law.
Article 115 TFEU allows the Council, acting unanimously in accordance with a special legislative procedure and on a proposal from the Commission and after consulting the European Parliament, to issue directives for the approximation of Member States’ laws directly affecting the establishment or functioning of the Internal Market238. However, all actions in the field of direct taxation under Article 115 TFEU find a fundamental obstacle in the requirement of unanimity and on the fact that, to put forward a proposal for a directive, the Commission must demonstrate that a certain distortion caused by direct taxation (or, better, by the interaction of national direct tax laws of Member States) implies an actual obstacle for the implementation of the Internal Market.
The combination of the need for unanimity and of the reluctance of Member States in accepting limitations to their taxing powers in the field of direct taxes has led to an almost complete “paralysis” of all forms of positive integration of direct taxation in the European Union context239-240.
Scholars are essentially unanimous in stating that, as a consequence of such a “paralysis” the Court of Justice of the European Union has been the institution that, more than all others, has driven forward the process of an European tax integration241. The efforts of the Court of Justice stand out in contrast to the lack of political will on the part of the Member States to reach a wide-ranging harmonisation of taxation by way of legislation. On the basis of the fundamental Treaty principles of non-discrimination, free movement of workers, free movement of goods, freedom of establishment, free movement of services and free movement of capital, the Court has elaborated general assertions and criteria to which Member States must comply. However, the Court of Justice case law on direct tax matters suffered a great deal of criticism by tax scholars for its apparent lack of clear tax policy objectives. Academics generally agree in recognising
238 On the point, see Commission Communication to the Council and the European Parliament, The contribution of
taxation and customs policies to the Lisbon strategy, COM(2005)532, where it is stated: “several aspects of the functioning of national tax systems have negative effects on market integration or prevent the advantages of a single market from being fully exploited. The removal of such obstacles would allow businesses to make sounder economic choices based on the productivity of factors and are less distorted by the influence of certain extra costs”.
239 Pistone, P., Expected and unexpected developments of European integration in the field of direct taxes, in Intertax, 2007,
70. For a complete summary of the European Union initiatives in the field of direct taxation and of the slow process leading up to the current situation, from the 1996 Ecofin held in Verona to current days characterised by a “soft law approach” on the part of the Commission, see Aujean, M., Le fonti europee e la loro efficacia in materia
tributaria, tra armonizzazione, coordinamento e concorrenza fiscale leale, cited above, 17.
240 It should be noted that one of the topics discussed during the Intergovernmental Conference of 2003-2004 was
the possibility to replace the need for an unanimous vote with a procedure based on qualified majority in some fields concerning taxation and relevant to the functioning of the Internal Market, such as administrative cooperation, the fight against tax fraud, tax evasion, free movement of capital, measures concerning corporate tax bases and environmental taxation. See Commission Recommendation to the Intergovernmental Conference, COM(2003)548. On the point, see also Aujean, M., Le fonti europee e la loro efficacia in materia tributaria, tra
armonizzazione, coordinamento e concorrenza fiscale leale, cited above, 12.
241 Vanistendael, F., The ability to pay principle in the EU legal order, in Salvini, L., Melis, G. (eds.), L’evoluzione del
the “judge-made harmonisation” of direct taxation in the context of the European Union as just the pars denstruens of the harmonisation process, arguing that a harmonisation built on the removal of national provisions does not (and cannot) provide the systemic coherent view and the global approach that statutory law could provide. And that is mainly due to the fact that the Court uses tools such as the non-discrimination principle, which, according to many, was established in order only to protect the citizens of a Member State from the discriminatory provisions of another Member State.
It is commonly accepted in the Court of Justice’s jurisprudence that, because there are no general European Union rules on direct taxation and on the allocation of taxing powers amongst Member States, the power to determine the criteria for the levying of taxes with a view to defining fiscal jurisdiction and avoiding double taxation lies with the Member States, which are free to define, unilaterally or by way of their double taxation conventions, the connecting factors for the allocation of taxing powers and the structure of their tax systems. The fact that each of the Member States has sovereignty over whether and how to levy direct taxes means, of course, that there are twenty-seven discrete and different direct taxation systems interacting in the context of the European Internal Market, with all the consequent advantages and disadvantages for taxpayers arising from the disparities created by the implementation of such rules242.
It follows that, according to the Court of Justice’s case law, Member States may choose to shape their tax systems following a model of source taxation not only for non- residents, but for residents as well, designing their tax jurisdictions so as to cover only domestic-source positive and negative items of income. The Court of Justice of the European Union has confirmed that the use of these criteria by Member States in order for them to establish their tax jurisdiction is compatible with EU law (Gerritse, De Groot, Saint Gobain, Futura). Nonetheless, it also goes without saying that, according to consistent case law of the Court of Justice, when exercising the taxing powers so allocated, Member States must not ignore or breach European Union law243. Therefore, even limitations to the Member States’ tax jurisdictions, either self-imposed or deriving from bilateral agreements, may be found as not compliant with European Union law when tested against the EU citizens’ right to unrestricted exercise of the Treaty freedoms. The Court of Justice’s case law has to a large extent interpreted fundamental freedoms as expressions of the more general principle of non-discrimination244. Especially
242 Weber, D., In search of a (new) equilibrium between tax sovereignty and the freedom of movement within the EC, cited
above, 586.
243 Greggi, M., Revisiting Schumacker: the role of limited tax liability in EU law, cited above, 52.
244 Garcia Prats, F.A., EC law and direct taxation: towards a coherent system of taxation?, Report to the EATLP Annual
in earlier times, the jurisprudence of the Court of Justice interpreted the Treaty provisions on freedom of movement as imposing on Member States a prohibition of discrimination towards citizens of different Member States. Subsequently, the Court of Justice partially modified this approach, thus stating that Treaty provisions on freedom of movement of persons, capital, goods, services and establishment not only prohibit discriminations against non-resident EU citizens (interpreted as indirect discrimination based on nationality), but also prevent Member States from establishing all other sorts of restrictions, towards both residents and non-residents, hindering or otherwise having dissuasive effects on the exercise of the freedoms of movement granted by the Treaty245.
This approach finds its ground on the paramount relevance of market equality in the European Union context. Fundamental freedoms are the expression of the need for Member States to grant equal opportunities and equal initial conditions to all economic actors within the Internal Market, irrespective of their residence or of the place where the income is produced. It has been correctly observed that this general principle does not automatically translate into an “absolute” principle of equality in the European Union context, which, as far as taxation is concerned, could, at least theoretically, be attained only by way of the unification of all Member States’ tax laws, but into a more “limited” meaning, i.e. the possible extension of domestic provisions to non-resident subjects or to the taxation of income produced in foreign territory246.
On the other hand, authors have argued that competition within the Internal Market should not be interpreted not only as between enterprises and economic operators, but also as amongst Member States, with the consequent need to eliminate all distortions of the proper functioning of the Market from whatever source they should come247. Applying such concepts to the field of tax law, according to this model, Member States should replace their tax models based on capital export neutrality (or “internal neutrality”) with new models based on capital import neutrality (or “external
direct taxation, stating, inter alia, that “Member States are put in a difficult situation: no matter what they do, they end up
discriminating”.
245 Bizioli, G., Il principio di non discriminazione, in Di Pietro, A., Tassani T. (eds.), I principi europei del diritto
tributario, Padua, 2013, 231; Cordewener, A., The prohibitions of discrimination and restriction within the framework of the fully integrated Internal Market, cited above, 12.
246 Bizioli, G., Il principio di non discriminazione, cited above, 207. The Author also highlights that the principle of
non-discrimination in the field of tax law is applied to the tax provisions of one Member State only, obliging that Member State to grant equal treatment to purely domestic situations and to cross-border situations, with the consequent elimination, within one single legal order, of different treatment, leaving unadulterated the disparity of treatment deriving from the implementation of tax laws belonging to a plurality of different legal order, with an unavoidable “fragmentation” of the Internal Market. This point will be further developed in the following pages of the research, with the analysis of the Court of Justice’s so-called “parallel exercise doctrine”.
247 Graetz, M., Taxing international income: inadequate principles, outdated concepts and unsatisfactory policies, in Tax
neutrality”)248, i.e., amongst other measures, replacing worldwide taxation with territorial taxation (taxation at source). It has also been recognised, however, that the problem with the adoption and implementation of such a model would be that a strictly territorial tax system would preclude the effective compensation of the losses suffered in a Member State with the income produced in another Member State by a taxpayer who is resident of the latter Member State, with the consequent risk of hindering the exercise of the fundamental freedom of establishment.
Even more so if we consider that the European Commission has repeatedly confirmed, with regards to direct taxation, that there is “no need for an across the board harmonisation of Member States’ tax systems. Provided they respect EU rules, Member States are free to choose the tax systems they consider most appropriate and in accordance with their preferences. In addition, any proposal for EU action in the tax field needs to take into account the principles of subsidiarity and proportionality. Many tax problems require only the better coordination of national policies”249. A similar statement has been voiced many times by the Court of Justice of the European Union, which, for example, in the Bachmann judgement250, has recognised that “it is neither the intention or avowed aim of EU law to call into question the limits of any inherent power of taxation or to disturb the order of priority of the allocation of tax competences as between Member States, and that, in the absence of EU harmonisation, the Court is not competent to interfere in the conception or organisation of the tax systems of Member States”.
Part of the scholarly opinion, therefore, has strongly criticised the Court, stating that is has no expertise in the field of international allocation of taxing powers and that sometimes it makes errors in tax law, the main one being that it incorrectly assumes the non-existent power to interpret bilateral tax treaties and national tax law. Some argue that the Court does not have any legal basis in EU law for any competence to interpret bilateral treaties between the member States. Nevertheless, in cases such as Wielocks,
248 Kemmeren, E.C.C.M., Principle of origin in tax conventions. A rethinking of models, citd above, 69; Weber, D., Is the
limitation of tax jurisdiction a restriction of the freedom of movement?, Paper for the annual conference of the European
Association of Tax Law Professors, Helsinki, 7-9 June 2007, 5.
249 Commission Communication to the Council, the European Parliament and the Economic and Social Committee,
COM/2001/260, Tax policy in the European Union: priorities for the years ahead. This was one of the few really comprehensive tax policy documents issued by the Commission, where the Commission identified three aims for taxation in the context of the Internal Market. More specifically, according to the Commission, national tax systems should be more transparent and simple, contribute to an effective functioning of the Internal Market and shift to lower rates and broader bases. Generally speaking, however, since positive integration requires unanimity, which is difficult to attain, the Commission aims at maximising the effects played by the “negative harmonisation” resulting from the case law of the Court of Justice of the European Union, closely monitoring the Court’s judgements on Treaty freedoms and issuing soft law communications on how these judgements should be understood, inviting Member States to consequently adapt their tax laws and administrative practices to comply with such interpretation (e.g. with regards to exit taxation, tax incentives for R&D, cross-border loss relief, levying and crediting of withholding taxes on cross-border dividends, abuse of law in the area of direct taxation, etc.) and, if necessary, initiating infringement proceedings against non-compliant Member States.
X&Y and Van der Grinten, the Court undertook such interpretation of bilateral tax treaties or even of national tax law251. This ultra vires interpretation of tax treaties and tax law shows a limited understanding of the issues, of their political importance and of the mechanism of tax base allocation and elimination of double taxation252.
From the viewpoint of the analysis of EU case law, scholars have pointed out that, as an effect of the Court of Justice’s intervention, the border between the competence of the EU and of the Member States has been shifted, with a de facto modification of the division of competences between the EU and the single Member States. Some scholars, in particular, have criticized the role played by the Court arguing that it has led to a violation of the principle of subsidiarity. More in detail, according to them, there is no concluding clear link between fundamental freedoms and national tax provisions because the Treaty principle do not make any reference to tax matters, thus concluding that the extension of the scope of application of the fundamental freedoms to tax matters was a mere creation of the Court of Justice.
1.3. Beyond the “discrimination-restriction” binomial: “overall approach” vs.