1. Fiscaal Intituut Tilburg Taxation and Economic Growth: Remove Harmful Tax Obstacles to Cross-Border Interest Payments Prof. Dr Eric C.C.M. Kemmeren

2. Fiscaal Intituut Tilburg 15-06-20092Agenda Economic policies in globalizing economiesEconomic policies in globalizing economies Origin-based allocation of tax jurisdiction on incomeOrigin-based allocation of tax jurisdiction on income Why should origin-based taxation prevail?Why should origin-based taxation prevail? Origin-based taxation and EU law: conflicting trends Origin-based taxation of interest payments and debt claims Concluding Remarks

3. Fiscaal Intituut Tilburg 15-06-20093 Economic policies in globalizing economies Increase of worldwide prosperityIncrease of worldwide prosperity Efficient allocation of production factors labour and capitalEfficient allocation of production factors labour and capital  Allocating production factors where “they earn” the highest return Tax NeutralityTax Neutrality  Taxation should not, or at least as possible, influence an efficient allocation of production factors >Capital (and Labour) Export Neutrality (CLEN) >Capital (and Labour) Import Neutrality (CLIN)

4. Fiscaal Intituut Tilburg 15-06-20094 Economic policies in globalizing economies Production of income in globalizing economiesProduction of income in globalizing economies  Business competes with business; not owners with owners  Employees compete with employees  Residents do not compete with residents In globalizing economies, the world is the production marketIn globalizing economies, the world is the production market  Trade-off is not domestic versus foreign investment  Trade-off is whether activity is done by foreign-based or domestic-based business CLIN increases efficient allocation production factors; CLEN not (anymore)CLIN increases efficient allocation production factors; CLEN not (anymore) CLIN supports an origin-based interpretation of ‘source’CLIN supports an origin-based interpretation of ‘source’

5. Fiscaal Intituut Tilburg 15-06-20095 Origin-based allocation of tax jurisdiction on income Principle of origin:Principle of origin:  Allocation of tax jurisdiction on income to a state if the income has been created through a substantial income-producing activity within the territory of that state  Origin of income: Substantial income-producing activity by an individual Substantial income-producing activity by an individual N.B. Source  origin N.B. Source  origin Substantial activity: Substantial activity: Activity forms an essential and significant part of the activity as a whole Activity forms an essential and significant part of the activity as a whole

6. Fiscaal Intituut Tilburg 15-06-20096 Why should origin-based taxation prevail? Enhances principle of justiceEnhances principle of justice Enhances economic faculty principleEnhances economic faculty principle Enhances direct benefit principleEnhances direct benefit principle Enhances inter-nation equityEnhances inter-nation equity Enhances tax neutralityEnhances tax neutrality Enhances territoriality principleEnhances territoriality principle Enhances efficient allocation of production factorsEnhances efficient allocation of production factors Reduces international juridical and economic double taxationReduces international juridical and economic double taxation Reduces (abusive) treaty shoppingReduces (abusive) treaty shopping Reduces (abusive) rule shoppingReduces (abusive) rule shopping Reduces tax fraudReduces tax fraud

7. Fiscaal Intituut Tilburg 15-06-20097 Origin-based taxation and EU law: conflicting trends Towards a internal marketTowards a internal market Principle of open market economy with free competition (Art. 4/98 EC)Principle of open market economy with free competition (Art. 4/98 EC) CLIN satisfies EC Treaty (Eurowings) bestCLIN satisfies EC Treaty (Eurowings) best Economic activity in EC = substantial income producing activity (Factortame II)Economic activity in EC = substantial income producing activity (Factortame II) Case law supports origin-based taxationCase law supports origin-based taxation  Schumacker, De Groot, Bosal, Saint-Gobain, Manninen, Marks & Spencer, Thin Cap GLO, Krankenheim Ruhesitz am Wannsee Directives support residence-based taxationDirectives support residence-based taxation  Parent-Subsidiary, Interest & Royalty, and Interest on Savings Directive EC Treaty does not determine ‘origin’EC Treaty does not determine ‘origin’  Member States are competent to determine the criteria for taxation of income and wealth (Saint- Gobain)

8. Fiscaal Intituut Tilburg 15-06-20098 Origin-based taxation of interest payments and debt claims Debtor is originator of the interest incomeDebtor is originator of the interest income Close connection between interest and capital gains on debt claimsClose connection between interest and capital gains on debt claims Origin-based allocation: State in which debtor produces the interest incomeOrigin-based allocation: State in which debtor produces the interest income Reduces tension between equity and debt financingReduces tension between equity and debt financing  Reduces tax driven overloaded debt financing (hedge funds, private equity funds, mergers & acquisitions, group financing)  Puts more flesh on the bones: strengthening of economic infrastructure, helpful in case of economic crises Mitigates (abusive) rule shoppingMitigates (abusive) rule shopping  Interposition of group finance companies will be ineffective Enhances tax neutralityEnhances tax neutrality Reduces tax fraudReduces tax fraud

9. Fiscaal Intituut Tilburg 15-06-20099 Origin-based taxation of interest payments and debt claims State O: - allows Entrepreneur deduction of 6.5 - may tax Bank on 6.5 -/- 0.5 = 6.0 - may tax Bank on 6.5 -/- 0.5 = 6.0 State B: - may tax Bank on 6.5 -/- 6.0 = 0.5 State R: - (C(L)IN) may tax Saver on 6.0 -/- 6.0 = 0.0 - (C(L)EN) may tax Saver on 6.0 State R tax -/- State O tax = Final State R tax - (C(L)EN) may tax Saver on 6.0 State R tax -/- State O tax = Final State R tax - does not waive tax jurisdiction if interest paid by Bank has not originated in State B or a DTC partner of State R - does not waive tax jurisdiction if interest paid by Bank has not originated in State B or a DTC partner of State R loan 100 deposit 100 interest6.5 interest 6.0 State O Entrepreneur State B Bank State R Saver

10. Fiscaal Intituut Tilburg 15-06-200910 Concluding Remarks In globalizing economies, CLIN increases efficient allocation of production factorsIn globalizing economies, CLIN increases efficient allocation of production factors ‘Source’ should be interpreted based on principle of origin‘Source’ should be interpreted based on principle of origin CLIN supports origin-based taxationCLIN supports origin-based taxation CLIN satisfies EC Treaty bestCLIN satisfies EC Treaty best Economic activity in EC = substantial income producing activity by individualEconomic activity in EC = substantial income producing activity by individual EC case law supports origin-based taxationEC case law supports origin-based taxation EC Treaty does not determine ‘origin’EC Treaty does not determine ‘origin’

11. Fiscaal Intituut Tilburg 15-06-200911 Concluding Remarks Moving more to origin-based taxation needs co-ordination of European tax systemsMoving more to origin-based taxation needs co-ordination of European tax systems Origin-based double tax conventions and EC Directives:Origin-based double tax conventions and EC Directives:  Justified  Feasible  Improves efficiency of globalizing economies  Improves EC’s internal market  Enables developing states to reduce gap in economic development with developed states  Improves worldwide prosperity