QUOTE OF THE WEEK (Week XVI)

“The possibility of transferring the losses incurred by a non-resident company to a resident company entails the risk that within a group of companies losses will be transferred to companies established in the Member States which apply the highest rates of taxation and in which the tax value of the losses is therefore the highest”. (par.49)

One of the three factors that the ECJ used to justify, in principle, the lack of cross-border relief in Europe - Case C-446/03 (Marks & Spencer case) - one wonders who is being protected by such assertion - probably the high tax countries that by mere coincidence are the latest defenders of a halt in EU tax harmonization!

ECJ landmark ruling on the Marks & Spencer case

The European Court of Justice (ECJ) released on 13 December a landmark ruling on the famous Marks & Spencer case.

Basically, the ECJ ruled in favour of Marks & Spencer which had argued that, in calculating its UK tax payable, it should allowed to take into account losses in its “failed” businesses in other EU member states, such as France, Germany and Belgium. According to the ECJ Marks & Spencer can claim tax relief on losses incurred outside the UK, but only when all possibilities of relief in the countries where its subsidiaries traded have been exhausted. This limitation (i.e. all possibilities of relief have been exhausted) is viewed as a considerable limitation on the effects of the ruling since only in restricted cases the country of the parent company is then obliged to recognize foreign losses realized by subsidiaries (e.g. liquidation losses) .

Notwithstanding such limitations this decision has to be viewed as a landmark ruling, since it forces most of the EU member states group taxation regimes to be reassessed in light of the conditions for cross-border relief laid down by the ECJ. It should be noted that currently only, France, Denmark, Italy and more recently Austria provide for some sort of cross-border relief of losses.

With regards to the exact implications of the ruling, it must be said that the case will now be referred back to the UK courts that will decide whether Marks & Spencer group will actually be entitled to cross-border group relief (i.e. if all possibilities of relief in France, Germany and Belgium where exhausted).

From a tax policy perspective, although the ruling is addressed primarily to the UK, it can be said that the principles of the judgment can be extracted by other group relief schemes in place in Europe and it is therefore expected slight adjustments to their application in cross-border situations. On this point even the ECJ made its own remark by pointing out in par. 58 that although in practice it may be possible to identify less restrictive measures in other countries (such as the Austrian system), such measures in any event require harmonisation rules adopted by the Community legislature. This for me means that Member States should only adjust their systems (to comply with the ruling) and any more extensive change should be made through the EC institutions (i.e. subject to the unanimity principle).

From a legal standpoint, I found the legal reasoning of the court a bit disappointing. In short, the ECJ held that, as EC Law currently stands, freedom of establishment does not preclude group taxation schemes that restrict cross-border loss relief within the European Union (1st Principle). In summary, the ECJ started by observing that UK group relief provisions constitute a restriction on freedom of establishment, as they differentiate (for tax purposes) between losses incurred by resident subsidiaries and losses incurred by non-resident subsidiaries.

Nevertheless, after reaching this conclusion the ECJ considered that taking into account, as a whole, three justifications (balanced allocation of the taxing powers, dual use of losses and tax avoidance) submitted by the United Kingdom and other EU Member States, the UK group relief provisions should be viewed as pursuing legitimate objectives compatible with the EC Treaty. In addition, in the ECJ's view, these justifications constitute overriding reasons in the public interest, making such group taxation schemes in principle, compatible with EC law. Despite these conclusions, the ECJ held (on the basis of the proportionality test) that group relief provisions that prevent a EU parent company from setting off losses incurred by foreign subsidiaries are incompatible with EC law if these subsidiaries have exhausted the possibilities to offset the loss in their state of residence (2nd principle).

Under the first principle, European group taxation schemes that restrict cross-border loss relief will suffice provided they comply with the second principle. In order to restrict the effects of the ruling to the situations covered by the second principle the court made some innovative considerations on three factors (balanced allocation of the taxing powers, dual use of losses and tax avoidance) that taken as a whole make such group taxation schemes compatible with the EC Treaty (on the basis of legitimate objectives and overriding reasons in the public interest).

In my view, this “bundling approach”, where three factors equal one justification seems to me a bit revolutionary and it may open the floodgates for other member states to start justifying their restrictive tax provisions on the same basis. This “bundling approach” is even more disappointing if one looks at the considerations of the ECJ on each one of the so called factors/justifications. Taken independently, the balanced allocation of the taxing powers, the risk of dual use of losses and the risk of tax avoidance, would perhaps never constitute a justification but aggregated they do!

It seams to me that this “bundling approach” simply boils down to say that, although a reduction in tax revenue (which would result of allowing full relief of foreign losses) cannot be regarded as an overriding reason in the public interest that justifies a restrictive measure, nonetheless if you aggregate more factors into the ball game the ECJ is perhaps ready to accept such justification (see points 41 to 51).

In the end, one can speculate that this “inflection" is a result of the peer pressure of EU governments on the ever-increasing impact of ECJ judgments on their tax revenues or a change in priorities of the ECJ due to some recent political failures in Europe (such as the NO to the EU Constitution). Only the next big cases, to be dealt by the ECJ (see the IRAP case), will tell if this inflection is a true change in orientation or not.

Impact of EC law on tax treaties between Member States and with third states.

The issue of the impact of EC Law on tax treaties is not only an interesting topic but also a chalenging one for the future of international tax in Europe. Therefore, it is no supprise that the EU Commission held a Meeting in Brussels on 5 July 2005 on the topic of EC Law and Tax Treaties. The contents of the meeting/workshop were now made available by the Commission.

After the introduction and presentation of the EU working document, the workshop was divided into 3 panels. The first panel examined possible conflicts between EC Law and tax treaties concluded among Member States. Such problems result mainly from court decisions of the European court of Justice. The second panel debated problems with EC Law related to tax treaties signed by individual Member States with third countries. The third panel discussed possible solutions and the role that the European Commission could play in this context.

It appears, that the existing tax treaties may need to be amended (to conform to the fast developing ECJ jurisprudence), and this workshop was certainly a step forward not only for spotting the working areas for further research but also to discuss possible ways out and ideas for the future. See for yourself the papers and presentations.

Welcome and introduction
EC Law and Tax Treaties (EU Working Document)
Annex A
Annex B
EU Presentation

FIRST PANEL (Tax Treaties between Member States)

Chaired by:
Prof. Frans Vanistendael , KU Leuven University
Other speakers:
Prof. Marjaana Helminen , University of Helsinki[Tax Treaties between Member States
Mr. Paul Farmer, Pump Court Tax Chambers, London
Mr. Arnaud de Graaf , Ministry of Finance, The Netherlands[Presentation and Slides Impact EC Law on Tax Treaties between Member States]

SECOND PANEL (Tax Treaties between Member States and Third Countries)

Chaired by:
Prof. Klaus Vogel , Ludwig-Maximilian University , Munich
Other speakers:
Prof. Hugh J. Ault , Boston College
Prof. Daniel Gutmann , University of Paris (I-Panthéon)[Tax Treaties between Member States and third Countries , Intervention by D. Gutmann]
Mestre Ana Paula Dourado , Ministry of Finance, Portugal[Tax treaties between Member States and Third Countries ]

THIRD PANEL (Possible Solutions)

Chaired by:
Prof. Peter Wattel , General-Advocate, High Court, The Hague
Other speakers:
Prof. Michael Lang , University of Vienna[EC Law and tax treaties: possible solutions ]
Prof. Pasquale Pistone , University of Salerno[Workshop on Tax Treaties and European Law European Commission, Brussels 5.7.2005 slides and text
Ms. Helen Pahapill , Ministry of Finance , Estonia

Contributions by participants:
- Prof. Daniel Deák, Corvinus University Budapest
- Prof. Albert Rädler, Universität Hamburg

The U.S. Corporate Income Tax: Economic and Competitive Issues

The Tax Foundation (US) has posted online streaming videos and slides from the presentations of the 68th National Conference, "The U.S. Corporate Income Tax: Economic and Competitive Issues"

Worldwide Trends in Corporate Taxation and Tax Reform
Scott Hodge, Tax Foundation
Christopher Heady, OECD
Finn Poschmann, C.D. Howe Institute

Impact of U.S. Corporate Tax on Competitiveness and Innovation
Kenneth Judd, Stanford University
Robert Carroll, U.S. Treasury Department

Corporate Income Taxes and Economic Growth
Dale Jorgenson, Harvard University
Douglas Holtz-Eakin, Congressional Budget Office

Recommendations of the President’s Tax Reform Panel
Jeffrey Kupfer, President’s Advisory Panel on Federal Tax Reform
Jonathan Z. Ackerman, President’s Advisory Panel on Federal Tax Reform

Keynote Address
John Snow, Secretary of the U.S. Treasury

Tax Planning for Sinter Klaas (Dutch Santa Claus)

IBFD as a good organization located in the Netherlands, organizes every-year its own Christmas gathering. According to the Dutch tradition, the Dutch Sinter Klaas, arrives in Mid-November by steamboat with his helper Zwarte Piet (Black Peter). He is said to have journeyed from Spain, where he spends the rest of the year, and arrives in Amsterdam where makes his rounds on December 5, distributing sweets to the children.

I am explaining this Dutch tradition because a colleague of mine shared a good piece of “tax poetry” during the Christmas gathering, in the form of an e-mail sent to Sinter Klaas by an egger US tax advisor. All credit for this text goes of course to Dan Geddes also known as “The Satirist”.

5 December 2005
To: Sinter Klaas
From: Tex E. Vader, Tax Adviser,
Dewey, Cheatham, and Howe, LLP
Houston, Texas, USA

Dear Sinter Klaas:

As an admirer of your kindly acts,
I'm obliged to tell you some unpleasant facts.
Your accountants have been a trifle lax.
You've failed to pay all your cross-border tax.

It must have stirred up your most primal fears
to find out your taxes were long in arrears,
that you've owed back taxes for 800 years
to Hapsburgs, Oranges, and even King Lear.

We are certain that it's not your fault, sir,
but would be a pity to default, sir.
If your Spanish shop is going to falter
You should relocate to Gibraltar.

You now comprise a global operation,
and serve the children of many nations.
You could set up a public foundation
to ease the burden of so much taxation.

It is hard to prosper in high-tax lands,
like Germany, Spain, and The Netherlands,
You could plant yourself in warm, white sands:
Aruba, Dutch Antilles, or the Cayman Islands.

Surely it is not greedy or craven,
to move assets to a known tax haven.
Think of the money you'll be saving,
When farewell to high taxes you're waving.

You incur high costs shipping your booty.
You could pay a lower customs duty,
shipping goods within the EU for free.
(And did know your ship is not a PE?)

And your old assets need amortizing!
Chances for new revenue are arising!
Get your share of all the merchandizing!
Please consider Sinter Klaas™ franchising!

So when children run up to you skipping
sugar candy from their mouths a-dripping
Your thoughts should turn to your worldwide shipping.
You have good chances for double-dipping.

It's truly not a nice birthday greeting,
to learn that you are taking a beating.
There are ways to pay less without cheating,
Please call us soon to set up a meeting.

Respectfully yours,

Tex E. Vader,
Tax Adviser,
Dewey, Cheatham, and Howe, LLP

© 2005 Dan Geddes