of illegal possession of firearm
III. Determinación judicial de la pena
It should be noted at the outset that a short overview of a State’s tax jurisdiction has already been provided in section 2.2.2. Although the overview given in section 5.2 is more comprehensive, there are overlaps between the two sections. With a view to service to the reader, I have decided not to cross-refer but to include the whole comprehensive account in section 5.2. Readers who are familiar with the concept of direct tax jurisdiction may skip section 5.2 and go directly to section 5.3.297
294 Noll 1997, p 339-441. Verschuuren has also argued that sovereignty should be seen as a principle
and not as a rule; see Verschuuren 2006, p 39.
295 Brownlie 2003, p. 287. 296 Isenbaert 2010, p 223.
297 Persons who would like to read more on the subject are referred to Monsenego 2011, p 57-102,
5.2.1 Legislative jurisdiction under customary international law Territorial and personal bases of jurisdiction
The traditional approach of establishing jurisdiction is founded on the territorial and personal bases of jurisdiction. As Jeffery has demonstrated, the fundamental jurisdictional connection is the territorial basis that refers to jurisdiction over persons, matters and things within the geographical boundaries of a State.298 In relation to fiscal jurisdiction,
this is illustrated by the taxation of income with its source, or a person residing, within the territory.299 The other jurisdictional connection is personal, based on the nationality or
domicile of a person as the connecting factor. The personal basis of jurisdiction: nationality
Nationality is widely accepted as a valid jurisdictional basis for the assertion of a State’s jurisdiction over persons. A person with the nationality of the taxing State can be liable to be taxed on his full, worldwide assets and income, from whatever source.300 Consequently,
a State has unlimited fiscal jurisdiction over its nationals. International law leaves it to a State to decide who are its nationals.301 According to Jeffery, the incorporation of a
company in a State is analogous to nationality with regard to persons, so that this is also a basis for unlimited fiscal jurisdiction.302
The territorial basis of jurisdiction
The principle of fiscal territoriality refers to jurisdiction over persons, matters and things within the geographical boundaries of a State. A State may tax a person residing in its territory or income arising there. The scope of jurisdiction of persons or income is by its nature different.
A State has unlimited fiscal jurisdiction over individuals and companies residing within its territory. Consequently, a State is competent to tax the worldwide income of those individuals and companies. Customary international law leaves it to States to determine who their residents are, including the nature and extent of presence within the territory that is required.303 The concept of residence does, however, make it clear that a more
permanent nature of contact is required to establish worldwide jurisdiction. As Martha has pointed out, fiscal jurisdiction on the basis of residence is, in the view of general international law, only relevant with regard to aliens.304
A State may tax non-resident aliens, individuals and companies, but only with regard to the particular sources of income within its territory. Accordingly, the fiscal jurisdiction of a State in respect of non-resident aliens is limited to the sources of income within the State.305
298 Jeffery 1999, p. 44.
299 Compare Case C-451/99 Cura Anlagen, § 40. 300 Martha 1989, p. 48. 301 Jeffery 1999, p. 49. 302 Jeffery 1999, p. 49. 303 Jeffery 1999, p. 45. 304 Martha 1989, p. 50-51. 305 Martha 1989, p. 54.
Thus, the jurisdictional principle of fiscal territoriality includes unlimited fiscal jurisdiction with regard to resident aliens and limited fiscal jurisdiction in respect of non- resident aliens.
Implied limitations on jurisdiction to tax
The jurisdictional principles to tax referred to in the previous paragraphs may also be formulated negatively. A State may tax a foreign company with no headquarters in the State and carrying on business in the State on the income derived from that business, but not on its worldwide income. A State may also tax persons who are not nationals or residents of the State with regard to income derived from property in the State, but the property and income do not justify the taxation of property or income outside the State.306
The American Law Institute has taken the position that the jurisdiction to tax nationals and residents implies that a State may tax a parent corporation on its worldwide income, including that of its branches and subsidiaries.307
5.2.2 Allocation of jurisdiction in tax treaties
It is clear from the outset that the application of the rules of customary international law with regard to fiscal jurisdiction may lead to international juridical double taxation. International juridical double taxation can be generally defined as the imposition of comparable taxes in two (or more) States on the same taxpayer in respect of the same subject matter and for identical periods.308 According to the Commentary to the OECD
Model Tax Convention, the harmful effects on the exchange of goods and services and movements of capital and persons are so well known that it is unnecessary to stress the importance of removing the obstacles that double taxation presents for the development of economic relations between countries. The primary purpose of the OECD Model is to provide a way of settling on a uniform basis the most common problems in respect of international juridical double taxation. Most tax treaties are, to a large extent, based on the OECD Model. The Introduction to the OECD Model explains that it establishes two categories of rules for the purpose of eliminating double taxation. “First, Articles 6 to 21 determine, with regard to different classes of income, the respective rights to tax of the State of source or situs and of the State of residence, and Article 22 does the same with regard to capital. In the case of a number of items of income and capital, an exclusive right to tax is conferred on one of the Contracting States. The other Contracting State is thereby prevented from taxing those items and double taxation is avoided. As a rule, this exclusive right to tax is conferred on the State of residence. In the case of other items of income and capital, the right to tax is not an exclusive one. As regards two classes of income (dividends and interest), although both States are given the right to tax, the amount of tax that may be imposed in the State of source is limited. Second, insofar as these provisions confer on the State of source or situs a full or limited right to tax, the State of residence must allow relief so as to avoid double taxation; this is the purpose of Article 23 A and 23 B. The
306 Restatement of the Law, Third, 1987, § 412(a). 307 Restatement of the Law, Third, 1987, § 412(e). 308 Commentary to the OECD Model, Introduction, § 1.
Convention leaves it to the Contracting States to choose between two methods of relief, i.e. the exemption method and the credit method.”309 Consequently, the first category of
rules allocates the jurisdiction to tax. The second relates to the method by which double taxation is eliminated. There are basically two methods of relief, i.e. the exemption method and the credit method.
5.2.3 Self-imposed unilateral limitations on jurisdiction
Many States have imposed unilateral limitations on the exercise of jurisdiction. For example, most States do not fully apply their worldwide jurisdiction on the basis of nationality.310
With regard to the taxation of income, the Netherlands, for instance, only applies the personal basis for jurisdiction (the nationality of the taxpayer) to companies.311 France
operates a territorial system for corporate income tax purposes. In principle, account is only taken of profits realized in undertakings operating in France or in those liable to taxation in France by virtue of a tax treaty.312 Consequently, France does not make use of
its unlimited fiscal jurisdiction with regard to companies incorporated under French law and those resident in France. Instead, France applies a strict territoriality principle for the taxation of company profits.
5.2.4 Consequences of the overlaps and limitations of direct tax jurisdiction Introduction
The outline of a State’s direct tax jurisdiction shows that tax jurisdictions may overlap and that a tax jurisdiction is necessarily limited in scope. The consequences of that have been subject to extensive ECJ case law (see section 2.2.4). The purpose of the present section is not to discuss this case law, but to clarify the consequences apart from any case law. Chapter 8 will discuss how the ECJ should have dealt with these consequences in relation to EU free movement under the theoretical optimization model outlined in chapter 7. Overlap of direct tax jurisdictions
The co-existence of discrete national fiscal jurisdictions leads to international juridical double taxation. After all, the application of the rules of customary international law with regard to fiscal jurisdiction – nationality, residence and source – may lead to an overlap. Three concurrences of bases of jurisdiction may typically arise.313
309 Commentary to the OECD Model, Introduction, § 19.
310 An exception is the United States, which, in principle, taxes its nationals on their worldwide
income.
311 Although the principle of nationality also plays a minor role with regard to individuals;
in particular, in respect of diplomatic staff (Art. 2.2 of the Individual Income Tax Law (Wet inkomstenbelasting 2001)). For the worldwide jurisdiction with regard to companies incorporated under Netherlands law, see Art. 2(4) of the Corporate Income Tax Law (Wet op de vennootschapsbelasting 1969).
312 Art. 219 General Tax Code (Code Général des Impôts (Territorialité de l’impôt sur les sociétés)). 313 Van Raad (loose-leaf), 1.2.2. See also Bender 2000, p 16-25.
1. Concurrence of subject and object related bases of jurisdiction. The most frequently seen concurrence is a simultaneous exercise of jurisdiction by two States based on residence and source respectively. As Van Raad shows, two main items of income should be distinguished.314 In the first place, there is the category of dividends and interest and
royalty payments. The source State may want to impose a withholding tax on such a dividend, whereas the State of residence (or nationality) taxes the recipient of the income on his worldwide income. Under tax treaties, many residence States would grant an ordinary credit for the foreign withholding tax (the withholding tax levied on the payment maximized by the domestic taxation attributable to it). In the second place, there is income from foreign real property, a foreign business (permanent establishment), dependent services and similar ‘active’ income. Normally, the source State will tax this income, whereas the State of residence (or nationality) also taxes the recipient of the income. Under tax treaties, many residence States would grant an exemption of this foreign income.
2. Concurrence of two subject related bases of jurisdiction. Three different situations should be distinguished here.315 In the first place, jurisdiction based on residence and
nationality respectively may lead to an overlap of jurisdiction. This may occur, for example, in respect of a company incorporated under Netherlands law of which the effective management in situated in another State. In this situation two States will tax the Dutch company on its worldwide income: the Netherlands on the basis of the ‘nationality’ of the company and the other State on the basis of its residence there. In the second place it is possible that two States will simultaneously treat a person as a resident taxpayer (worldwide taxation). In the third place, a taxpayer may have a double nationality, as a result of which he may be subject to worldwide taxation in both States.
3. Concurrence of two object related bases of jurisdiction. This situation occurs if a person is subject to limited taxation in a source State on income which has arisen in a third State. Van Raad gives the example of profits attributable to a permanent establishment, where interest payments from a third State are included in that profit. The third State may have imposed a withholding tax on the interest payment, whereas the source State also taxes the interest.316
Limitation of direct tax jurisdictions by customary international law
The fact that national tax systems are necessarily limited in geographical and personal scope has two consequences. In the first place, disparities, or variations, exist between these jurisdictions. In the second place, a State may – in the exercise of its sovereignty – treat situations that arise fully within their own jurisdiction differently from those that are partly within their jurisdiction and partly in the jurisdiction of another State. These consequences are discussed below.
1. Disparities. A consequence of the co-existence of discrete national tax systems is that disparities, or variations, exist between these jurisdictions. For example, a State may choose to impose a relatively high tax rate within its jurisdiction. The existence of these disparities has inevitable distorting effects on investment, employment and, for companies
314 Van Raad (loose-leaf),1.2.2.B. 315 Van Raad (loose-leaf),1.2.2.C. 316 Van Raad (loose-leaf),1.2.2.D.
and self-employed persons, establishment decisions. A taxpayer who wishes to transfer his activities to a State other than that in which he previously resided will not necessarily be neutral as regards taxation. Given the disparities in the tax legislation, such a transfer may be to the taxpayer’s advantage in terms of taxation or not, according to circumstance.
2. Items of income outside the tax jurisdiction. If, for example, a French company opens a branch in Luxembourg, the losses attributable to the French head office will normally not be taken into account for determining the profits of the branch for Luxembourg corporation tax purposes, whereas the losses of a domestic head office would be deductible. The reason for this different treatment is that the French company – neither a national nor a resident of Luxembourg – is only subject to limited taxation in Luxembourg.
3. A taxable subject or object leaves the tax jurisdiction. If a taxpayer owning assets with an unrealized gain or these assets themselves leave a State’s jurisdiction, that State will normally impose an exit tax on that unrealized gain. The reason for this is that the State concerned loses its jurisdiction to tax, whereas it considers it reasonable to tax the unrealized gains which have accrued on its territory. In the Netherlands, for example, if an individual who has a substantial interest (more than 5%) in the shares of a company emigrates to another country, the Netherlands will in principle tax the unrealized gain present in the shares.317 Also, a State may consider it as an abuse of its tax legislation that
a taxpayer or asset leaves its jurisdiction in order to benefit, for example, from the tax regime of a low taxing country. An example of specific anti-abuse legislation aimed at combating such abusive transfers can be found in CFC-legislation. This legislation leads to the taxation of the profits of a subsidiary established in a low taxing country at the level of its parent company. Rules which limit the deduction of interest paid to a recipient which is a resident of another country have a similar aim. The reason for these types of anti-abuse legislation is that the State applying that legislation has an absolute lack of jurisdiction over adjusting the tax rate of the tax base applied in the other country.
Limitation of direct tax jurisdictions by tax treaties or internal law
States are competent to determine the criteria for taxation of income and wealth with a view to eliminating double taxation either unilaterally or by means of international agreements. They are, in other words, free not to fully exercise the jurisdiction entrusted to them by customary international law. Two phenomena should be distinguished. In the first place, States may not fully exercise the tax jurisdiction to which they are entitled on the basis of the person of the taxpayer (e.g. a national). In the second place, States may exclude certain categories of income from the tax base. These categories will now be discussed.
1. Exclusion of a taxable subject from the tax jurisdiction. Many States have unilaterally decided not to exercise tax jurisdiction on the basis of the nationality of natural persons, whereas they do tax residents on the basis of their world-wide income. Other exclusions of taxpayers from the tax jurisdiction are also possible.
2. Exclusion of a taxable (negative) object from the tax jurisdiction. A German company with income from industrial or commercial activities is precluded, when calculating its profits, from deducting losses from a permanent establishment in another Member State on the ground that, according to the applicable double taxation convention,
the corresponding income from such a permanent establishment is not subject to taxation in Germany. Similar measures may be taken unilaterally. In this category of ‘dislocations’ or ‘tax base fragmentations’, to which Wattel has drawn attention, a disadvantageous tax effect is caused by the fact that the tax base (the income) is created in two tax jurisdictions and the resulting need to divide that base between the two jurisdictions (fragmentation) and for double tax relief mechanisms.318 This issue has also been dealt with in the
paragraph on customary international law, with one important difference: the exclusion of a (negative) item of income from the tax base unilaterally or bilaterally is a choice, whereas the exclusion of an item of income on the basis of customary international law is an obligation, if other States refuse to conclude an international agreement which deviates from customary international law.
3. Allocation of tax jurisdiction in tax treaties and disparities. Tax treaties divide the tax jurisdiction between the contracting States. Obviously, the choices laid down in the tax treaty directly affect taxpayers. An allocation of tax jurisdiction to the State with the highest level of taxation leads to a tax treatment which is harsher than it would have been if the tax jurisdiction had been allocated to the State with the lowest level of taxation. Consequently, the worse treatment is caused by two circumstances: i. the choice to allocate the taxing power to State A and ii. the fact that State A has a higher effective tax rate than State B. The second cause is the direct result of the fact that direct taxes are not harmonized: a different treatment caused by disparities. The first cause reflects the freedom of States to choose the connecting factors for allocating jurisdiction in tax treaties.
4. A taxable subject or object leaves the tax jurisdiction as defined by a tax treaty or unilaterally. The choice made in a tax treaty or unilaterally not to exercise a State’s full tax jurisdiction under customary international law normally leads to more exit taxes: if a taxpayer owning assets with an unrealized gain or leaves a State’s jurisdiction thus defined, that State will normally impose an exit tax on that unrealized gain. The same applies to