The Balanced Allocation of Taxing Powers in EU Law Marcel Schaper LL.M M.Sc Junior Researcher, Maastricht University Ius Commune Conference 2009 Workshop Tax Law, 26 November 2009

Introduction – Literature Review No preferred interpretation of BAOTP in literature Inter-personal equity Inter-nations equity Tax Avoidance/Evasion Loss of tax revenue Jurisdictional/territorial coherence Jurisdictional comparability Double relief / advantages

Research questions What is the ECJ’s interpretation of the concept of BAOTP? How does that interpretation fit into the constitutional system of EU law? BAOTP as argument within the limits of negative integration BAOTP as justification of private right infringements BAOTP compared to other justification grounds

Method Social Network Analysis Legal analysis Case law as network of precedents Citations to precedents in judgments Legal analysis Interpretation of evolution of conditions for applicability following evolution of precedent Method of distinguishing of precedent Conceptual analysis Common Core in precedent Coherency

Preliminary findings BAOTP is: Protecting the legitimate competence of Member States to levy tax On income generated by activities undertaken in their territory Only if that claim is asserted against all taxpayers in a consistent, systematic and non-discriminatory manner Necessary, suitable and proportionate Or by combating wholly artificial arrangements not reflecting economic reality, set up by the taxpayer to avoid/evade tax normally due in that Member State

Preliminary findings BAOTP is NOT: Protecting the balanced allocation BETWEEN Member States No trade-off or reciprocity element of inter-nations equity Protecting the tax revenue Opposed to protecting the general competence to tax Carve-out for territorial tax systems BAOTP specifically obliges to take into account extra-territorial activities

Constitutional fit of BAOTP Not an external validation of private right infringements (OROPI) Cf. Effectiveness of fiscal supervision, public health and safety But, an intrinsic limitation of the right to free movement Disadvantages from allocation of tax powers, versus Beyond scope of free movement rights Disadvantages resulting from the tax powers so allocated Within scope of free movement rights

Framework of Constitutional Analysis Step 1: is there a facial restriction? Strict interpretation of private free movement rights Step 2: What would the consequences be if EU law would eliminate the restriction? Intrinsic limitation of free movement based on BAOTP No right to double advantages Losses cf. Marks & Spencer Ability to pay cf. Schumacker Step 3: If restriction is within scope of private right, is there an external justification of restriction (OROPI)? For example, effectiveness of fiscal supervision

BAOTP as protection of source state capacity? Discussion BAOTP as protection of source state capacity? Intrinsic limitation or external justification? Negative integration cannot negate a Member State’s competence  intrinsic? The competence in itself is an overriding reason of public interest  external?

Application – Case C-337/08 X Holding Obligation of extra-territorial effect of fiscal unity? General exclusion of non-resident subsidiaries Specific inclusion of NL PEs of non-residents Step 1: Difference based on place of establishment YES, general exclusion Difference in law Cf. AG Kokott, para 29

Internal Legitimacy Does NL have a right to tax the income of the BE sub? Relation between DTC and national law NOT a question of EU law If yes No a priori problem with including a non-resident subsidiary in a fiscal unity Comparability within the scope of competence If no Disadvantage results from allocation of tax powers?

Competence of NL to tax a company established in BE Internal Legitimacy Competence of NL to tax a company established in BE NO competence 7(1) DTC  exclusively Belgium “latent” competence (Hoge Raad case law) 7(1) DTC  attribution of subsidiary assets and income to parent 7(1) DTC  Assets and income subsidiary = PE of parent (fictitious?) 7(1) DTC  Shared jurisdiction 23 DTC  Exemption (with recapture)

Nature of disadvantage Group effective tax rate Also on purely domestic income ETR Disadvantage = cash flow disadvantage loss relief Group income consolidation Inter-entity income equalisation = loss relief disadvantage Elimination of inter-entity transactions (income)

Exclusion of non-residents Purely domestic income is treated differently in effect Higher ETR on income within taxation competence of NL Different treatment of two resident parents based on p.o.e. of subsidiary Different treatment of reorganisations and recapitalisations Domestic: not taxable event (with FE) Cross-border: taxable event (without FE)

Effect of obligatory general inclusion Loss of tax revenue on domestic activity, with possibility to recapture If BE has exclusive competence, then “no double advantages” may justify restriction Cf. Lidl Belgium Loss of competence on assets and capital transferred tax free abroad i.e. exclusive jurisdiction to other MS according to DTC applicable BAOTP may justify restriction Cf. N.

Effect of obligatory general inclusion Extra-territorial activities are taken into account to properly assess the tax burden due on income within taxing competence General exclusion is discriminatory if NL has “latent” competence on BE subsidiary Even discriminatory of NL has no jurisdiction? Taking into account foreign losses does not render void any source state capacities Only lowers effective tax rate = loss of revenue Protecting taxing competence in reorganisations General exclusion is suitable to obtain a legitimate purpose, but certainly not proportionate

Conclusion – Case C-337/08 X Holding General exclusion is discriminatory in law and effect Higer tax burden on income within taxing competence based on p.o.e. of subsidiary BAOTP can theoretically justify mitigation of specific risks (reorganisations and transfer pricing) General exclusion is disproportionate No external justification (OROPI) proposed Article 43 precludes Dutch system NL IS NOT OBLIGED TO IMPORT LOSSES OR EXTEND ITS JURISDICTION BEYOND DTC!