functioning of the internal market. Firstly, the fact that an economic operation event could be taxed twice in the EU creates an important limitation for the free movement of people and their capital on the internal market. Secondly, the present miss-coordination of the corporate taxation in the Member States generates both obstacles and opportunities for companies operating within EU, as they face 27 different corporate tax bases, creating high operative costs and bureaucratic liabilities that are both limiting the European competitiveness and generating opportunities for aggressive tax-planning schemes based on the exploitation of mismatches.⁷

6 Daniel Deak, Legal considerations of tax evasion and tax avoidance (September 12, 2009), Society & Economy, 26(1), 41–85, 2004, available at: https://ssrn.com/abstract=1472508 7 Paolo Arginelli, A proposal for harmonizing the rules on the allocation of taxing rights within the European Union and in relations with third countries, Pistone Pasquale, Part 6 – A Possible Roadmap: European Tax Integration, 653–694, 2018.

In the general context of globalization, digitalization and internationalization of the economy, taxation evolved from a national regulatory prerogative to a very demanding and intensely argued subject of cooperation among governments. The topic is acute and the difficulty in finding reasonable and efficient (if not perfect) regulation is generated by the dimension of divergent interests: paying less taxes and obtaining higher revenues to the state budget. It is generally acknowledged that the governments, which are competent in implementing money spending policy, are oriented to keep their offices for longer terms, so they prefer to gain the voters trust by proving their generosity in spending. Consequently, large public budgets can support bountiful public spending programs and generate higher electoral satisfaction. For sure, maximizing the public budget income is in direct connection with the respect for the liability to pay taxes and with the efficiency of the regulation of the tax system.

1.1 Current topics for research in taxation

Taxation is a topic of intensive research; scholars and practitioners are looking for the appropriate rules of law to limit and, if possible, to eradicate tax avoidance. Among the taxpayers, companies are more likely to adapt their activities, looking for the most innovative ways in saving tax money, especially when operating at the international level. The ubiquity of using state sovereign rights to rule taxation and the dysfunctions of the mechanism of international taxation create the opportunity for avoiding the tax mandatory liability. It is expected that a taxpayer uses all available methods to reduce fiscal payments, especially when its activity is flexible and innovative. This conduct is usually called tax planning and it is not unanimously qualified as illegal,⁸ but its effects on the public budgets are negative in all cases.⁹

8 Simone de Colle and Anne Marie Bennett, State-induced, strategic or toxic? In ethical analysis of tax avoidance practices, Business & Professional Ethics Journal, 33(1), 53–82, 2014. 9 Kay Blaufus, Matthias Braune, Jochen Hundsdoerfer and Martin Jacob, Does legality matter? The case of tax avoidance and evasion, arqus Discussion Paper, No. 193, Berlin, Arbeitskreis Quantitative Steuerlehre (arqus), 2015.

Weaknesses in the current domestic rules create opportunities for diminishing the amount of money that is subject to taxation (strategy called base erosion) and for moving the profits from one company, which is subject to high taxation, to another company in the same group that is situated in a territory with a lower level of taxation (which is called profit shifting). Usually, a precise taxation subject uses strategic tax planning, and it may take advantage of both these mechanisms, which are together addressed in literature and by practitioners as Base Erosion and Profit Shifting (BEPS). The dimension of tax avoidance using BEPS requires courageous measures adopted by policy makers to restore confidence in the taxation system and to ensure that profits are submitted to justified fiscal treatment, in respect of the fundamental principle of equity in taxation.

There are different levels of action in response to MNEs’ efforts to identify methods for optimizing their fiscal liability. There is the national level, the most convenient one in terms of time reaction, effectiveness of the ruling procedure and administrative costs, but also less efficient for the taxation of the corporations’ income generated in internationally developed economic activity. In this direction some countries (e.g. France’s digital service tax) have already taken important and controversial steps.

There is also the regional level, for big states and for the local association of states (USA and EU) and there is the worldwide level, the most efficient in terms of intended results but the most sinuous in terms of adoption procedure. The analysis of the results generated by the tax reform at local and regional level is not encouraging for supporting this type of action,¹⁰ the equality of taxation and the efficiency of the regulatory system being in direct dependency relation with the global acceptance of the new concepts and fiscal treatment.

10 Mihaela Tofan, State right to rule tax system vis-à-vis multilateral regulation on new nexus and income allocation, Cluj Tax Forum no. 7/2019, available at: https://heinonline.org/HOL/LandingPage?handle=hein.journals/cluj2019&div=50&id=&page=, retrieved on October 15, 2021.

The international regulation in the field is dominated by the Organisation for Economic Co-operation and Development’s (OECD) actions in 2015¹¹ and 2019¹² and oriented by the 2017 changes in taxation by the US,¹³ and it is accompanied by the EU’s struggle to identify efficient methods to fight tax avoidance, in general, and BEPS, in particular by the end of 2020.¹⁴

11 OECD, Measuring and monitoring BEPS, action 11–2015 final report, OECD/G20 Base Erosion and Profit Shifting Project, Paris, OECD Publishing, 2015, doi:10.1787/9789264241343-en. 12 OECD and country officials discussed OECD’s workplan for new rules for taxing multinational businesses and ongoing projects in the annual tax conference in Washington, DC, on June 3–4, 2019. Under the name The Road to 2020: Tax Challenges of Digitalization, new proposal for Profit Allocation and Nexus (Pillar One) were analyzed (https://taxinsights.ey.com/archive/archive-news/oecd-and-country-officials-discuss-oecd-workplan-for-new-rules.aspx, retrieved on August 17, 2020). 13 Erica York and Alex Muresianu, The tax cuts and jobs act simplified the tax filing process for millions of households, Fiscal Fact No. 604, Washington, DC, Tax Foundation, 2018. 14 European Commission, Aggressive tax planning indicators, final report, TAXUD/2016/DE/319 FWC No. TAXUD/2015/CC/131, available at: https://ec.europa.eu/taxation_customs/sites/taxation/files/taxation_papers_71_atp_.pdf, retrieved on March 15, 2020.

The widest level of regulating the MNEs’ taxation in the present context is supported by the Organisation for Economic Cooperation and Development’s (OECD) initiatives to adopt a unified approach for international taxation. There is an intense debate on the proposed regulation; information was presented in documents for public comments and further analysis by specialists, researchers, and representatives of the MNEs during a meeting at the OECD headquarters.

The OECD’s unified approach for fighting aggressive tax planning has two main pillars, and it was presented in January 2019, when the Inclusive Framework on BEPS has approved a Policy Note on Addres...