Cross-Border Group Relief and ECJ case law

Transcription

1 Cross-Border Group Relief and ECJ case law Lecture on Wednesday, 13th July 2005 Lecturer: Chair of General Business Administration and Taxation Prof. Dr. Ulrich Schreiber

2 1. Introduction 2. Economic Requirements of Loss Compensation 2.1 Net Principle and Neutrality of Legal Form 2.2 International Neutrality and Separation Principle 3. Group Relief in Germany 4. The Freedom of Establishment and Cross-Border Group Relief 4.1 The Case Marks & Spencers: The Facts and the Litigation 4.2 The Scope of the Freedom of Establishment 4.3 Restriction of the Freedom of Establishment 4.4 Justification for a Restriction 4.5 Requirement of Proportionality 4.6 Conclusions for the German Group Relief 2

3 5. Economic Consequences of ECJ Case Law 5.1 Consequent Application of the Territoriality Principle 5.2 Abolition of Group Relief 5.3 Extension of Group Relief Inclusion of Foreign Losses Inclusion of Foreign Profits and Losses 5.4 Common Tax Base as Possible Solution 6. Summary 3

4 1. Introduction Net principle and separation principle are internationally accepted principles in all EU member states. Economic view on group: Group relief for parent subsidiary relationship in many EU countries. Group relief in most cases restricted to domestic companies. This restriction might be an infringement of EC law: Pending case Marks & Spencer (M&S), Ref. C-446/03. Ruling in case M&S also has repercussions on German group relief. Estimated figures of up to 30 Bio. loss in tax revenue for Germany. 4

5 2. Economic Requirements of Loss Compensation 2.1 Net Principle and Neutrality of Legal Form Net principle: Business revenues less business expenses. Upon occurrence of a loss in the year of assessment, an immediate tax refund should take place. Alternatively, loss carry back or interest-bearing loss carry forward: Possibly no restrictions. This loss set-off is derived from the net principle. Separation principle: Parent and subsidiary are separate legal entities, no loss set-off available. Neutrality of legal form: Equal tax treatment of subsidiary and permanent establishment (PE) via group relief. 5

6 2.2 International Neutrality and Separation Principle Capital Export Neutrality (CEX) is given, if the source country waives its taxing right or the source country exercises its taxing right and the country of residence implements the credit method (full credit). International production efficiency: Gross yields worldwide are not influenced by income taxes. The marginal productivity of capital is equal worldwide, and the total amount of capital is allocated efficiently. However, the allocation of savings and consumption is distorted. 6

7 The credit method is fair in the following sense: Tax as a premium for protection and social security. The taxpayer benefits from public services and faces the tax burden for these services. Moreover, every citizen of a country is taxed equally: Principle of equality (Art. 3 GG). In cases of tax credit limitations, the credit method yields the same economic result as the exemption method. Tax planning vanishes: There is no competition via the tax rate. Note: There is still competition via the transfer of residence. 7

8 Capital Import Neutrality (CIN) is given, if the source country exercises its taxing right whereas the country of residence waives its taxing right completely. Exemption method is production-inefficient: Net yields are equal worldwide, gross yields may vary. The marginal productivity of capital in a country with a higher tax rate has to be higher than in a country with a lower tax rate, and the total amount of capital is allocated inefficiently. Uniform net rate: Efficient allocation of savings and consumption. CIN favours foreign investments, if the foreign tax rate is lower. Tax advantage granted to domestic investor by exemption is final: International tax competition via the tax rate. 8

9 CEX versus CIN: Credit method is superior in terms of neutrality and fairness. Difficulties arise with respect to corporations. Even a 100% subsidiary is subject to corporation income tax. Income is taxed in the source country, and dividends are taxed in the country of residence. This dual tax system is mainly due to administrative problems. Taxpayer can defer personal income taxation on foreign income. Tax deferral is undermining the worldwide principle. This problem is even exacerbated by the exemption method 9

10 3. Group relief in Germany The controlling enterprise is a taxable entity subject to unlimited tax liability (place of management in Germany). The subsidiary is a corporation (AG/GmbH) resident in Germany (seat and place of management). - The controlling enterprise directly or indirectly owns more than 50% of the capital (Sec. 14 (1) Nr. 1 KStG). - A profit and loss pooling agreement has to be concluded for at least five years (Sec. 14 (1) Nr. 3 KStG). 10

11 Consequences of the German group relief: Subsidiary (Organgesellschaft) remains a taxable entity. The subsidiary s income is transferred to the controlling enterprise (Organträger). The controlling enterprise has to pay the taxes on the transferred income. Note: The group taxation is not based on a consolidated balance sheet of the group. Advantage of the group relief: Loss transfer from the subsidiary to the controlling enterprise. 11

12 4. The Freedom of Establishment and Cross-Border Group Relief: The Case Marks & Spencer Art. 94 EC Treaty: The council has a mandate to issue directives concerning laws which affect the functioning of the internal market. As for tax laws, Art. 94 and 95 EC Treaty prescribe unanimity. Principle of subsidiarity in Art. 5 EC Treaty: EC will be only active in areas which it is responsible for according to the EC Treaty. In principle, direct taxation is still a matter of the member states. 12

13 Fundamental freedoms and taxes: Despite the far reaching tax autonomy, the tax law of EU member states has to be in line with EC law, esp. the four freedoms. In the field of business taxation, the most important are: - Freedom of Establishment (Art EC Treaty) and - Free Movement of Capital (Art EC Treaty). EC law is supranational and ranks higher than national law. EU-member states have to take into account EC law when they design their tax law. EC law is interpreted by the European Court of Justice (Art. 220): ECJ Case Law becomes increasingly important, e.g. in the case M&S. 13

14 The preliminary ruling procedure (Art. 234 EC Treaty): A case can be referred to the ECJ, if the ruling of the ECJ is necessary for judging the case, i.e. EC law is relevant for the case. Only national courts have the right to refer a case to the ECJ (Art. 234 (2)). The court has the duty to refer the pending case, if it is the highest national court (Art. 234 (3)). The rulings of the ECJ are binding for all national courts involved. However, it does not solve the actual case. 14

15 4.1 The Case Marks & Spencer The facts and the litigation The facts: M&S, resident in the UK, established trading subsidiaries in Belgium, France and Germany which did not carry on business in UK. Throughout 1998 till 2001, losses were incurred in all subsidiaries. At the end of 2001, the French subsidiary was sold and the trading operations in the Belgian and German subsidiaries were terminated. In the source countries, the losses have not been used. According to UK-GAAP, the foreign losses amount to ca. 100 Mio. In the disputed years, the British profits were high enough for a complete loss set-off. Thus, the foreign losses would imply a tax relief of about 30 Mio. 15

16 Case Marks & Spencer Simplified group structure: M&S parent (UK resident) M&S BV (Dutch holding) M&S Belgium Operations terminated in M&S France Sold in M&S Germany Operations terminated in

17 Case Marks & Spencer The litigation: M & S claimed group relief in order to surrender the foreign losses to the domestic parent. The Inland Revenue refused the claims since group relief is only open to companies being resident or trading in UK. M & S appealed against this decision to the UK Special Commissioners (UK SC) which confirmed the refusal: The UK SC argued that the situation of e.g. a French and a British subsidiary was not comparable. M & S again appealed to the UK High Court which referred the case to the ECJ (see Art. 234 (3) EC Treaty). The judge said he was unable to decide the case given the lack of precedent in ECJ case law in this area. 17

18 Case Marks & Spencer Questions submitted to the ECJ: Does excluding a company with subsidiaries in other Member States from the benefit of consolidation for tax purposes applicable to a company with branches in other Member States constitute a restriction on freedom of establishment? [Comparison foreign subsidiary foreign PE] Does excluding a company with subsidiaries in other Member States from the benefit of the group relief regime applicable to a company with subsidiaries established in the same Member State constitute a restriction on freedom of establishment? [Comparison foreign subsidiary domestic subsidiary] In the event of a restriction prohibited by the EC Treaty, can that restriction be justified on legitimate grounds recognised by Community law? 18

19 The four step scheme of the ECJ (overview): No Step 1: Scope of fundamental freedom given? Spatial scope, protected persons and activity. No restriction. Yes No Step 2: Restriction of relevant freedom? Inbound-Discrimination; Outbound-Discrimination; Restriction. Yes Infringement of EC law. No Step 3: Justification for restriction? E.g.: Dismissed: Fiscal reasons; Sustained: Coherence. No infringement of EC law. No Yes Yes Step 4: Requirement of proportionality given? Appropriate, necessary and adequate. 19

20 4.2 The Scope of the Freedom of Establishment: The fundamental freedoms are legal rights: In principle, natural and legal persons resident in the EU can invoke these legal rights (Protected persons). The protected activity depends on the freedom, but it has to be part of the economic life (Art. 2 EC Treaty). It always has to be a cross-border issue (Spatial Scope). The fundamental freedoms are legally enforceable for every person in the EU: Preliminary ruling procedure (see previous slide). If a national tax rule is found not to be conform with EC law, it is no longer applicable to EU citizens or companies. 20

21 The scope of the freedom of establishment: Art EC Treaty. Protected Persons: EU-citizens (Art. 43) and legal persons (Art. 48) resident in the EU. Legal persons protected by Art. 48 include, among others, incorporated firms. Protected Activity: Free choice of residence or seat and free choice of setting up agencies, branches and subsidiaries in a foreign EU-member state. The freedom of establishment ensures the free choice of (self-employed) business activities within the territory of the EU. According to ECJ, the freedom of establishment is relevant, if there is a substantial/controlling interest in the company. 21

22 Step 1 The scope of the freedom of establishment: Spatial scope: A British parent established foreign subsidiaries. Protected persons: Every legal person affected is resident in the EU. Protected activity: M & S wants to exercise its freedom to establish subsidiaries (Art. 43 (2)) in other member states. Scope of freedom of establishment is given. 22

23 4.3 Restriction of the Freedom of establishment The ban on discrimination and restriction: Inbound Art. 43 (2): - Overt discriminations: Discrimination because of citizenship or seat (Judgement in case Metallgesellschaft, 2001, lit. 42, 76). - Concealed discrimination: Discrimination because of other factors than citizenship or seat leading to the same result like overt discrimination (Judgement in case Lankhorst-Hohorst, 2002, lit. 29, 32). Outbound: The member state may not restrict the freedom of establishment of its citizen/company in another EU-member state (Judgement in case Daily Mail, 1988, lit. 16). It is not yet clear how far the ban on restriction reaches. 23

24 Limits of non-restriction approach: A wide understanding of the ban on restriction would effectively imply full harmonisation of European tax rules and regulations. Example: A permanent establishment and a subsidiary would have to face equal tax treatment despite several non-tax differences. EC law does not demand that both establishment forms be treated equally (Opinion in case Marks & Spencer, 2005, lit. 49). A wide understanding of the restriction ban would contradict the subsidiarity principle (Art. 5). Moreover, restrictions may be allowed if they can be justified. 24

25 Step 2 Restriction of the Freedom of Establishment: General comparison regardless of group relief: Foreign subsidiary versus foreign PE: Not comparable because these forms of establishment are different in many ways, e.g. extent of liability. Foreign subsidiary versus domestic subsidiary: The fact that the loss of foreign subsidiaries is not included in the parent s income is due to the separation principle which also applies to domestic subsidiaries. Therefore, there is no discrimination against the foreign subsidiary because of its seat. ECJ has ruled that the comparison has to be made in the light of the specific tax rule (Judgement in case Saint-Gobain, 1999, lit ). 25

26 Step 2 Restriction of the Freedom of Establishment II: Comparison in the light of the specific tax rule of the group relief: Foreign subsidiary versus foreign PE: The fact that parent and subsidiary are separate legal units is (partly) disregarded by the group relief. But: Subsidiary still separate taxable entity. Foreign subsidiary versus domestic subsidiary: The fact that profits/losses of subsidiaries cannot be surrendered to a parent is due to the separation principle. If group relief systematically removes the legal separation between parent and subsidiary, then foreign and domestic subsidiaries are very well comparable. In the light of the specific tax rule, a comparison can be made between a domestic and a foreign subsidiary. 26

27 Step 2 Restriction of the Freedom of Establishment III: Comparison foreign subsidiary and domestic subsidiary: Group relief allows an immediate loss set-off between parent and domestic subsidiary in order to ensure economic neutrality. However, this loss compensation is denied for a foreign subsidiary. The foreign subsidiary can only carry forward its losses and suffers from liquidity and interest disadvantages. Outbound-Discrimination against the foreign subsidiary, not because of systematic reasons (separation principle) but because of the seat of the company. It becomes less attractive for the parent to carry on business via foreign subsidiaries compared to domestic subsidiaries. 27

28 4.4 Justification for a Restriction The EC treaty itself (Art. 46) allows restrictions, if they are justified by reasons of: - Public policy and security; - Public health. The ECJ has developed justifications limiting the general ban on restricting freedoms, the so called Cassis-Formula. Rule of reason principle: - The national rule is applied in a non-discriminatory manner; - It is justified for reasons of public interest; - It is proportionate. The ECJ has acknowledged these requirements repeatedly (Judgement in case Lasteyrie du Saillant, 2004, lit. 49). 28

29 Dismissed Justifications: The most important, among others, are: 1) No harmonisation in direct tax issues: - Even though the ECJ respects the national fiscal sovereignty of each member state, the court has stressed that national tax law has to go conform with EC law (Judgement in case Amid, 2000, lit. 19). - The ECJ has already made this statement in his first judgement on a direct tax issue (Judgement in case avoir fiscal, 1986, lit. 24). - Otherwise, the missing harmonisation would render the fundamental freedoms worthless for cross-border activities. 29

30 Dismissed Justifications II: 2) Fiscal reasons (Avoidance of reduction of tax revenue): - The ECJ has made clear that fiscal reasons can never justify a restriction (Judgement in case Saint-Gobain, 1999, lit. 59). - This is consequent, since the ECJ has to interpret European law and does not have to allow for national interests. - Otherwise, every discrimination or restriction could be justified by an imminent loss in tax revenue. 30

31 Dismissed Justifications III: 3) Compensation of advantages: - The ECJ has not accepted an unfavourable tax treatment of a foreigner to compensate for other advantages stemming from unrelated tax rules (Judgement in case Asscher, 1996, lit. 53 f.). - Otherwise, restrictions could be justified with rules which have nothing to do with the tax norm under scrutiny. - The ECJ has specified under which circumstances a compensation is allowed (see slides on coherence). 31

32 Step 3 Justification for a Restriction: Arguments for justifying a restriction which have to be dismissed: A foreign subsidiary is not comparable to a domestic subsidiary: Since the profits of a foreign subsidiary are not subject to British tax jurisdiction, the losses also have to be claimed in the foreign country (territoriality principle). (Judgement in case Futura, 1997, lit. 22). Counter-argument: UK applies the worldwide income principle, income of foreign PEs are included in domestic income. Moreover, the dividends of foreign subsidiaries are taxed (credit method in UK). 32

33 Step 3 Justification for a Restriction II: Arguments for justifying a restriction which have to be dismissed: Due to the lack of harmonisation, allowing foreign losses to a national group relief results in a loss trafficking to high tax jurisdictions at the expense of their tax revenue. Counter-argument: Never are missing harmonisation and budgetary risks accepted reasons in the public interest. Danger of abuse by taxpayers: Double tax relief in both parent s and subsidiary s countries. Counter-argument: Budgetary risks is not an accepted reason in the public interest. For fighting tax evasion, the general exclusion of foreign subsidiaries is too restrictive (proportionality). 33

34 Up to now, the ECJ has sustained only two justifications whereof coherence is the most important and, thus, looked at more closely: Coherence: General definition: Coherence means that several tax rules have to be evaluated in a systematic context. If one of these rules was missing, the national tax system would be inconsistent. In 1992, the ECJ accepted this justification for the first and currently only time (Judgement in case Bachmann, 1992, lit. 21). Henceforth, the ECJ has clarified the justification of coherence: The tax rules have to be in a systematic context on the level of the same taxpayer (Judgement in case Verkooijen, 2000, lit. 57f.). 34

35 Coherence Possible extensions: Obviously, the strictly legal view of the ECJ in terms of the narrow interpretation of coherence renders the justification of coherence almost worthless. This is especially true for economic units, e.g. parent and subsidiary. Recently, a more economic interpretation of coherence has been suggested (Opinion in case Manninen, 2004, lit. 61f.): - The tax is levied at least on the same income or the same economic process. It is not required that the taxpayer is identical. - It is ensured that the advantage accrues to the one taxpayer, only if the disadvantage to the other is real and in the same amount. At present, it is not part of (established) Case Law. 35

36 Step 3 Justification for restriction III: Arguments for justifying a restriction: Coherence of the British tax system: UK group relief is characterised by an advantage (immediate loss setoff within group) and a disadvantage (losses are no longer available for loss carry forward) in the hands of the same taxpayer (the UK group). Counter-argument: There are still two taxpayers: the parent receiving the losses and the subsidiary surrendering the losses and being taxed on its profits respectively. Even in a broader sense, it remains questionable if there is a direct link between the advantage and disadvantage: E.g. if the domestic or foreign subsidiary yields no more profits in the future. 36

37 Step 3 Justification for restriction IV: Based on the opinion, the argument of coherence is sustained: Lit. 72: The aim of the UK scheme of group relief is to ensure fiscal neutrality of the effects of the creation of a group of companies. Lit. 74: If the losses can be used by the foreign subsidiaries in the state of establishment, there is the danger of a double taxation relief: in the state of establishment and of the parent. In such a case, the prohibition of transfer of foreign losses to the parent appears to be justified. But: There is an interest disadvantage for the group, if foreign losses are carried forward (see also Judgement in case Metallgesellschaft, 2001, lit. 44). 37

38 4.5 Requirement of Proportionality If a justification is accepted, the ECJ requires that the justification be proportionate (Judgement in case Lasteyrie du Saillant, 2004, lit. 49). Appropriate: A tax rule is appropriate, if it ensures the attainment of the objective pursued. Necessary: The tax rule does not go beyond what is necessary to attain the objective: There is no less restrictive measure available. Adequate: A tax rule is adequate, if the advantages of this specific rule exceed the disadvantages from restricting a fundamental freedom. 38

39 Step 4 Requirement of Proportionality: If the group relief is justified as an anti-abusive measure, it is not proportionate because general criteria (the seat of the subsidiary) are applied to prevent abuse. If the group relief is justified as a measure to preserve the coherence of the UK tax system (see previous slides), it is not proportionate, if a member state merely prohibits any transfer of losses on the sole grounds that it is impossible to tax foreign subsidiaries (lit. 75). Justification based on cohesion of the system can be accepted, only if the foreign losses may be accorded equivalent treatment in the State in which those losses arise (lit. 76). Consequence for the matter in issue: UK group relief is a restriction of Art. 43 and 48 because the losses are ultimately lost. 39

40 4.6 Conclusions for German Group Relief Basically, the German group relief works the same way like the UK group relief: It is also restricted to domestic companies (Sec. 14 (1) KStG). Thus, a restriction of freedom of establishment is obvious. It is argued that there is no comparability due to the profit and loss pooling agreement. Counter-argument: A profit and loss pooling agreement is a form of discrimination by civil law. An equivalent on the basis of contractual relations might be found. Apart from that, all above arguments apply to German group relief as well: Organschaft might well restrict the freedom of establishment if losses cannot be used equivalently in the country of establishment. 40

41 5. Economic Consequences of ECJ Case Law Several alternatives are available to member states to design a group relief system conform with EC law: Consequent application of territoriality principle; Abolition of group relief altogether; Extension of group relief to foreign subsidiaries: - Inclusion of profits and losses of foreign subsidiaries. - Inclusion only of losses of foreign subsidiaries, if they cannot be deducted immediately. The imported losses are subsequently recaptured in the event of profits. - Inclusion only of losses of foreign subsidiaries, if they cannot be deducted at all (immediately, carried forward etc.). 41

42 5.1 Consequent Application of the Territoriality Principle All foreign profits and losses are systematically excluded from the tax base. But: It is not a very realistic alternative due to the loss in tax revenue and due to the fact that this would imply a complete change of the tax system in Germany. 42

43 5.2 Abolition of Group Relief Abolition of group relief altogether: No more restriction with respect to foreign subsidiaries. Exclusion of foreign losses due to separation principle. But: Loss compensation will be aggravated: Negative impact on tax neutrality and neutrality of legal form. Net principle will be distorted. Strong constitutional objections (Art. 3 GG). Tax planning of the companies inevitably increases. The impact on tax revenue is ambiguous. Neither CIN (net profit) nor CEX (exemption) given. 43

44 5.3 Extension of Group Relief Inclusion of Foreign Losses Inclusion of losses, if they cannot be deducted immediately: Recapture rule for future profits is necessary. But: Budgetary risks because of loss trafficking: Possibility of tax arbitrage. Maybe race to bottom with respect to loss compensation rules. The recapture rule is highly problematic (administrative problems). Net principle is distorted due to tax arbitrage but also due to the possible restriction of loss compensation rules. Neutrality of legal form is distorted due to tax arbitrage. Neither CIN (losses with parent) nor CEX (profits excluded). 44

45 5.3 Extension of Group Relief Inclusion of Foreign Losses Inclusion of losses, if they cannot be deducted at all: Recapture rule is not necessary. But: Budgetary risks are lower than in the previous alternative. Seemingly, the problems of tax arbitrage diminish as well But due to tax planning, the basic problem of tax arbitrage remains. Distortions with respect to domestic and international neutralities like in the previous alternative. Decisive question: What does equivalent mean? 45

46 5.3.2 Inclusion of Foreign Profits and Losses Systematic inclusion of both profits and losses into tax base. To avoid double taxation of profits: Exemption or credit method. Recapture rule is not requisite. But: Exemption method: Same problems like with mere inclusion of losses. Credit method: mitigation or reversal of loss in tax revenue. Also, net principle reinforced: no tax arbitrage. Neutrality of legal form not attained due to German DTCs. CEX attained. But: Ordinary Credit. DTCs have to be renegotiated or treaty override (not very realistic?). 46

47 5.4 Common Tax Base as Possible Solution Basic Idea: Companies with EU wide operations are taxed on the basis of a single consolidated tax base. The EU member states will have to agree on a set of common rules for determining the tax base of enterprises with operations in several EU member states. The group s tax base does not include intra-group profits. Automatic consolidation of profits and losses is effected. 47

48 Administration of Common Tax Base: The assessment of the EU-group s tax base will be the sole responsibility of the member state where the parent of the group is resident. The rate of the corporation income tax will still be set by each individual member state. Therefore, an allocation of the overall profit of the group to the individual member states is required. This implies an allocation according to the terms of an agreed formula. The so-called formula apportionment usually employs allocation factors like capital, labour and sales which have to be weighted. Then, every allocated share of profit is taxed in the respective member state with the relevant corporate tax rate. 48

49 Analysis of Common Tax Base: Governments: The allocation of the overall profit would not be determined by separate accounting but by the formula. Due to EU wide loss consolidation, each member state bears a subsidiary s loss in proportion to its share of the overall profit. It is easier for member states to accept cross-border group relief. Companies: Automatic consolidation of losses and profits within group. Given sufficient profits, a cross-border loss compensation is available. In the case of an overall loss: Requirement of a loss carry forward and a loss carry back in each member state. 49

50 Analysis of Common Tax Base II: Neutralities: Neutrality of legal form: PEs and subsidiaries are treated equally. Net principle: No tax arbitrage possible and immediate loss set-off conceivable. Loss carry back and forward depend on the member state s loss compensation rules. CIN seemingly given: Final source taxation of allocated share of business profits pursuant to formula. But: Net profit is taxed. Ultimate shareholder is not covered by the proposals. 50

51 6. Summary Loss compensation is derived from the net principle and is a very important feature of any tax regime in the EU. Due to the separation principle, subsidiaries and their parent are taxed separately. A loss compensation is, in principle, not available. Regarding the economic requirement of neutrality of legal form, the separation principle leads to higher tax burden of groups. Therefore, most EU-countries have rules providing for a group relief which allows a loss set-off within the group for tax purposes. Apart from the domestic neutralities, international neutrality has to be borne in mind: CEX is preferable from an economic point of view. CEX implies either an immediate allocation of profits and losses to the parent or at least the taxation of foreign dividends at the same time crediting foreign taxes fully. 51

52 Also, Germany has tax rules for a group relief: It is restricted to domestic companies, mainly to protect national tax revenue. Most national tax rules trying to protect the national tax revenue, in particular tax rules which only affect cross-border transactions, are suspected of infringing the fundamental freedoms of the EC Treaty. As for business taxation, the most important fundamental freedoms are the freedom of establishment and the free movement of capital. Those freedoms, in principle, grant that cross-border transactions may not be disadvantaged to comparable domestic transactions. In the case M&S, it is very likely that the Court will recognise such restriction, if group relief is confined to domestic companies. However, the justification of coherence might be sustained, if the foreign losses are accorded an equivalent treatment in the country of establishment. 52

53 The decisive question is how the term equivalent is interpreted. That will also influence the alternatives available for the legislator. Every single possible legislative reaction to a ruling in the case M&S leads to distortions of domestic and international neutrality. Moreover, the severe problem of tax arbitrage might arise. It can be observed in other fields of taxation that established ECJ case law has often facilitated international tax planning and, thus, has become increasingly important for the member states tax revenues. To preserve their tax revenue, member states often react by extending cross-border restrictions to national transactions, thus creating additional restrictions and a higher tax burden. Therefore, common action of the EU is indicated. A common tax base might be a solution to many problems. 53