European Tax Law - JKU

Another point of criticism echoes the comments of
some European authors: “... making nondiscrimination
the sole criterion for the choice necessarily suppresses
considerations of efficiency, fairness, and administrability
that should inform difficult tax policy decisions.” 11
The principles that should govern national tax policy are
pushed away by the overriding concern for free movement
and non-discrimination. This is a judicial reshaping
of tax policy that again should be left to the legislator
and does not belong to the competences of the Court.
2.2. ECJ’s inconsistency in applying territoriality and
sovereignty of the Member States in determining
tax jurisdiction and the creation of new “taxing
rights”
The most radical criticism was formulated by Dennis
Weber in his Helsinki report: “The ECJ case law is incorrect
from a dogmatic point of view because the Court
does not pay heed to the consequences of its own basic
assumptions e.g. that the Member States are free to
determine the criteria for taxation in order to delimit tax
jurisdiction and to avoid double taxation.” 12 Weber’s criticism
is based on the following reasoning: (1) capital and
labour-import neutrality (CLIN) is the principle that
best achieves the objectives of the internal market, (2)
CLIN requires applying the principle of territoriality, e.g.
taxation in accordance with the rules of the state of
source or origin and this principle applies to non-resident
as well as resident taxpayers, (3) the Member States
have absolute sovereignty in determining their tax jurisdiction
and in designing the way in which they eliminate
double taxation, and (4) the ECJ has accepted the principle
of territoriality and the sovereignty of the Member
States to determine tax jurisdiction, but (5) the ECJ has
not drawn the logical consequences of its position as
illustrated in particular by its decisions in Bosal Holding,
Marks & Spencer, Manninen and Ritter-Coulais.
2.2.1. CLIN as the best solution for the internal market
In the debate between CLEN and CLIN, Weber favours
CLIN as the best solution for the internal market. It is
interesting to note that this view is quite different from
the position defended by Graetz and Warren. Weber,
however, pointed out that competition is not only
between private undertakings, but that “competition
between legal systems is one of the foundations of the
Internal Market”. Competition between legal systems
includes competition between tax systems. Competition
between tax systems enhances the efficiency of governments,
which contributes to the overall efficiency of
economic systems.
2.2.2. Territoriality as a consequence of CLIN
The next step in Weber’s reasoning is that taxation on the
basis of territoriality is the principle which achieves
CLIN most adequately. This principle has also been
accepted by the ECJ as a legitimate criterion by which
the Member States, exercising their sovereign taxing
power, determine their tax jurisdiction. On incoming
Articles
movements of persons, services or capital, the ECJ has
consistently applied the fundamental freedoms taking
into account the limitation on tax jurisdiction based on
the principle of territoriality. The problem, however, is
with the application of the principle of territoriality to
outgoing movements by resident taxpayers.
2.2.3. By negating territoriality, the ECJ is creating new
“taxing rights”
The ECJ has recognized the power of the Member States
to decide the criteria for determining their tax jurisdiction
and avoiding double taxation. This implies that the
Member States are free (sovereign) to limit their taxing
rights and thus not to levy tax on certain taxpayers or
types of income. The Member States have restricted their
tax jurisdiction either unilaterally or bilaterally in
treaties. In doing so, they applied the principle of territoriality
to certain outgoing movements of persons or capital
and, as a consequence, these persons or capital, by
exercising their freedom and moving abroad, have left
the tax jurisdiction of a Member State. “Disadvantages
arising because a certain person is not liable to tax or
because certain (negative) income falls outside the tax
base are ... not prohibited restrictions,” and further “[i]f
limiting tax jurisdiction were to be considered a restriction
in certain circumstances (and the ECJ were thus
actually to require that a person or type of income had to
be subject to tax), Community law would be creating
taxing rights. This would be a direct breach of Member
State sovereignty”. 13 García Prats in his report came to
similar conclusions.
2.2.4. Limitations on the fundamental freedoms as a
factor of negative integration
A similar criticism from a different point of view has
been formulated by Julian Ghosh. Starting from an
analysis of the functions of residence and source in
international taxation, he distinguishes between the
function of residence, on the one hand, in identifying the
tax unit and, on the other, in identifying the tax base, setting
the rates, and regulating administration, assessment,
collection and recovery of taxes. This distinction seems
to correspond to the distinction made by the ECJ
between rules determining tax jurisdiction and rules
exercising tax jurisdiction. In the view of Ghosh: “... the
use of residence to define the tax unit cannot, as a matter
of principle, result in a breach of the EC treaty, whereas
the use of residence to define the tax base of a taxing
State ... could indeed result in such a breach.” 14 This
rejoins the ECJ’s reasoning in Gilly15 that the determina-
11. Id. at 1212.
12. Accounting and Taxation & Assessment of ECJ Case Law, 2007 EATLP
Congress, Helsinki (2008), Report submitted by Denis Weber, at 113, 115.
13. Id. at 122.
14. Ghosh, supra note 7, at 3.
15. Case C-336/96, Gilly, 12 May 1998, Para. 30: “Although the criterion of
nationality appears as such in the second sentence of Article 14(1) for the purpose
of allocation of fiscal jurisdiction, such differentiation cannot be
regarded as constituting a discrimination prohibited under art. 48 of the
Treaty.”
© IBFD BULLETIN FOR INTERNATIONAL TAXATION MARCH 2008 91