European Tax Law - JKU

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this competition is best served by CLIN. The defenders
of CLEN argue that taxes are not neutral and undermine
economic efficiency and that, therefore, the differences
in tax systems should be eliminated by the CLEN policy
and the credit method. It is generally accepted, however,
that public services are indispensable for economic
activity in the market sector: without advanced public
services, no advanced market economy. These public
services are financed by tax systems. In order to provide
these services efficiently, competition between governments
– and hence competition between tax systems – is
desirable. Such competition is possible with CLIN, but
almost entirely excluded with CLEN.
In addition, when, as seems more and more likely, the
United Kingdom moves to a system of exemption for
foreign-source dividends, this will leave only Greece,
Ireland, Malta and Poland in the EU as adherents of the
credit system. Even based on this overwhelming evidence,
the ECJ may still not have the power to impose
CLIN and the exemption system on the Member States
right away, but the ECJ could certainly use its “power to
destroy” to sharpen its opinion on the discrimination
and restrictions resulting from the credit system and
make Community life more miserable for the Member
States continuing to apply that system.
3.3.3. Consequences of CLIN on the substantive tax law
of the Member States
The question is whether the ECJ in its decision-making
process should wait until the last EU Member State has
made up its mind and there is de facto unanimity in
favour of exemption and CLIN. In my view, the ECJ
should not because this would mean that a single Member
State, however small in comparison to the mass of all
the other Member States, would be able to block the
decision-making process in the Court. For the approval
of legislation, the EC Treaty formally requires the unanimity
of all the Member States for e.g. directives in taxation.
However, for the ECJ to decide an issue concerning
the internal market, which it has the power to decide
under the EC Treaty, there is no rule requiring consensus
or unanimity on the issue by all the Member States. If the
decision advances realization of the objectives of the
internal market and if the overwhelming majority of the
Member States has accepted a similar substantive solution
in their tax legislation, the ECJ is reasonably
entitled to take such a decision.
In some areas, CLIN cannot be used as a principle of
policy, such as for instance the taxation of interest
income of individuals. 25 For reasons of interpersonal
equity, the EU Member States have clearly chosen to tax
interest income, based on the exchange of information,
in the residence country of the taxpayer, but also to neutralize
any tax levied in the source country. This is a clear
indication which the ECJ should follow in dealing with
double taxation and discrimination or restriction on
interest income paid to individuals. Withholding taxes
in the source country should be abolished when they
discriminate against non-resident taxpayers. Foreign
withholding taxes should be credited when double taxation
results from the parallel exercise of taxing powers.
3.3.4. The one or two country approach
Finally, there is the question of the one or two country
approach. This question should, in my view, be subdivided
in two quite distinct situations: (1) where one
Member State is indeed discriminating, but the discrimination
may be compensated by the impact of the
domestic tax system of the other Member State; and (2)
where cross-border flows of income, capital or labour
are indeed treated less favourably, but the disadvantage
results from the parallel and non-discriminatory exercise
of the taxing powers of two Member States.
Regarding the first situation, the EFTA (European Free
Trade Association) Court, which operates under the
same rules as the ECJ, has taken the position that a state
of source or origin is not excused from violating the
EFTA Treaty because the negative consequences of its
discrimination are compensated by a favourable tax
treatment in the residences state. 26 The ECJ has not yet
played its final hand. In Manninen, 27 it indicated that it
might take into account the mitigating effect on double
taxation of the tax system of the other Member State (the
source state). In Denkavit Internationaal BV, 28 it decided
that the combination of treaty provisions and the
domestic tax system of the other Member State (the residence
state) was relevant in theory, but not in practice;
but the Court did not take any position on the sole effect
of the domestic rules of the other state (of residence)
without any reference to the provisions of a tax treaty.
The effective impact of a tax treaty concluded by a Member
State may be taken into account in combination with
the domestic rules of the other state. But the Court did
not rule on the effect of advantageous parallel domestic
tax rules in another Member State when they incidentally
would also resolve discrimination problems in the
source state. In this respect, CLIN may resolve discrimination
issues in the source state, but CLIN by itself does
not resolve issues of double taxation following the parallel
exercise of tax jurisdiction by the source and residence
states.
The second situation is of a different nature. Two Member
States are also involved, but the disadvantage results
from a double burden or a parallel and non-discriminatory
exercise of taxing powers. It has been argued several
times by Advocate-General Geelhoed and also, among
others, in the famous case of Test Claimants Class IV of
the ACT Group Litigation that there is no legal basis for
eliminating these cases of economic or juridical double
taxation as a result of what he described as “quasi-restric-
25. Council Directive 2003/48 EC of 3 June 2003 on the taxation of savings
income in the form of interest payments.
26. Case E-1/04, Fokus Bank, 23 November 2004.
27. Case C-319/02, Pätri Manninen, 7 September 2004, Para. 34.
28. Case C-170/05, Denkavit Internationaal BV, 13 December 2006,
Paras. 44-54.
96 BULLETIN FOR INTERNATIONAL TAXATION MARCH 2008 © IBFD