European Tax Law - JKU

tions”. 29 According to this position, the ECJ has no legal
authority to eliminate cumulative administrative burdens,
economic double taxation or even juridical double
taxation resulting from the juxtaposition of national tax
rules on the basis of the rules dividing and allocating
national tax jurisdiction.
I respectfully disagree with this position. Cumulative
burdens, economic and juridical double taxation, even
when they result from the parallel and non-discriminatory
exercise of tax jurisdiction, are clearly in contradiction
with the basic concept of the internal market. As
indicated above, these instances of double taxation can
be removed not only by tax treaties and secondary Community
legislation like directives and regulations, but
also by Community jurisprudence on the basis of the
supremacy of the fundamental freedoms. In its case law,
the ECJ has made a distinction between establishing the
criteria determining tax jurisdiction and the rules by
which the Member States exercise tax jurisdiction. The
former are outside the scope of scrutiny by the ECJ, the
latter are within.
First, the distinction between the rules determining tax
jurisdiction and the rules exercising tax jurisdiction is
not an easy one to make. When a Member State determines
that a person or company is a resident within the
ambit of its tax system, is the Member State determining
its jurisdiction or is it interpreting its national tax law
and exercising its jurisdiction? When a Member State
determines that interest income is connected to a permanent
establishment in its territory, it decides at the
same time that the interest income is business income
and therefore income from a permanent establishment
falling within its tax jurisdiction. By deciding that the
interest income is connected to the permanent establishment,
the Member State has interpreted its rules on
interest income as business income or as private investment
income and therefore exercised its taxing power
within its jurisdiction. But the consequence of applying
this rule is that the income from a permanent establishment
belongs to its tax jurisdiction and that means it is
defining its tax jurisdiction. I find it difficult to make the
intellectual distinction between the two parts of this single
decision.
Second, there is no reason of principle why rules “exclusively”
determining tax jurisdiction should be out of
bounds when applying the fundamental freedoms, at
least if we accept the concept of the internal market as
the guiding principle for deciding cases under the EC
Treaty. There is long-standing case law that the fact that
a particular area of (tax) law has not yet been harmonized
is no excuse for not applying the fundamental
freedoms to this area. In other words, the fact of nonharmonization
means that the Member States are indeed
still free to legislate or to conclude tax treaties, but these
treaties and tax laws, including the existing laws, must be
in conformity with the dominating provisions of the EC
Treaty. There is also no legal basis for “carving out” the
international rules determining tax jurisdiction, either
in the EC Treaty or elsewhere. The reason why the ECJ in
Articles
Gilly held that the tie-breaker rule of nationality did not
constitute discrimination was not that the ECJ had no
jurisdiction to rule on this question, but that it was a reasonable
rule which in itself had no discriminatory effect.
A rule merely determining which state has the power to
tax is almost always absolutely neutral as to the operation
of the internal market and therefore cannot under
any circumstances be discriminatory. The result of
applying this rule may well be that a taxpayer exercising
his right to free movement pays more tax in the new
Member State. But that result is not in contradiction
with the internal market. The objective of the internal
market is not to erase all tax differences between the
Member States, but, among other things, to erase the
double burdens occurring in the exercise of the basic
freedoms.
In this respect, it is of great interest to find out precisely
the scope of the international rules determining tax
jurisdiction. These rules are simple and few in number.
Their only purpose is to determine which state is entitled
to tax. Residence and source in the national territory
and sometimes nationality are the criteria on the basis of
which tax jurisdiction is divided between states. Here I
would like to point out that the act of determining tax
jurisdiction is restricted to the decision of a state to tax
residents (in principle on their worldwide income) or to
tax non-residents (on their income from the national
territory).
29. See several opinions by Advocate-General Geelhoed in Case C-374/04,
Test Claimants Class IV of the ACT Group Litigation, 23 February 2006, Paras.
36-39: “... in the direct taxation sphere, there is no practical difference between
these two manners of formulation i.e. ‘restriction’ and ‘discrimination’. What is
essential, however, is to distinguish between two senses of the term ‘restriction’
when dealing with direct tax rules. The first refers to restrictions resulting
inevitably from the co-existence of national tax systems. In accordance with
Member State competence for the area in the present state of Community law,
direct tax within the E.U. is governed by co-existing discrete and varied
national tax systems. Certain disadvantages for companies active in crossborder
situations result directly and inevitably from this juxtaposition of systems
and in particular: (1) from the existence of cumulative compliance burdens
for companies active cross-border; (2) the existence of disparities
between national tax systems; and (3) the necessity to divide tax jurisdiction,
meaning dislocation of tax base ....
... The use of the term ‘restriction’ – although employed in the Court’s
case law – is in this context misleading. In reality, at issue here are distortions
of economic activity resulting from the fact that different legal systems must
exist side-by-side. In certain cases these distortions provide disadvantages for
economic actors; in other cases, advantages. While in the first case they are
‘restrictive’, in the second case they stimulate cross border establishment activity.
Although the Court is as a rule faced with what can be termed ‘quasirestrictions’
flowing from these distortions, one should not forget that there is
a second side to the coin – that is where particular advantages arise from the
cross border establishment .... The causes and character of these ‘quasi-restrictions’
mean that they may only be eliminated through the intervention of the
Community legislator, by putting in place a cohesive solution on an EU-wide
scale, that is an EU-wide tax system. In the absence of an EU-wide tax solution,
therefore such quasi-restrictions should be held to fall outside the scope
of Article 43 EC.”
Case C-513/04, Kerckhaert-Morres, 6 April 2006, Paras. 30-31: “In this
regard, I would recall that the free movement provisions of the Treaty do not
as such oblige home states to relieve juridical double taxation resulting from
the dislocation of tax base between two Member States ... the possibility of
juridical double taxation, in the absence of priority rules between the relevant
States, is an inevitable consequence of the generally accepted method under
international tax law of dividing tax jurisdiction between States – that is, the
distinction between home State taxation (worldwide taxation of residents)
and source State taxation (territorial taxation of non-residents). Under Community
law, the power to choose criteria of, and allocate, tax jurisdiction lies
purely with the Member States, as governed by international tax law.”
© IBFD BULLETIN FOR INTERNATIONAL TAXATION MARCH 2008 97