1.B LA RAZA RASA ARAGONESA

What has been argued in the previous pages has essentially shown that, rebus sic stantibus, it would be quite difficult (if not impossible) to assert the existence of a binding principle or rule of tax territoriality enshrined in a source of international law, being it as a “general principle of law recognised by civilised nations” or as embedded in an international customary rule. With the consequence that sovereign states are generally free, in absence of any more specific rule (e.g. provisions of an international treaty) to exercise their taxing powers on foreign income as they see fit, being it theoretically possible and legitimate for states to enact legislation levying taxes even on income

214 Dorigo, S., Mastellone, P., L’evoluzione della nozione di residenza fiscale delle persone giuridiche nell’ambito del Progetto

BEPS, in Riv. dir. trib., 2015, 3, 39. For a general overview of the (potential) consequences of the BEPS Project on

the concept of “source” and on the debate on territoriality and allocation of taxing powers, see also López, E.E.,

An opportunistic, and yet appropriate, revision of the source threshold for the Twenty-First Century tax treaties, cited

above, 6.

215 Some authors have strongly criticised this approach, stating that the BEPS Project would be doomed to fail right

from the start, being it based on an attempt to solve new problems through essentially traditional concepts.

216 Dorigo, S., Mastellone, P., L’evoluzione della nozione di residenza fiscale delle persone giuridiche nell’ambito del Progetto

having its source in foreign territory and even in a dearth of connections with the taxing state. In simpler terms, state sovereignty implies jurisdiction to tax both residents and non-residents on income generated outside state territory.

For the same reasons, general international law does not seem to entail any explicit prohibition of juridical or economic international double taxation: sovereign states are generally free to consider a certain item of income as taxable without depending on the choices made by other states concerning that same item of income, exception being made for the case-by-case solutions adopted by states to counter the negative effects of double taxation on their businesses and enterprises, either unilaterally or through bilateral tax treaties. There is no hierarchical order which rules the claims extended by different countries on the same items of income; thus, any overlap stemming from the exercise of concurrent taxing powers on the part of different countries is, from an international tax law perspective, nothing but a “natural consequences” of the nature of international law itself and of the interaction of states which are all “equally sovereign”217.

It follows that it does not seem possible, rebus sic stantibus, to come up with any uniform and homogeneous theory for the allocation of cross-border income and of states’ taxing powers at international level, given that this hypothetical “model”, in absence of a concerted action by states (which is quite difficult to imagine), would be deprived of any actual grounds to be based on.

This conclusion may be considered as acceptable in the international context, accepting that states are theoretically “boundless” when designing their domestic tax provisions with cross-border relevance; especially if we consider that, on a practical level, irrespective of the actual nonexistence of a binding principle of tax territoriality in a stricter sense, states show a certain degree of restraint in allocating their taxing powers, generally (but not always and not always with irreproachable results) searching for a reasonable link between them and the tax object.

It could be stated, therefore, that states generally tend to conform to criteria whose application resembles the mechanisms underlying the “principle of territoriality” as it stands in general international law, as a jurisdiction principle recognising a rights to legislate on the basis of a territorial connection between a state and a certain subject or object. In the international tax law practice, said link is, in fact, always of a “territorial” nature, where the term “territorial” is used lato sensu, referring both to “subjective

217 The adoption of this assumption on the part of the Court of Justice of the European Union, as it will be shown in

the following chapter of the research (see Chapter II, paragraph 6), has led to interesting results, in the context of the EU Internal Market, which will are going to be described as “parallel exercise of taxing powers doctrine”.

territoriality”, based either on residence, nationality or other subjective kinds of connection with the state’s territory, and to “objective territoriality”, based on the actual collocation of the income or the factors underlying the production of said income within the state’s territory. International law, therefore, does not favour any of the two “criteria” mentioned above, i.e. worldwide taxation and strictly territorial taxation, leaving countries with the outmost freedom in shaping their tax systems and in the extension of their taxing powers, with the only limits to that freedom being those self- imposed by the states themselves, by entering into conventions for the elimination of double taxation.

The same, however, cannot be as easily accepted with regards to the European Union context, which is characterised - as known and as it will be further discussed in the following pages of the present research - by both general principles (e.g., the principle of non-discrimination, the fundamental freedom of movement of persons, goods, capital and services, the freedom of establishment, etc.) and specific provisions (directives and regulations, or even Treaty provisions concerning, for example, competition) that are aimed at ensuring, amongst other purposes, the proper functioning of the Internal Common Market.

This is even more true if we consider the fact that, in giving birth to the European Union, Member States have renounced to a part of their sovereignty by way of a transfer of competences, at least with regards to some specific areas, in favour of the Union itself. Therefore, if, in the international context, state sovereignty does not encounter any particular limitation besides those deriving from the (quite rare) international general principles of law and from bilateral conventions, the same reasoning cannot automatically apply in the context of the European Union.

Therefore, tax territoriality as described beforehand - or, rather, the absence of a binding principle of tax territoriality applicable to countries - amounting to the assertion of the outmost freedom for states (and Member States) to shape their tax systems and to levy taxes on foreign income without necessarily being limited to facts and events located within their national borders, constitute a potential hindrance for the effectiveness of the attainment of the purpose of integration of the European Internal Market. Even more so if we consider the negative effects that the boundless exercise of taxing powers on the part of the Member States can generate, in terms, for example, of juridical double taxation.

The question should, therefore, be which role could, and should, be played by tax territoriality in such a context. Once we abandon the idea that a hypothetical principle of

territoriality could be of any help to the process of integration of the European Market, we should ask ourselves whether or nor a more significant role could actually be played by tax territoriality (either “objective” or “subjective”) interpreted as a criterion for allocating taxing powers amongst Member States in a way that does not conflict with fundamental principles of the Union or with the functioning of the Common Market.

In case of a positive answer, territoriality would, thus, go from constituting a potentially very significant hindrance to the realisation of a fully operative and functioning European Common Market from becoming a fundamental instrument at the service of European integration.

This is what will constitute the object of the following pages of the present work, where we will, first of all, attempt to verify, through an analysis both of the statutory provisions of the European Union in the field of direct taxation and of the most significant case law of the Court of Justice of the European Union on the point, the relevance and meaning of the “territoriality principle” for the purposes of European Union law, verifying if and how the domestic and international elaboration of the concept can be transposed in the European context. This analysis will serve as a necessary presupposition in order to understand, from a de jure condendo perspective, which of the two models described above (either worldwide taxation or “territorial” taxation or, possibly, none of them) better fits the European Union system and its fundamental principles and whether or not it could be possible to formulate a more general theory for the allocation of cross-border income (and taxing powers) in the Internal Market and for the taxation of non-residents on the part of the Member States.

CHAPTER II

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1. European Union law and the consequent limitations to the Member States’