«dr. Balázs Békés DIRECT TAXATION IN THE EUROPEAN UNION Possibilities and limitations in the national legislation thesis of the doctoral ...»
Actually the tax law of the European Union can be defined as the approximation of tax rules inside the tax system of Member States. “The European tax law is the sum all of primary and secondary sources of law which is formed as a result of tax harmonization.”7 Dr. Deák Dániel: Adóverseny a kibővített európai Unióban, Gazdaság és Jog, 1/2005 17-22. o.
See more detailed: Erdős Éva: Az adójogi harmonizáció folyamata és eszközei az Európai Unióban In: Ünnepi Tanulmányok Prof. Dr. Kalas Tibor egyetemi tanár oktatói munkásságának tiszteletére Z-Press Kiadó, 2008.
See: Dr. Erdős Éva: Nemzetközi, illetve európai adójogi konfliktusok és kezelésének módjai: Publicationes Universitatis Miskolcinensis, Sectio Juridica et Politica Tomus XXV/1. Miskolc University Press, 2007. 267o.
It can be concluded that in the area of direct taxes due to the resistance of Member States the approximation of rules has been a considerably less significant, the positive harmonization is on a low level and the differences are remarkable. Therefore this process can be named as the coordination of tax policies, not the harmonization of them.8 It follows from the foregoing that European Tax Law (in the field of direct taxation) is a summary of norms laid down in primary sources of law and as constituted by the institutions of the European Union (secondary sources of law). In a broader sense, it includes the imaginary tax system as defined by negative harmonisation in which all principles to be present in any tax system of the Member States as a pre-condition for compliance with EU Law are contained.
The features of EU tax policy of direct taxes
The direct taxation plays an important role in the achievement of the single internal market.
However as I presented in my Dissertation neither the EEAS not the TFEU did really create the legal framework for the harmonization of direct taxes. This is not a coincidence the Member States did not intend to give the asset of direct taxation out of their hands and as a result of this there are extremely very few primary or secondary sources of law.
The scope of tax law for the creation of the single internal market the most obvious solution appeared to be the harmonization of regulations. A harmonization like this enables to create and operate a system which was designed carefully and was well-planned and via this to eliminate rules which distort the operation of the single internal market. This harmonization was realized solely in the area of indirect taxes; in contrast the positive harmonization of direct taxes can be regarded as unsuccessful except for a relatively short period.
The consequence of the half success of the above efforts made toward harmonizing from the current system of the EU is that member states are hardly restricted, their obligation extends in connection with direct taxes to co-ordinate their tax systems, rather than harmonizing them.
In the current system the principles of subsidiarity, ad hoc delegation of powers and proportionality form the base of constitutional structure. The bodies of the EU are not Galántainé Máté Zsuzsanna: Az adójog-harmonizáció fő jellemzői az Európai Unióban, Külgazdaság, XLVII.
évfolyam, 2003/6. szám.
typically authorized to take actions and the requirement of unanimity voting and the fact that the provisions relating to internal market legislation does not include tax matters makes it unrealistic that a significant change can occur.
In the absence of harmonization, the member states can compete with each other to attract investors and taxpayers. This competition can typically distort the decisions of enterprises and thus it does not help the Union to achieve its objectives.
If a national tax system in a member state meets with the directives and is exempt from disadvantageous discrimination or the restriction of free competition, then the tax system of this Member State is legally impeccable. If it operates a system which is harming the interests of other states, because it splits a too large slice from the common tax pie, then other Member States can force the transformation of their tax rules, but this is an exertion of political pressure, and does not take place in a legal process framework.
The constitutional system established by member states is not suitable legally for the harmonization of direct taxes. Bearing in mind that the European Parliament is not entitled with legislative power in fiscal affairs and the EU is not working on a federalistic basis, the creation of a common tax system is not only unrealistic but it could be also questionable from a democratic point of view.
The role of the European Court of Justice
According to the weakness of the above the national legislators can convert the direct taxes without limits. In those cases when several Member States are concerned the fundamental freedoms because applicable and this was the moment when the European Court of Justice has entered the stage of direct taxes, which is a difficult role. Same countries want to restrict it’s opportunities for this as an example the United Kingdom and Germany attempted this before the acceptance of the Amsterdam Treaty. Others believe that the verdicts are not sufficient to serve realization of single internal market, such as the extension of mostfavoured-nation principle.9 Vaninstendael, F, „The ECJ at the crossroads: balancing tax sovereignty against the imperatives of the single market”, European Taxation, 2006, p. 413.
The action of the European Court of Justice is ambivalent. On the one hand from the nature of judgement it can only convert the tax law indirectly because its activity covers one matter and one Member State. However analysing the case law the court really did not express sufficiently purposively and progressively in a range of issues. However this is not actually the task of the applier of law but of the creator of law. At the same time has made a lot of efforts to keep the national legislators within borders with its own tools so that it would force the same application of the identical principles among Member States and that fundamental freedoms would prevail in the direct taxation of the European Union.
Discrimination and Restriction
The tax systems of the Member States regards residence as the factor constituting the basis for unrestricted right for taxation, while intending to tax foreign residents in its capacity as source state. As a consequence, different tax rules are applied to domestic and foreign residents, with domestic residence paying tax on their worldwide income in the particular Member State, and the foreign residents paying tax on the income earned by them in the particular country.
The concept of residence status has the meaning as defined in the internal regulations of the particular Member State, in other words, no relevant Community concept exists. The differentiation between domestic and foreign residents under tax law many times gives rise to discrimination. In accordance with the case law of the Court, fundamental freedoms do not impose the obligation on the Member States to provide one and the same conditions for domestic residents and residents in another Member State in view of the fact that tax allowances are to be provided for by the country of residence by default.
Regarding the discrimination the Court established, most of the times, the circumstances of taxpayers with domestic residence and foreign residence are not comparable therefore equal treatment is not imposed as requirement. At the same time, in cases where the circumstances of the taxpayer resident in another Member State is comparable with those of the domestic residents, the tax allowances must be granted and equal tax treatment under the same conditions must be ensured, except when approved grounds for exclusion are in place.
In contrast with this restriction or limitation is occurs if freedom and rights are restricted unreasonably regardless whether the restriction concerns domestic or foreigner.
As regards taxpayers with residence in a third state, the Member States have the right to set tax regulations at their sole discretion, which may deviate from those imposed on domestic residents. An exception lies in case of situations subject to the freedom of movement of capital, as in this case the requirements of equal treatment will apply.
In case-law a train of thought has been crystallized through which certain tax rules are examined to be in compliance with EU law, furthermore those arguments, which Member States set to protect their national law.
The justification of judgements typically begins with a statement which establishes the competency of the Court. In this context it is stating that although according to the permanent judgement practice direct taxes belong to the competency of Member States, the latter ones are obligated to practise their powers with respect for community law.10 After this in the following section the harmony of the given place of regulation with the community law will be examined through a questionnaire (test) which was formed in the
wake of the principles laid down in the Gebhard case:
• Does the effect of the TFEU expand to the particular case?
• If the answer to the previous question is yes, then is the particular provision discriminative or restrictive?
• If yes, then is the discrimination or restriction justified?
• If yes, then it is a further question, whether the justified restriction is necessary and its level is proportionate to the intended objective.
C-311/97 Royal Bank of Scotland (ECR 1999 I-02651. o.) 19. paragraph; a C-319/02 Manninen (ECR 2004 Io.) 19. paragraph and a C-446/03 Marks & Spencer (ECR 2005 I-10837. o.) 29. paragraph.
Based on the above a tax law institution is not contrary to the community law if its effect does not extend to it – for example there is an exclusively internal element of the transaction, or it is non-discriminative or non-restrictive. The latter type of cases can only remain in force if their maintenance in force is justified and restriction is proportionate to the intended objective.
The exculpation reasons of Member States
In jurisprudence the arguments that Member States cite as reasons for a particular discrimination or restriction are also formulated and have become a standard term for reference. Of the above arguments, the European Court of Justice does not typically accept
the following ones:
• lack of harmonisation of direct taxes;
• taxpayer with an opportunity to attain the same economic objective in an alternative structure (e.g. foundation of a branch office rather than an affiliate);
• an existing disadvantage being compensated for by other advantages (e.g. although a country does impose taxes in a discriminatory manner, the particular revenue in the other country is tax-exempt);
• low tax rates for a particular revenue payable by the taxpayer in another Member State;
• ensuring efficiency of financial audits, difficulties in public administration in law enforcement and implementation;
• impact of double-taxation treaties, which might compensate for detrimental national regulations;
• protection of tax base, preventing tax revenues from reduction;
• maintaining the unity of the tax system.
At the same time Member State have cited successful arguments which are typically
categorized in the following:
• combating tax evasion and tax fraud;
• ensuring the balance of the right of taxation between the Member States.
If it is clear that the applied national tax provision serves one of these two objectives, then measure which breach the EU law that is non-residents are effected disadvantageously can still be accepted and consequently it can be sustainable in the national tax law.
Most of the cases, regulations against tax evasion violate the freedom of cross-border transactions, however, Court case law proves that these provisions may continue in force and application where they are designed to exclude completely arbitrary agreements solely aiming to evade existing tax liability. This was laid down by the Court in the Cadbury Schweppes11 and the Thin Cap Group Litigation cases12. Where the activity is genuine, the restrictions in tax legislation of Member States for avoiding tax evasion may not be applied.
The Court has established a number of conducts that are not to be deemed as completely arbitrary agreements. Foundation of an affiliate in another Member State for example is not to be deemed as an attempt for tax evasion13. Further, the fact that a taxpayer could well maintain its secondary premises in the Member State it resides should not be deemed as a completely arbitrary agreement14. Reduction of the tax liability is a reasonable objective provided that it will not result in an arbitrary redirection of revenues15.
It follows from case law that the fight against abusing tax law can justify the national measure which is contrary to the EU law, if the national provision is sufficiently specific in order to attack the tax structure which was artificial and was only formed for the purpose of achieving C-196/04 Cadbury Schweppes (ECR 2006 I-07995. p.) C-524/04 Test Claimants in the Thin Cap Group Litigation (ECR 2007 I-02107. p.) C-264/96 ICI (ECR 1998 I-04695. p.) C-196/04 Cadbury Schweppes (ECR 2006 I-07995. o.) C-294/97 Eurowings (ECR 1999 I-07447. o.) tax benefits. In addition, the measure of the member state must be targeted as well. The existence of artificial formation must be settled under objective factors, through which taxpayers have given the opportunity to evidence to the contrary. Creating the opportunity of evidencing the contrary also supplies to promote that the concerned national provision comply with the requirements of proportionality and necessity.
From the extremely colourful legal practice a kind of a standpoint is outlined which leads to the conclusion that the definition of abuse of rights in tax law in the interpretation of EU law has objective and subjective criteria.16 The subjective criteria clearly refer to the intention of taxpayer to artificially create the structure which is the basis of decreasing their tax burden.