European Tax Law - JKU

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cerned”. If that consultation has no effect, “the Council
shall, acting on a proposal of the Commission, acting by
qualified majority, issue the necessary directives”. There
is no exception for taxation. Although the latter provision
has never been used for tax purposes, it is clear that
the founding fathers of the European Community
clearly intended to grant legislative power to the Community,
also in the area of direct taxation, when this
would be necessary for the functioning of the common
market. Since it is indisputable that direct taxation has
an important bearing on the functioning of the internal
market, it is clear that the sovereign taxing power of the
Member States is not exclusive; they share the power
with the EU.
The taxing power is also not absolute. All laws of the
Member States, including all tax laws, are subject to the
provisions of the EC Treaty: the free movement of goods
(Arts. 28-31), the four economic freedoms (Arts. 39-58),
and the non-discrimination provisions (Arts. 90-93).
There are some public policy exceptions to this primacy
of European law mentioned in the EC Treaty, but taxation
and the loss of public revenue are not part of these
exceptions. The only possible exception could be Art.
293 of the EC Treaty stipulating that the Member States
shall enter into negotiation with each other in order to
abolish double taxation, which would mean that issues
of double taxation could only be resolved through bilateral
tax treaties.
Such a conclusion is unwarranted, however. This follows
from the general structure of the EC Treaty. Art. 293
belongs to the general and final provisions of the Treaty,
which contain a mixed bag of unstructured, miscellaneous
clauses. It cannot be disputed that issues of direct
cross-border taxation are vital to the functioning of the
common market. The legislative power with respect to
those issues in the area of taxation is laid down in Arts.
93, 94 and 96 of the EC Treaty. Taking into account the
public policy exceptions, the scope of the primacy of the
EC Treaty provisions is absolute. The consequence of
this hierarchy of norms is that Art. 293 cannot be viewed
as a kind of “carve out” for international taxation, e.g. a
provision that gives exclusive power to the Member
States to decide issues of international double taxation.
It is rather a specific supplemental provision that, in
addition to the ordinary Treaty rules, grants power to the
Member States also to regulate issues of international
double taxation.
3.2.2. Fiscal sovereignty is neither exclusive nor absolute:
the case law
Fiscal sovereignty is neither exclusive nor absolute. This
follows from decisions of the ECJ on these issues. The
Gilly decision is much cited as justifying the absolute
power of the Member States with respect to tax treaties.
This is not the correct reading of the case. Gilly accepted
the reasonable operative rules of tax treaties inspired by
the OECD because Art. 293 specifically invites the
Member States to conclude such treaties for the elimination
of double taxation, and therefore these rules, agreed
in bilateral treaties, constitute a valid legal basis for the
Member States to act in matters of direct taxation under
the EC Treaty. In the Gilly decision, however, the ECJ
said: “The Member States are competent to determine
the criteria for taxation of income and wealth with a
view to eliminating double taxation – by means, inter
alia, of international agreements – and have concluded
many bilateral conventions based, in particular, on the
model conventions on income and wealth tax drawn up
by the Organisation of Economic Cooperation and
Development (‘OECD’).” 21 The key words here are “inter
alia”, which mean that next and in addition to the traditional
and classical instruments like international tax
conventions for the avoidance of double taxation based
on the OECD Model, there is also room for the European
communitarian instruments to eliminate economic
double taxation. This is highlighted by the
approval of the Parent-Subsidiary Directive on dividends
and also by the ECJ case law under the banner of
the fundamental freedoms.
The case in point here is Saint-Gobain where the
Swedish government argued in the style of the D case: “...
that double taxation treaties are based on the principle
of reciprocity and that the balance inherent in such
treaties would be disturbed if the benefit of their provisions
was extended to companies established in Member
States which were not parties to them.” 22 The ECJ literally
repeated its holding in Gilly that, in the absence of
harmonization measures, the Member States remain
competent to determine the criteria for taxation with a
view to eliminating double taxation by means, inter alia,
of international agreements. But then it decided that
“[i]n the case of a double taxation treaty concluded
between a Member State and a non-member country,
the national treatment principle requires the Member
State ... to grant permanent establishments of non-resident
companies the advantages provided for by that
treaty on the same conditions as those which apply to
resident companies”. 23 This is a clear holding that the
right of establishment overrules a basic rule of international
taxation, i.e. that permanent establishments of
non-resident companies do not have access to treaty
benefits. It may be a matter of debate whether this international
tax rule is a rule determining jurisdiction or a
rule flowing from exercising tax jurisdiction, but the rule
was clearly set aside on the basis of the primacy of EU
Community law over international treaty law.
3.2.3. Consequences of ECJ decisions on the basis of
fundamental legal texts
Once the relative hierarchy between the legal order of
the European Community and the national legal order
of the Member States has clearly been established as it
has been in innumerable tax and non-tax decisions of
the ECJ, it is inevitable that the enforcement of the fun-
21. Case C-336/96, Gilly, 12 May 1998, Para. 24.
22. Case C-307/97, Saint-Gobain, 21 November 1999, Para. 56.
23. Id., Para. 58.
94 BULLETIN FOR INTERNATIONAL TAXATION MARCH 2008 © IBFD