EU Tax Law

Introduction

The EU (European Union) must mediate and act to eliminate tax distortions within the scope of economic integration; however, it is evident that the European strategy has rejected the full tax and financial integration of the Union so far, due to the undoubted difficulties it would carry, mainly taking into account the so feared loss of tax sovereignty of Member States.

In a first stage, the Union used offset or neutralization mechanisms favoring the conditions to create a single market. Nevertheless, in last years it was decided to implement gradual and pragmatic tax harmonization, an instrument to avoid the disparities between tax systems and the permanent tax distortions in the European common market, which cannot be avoided using offset mechanisms.

In a first phase, tax harmonization in the European Union was developed through the horizontal coordination of a tax in different Member States. The EU has repeatedly tried to unify policies at supranational level unsuccessfully; this is why this implementation was performed separately in each State, which explains why only a few legal authors have written about these issues until to date.

To begin with, we can affirm that taxation in the EU is composed by two branches:

1. Direct taxes: the Member States are exclusively competent on direct taxes and, therefore, Member States shall adopt the relevant measures to avoid tax evasion and double taxation problems.

2. Indirect taxes: referred to free circulation of goods and free provision of services. The EU shall avoid that the competence of the Member States is adversely affected by the differences in the rates and the taxation systems of indirect taxes.

The EU shall set forth provisions aiming to avoid possible adverse effects on tax competence, so that business companies may perform transfers between Member States of the EU.

The tax policy of the EU has been created to guarantee that tax law is compatible with their goals of employment creation, increase of competitiveness within the EU, single market and free circulation of capital. So, therefore, the Member States hold exclusive competent jurisdiction on direct taxes (taxes on individual income and business company earnings).

The different Member States shall also establish their public expenditure and the taxes levied to have the necessary funds for that expenditure; but they will have to comply with the condition of being compatible with the single market and free circulation of capital.

Such competent jurisdiction will allow them to tax business companies and individual income, as well as savings and capital gains. National autonomy of the Member States has been sustained by the EU through the European Law providing that decisions on tax issues shall be unanimously approved by the 25 Member States.

But the autonomy of Member States is limited, such limits establish that the European Commission or those affected by the tax rules enacted by any Member State may file an appeal before the Court of Justice of the European Communities when matters referred to the single market, the free circulation of capital or individual rights are affected.

DIRECT TAXES

The Treaty of Rome is the first agreement establishing rules on direct taxation, particularly, the harmonization of the provisions on direct taxes. The Treaty of Rome establishes one of its essential prerogatives: free circulation of people, services and capital within the boundaries of the countries of the Community. Article 67 of this Treaty provides the progressive elimination of restrictions over capital movements within the community and any other kind of discrimination related to nationality, investors residence or the place where investments are performed.

There is a residual reference to direct taxes in the “final provisions” of this Treaty, which are referred to under Article 98, by excluding indirect taxes. In addition, Article 100 considers it necessary to approximate the rules affecting the free establishment of the common market, thereby acknowledging the need for harmonized direct taxes. Similarly, Article 101 refers to the approximation of the Law distorting free competition.

In another scope, Article 220 requires that the Member States begin negotiations to avoid double taxation of resident individuals and business companies and, similarly, Article 221 establishes equal treatment for the residents in the Community as regards their capital share in companies of each country.

It is evident and, if we try to outline the reasons leading to the delay in the harmonization process of direct taxes, we can find political and socioeconomic reasons for such delay, along with the economical reasons sustaining the priority of direct taxation. In the first place, as previously noted, the States were resilient to resign part of their tax sovereignty and, in the second place, the differences in tax burdens between capital and work, and the consequences deriving therefrom. In the same way, during last years the role of direct taxes as the main instrument of interim policies in the hands of the States, which has resulted in an important present slowing down in the direct taxes harmonization process.

To sum up, all the above mentioned reasons have contributed to define direct taxes harmonization as Suggested Law and not as Derived Law.

* Tax on Companies:

Regarding the tax on companies, the EU has two clearly set objectives: disregard the detrimental tax competent jurisdiction between the Member States and, on the other hand, give the necessary support to the free capital movement principle. There is a Code of Conduct to which the Member States are subject and which prevents them from granting tax deductions unfairly distorting investment decisions.

We can affirm that, in the same way, there are rules aiming to guarantee that the same taxation system (or a similar system in many sectors) is applied to corporations within the whole EU. We can point out: the tax treatment of cross-border payment of interest and royalties, dividends for related companies and parent companies, taxation systems for business groups and cross-border sales of goods and services within a single company. Within this same trend, the possibility of creating a common tax basis for EU companies is being considered, that is to say, the rules applicable to a kind of transaction should be the same in order to avoid unfair competition. It must be clarified that the Member States shall establish taxes rates.

* Savings:

Regarding savings, and as mentioned above, the EU shall only intervene to guarantee non-discrimination, that is to say, the EU shall prevent the Member States from granting any kind of advantage to people working or who may invest in another country; therefore, we can affirm that the rules and tax rates to be levied on individual income shall be enacted by the Member States. In this way, the European Commission adopt measures to guarantee that EU citizens are not discouraged from working in other countries of the EU with possible problems arising from transfers and taxation on pension rights.

Therefore, the citizens of the EU can invest their savings, without any restriction or obstacle, where they think they may obtain better profits. Nevertheless, we must point out that taxes shall be paid in the country of residence and the EU is aware that the MSs do not receive any revenue when the residents do not include in their tax returns the earnings deriving from their savings deposited in a foreign country. Consequently, since July 1, 2005, the EU together with the Member States have decided to exchange the information related to non-resident accounts. Within this same course of action, Austria, Belgium and Luxemburg, among other States, applied withholdings on account and shall transfer an important percentage of the income resulting from this withholding to the investor’s country of residence, that is to say, the country where the tax is owed.

INDIRECT TAXES

The Founding Treaty of the European Community uses the term “harmonization” regarding indirect taxes, specifically, in Article 93.1.[1] It must be pointed out that this article is an instrument to achieve the purposes provided under Article 2 of this treaty and, specifically, to guarantee the establishment and development of the common market, referred to by Article 3, as one of the main actions to be developed by the community to achieve such purposes.

It must be pointed out that, in the same way, the Treaty contains other articles with the term “approximate legislation”, among them: Articles 3.1 h)[2] and 94[3], which are not specifically referred to tax matters, and only refer to “harmonization of the legislation” as a means or measure aiming to achieve the establishment and development of the common market. Although these provisions do not refer to taxation, it may be affirmed that they are the legal basis to justify tax harmonization of direct taxes.

On the other hand, Article 93 of the Treaty only deals with: taxes on the volume of business, excise taxes and other indirect taxes. But the harmonization is not an end in itself, it is the instrument to guarantee the establishment and development of the common market, and only when this harmonization is necessary to achieve such objective, its use by the Council and the Commission is legitimate.

At present, there are no restrictions regarding the kind of rules to be implemented for the tax harmonization of indirect taxes, but we must point out the Directive as the most frequently used instrument for such purpose.

For all the foregoing, it may be affirmed that the term “tax harmonization” refers to the “coordination or approximation” of the rules related to taxation, specifically those established by the Member States of the EU, and it does not entail the homogenization or unification of legislations.

The existence of certain uniformity in those rules on the Value Added Tax (VAT) and excise taxes is essential for the good development of the EU. It is evident that possible differences on the VAT or the excise taxes on gas, alcoholic beverages and cigarettes may distort competition and, even in this case, certain margin is allowed to respect cultural differences.

* Minimum Rates:

The EU established minimum rates as a measure to favor fair competition and, furthermore, to encourage energy saving and to use environmental-friendly sources of energy; these minimum rates are established on gasoline, natural gas, electricity and coal. Nevertheless, it must be clarified that the systems shall be flexible enough to allow their adaptation to special national circumstances.

Furthermore, an agreement on a minimum rate for the VAT has been established, this 15% rate is applied on most goods and services, with certain exceptions. Nevertheless, a higher uniform rate may be set forth, as long as certain limits are respected. Similarly, there are smaller rates and exemptions for several products[4], this is normally limited to goods and services not competing with goods or services of another MS.

The EU shall try to reduce exceptions to a minimum, in order not to distort the common market, to avoid fraud and the cost of business transactions, which could be increased due to a complex system. Based on the foregoing, the simplification and fight against abuses, together with the implementation of technological improvements (such as electronic purchases, computer programs, etc…), are a priority for the EU.

Up to this moment, cross-border purchases performed by electronic means within the EU are taxed with the VAT, applying the rate effective in the country of acquisition, therefor implying an exception to the VAT principle stating that this tax is collected in the country of consumption. This exception has not excessively worried the EU, in spite of the increasing activity of electronic business, which has motivated the present debate about possible income distortions and has originated a new debate in the EU about the updating of the rules to consider these transactions as local purchases.

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1. The Council, by unanimous vote, at the proposal of the Commission and prior consultation to the European Parliament and the Economic and Social Committee, shall adopt the provisions referred to harmonization of the Law related to taxes on the volume of business, excise taxes and other indirect taxes, as long as such harmonization is necessary to guarantee the establishment and development of the common market in the term of time set forth by Article 14”.
2. In order to achieve the objectives listed under Article 2, the Community actions shall imply, under the conditions and the terms set forth in this Treaty: (…) h) the approximation of national legislation in the extent needed for the development of the common market.
3. The Council shall adopt by unanimous vote, at the proposal of the Commission and prior consultation to the European Parliament and the Economic and Social Committee, directives to approximate legal, regulatory and administrative provisions of the Member States, directly affecting the establishment or development of the common market.
4. Meals at restaurants, basic commodities for everyday use, food and medicines.