European Direct Tax Policy: Harmonisation versus Coordination. Dr Tom O Shea Queen Mary, University of London t.o shea@qmul.ac.uk

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1 European Direct Tax Policy: Harmonisation versus Coordination Dr Tom O Shea Queen Mary, University of London t.o shea@qmul.ac.uk

2 The Regulatory Framework for Tax in the EU ECHR EU Law International Law National Tax Laws of the EU Member States TEU + TFEU Regulations Directives Decisions Charter of FF International Agreements (EEA) Soft Law Double Tax Conventions (A) MS-MS (B) MS-TC (C) Prior Competence Compliance DTC Discrimination Restriction Comparability Justification Proportionality Host Origin Third Country Origin State rules Host State rules Purely domestic rules (TEU/TFEU not engaged) 2

3 Background Competence in relation to direct tax Unanimity requirement (other instruments are needed to achieve EU objectives + to get past the impasse) Harmonised rules at the EU law level Coordination of national tax systems (at MS level) Need for a European Direct Tax Policy to support EU goals (such as the Lisbon Strategy to make the EU the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion) Tax systems must be conducive to helping generate growth and jobs + must develop with the times (like OECD Model) 3

4 Harmonisation and Coordination Harmonisation results in the creation of a common body of EU legislation which supersedes national laws, co-ordination builds on domestic systems to render them compatible with the Treaty and with each other 4

5 Harmonisation and Coordination The aim of co-ordination is not to replace existing national tax systems by a uniform EU system but to ensure that such national systems can be made to work seamlessly together The aim is to make tax systems work better across the EU 5

6 EU Tax Policy Challenges Stabilisation of the tax revenues of the MS Promoting growth and employment Ensuring the smooth functioning of the European Internal Market (EIM) Increasing globalisation changing taxpayer behaviours E-commerce [mobility of certain forms of economic activity, particularly, services + capital] Rapid technological developments Need to reduce the overall tax burden to boost employment, entrepreneurial activity and growth [for instance, by removing obstacles and disincentives] 6

7 EU Direct Tax Policy Environmental tax reforms Energy taxes need for a coherent EU energy tax policy Tax policy in the area of health and consumer protection Research and Development + Innovation Global trends towards economic integration [ASEAN Economic Community in 2015 Globalisation trade, services and capital flows across borders tax policy must ensure that the EU s global competitiveness is enhanced not put at risk] 7

8 EU Direct Tax Policy EU businesses operate in more than one MS more international mergers and acquisitions => tax barriers to free movement of capital and tax measures that distort competition must be eliminated EU tax systems must be sufficiently flexible and responsive to keep pace with these developments + as transparent and as simple as possible (to reduce compliance and administrative burdens and to minimise opportunities for fraud and abuse) Achieved through cross-border co-operation and exchange of information 8

9 EU Direct Tax Policy Removal of tax obstacles to the exercise of the fundamental freedoms and EU citizenship rights [EU tax policy must contribute to higher efficiency in the functioning of the goods, services and capital markets as well as the proper functioning of the labour market] Elimination of the inefficiencies linked to the operation of 27 different tax systems within the EU Simplifying the tax systems Ensuring more efficient tax collection These objectives of EU Direct Tax Policy must be compatible with other EU policy objectives [Lisbon Strategy + support the EIM] 9

10 Tax Competition EU/OECD have been combating harmful tax competition since the late 1990 s + preventing the erosion of tax bases MS need a tax policy which promotes free and fair competition and assists cross-border economic activity [important objective of EU direct tax policy is to ensure that tax regimes assist cross-border economic activity taxation is an important location factor] OECD - (Harmful Tax Competition Report + TIEA s with tax havens) EU Code of Conduct for Business Taxation standstill + rollback + extension to certain third countries 10

11 Cross-border activity problems Discrimination (Avoir Fiscal) Double taxation (Kerckhaert-Morres) Obstacles to the exercise of the fundamental freedoms (De Groot) Cross-border loss relief problems (Marks & Spencer) Cross-border anti-avoidance rules CFC [Cadbury Schweppes] Transfer Pricing [SGI] Thin capitalisation [Thin Cap GLO] Exit taxes [National Grid Indus] Need for more European solutions + removal of tax obstacles 11

12 Harmonisation in the EU Limited number of Directives and Regulations in the Direct Tax area Parent Subsidiary Directive Mergers Directive Interest and Royalties Directive Interest Savings Directive Mutual Assistance Directive Recovery of Taxes Directive 12

13 The Regulatory Framework for Tax in the EU ECHR EU Law International Law National Tax Laws of the EU Member States TEU + TFEU Regulations Directives Decisions Charter of FF International Agreements (EEA) Soft Law Double Tax Conventions (A) MS-MS (B) MS-TC (C) Prior Competence Compliance DTC Discrimination Restriction Comparability Justification Proportionality Host Origin Third Country Origin State rules Host State rules Purely domestic rules (TEU/TFEU not engaged) 13

14 Soft law Code of Conduct in Business Taxation ( peer pressure ) Commission Recommendations (such as on the taxation of non-residents / frontier workers, 1993) Commission s interpretative guidance/notices Commission Communications [point towards potential legal problems and indicate possible ways forward + contribute to the development of new tax rules] Commission Guidance on the principles flowing from the case law of the ECJ and how these apply in the direct tax area [to promote greater legal certainty for the benefit of taxpayers, tax authorities and national courts] BUT soft law is not directly enforceable and can be very resource intensive 14

15 Is tax harmonisation in the EU necessary? Increased co-operation would assist in the fight against tax fraud and abuse and result in more efficient tax collection Commission s view there is no need for across the board harmonisation of MS tax systems (provided they respect EU law) MS are free to choose the tax systems they consider most appropriate Tax harmonisation is neither necessary nor desirable in view of the widely different characteristics of the MS tax systems and different national preferences 15

16 Indirect taxes A high degree of integration is necessary because indirect taxes may cause an immediate obstacle to the free movement of goods and free supply of services within the EIM and create distortions of competition Even indirect taxes generate problems [VAT for example] RBS Deutschland [double non-taxation] Failure to implement the Directive correctly failure to fulfil their EU obligations There are as many compliance issues in relation to VAT as in relation to the direct tax area 16

17 Harmonised Rules Directives and Regulations are only adopted after full discussion in the Council, the European Parliament and in the Economic and Social Committee They offer legal certainty They can be enforced by the Commission and the ECJ BUT - the pace at which they are agreed is very slow [insufficient political will on the part of the MS and the unanimity requirement are the main obstacles to progress] A move to QMV for some tax issues may be one solution Where legislation is not absolutely essential other methods will have to be found to remove tax obstacles + distortions to the EIM 17

18 Guardian of the Treaties Commission s role of guardian of the Treaties In recent years, increased use of infringement proceedings Proposes a common response to an ECJ decision to ensure correct application of judgments of the ECJ Improved Directives on Mutual Assistance (new Mutual Assistance Directive) Increased focus on coordination and cooperation rather than harmonised rules (move towards greater cooperation between MS - Savings Directive [harmonisation] Arbitration Convention [coordination] 18

19 Coordination International drive towards exchange of information (international fora like OECD need for a coordinated approach) Coordination is needed to eliminate tax barriers to the EIM (double taxation in Kerckhaert-Morres) Personal income taxes can be left with the MS (just need to coordinate cross-border situations MS must respect the National treatment principle (De Groot) + the Nondiscrimination on grounds of nationality principle However, as far as the exercise of the power of taxation so allocated is concerned, the Member States must comply with the Community rules and, more particularly, respect the principle of national treatment of nationals of other Member States and of their own nationals who exercise the freedoms guaranteed by the Treaty. [Coordination may be necessary - pensions] 19

20 Mobile tax bases The need for a certain degree of co-ordination and harmonisation has been recognised Examples: exchange of information under the Interest Savings Directive exchange of information in the Code of Conduct for Business Taxation exchange of information in the Interest and Royalties Directive 20

21 Direct tax obstacles and EIM Company taxation obstacles Double taxation simply due to the cross-border nature of economic activity is an unacceptable obstacle Unintentional non-taxation Combat cross-border evasion Sovereignty of the MS must be respected coordination can help in this area [principle of subsidiarity + principle of proportionality are further barriers to harmonised rules] + Commission must ensure the freedoms are protected Frontier workers Cross-border occupational pensions 21

22 Protectionist national tax rules Often, national tax rules are designed solely or primarily with the domestic situation in mind may give rise to inconsistent tax treatment when applied cross-border Examples Schumacker (host) - workers De Groot (origin) - workers Eurowings (origin) - services Gerritse (host) - services Avoir Fiscal (host) - establishment Marks & Spencer (origin) - establishment Manninen (origin) - capital Bouanich (host) - capital 22

23 Barriers to the exercise of the freedoms Schumacker [failure to grant a personal allowance to a nonresident] De Groot [failure to grant a full maintenance allowance to a national] Eurowings [add-back tax rules that took away a tax advantage when services were acquired in another MS] Gerritse [host State taxed non-resident on a gross income basis but a resident on a net basis] Avoir Fiscal [Host MS refused to grant tax credits to insurance companies established in other MS that had branches in host MS] 23

24 Barriers to the exercise of the freedoms Marks & Spencer [Origin State refused to grant cross-border group relief for losses incurred by subsidiaries established in other MS] Manninen [Origin MS refused to grant a tax credit to an origin MS national who received a dividend from another MS] Bouanich [Host MS treated a foreign investor less favourably that a domestic investor unless the DTC delivered a better result] 24

25 Barriers to the exercise of the freedoms Disincentive to work or invest in other MS Barriers to cross-border establishments Barriers to cross-border activities Barriers to cross-border investment by companies Deters/hinders/discourages them from taking full advantage of the EIM Fiscal barriers remain + many cases demonstrate this These problems are only partly addressed through Unilateral action on the part of the MS Bilateral action through their DTCs 25

26 Unharmonised national tax regimes Need to ensure that MS national tax systems work together properly to overcome obstacles such as double taxation, double non-taxation, discrimination and additional compliance burdens Improved cooperation and better co-ordination of their tax regimes will significantly improve the performance of their tax systems Tax systems will contribute more effectively to the success of the EIM To improve growth and employment Enhance competitiveness of EU business at the global level 26

27 Commission s key principles Coherent and co-ordinated treatment implies: Removing discrimination and double taxation Preventing inadvertent double non-taxation and abuse Reducing the compliance costs associated with being subject to more than one tax system 27

28 Co-ordinating initiatives Variety of forms Unilateral action DTCs Commonly agreed solutions Change domestic rules to remove discrimination etc. EU Soft law (Code of Conduct for Business Taxation) Collective legal instrument (Arbitration Convention) EU legal instrument (Directive) ALSO, there is a need to coordinate arrangements with Third Countries particularly, in relation to antiavoidance measures to safeguard national tax bases 28

29 Problems MS have sometimes responded to ECJ decisions by unilaterally removing tax advantages or by extending requirements to cross-border situations in circumstances where this was not desirable in tax policy terms Example Thin cap/transfer pricing rules that applied cross-border only were applied domestically despite the pointlessness and the extra compliance burden for domestic companies This runs counter to the interests of the EIM and undermines the competitiveness of MS economies Therefore, it is necessary to find coherent cross-border tax solutions 29

30 Problems International juridical double taxation Major obstacle to cross-border activity and investment in the EU DTCs But even they do not solve all the double taxation problems (Kerckhaert-Morres) MAP does not necessarily guarantee a binding result Other coordinated solutions are necessary cooperation between the MS is necessary Non-taxation and abuse are equally detrimental to the EIM because they undermine the fairness and balance of MS tax regimes these can also be addressed by better coordination and improved cooperation + enforcement 30

31 Problems Reducing compliance costs (multiple tax systems => multiple compliance obligations) Simplifying procedures (Joint Transfer Pricing Forum easing TP compliance, simplifying documentation + improved administrative cooperation between the MS + binding results) Exit taxes (risk of double taxation or double non-taxation) Cross-border loss relief (risk that losses will be stranded in subsidiary establishments) CFC rules (a coordinated solution might be preferable to unilateral measures need to ensure a balance between combating abuse and avoiding disproportionate restrictions on the fundamental freedoms + a need to deal with TC situations Inheritance tax (cross-border double taxation is not always resolved) 31

32 Thanks very much! 32