tax notes international - Tuck School of Business - Dartmouth College

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exports, and the recent drop in oil prices has created a difficult economic scenario that will affect government funding and the cash flow of private enterprises. (For prior coverage of the Tax Fairness Bill, see Doc 2008- 472 or 2008 WTD 7-5.) The new law extends a 10 percentage point reduction in the 25 percent corporate income tax rate to financial entities and cooperatives that reinvest their profits by increasing their capital and purchasing assets that would help their operations. The amendments provide for the reduction or dismissal of the advance income tax payment when there are economic effects for a given industry or economic sector. To be approved by the president, the Ministry of Economy and Finance and the tax administration must issue technical reports of an income reduction in the industry or economic sector. The reduction or dismissal of the payment must be evaluated on a yearly basis. The new law establishes 2009 as a transition year regarding withholding tax on interest paid on foreign credits. The normal 25 percent withholding rate over interest, which does not exceed the Ecuadorian Central Bank’s rate, has been reduced to 5 percent until December 31, 2009. Payments made by financial entities are free from withholding during the entire year. The capital flight tax rate has been increased from 0.5 percent to 1 percent, and all but one exclusion have been eliminated. Therefore, all payments (including those made for imports) are charged with the 1 percent capital flight tax. Individuals can leave the country with up to US $8,570 in cash free of tax. All imports whose payment is made with funds located abroad are deemed to be made with local money and therefore will be taxed. To encourage financial entities and those entities participating in the stock market to bring billions of Ecuador dollars of their clients’ deposits into the country, the National Congress has created a new tax. This tax will be charged on all deposits held abroad by the above-mentioned companies at a monthly rate of 0.084 percent of the amount of their assets held abroad. ♦ Roberto M. Silva Legarda, professor of tax law, Pontificia Universidad Católica del Ecuador, Quito, and partner, Tributum Consultans European Union EUROPEAN UNION Austrian Leasing Rules Incompatible With EC Treaty, ECJ Says Austrian rules that denied an investment-premium tax advantage to lessors of goods used by lessees in other EU member states violated article 49 of the EC Treaty (the freedom to provide services), the European Court of Justice said in its December 4, 2008, judgment in Jobra Vermögensverwaltungs-Gesellschaft mbH v. Finanzamt Amstetten Melk Scheibbs (C-330/07). (For the judgment, see Doc 2008-25509 or 2008 WTD 235-10.) Background Jobra was an Austrian company with a wholly owned subsidiary, Braunshofer, also an Austrian resident company. Jobra purchased some trucks and leased them to Braunshofer, which used the trucks in EU member states other than Austria. Consequently, Jobra was denied an investment-premium tax advantage because the leased assets were used ‘‘primarily abroad’’ and not in Austria. The Austrian tax rules at issue made the tax advantage available only if the assets had been used at an Austrian place of business for at least half the time they had been in use. Jobra argued that the rules were incompatible with its rights under EC Treaty articles 43 (freedom of establishment) and 49 (freedom to provide services). Considerations The ECJ noted that the leasing of vehicles is a service under article 50 of the EC Treaty. The Court went on to determine that the Austrian tax regime at issue — ‘‘which applies a less favourable tax regime to investments in assets which, once they have been hired out for remuneration, are used in other Member States, than to investments in such assets that are used domestically — is likely to discourage undertakings that would be eligible for that tax advantage from providing rental services to economic operators that carry out their activities in other Member States.’’ Justifications The ECJ examined and rejected three possible justifications: the need to ensure balance in the allocation of taxing rights, the need to safeguard the coherence of the national tax system, and the need to prevent abuse. Allocation of Taxing Rights The Austrian and German governments argued that the investment-premium rules at issue were consistent with the allocation of taxing rights between the member states. They pointed out that the conditional granting of the investment-premium tax advantage ‘‘aims to TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 391 (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
EUROPEAN UNION ensure that there is a connection between, on the one hand, the granting of that tax advantage and, on the other hand, the taxation of profits generated through the use of those assets.’’ The ECJ replied that the rental income at issue is taxable in Austria; therefore, Austria’s right ‘‘to exercise its taxing powers in relation to activities carried on in its territory’’ was not jeopardized. Coherence of the Tax System In response to arguments about the need to safeguard the coherence of the tax system, the ECJ noted that there was no direct link between the investmentpremium tax advantage granted to the lessor and the subsequent taxation of the lessee’s income generated through the use of the leased assets. Need to Prevent Abuse The Austrian government argued that the tax rules at issue were aimed at preventing ‘‘wholly artificial arrangements involving transfers for remuneration.’’ One concern mentioned by the government was that ‘‘the lessor could hand over all or part of the premium to the lessee which, for its part, could use that asset to generate profits in other Member States. Thus, it would be possible to circumvent the fact that the advantage is limited to Austria.’’ Without the tax rules at issue, ‘‘it would be possible, merely by setting up the leasing company for a corporate group in Austria, to claim the investment premium for all the acquisitions made by that group, irrespective of where those assets are used,’’ it said. The ECJ agreed that the member states can have national tax rules that restrict the freedom to provide services, provided that those rules specifically target ‘‘wholly artificial arrangements which do not reflect economic reality and whose only purpose is to obtain a tax advantage.’’ However, it said the leasing of assets to another undertaking for use in other member states ‘‘cannot be the basis of a general presumption of abusive practice and justify a measure which compromises the exercise of a fundamental freedom guaranteed by the Treaty.’’ The ECJ observed that the Austrian tax rules affected every lessor eligible for the investment-premium tax advantage that hired out assets for remuneration to undertakings operating cross-border activities, ‘‘and does so even where nothing points towards the existence of such an artificial arrangement. Furthermore, the legislation does not allow lessors to adduce evidence that no abuse is taking place.’’ The Judgment Accordingly, the ECJ held that because the Austrian tax rules did not make it possible to limit the denial of the investment-premium tax advantage to cases involving wholly artificial arrangements, the rules could not be justified by overriding reasons of public interest and, consequently, were precluded by article 49 of the EC Treaty. The ECJ further stated that there was no need to examine whether the EC Treaty provisions on freedom of establishment might also preclude the rules. Analysis This case is particularly interesting because of the ECJ’s comments on justifications — particularly the need to prevent tax abuse. The judgment appears to take the ECJ’s previous reasoning in this context one step further. The judgment also represents the latest in a line of cases concerning the taxation of leasing services and how the tax rules interact with the fundamental freedoms. Balancing the Allocation of Taxing Rights In Jobra, that justification of the Austrian rules was unsuccessful because Austria failed to take into account the rental income received by Jobra from its subsidiary in relation to the leased assets. That income remained taxable in Austria. Thus, even though the leased assets might be used outside Austria, the income received from the leased assets remained within Austria’s tax jurisdiction. Consequently, the argument that there was an impact on the allocation of taxing rights was rejected, because although Austria granted an investment-premium tax advantage for the leased assets, which in this case were not used mainly in Austria, that did not impinge on Austria’s right to tax the income from those assets. Preventing Tax Abuse The ECJ acknowledged that the member states retain the right to prevent abuse in situations when the national rules specifically target ‘‘wholly artificial arrangements which do not reflect economic reality and whose only purpose is to obtain a tax advantage.’’ This was, in many respects, a repeat of its mantra from earlier cases such as Marks & Spencer (C-446/03), in which the ECJ noted that the member states were ‘‘free to adopt or to maintain in force rules having the specific purpose of precluding from a tax benefit wholly artificial arrangements whose purpose is to circumvent or escape national tax law.’’ 1 (For the ECJ judgment in Marks & Spencer, see Doc 2005-25015 or 2005 WTD 239- 16.) The word ‘‘specific’’ should be emphasized because, as the ECJ explained once again in Jobra, problems 1 This harks back to the much earlier ECJ judgment in ICI v. Colmer (C-264/96), in which the ECJ held that the U.K. rules were precluded by the freedom of establishment because they applied generally to all situations in which most of the group’s subsidiaries were established for whatever reason outside the United Kingdom. 392 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
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