Index on European tax law research (draft version)

European tax law has immense research opportunities. As Professor Pistone said recently “European tax law is picking up” and therefore keeping up to date with this new promising tax area is a challenge even for the so-called EU specialist. This index is designed to be a short index on EC Tax Law information available through various websites of the European Union's institutions and specialized agencies in Europe and provide you a useful tool to navigate in the cyberspace in a time effective manner.

EU Legislation on Taxation (as of 1.9.2005)

Direct Taxation Directives

Indirect Taxation Directives

Company Law Directives

Treaty establishing the European Community

Other Treaties or basic legal texts of the European Union

Taxation and Customs Website

Commission Staff Working Paper - Company Taxation in the Internal Market - SEC(2001) 1681
An Internal Market without company tax obstacles: achievements, ongoing initiatives and remaining challenges - COM (2003) 726

Dividend taxation of individuals in the Internal Market - COM (2003) 810

Code of Conduct on Business Taxation (Primarolo report)

OECD Harmful Tax Practices report (1998) and the 2004 Progress Report

DG Competition website (in-charge for State Aid procedure)

Report on the application of the state aid rules to measures relating to direct business taxation (2004)

State Aid Register - Commission Decisions

Search form for Judgments, Opinions and orders of the European Court of Justice

Case-law by numerical access from (i) 1953 to 1988 and (ii) since 1989

Court Cases in the field of Direct Taxation (updated as September 2005)

Daily Official Journal of the European Union

ECOFIN - Economic and Financial Affairs

UK Presidency of the Council of the European Union Website (1 July to 30 December 2005)

Latest press releases from EU

EU Member States Links

Financial Times - Brussels briefing

Loyens & Loeff EU tax alert

Baker & McKenzie European Tax Newsletter

Deloitte World Tax Advisor

Reference Books (Recent publications)
§ Ben Terra & Peter Wattel, European Tax Law; 4rd edition 2004, Kluwer Law international
§ Paul Farmer and Richard Lyal, EC Tax Law, 2nd edition, Oxford, To be Published: April 2006
§ Carlo Pinto, Tax Competition and EU Law (Eucotax), Kluwer Law International, 2003
§ Pasquale Pistone, The Impact of Community Law on Tax Treaties: Issues and Solutions (Eucotax Series), (Eucotax), Kluwer Law International, 2002
§ Servaas van Thiel, Free Movement of Persons and Income Tax Law: The European Court in Search of Principles, IBFD Doctoral Series, 2002

Relevant Tax Journals
European Taxation & VAT Monitor (IBFD)
Intertax & EC Tax Review (Kluwer)
Tax Planning International European Union Focus (BNA)
EC Tax Journal (Key Haven Publications)
British Tax Review (Sweet & Maxwell)

Any comments or suggestions for new additions should be sent to t.neves@ibfd.org

“How to” and “when to” submit a question to the ECJ

This is one of the perks of working in IBFD, yesterday Philippe Martin (Conseiller d’Etat, France) made a very interesting presentation on the IBFD about two recent cases submitted to the European Court of Justice (ECJ) by the Conseil d’Etat.

The first case discussed was Monsieur Hughes de Lasteyrie du Saillant v Ministry of the Economy, Finance and Industry (C-9/02) which relates to the compatibility of the French residential exit tax – due by an individual transferring his tax residence out of France to Belgium – with the European Community (EC) freedom of establishment principle in the EC treaty. The ECJ held on March 2004 that the French residential exit tax was in breach of the freedom of establishment provisions of the EC treaty. The French as a response to the Judgment decided to repeal the system as of 1 January 2005.

The second case discussed, which contrary to the previous was only very recently submitted to the ECJ, deals with the compatibility of French withholding tax on outbound dividends with the freedom of establishment. This case is raising the atention of tax practitioners and scholars, because of its potential impact on the tax systems of member countries. Nevertheless, the Advocate General has still to issue an advisory opinion in this case called Denkavit II (name of the Dutch parent company). Therefore, still a lot of “water” will pass below the bridge in terms of discussion by practitioners and scholars.

One of the most interesting issues of the presentation was to hear a first-hand view of a Supreme Court Judge on “how to” and “when to” submit a question to the ECJ. The readers are aware that EC Law is not an appellate system. No individual has a right to appeal to the ECJ. It is for the national court to make the decision to refer. The ECJ rules on the issue framed by the national court and refers back the issue to the national court, which then applies the EC Law to the issue in question. Judge Philippe Martin explained the process that judges pass before submitting a question to the ECJ. We all know that answers depend much on the questions. Therefore, submitting the right questions is essential in the process of interpretation of EC Law. With regards to tax cases, it would be an interesting exercise to analyze the difference in styles between national courts on the completeness of the questions submitted to the ECJ. I am sure the results would be supprising!

Do less developed countries need tax treaties?

And now back to serious stuff. Due to my job as country specialist in IBFD, I have had the privilege of spending some time analyzing the tax systems of African-Portuguese speaking countries. During my analysis I came across a particular issue common to less developed countries: the lack of tax treaties with their main investment counter parties.

As businesses move toward deeper levels of globalization, suggesting the participation of "everyone in everywhere business", the task of expanding and deepen the knowledge of international taxation is crucial, especially for less developed countries, which are desperately seeking to attract foreign investment. The existence or in this case the lack of an extensive network of tax treaties in Africa is an interesting subject of analysis.

Just to give you some numbers, by 1956, when the OECD (then under another name) started its work on international tax, there were probably fewer than 100 tax treaties worldwide. The impact of the OECD is demonstrated by the fact that almost 40 years later the total number of tax treaties reached 2,000, covering almost 200 countries. Only by 1970, developing and less developed countries began to enter into tax treaties with developed countries. Nevertheless, especially with Africa there is still a long way to go.

Can the lack of tax treaties between the main investment power blocks (US and Europe) and African countries be explained by disinterest or lack of support of lawmakers? Can the lack of tax treaties be explained by the common understanding that when dealing with less developed countries tax treaties provide few tax benefits and add almost nothing to the current situation of investors?
It is usually said that tax treaties serve:
– to eliminate double taxation;
– to allocate taxing jurisdiction between the contracting states;
– to counter tax avoidance and evasion; and
– to facilitate international commerce and investment.
With regards to the last point, tax treaties may be considered a “good sign” that a country welcomes foreign investment. But sometimes they are not the only sign available or even the most effective one.

All of this, because of an interesting recent paper published by Allison Christians, from Northwestern University, "Tax Treaties For Investment And Aid To Sub-Saharan Africa: A Case Study" (2005). http://ssrn.com/abstract=705541

Prize for best performance by tax authorities (II)

This month prize for best performance by tax authorities goes to Sierra Leone rampaging newspaper advertisement, which goes like this "all Christians should follow the teachings and example of Jesus Christ. This week: Pay your taxes!"

Interesting way to convince taxpayers to pay tax, I would say! Specially if we take into account that Christians only make up 30 per cent of the population of Sierra Leone. Are the tax authorities preparing tailored made advertising for other religions? I can imagine they are still thinking of how to address for example agnostics? I can help! I propose the following line “You agnostic, I know you are not a believer! At least believe in the State, pay your taxes and we will give a tax refund!”

It is better to stop here, because mixing tax with religion is not an easy subject. Furthermore, when tracing the line between temporal powers and religious authority, I always remember the ancient Roman expression “Give to Cesar what belongs Cesar and to God what belongs to God “.

If you think I make up this stories click here.

For last moth’s prize for best performance by tax authorities click here.

The flat-tax revolution – The Economist article

In the April 14 issue of one of my favorite magazines (The economist) there is an interesting article on the current option posed to countries to simplify their tax systems by implementing a flat-tax. The readers of this blog are aware in this regard of the current discussions on reforming the US IRS code (see my post of April 15). The discussion of the pros and cons of a flat-tax is now made under the background that it is time disentangle some of the complications of the tax system and a flat tax maybe (partly) the way to do it.

The first article starts like this: “the more complicated a country's tax system becomes, the easier it is for governments to make it more complicated still, in an accelerating process of proliferating insanity—until, perhaps, a limit of madness is reached and a spasm of radical simplification is demanded.” With regards to the limit of madness, I can say that the “complicator” button pressed by some legislators over tax systems is deriving some investors mad. I remember the A&T CEO saying that his company fills out 39,000 tax forms a year, that's one every three and a half minutes!

With regards to the solution on the horizon, I have my doubts. First what is flat tax? Flat simply means no different brackets applying depending on the amount of income derived. Everybody pays tax at the same rate. Progressivity is achieved through other mechanisms. I remember my face of surprise when an Estonian ex-colleague of mine described the Estonian tax system for the first time. In fact, Estonia became the first country in Europe to have a “flat tax”. This flat-tax “mania” is spreading throughout the eastern European countries and is slowly convincing more and more politicians (and even the US) to take a look at it with sharper attention. What I like is the simplicity, since simple ideas are easier to grasp and easier to administer.
That’s why if you want to be up to date in this discussion you must read the Economist of this week! You can click here to read the first part of the article.
I hope you have a Flat reading!

QUOTE OF THE WEEK (IV)

"You must pay taxes. But there's no law that says you gotta leave a tip."
US Advertisement (perhaps from the IRS)

Previous quotes:
Week I
Week II
Week III

Book review - A Tax Globalist: Essays in Honour of Maarten J. Ellis

The IBFD has recently published a new book called “A Tax Globalist: Essays in Honour of Maarten J. Ellis”. This book, which comprises of 20 essays written by renowned tax experts, was presented on the occasion of the retirement of Maarten Ellis, last 17 March, from his position as a professor of international tax law at the Erasmus University of Rotterdam. The book comprises two parts. Part A deals with issues relating to International Tax Law and part B deals with issues relating to European Tax Law. Amongst the contributors I highlight: John Avery Jones, Kees van Raad, Michael Lang, Guglielmo Maisto, Richard Vann, Tanja Bender and Frank Engelen, Stef van Weeghel, Luc de Broe, Malcolm Gammie, Luc Hinnekens, Frans Vanistendael and other renown tax experts.

The book has very interesting and must read articles. Of course your preferences are always deemed to be subjective, specially in the eyes of other readers with different interests. Nevertheless, I take the opportunity to make my own short selection of must read articles of this book:

International tax
1. Does any income fall within Article 21(2) of the OECD Model? by John Avery Jones;
2. "Fictitious income" and tax treaties, by Michael Lang;
3. Nondiscrimination in taxation of cross-border income under the OECD Model and EC Treaty rules : a concise comparison and assessment , by Kees van Raad;
4. The allocation of severance payments under Article 15 of the OECD Model, by Frank Pötgens.

European tax
5. Hard times for emigration taxes in the EC, by Luc de Broe;
6. Hughes de Lasteyrie du Saillant : crossing borders? by Henk van Arendok, Luc de Broe;
7. Is double taxation arising from autonomous tax classification of foreign entities incompatible with EC law? , by Gijs Fibbe and Arnaud de Graaf;
8. When business grows global, taxes cannot remain local: quo vadis fiscal principle of territoriality?, by Luc Hinnekens;
9. Double taxation, bilateral treaties and the fundamental freedoms of the EC Treaty, by Malcolm Gammie.

In the next weeks I hope to have time to provide some more insight on some of the interesting contributions included on this book. In the meantime, you can order it through http://join.ibfd.org/shop/

What background do I need to be an international tax advisor?

Talking to a friend of mine, the issue of economics/accounting background vs legal background surfaced with regards to working and practicing tax.

My comments were based on my short experience of working as a tax advisor and more specifically from an international tax perspective. In my view an accounting background is not essential to be a good tax advisor. It can truly help but.... You can be a great tax advisor even if you don't have an accounting degree. Just think of prominent tax practitioners, judges, tax officials involved in taxation, who lack accounting background. For those who do have accounting background I think that certain issues will be more easily reachable than others. In my opinion, the more we slide from a purely domestic tax environment to a more international framework, the more legal the work starts to become. That gives an advantage, an edge, for persons with a legal background to navigate through complex and sometimes intricate laws. An edge that is reflected in the legal framework of international tax (vide. OECD Model and Commentaries). You just need to read the first lines to understand that the legislator had a legal background. And who best than a person with similar background to understand the views, thoughts and even mistakes of the legislator? Secondly tax is not all about preparing tax returns! It does not start there and it does not end there!
I know that these are only small flashes on a wider discussion. But the issue is there and a good example of how to confront this issue is for example how the Netherlands and Italy introduced specific university courses on tax, which combine legal, accounting and economic backgrounds. No wonder that in my class of LL.M the best students where Italian and their background was hybrid. Confused? Don’t be, because I still think that a legal background is fundamental to work in international tax .

Is US going for a VAT system?

There is widespread agreement between business and scholars in the US that it is time for a major reform of the tax system. On January 2005, President Bush established the bipartisan Advisory Panel on Federal Tax Reform to recommend options for reform of the tax code. Some of the options under discussion are: (i) a flat consumption tax, (ii) a flat income tax, an add-on value-added tax (VAT), (iii) an income value-added tax (IVAT) with Social Security integration, and (iv) reform of the current income tax.

In fact, it is interesting to note that a growing number of policy analysts and politicians are saying that it may finally be time to consider a value-added tax as part of the US federal revenue system. But are they really going forward with this idea! As a European, I would say that it would be funny to see US adopting a "French Tax Invention" like the VAT.

In the meantime and to help my readers in the background discussion of whether a consumption tax is a good option, I should mention a recently published paper by Joseph Bankman and David A. Weisbach on “the Superiority of a Consumption Tax over an Income Tax”
Here is a short outline:
"Perhaps the single most important tax policy decision is the choice between an income tax and a consumption tax. The topic has been discussed and argued over since at least the time of Hobbes (1651) and Mill (1871) without apparent resolution. Consumption and income taxes both represent substantial sources of revenue in all modern economies. This paper considers the choice between an income tax and a consumption tax focusing on an argument made by Anthony Atkinson and Joseph Stiglitz in 1976 (AS 1976). AS 1976 shows that taxes should be imposed on all commodities at the same rate – taxes should be neutral. For reasons illustrated below, this conclusion implies that a consumption tax is superior to an income tax. AS 1976 has recently attracted substantial attention in the technical economics literature but, perhaps because the arguments are technical, it has yet to receive any attention in the legal literature. Our task here is to explain the intuition behind AS 1976 and explore how applicable the model is to the real world. Our conclusion is that consumption taxes are superior to income taxes. "

Give a look to the paper: “The Superiority of a Consumption Tax over an Income Tax”

And if a parent company sought to deduct losses of foreign subsidiaries?

This is what happened in the UK when Marks & Spencer went to court to try to take into account in its UK taxable base the losses incurred by its French loss-making subsidiaries. Let’s see how the European Courts are handling this issue.

In another high profile UK case, the ECJ Advocate General considered that the UK group relief scheme preventing parent company deducting losses of foreign subsidiaries incompatible with EC Treaty
Case facts:
Marks & Spencer (M&S) is a company incorporated in England and Wales and resident in the United Kingdom for tax purposes. M&S is the holding company of various United Kingdom and overseas companies. It claimed group relief for the set-off of losses incurred by non-UK resident subsidiaries in Belgium, France and Germany against the profits of UK resident companies in the group in the years 1998 to 2001. The UK Special Commissioners rejected the claim. M&S appealed the decision to the UK High Court, which stayed proceedings and remitted the case to the ECJ.
Issue at stake:
The UK High Court requested the ECJ to rule on whether or not the legislation in question constitutes a restriction under Art. 43 of the EC Treaty when read in conjunction with Art. 48 of same (freedom of establishment) and whether or not this is justified under Community law. The UK legislation prevents a resident parent company from reducing its taxable profits by setting off losses incurred by subsidiary companies resident in other EU Member States. The UK High Court also asked what difference there is if relief can be obtained for some or all of the losses incurred by the subsidiary against taxable profits in the EU Member State of the subsidiary and whether or not it would make any difference if there was evidence that relief had been obtained for the losses in the EU Member State in which the subsidiary was resident. Finally, the UK High Court asked whether or not it would matter that the relief was obtained subsequently by an unrelated group of companies to which the subsidiary was sold.
Advocate General's opinion:
The Advocate General observed that the denial of a tax advantage is a restriction incompatible with the EC Treaty if it principally relates to exercising the freedom of establishment. He held that the group relief scheme constitutes a tax advantage for a group of companies. This advantage is denied to a UK parent company, which establishes subsidiaries in other EU Member States. Accordingly, the UK legislation contains an "exit restriction", which creates an obstacle for companies established in the United Kingdom to establish subsidiaries in another EU Member State. Consequently, the UK legislation restricts the freedom of establishment.
The Advocate General concluded that the restriction could not be justified on general interest grounds, on the basis of the territoriality principle and based on fiscal cohesion.
The Advocate General, however, stated that a general prohibition of loss relief for losses sustained by foreign subsidiaries exceeds what is necessary to protect the cohesion of a group system. It would have been appropriate for the United Kingdom to take account of the treatment applying to the losses of subsidiaries in the EU Member State in which they are residents. A restriction of the relief based on the coherence principle could be accepted only if the foreign losses would be treated the same in the EU Member State in which the losses arose. Consequently, the Advocate General proposed that the granting of the loss relief benefit should be subject to the condition that the losses of a foreign subsidiary are not advantageously treated in their EU Member State of residence. If their EU Member State of residence allows those subsidiaries to impute their losses to another company or to carry them forward to another financial year, EU Member States may disallow a cross-border transfer of losses. In this case, relief must be sought in the EU Member State of residence of the subsidiary. The Advocate general conclusion is not a final decision. The final decision is expected by the end of the year.

Avoidance and VAT (II)

Almost in simultaneous with the ECJ cases reported below, the European Commission issued a Directive Proposal on 16 March 2005 to amend the Sixth VAT Directive, which authorizes Member States to introduce special measures in order to simplify the procedure for charging the tax and to prevent certain types of tax evasion or avoidance.
Background:
Currently, EU Member States wishing to derogate from the Sixth VAT Directive so as to simplify the procedures for charging VAT or prevent certain types of tax evasion or avoidance may be so authorized (under Art. 27) by the European Council, acting unanimously on a proposal from the Commission. This route to introduce legislation can be seen as too cumbersome and too lengthy. Taking into account the large number of derogations currently in force (more than 140), the Commission decided to undertake a rationalization exercise, which involves repelling previously approved derogations and making certain individual derogations available to all Member States through an amendment to the Sixth VAT Directive.
Proposed Directive:
The Commission proposes to provide Member States with the option of adopting legally sound measures in order to counter avoidance and evasion in certain specific and targeted areas.
§ VAT Group and Transfers of going concerns. In both the area of "grouping" in Article 4(4) of the Sixth Directive and in "transfers of going concerns" (Article 5(8)) the proposal allows for Member States to take steps to ensure that the operation of the rules does not allow an unfair result which would unjustifiably benefit or prejudice those concerned.
§ Investment Gold. Several Member States already apply a special measure on the basis of Article 27 to counter an arrangement which avoids the payment of VAT on untaxed investment gold used as a raw material for making consumer goods. It is now proposed to provide within the Sixth VAT Directive the means for all Member States to apply this measure.
§ Valuation of supplies. The Commission proposes to introduce a new paragraph (6) to Article 11(A) that provides an optional rule that enables Member States to revalue certain supplies. This measure aims to combat avoidance where a taxable supply is made at a low value to a purchaser who is not able to deduct all his VAT and thus the lower amount of tax represents a real and lasting loss to tax revenues. In parallel, the rule in relation to overvalued supplies is aimed at businesses who do not have full right of deduction, and who inflate their taxable supplies to a fully taxable business connected to them.
§ Capital items. The Commission proposes by amending Article 20(4) to clarify that adjustment of deductions relating to capital items under Article 20 of the Sixth Directive may apply equally to services - provided that they are of a capital nature and are treated as such.
§ Reverse charge. The Commission proposes to extend the use of an optional reverse charge mechanism for certain supplies of services in tax avoidance prone areas like for example construction and building activities and waste disposal activities.

Avoidance and VAT (I)

According to the Advocate General, the Community principle of abuse of law may affect the time of chargeability of VAT and the right to deduction. The Advocate General of the European Court of Justice (ECJ) gave his opinion on 7 April 2005 in three high profile UK cases concerning transactions carried out with the aim to reduce the VAT burden.
Breif description of the facts of the cases:
Halifax (C-255/02)
Halifax was a company carrying out financial transactions predominantly exempt under Art. 13(B)(d) of the Sixth VAT Directive. Less than 5% of its input VAT was deductible. For the purpose of acquiring four call centres located in the United Kingdom, Halifax entered into a series of transactions involving three subsidiaries as a result of which the VAT incurred on the construction would be fully deductible.
BUPA Hospitals Ltd (C-419/02)
BUPA Hospitals Ltd managed a number of private hospitals. Its supplies of drugs and prostheses in UK private hospitals were zero rated until 1997. From 1 January 1998, the zero rate was replaced with an exemption, under which BUPA could no longer deduct input VAT. In September 1997, BUPA entered into a contract for the supply of large amounts of unspecified drugs and prostheses to be made by connected companies and to be delivered in 1998 to 2001. The contract included an advance payment which determined the time of supply and, consequently, that of deduction at the time the payment was made. The advance payment was financed through a loan granted by another entity that formed part of the BUPA VAT group.
University of Huddersfield (C-223/03)
The University of Huddersfield was a higher education establishment, whose educational services were generally exempt from VAT. Its rate of input tax deduction had fallen from 14.5% to 6%. For the purpose of achieving full input tax deduction in respect of the construction of two buildings, the university leased the buildings to a connected trust which leased them back to the university.
Issue:
Although the facts and the tax planning mechanisms were different, the questions referred to the ECJ by the UK VAT and Duties Tribunals of London and Manchester, and the High Court of Justice of England and Wales concerned similar issues. The principal questions were whether or not transactions carried out for the sole purpose of avoiding VAT ,or of ensuring the availability of deductions in respect of goods used for the purpose of carrying out exempt transactions constitute economic activities; and, if they do, whether or not their VAT treatment is affected by the doctrine of abuse of law as developed by the ECJ.
Advocate General's opinion:
Since Art. 4 of the Sixth VAT Directive defines the concept of taxable persons as anyone who independently carries out economic activities, whatever the purpose or results, the Advocate General concluded that the fact that supplies are made with the sole intention of obtaining a tax advantage is immaterial. In that context, each of the transactions at issue must be considered objectively and per se.
As regards the right to deduct input VAT, the Advocate General concluded that under the Community principle of abuse of law that right should not be conferred on taxable persons if two objective elements are found present by the national courts: i.e. (i) the aims and results pursued by the legal provisions formally giving rise to the right to deductions would be frustrated if that right were actually conferred; and (ii) the right to deductions is derived from activities for which there is no other explanation than the creation of that right.

Now remains to be seen the impact of these conclusions on the direct taxation directives?

QUOTE OF THE WEEK (III)

"The hardest thing in the world to understand is the Income Tax."
by Albert Einstein

Is tax competition bad?

I am back from my Easter break with a post about tax competition.
While tax rates around the globe continue to be decreasing, high tax countries have been engaged in an aggressive war against low tax-rate countries around the world. They do so by for exmaple forcing low-tax countries to raise their tax rates, particularly on capital and by making it more difficult for savers and investors to move their capital freely around the world to its best use. The European Union and the OECD have been in the forefront of this discussion and battle. The EU Code of Conduct and OECD work on Harmful Tax Competition are good examples of this. The EU Savings Directive which is planned to enter into force in July 2005 also exemplifies this approach to counter tax competition by increasing the information-sharing mechanisms for savings income located in low-tax jurisdictions.
Nevertheless, what needs to be discussed (or seems to be not widely discussed) is why tax competition is bad after all? Is it bad for you? Is it bad for all of us?

Most of you are awere of studies, papers or articles reflecting the position of the EU or the OECD on this matter. For the ones (like me) that are always interested on reflecting on different viewpoints, please read Richard Rahn's primer on the Tax Competition Battle. Here is a short abstract:

For the last decade, the high-tax countries of the European continent have been engaged in an aggressive and largely unknown war against low tax-rate countries around the world. This is not just a war of rhetoric, but one in which Continental governments are trying to destroy the economic livelihood and prospects of many smaller and poorer countries. The war has the goal of stemming the flow of savings and investment to low-tax entities from the high-tax countries.