European Tax Law - JKU

ignored. Both companies could be taxed as a single
entity. However, the issue of whether consolidation
regimes operate cross-border in Europe is subject to
debate. In addition, there is a dividing line between two
national tax systems: the subsidiary and the parent are
subject to different tax jurisdictions. If we respect the
boundaries of these jurisdictions, it is not evident that
the expenses incurred in one jurisdiction are deductible
in another jurisdiction. If we take into account these
considerations, the Bosal Holding decision by the ECJ
does not look so inconsistent.
3.1.2. Marks & Spencer
Marks & Spencer is, of course, the hallmark case of territoriality
and the symmetric application of the laws of a
national tax jurisdiction. If there is no power to tax foreign
income, there is no obligation to allow a deduction
for foreign losses. The outcome of the Marks & Spencer
decision followed this logic because the ECJ held that
the restriction was justified. It only made a (small)
exception on the basis of the principle of proportionality.
Thus, the right to disallow foreign losses was not
absolute. Only in very extreme cases was a transfer of
losses from one tax jurisdiction to another held to be
mandatory under EU law. Is this inconsistent with the
principle of territoriality, an attack on the absolute tax
sovereignty of the Member States, or a deadly danger to
their tax policies or their power to determine tax jurisdiction?
From the point of view of principle, the UK’s tax jurisdiction
did not extend to foreign subsidiaries (1)
because they were not residents and (2) because there
was no source of income in the UK. Therefore, in the
view of the Tax Commissioners, that was the end of the
story. There was no doubt that there was not even an
issue under the fundamental freedoms. Why did the ECJ
did not see this clear distinction?
We should keep in mind that the UK operates a system
of group relief allowing for the transfer of losses from
subsidiaries to the parent company and that foreign
companies can be members of the group. Therefore, the
question whether there was a discriminatory restriction
focused on the unequal application of the rules on the
transfer of losses between domestic and foreign subsidiaries
and their respective UK parent companies,
while the basic issue of tax jurisdiction was somewhat
obscured. In general, however, even though it did not use
the right theoretical arguments, the ECJ in Marks &
Spencer gave clear priority to the determination of tax
jurisdiction over the discriminatory treatment of outbound
companies. The subsequent Finnish case of OY
AA20 gave an indication of what could happen if companies
were free to decide to transfer their losses from one
tax jurisdiction to another. The notion of national tax
jurisdiction would lose all its meaning, and the ECJ is
clearly determined not to permit such chaos.
On the other hand, the ECJ could not negate its own
well-established case law condemning all kinds of discriminatory
restrictions on outbound movements in
Articles
non-tax cases. In addition, the full force of the principle
of division of tax jurisdiction may not have been apparent
to the ECJ in Marks & Spencer because, until then,
the debate had concentrated mainly on coherence of the
national tax system. Hence the decision may not be
entirely satisfactory from the point of view of principle,
but is a valiant attempt to reconcile the legitimate interests
of the Member States and their right to determine
tax jurisdiction, on the one hand, and the fundamental
freedoms enshrined in the EC Treaty, on the other. The
ECJ ultimately made a choice, as it should, for the primacy
of the concept of the internal market over the
essential concepts of residence and source; nevertheless,
the ECJ clearly took account of the necessity to protect
national tax systems by respecting the boundaries of
their national tax jurisdiction. The damage done by
Marks & Spencer to national tax systems is very limited.
Current cross-border losses are clearly not deductible
under its holding, and I wonder how many groups of
companies will emulate the example in Marks & Spencer
and attempt to deduct their liquidating losses in the
Member State of the parent company.
3.2. Creation of new rights for taxpayers without legal
basis
This idea rejoins the widespread criticism that the ECJ is
not interpreting but legislating in the area of taxation.
Weber and García Prats brought more focus to this criticism:
if a Member State that abstains from exercising its
taxing power is construed to be discriminating or
restricting and the ECJ grants rights to taxpayers as if the
Member State had exercised its tax jurisdiction, the ECJ
is creating taxing rights which did not exist before.
3.2.1. Fiscal sovereignty is neither exclusive nor absolute:
the EC Treaty
This criticism raises the question of the distribution of
powers in the European construction. First, it should be
mentioned that the much vaunted tax sovereignty of the
Member States is neither absolute nor exclusive. It is not
exclusive because the EC Treaty clearly provides in
Art. 94 that the EU “has the competence to approximate
the laws, regulations or administrative provisions of the
Member States, by way of directive, where they directly
affect the establishment or functioning of the common
market”. Contrary to the measures mentioned in Art. 95,
tax directives must be approved unanimously. Art. 96
provides that, when the Commission finds that a difference
in national law is distorting competition in the
common market, “it shall consult the member states con-
20. Case C-231/05, Oy AA, 18 July 2007, Para. 56: “... to accept that an intragroup
cross border transfer ... may be deducted from taxable income of the
transferor would result in allowing groups of companies to choose freely the
Member State in which the profits of the subsidiary are to be taxed, by removing
the basis of the assessment of the latter and, where that transfer is regarded
as taxable income in the Member State of the parent company transferee,
incorporating them in the basis of assessment of the parent company. That
would undermine the system of the allocation of the power to tax between the
Member States ....”
© IBFD BULLETIN FOR INTERNATIONAL TAXATION MARCH 2008 93