Tax Treaties and EC Law: Development, Problems and Solutions

Introduction : One of the major problems faced in international taxation is that of double taxation. Double taxation arises when the same asset, financial transaction or income is taxed twice or more due to different states’ overlapping tax jurisdictions and conflicting tax laws. A prime example is a taxpayer who lives in one state but works in another. The residence state will typically want to tax its resident on his or her worldwide income, while the source state in turn will want to tax the income that is derived from working within its territory. The tax-payer will be caught in between and be unfairly burdened by double taxation. To prevent this from occurring, states primarily use the method of negotiating and signing treaties for the avoidance of double taxation. Almost all of these treaties are bilateral, i.e. between two states, although there have been some ventures into concluding multilateral treaties. The Organization for Economic Co-operation and Development (the OECD) plays a vital role in the field of double taxation, as its Model Tax Convention on Income and Capital is the basis of most tax treaties concluded between states.

Abstract

Double taxation treaties play a vital part in the international relations between states regarding taxation matters. Since double taxation can occur as soon as a person has income in more than one state, it is very important that there can be effective remedies to the problems that can occur in these situations. Double taxation treaties are necessary in most situations created by international trade and they are even more important in such a free flowing economic co-operation such as the EU, where the trade between the Member States is not only free but also very frequent. Most double taxation treaties are based on the Model Treaty created by the OECD. Even states not members of the organization use it as a model for their treaties. This means that treaties between Member States of the EC are often rather similar, but many times have been drafted without consideration taken to EC law. This can create problems since the European Court of Justice (ECJ) has stated in its case law that even though the Member States are solely competent when it comes to direct taxation,that competence must be used in accordance with EC law. Since double taxation treaties are directed at flows of income and capital between states, it is most probable that they can run afoul of EC law. After some judgments of the ECJ the situation is clearer now, but there are still some possible future problems. Examples of such problems are trailing taxes, limitations of benefits and the most favoured nation (MFN) principle. The latter has been before the Court, but there are many questions surrounding the MFN principle that has not been answered satisfactorily. Even if more cases are brought before the Court and it gives more guidance on how the Member States shall conclude treaties with each other, it is still preferable with proper EC legislation on the subject. It must also be mentioned that the ECJ has shown reluctance to disrupting the tax treaty networks in place and has been reluctant to dismiss rules based on the OECD Model Treaty…

Contents

1 Introduction
1.1 Background
1.2 Purpose
1.3 Method
1.4 Delimitations
1.5 Disposition
2 Development
2.1 Introduction
2.2 Case law on direct taxes and EC law
2.2.1 The competence of the ECJ
2.2.2 Avoir Fiscal
2.2.3 Comparability of residents and non-residents
2.2.4 Accepted grounds of justification
2.2.5 Rejected grounds of justification
2.3 EC directives on direct taxation
2.4 Case law on tax treaties and EC law
2.4.1 Concerning the cases
2.4.2 Gilly
2.4.3 Saint-Gobain
2.4.4 de Groot
2.5 Summary
3 Problems
3.1 Introduction
3.2 Allocation of fiscal jurisdiction
3.2.1 Connecting factors and discrimination
3.2.2 Allocation or exercise?
3.3 General problems
3.3.1 Problems put before the ECJ
3.3.2 Problems not put before the ECJ
3.4 The MFN principle, tax treaties and EC law
3.4.1 About the principle
3.4.2 The D case
3.5 Economic and political aspects
3.5.1 Introduction
3.5.2 The ECJ and the EC
3.5.3 The current situation
3.6 Summary
4 Solutions
4.1 Introduction
4.2 Alternative solutions
4.2.1 Introduction
4.2.2 Judicial application of the MFN doctrine
4.2.3 The purely international solution
4.2.4 The purely Community law solution
4.2.5 Strengthening source taxation
4.3 A Multilateral EU Tax Treaty
4.3.1 About the Multilateral EU Tax Treaty
4.3.2 Arguments in favour of a Multilateral EU Tax Treaty
4.3.3 Arguments against a Multilateral EU Tax Treaty
4.3.4 Comments
4.4 An EU Model Tax Treaty
4.4.1 About the EU Model Tax Treaty
4.4.2 Arguments in favour of an EU Model Tax Treaty
4.4.3 Arguments against an EU Model Tax Treaty
4.4.4 Further thoughts
4.4.5 Comments
4.5 Procedural issues
4.6 Summary
5 Analysis
5.1 Introduction
5.2 Development
5.3 Problems
5.4 Solutions
5.5 Conclusion
References

Author: Muren, Gustaf,Krohn, Peter

Source: Jönköping University

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Tax Treaties and EC Law: Development, Problems and Solutions