7 - 1 - Tax Law in General (14-35)

7/25/2019 7 - 1 - Tax Law in General (14-35)

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[MUSIC]Hello and welcome to thissession on European tax law.The goal of this tutorial is toprovide you with an overview ofthe applicable EU law as it standstoday in the field of taxation.It's a fascinating legalarea where lots ofpolitical debate tends tounderlie each and every question.Indeed, governments are facedwith a policy dilemma.They have to strike a balance betweenthe need to finance domestic welfareby letting high taxes and at the same timekeeping those who voted for their content.In addition they also needto attract foreign capital.And address the issue of theirdomestic tax bases disappearing inthe globalized world.Where capital moves so easily.Political choices have to be made within

the boundaries of the EU legal framework.You may have read aboutGoogle in the news.The internet search giantwhich only paid a tax rate of2.6% on $8.1 billion in non U.S.income in 2012.Because its channeled almost all of itsoverseas profits to a subsidiary inBermuda, where no corporateincome tax is levied.Almost all the profit terms from nonUS clients, in form of license fees for

the use of Google intellectual propertyis transferred perfectly legally.Out of high tax jurisdictions.And this is now triggering a debate inthe G20 on how to find a better way oftaxing multinational corporationsaccording to their ability to pay.The material I'm going tocover is organized as follows.First, I'll give you someelements of tax policy.Before describing the sources of EUlaw applying in the field of tax law.

After this introduction we'lltake a tour of the world forissues of relevance to your basicunderstanding of this topic.All states have a private anda public sector.The public sector is financed by taxes.That are levied on the economy activitiescarried on in the private sector.In the market economy,


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economy transactions inthe private sector come about throughvoluntary agreements between individuals,however taxes are not the result ofa voluntary decision by individuals.They're imposed on tax payers by nationalpolitical decisions of parliament andother political subdivisions.The primary purpose of taxationis to create space forpublic sector activities tothe detriment of the private sector.Taxation is therefore the mostimportant economic andsocial policy instrument foreach national government.So it's no wonder thattaxation is still socentral to the sovereigntyof member states.And then, of course you have to keepin mind that the European Union,not being a federation, has no powerto levy taxes for its own budget.

That's also another reason why the memberstates of the European Union still havethe sovereign power to levytaxes on their own territory.There is no general.EU level income tax nordoes the EU benefit directly fromthe member state's tax revenue.What's more, another really importantfeature of this discipline isthat member states have to agreeunanimously on any secondary legislation.And all though this has occurred

it's been in a limited fashion.Member states are at liberty todetermine the size of public sector theywish to create.And they're free to choose the tax systemsthey consider most appropriate to theirIn other words they determine the taxmix applicable within their own borders.A statistic shows,public sector size varies tremendouslyfrom one member state to another one.The European Union,is relatively high tax area,

with tax revenues representingalmost 40% of national GDP's.Denmark, Belgium, France,Austria, Finland andSweden, each have a large public sector.When the tax revenuereaches 45% of the GDP,that is 7% higher than the EU average.As a starting point, you might wonderwhat kind of taxes we're talking about.


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Taxes can be classified from an economic,legal, or tax policy viewpoint.From an economic viewpoint, taxes areusually levied on three kinds of items.Labour, Capital and Consumption.Taxation on labour includespersonal income tax andto a certain extent,Social Security contributions, butI'll leave those contributions outsidethe scope of this presentation.Taxation on Capital.Includes taxes on corporation andinvestment income as well as property andinheritance taxes.Taxation on Consumption includes value,added tax, and excise duties.VAT applies to the value of the goods andservices that are bought andsold for domestic consumption.Goods and services sold abroad,exports, are not subject to VAT,in the country of origin, butin the country of destination.

Conversely, imports are taxed soas to keep the system fair for producers.Excise duties are often leviedto improve people's lifestyle.For instance tax on tobacco, orto encourage environmentally friendlyproduction tax on harmful emissions,for instance.From a legal viewpoint taxesare classified either as direct taxes,those which are levied on taxpayersdirectly, or indirect taxes.Which are levied on consumption but

remitted bytaxpayer who passes on to the consumerthe economic charge of the tax.As that's the case of the 80 andexcised duties.From a tax policy viewpoint it is wellknown that some taxes are more conduciveto growth than others taxation oncapital and corporations hampersgrowth most heavily, mainly becausethese taxes lead to fewer innovations.And are levied ona particularly mobile tax base.

In a perfect world, taxes are neutralto the investment decisions ofeconomic actors, andthey also respect European Union law.What are these EU law rules?Well the main issue we need tothink about now, is what is andwhat is not harmonized inthe field of taxation?Bound up to with this,


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we also need to consider why.Certain types of taxes are harmonized,and other not.And on what the legal basis the decisionwhether to harmonize has been made.We usually talk aboutseveral sources of EU law.EU law consists of the founding treaties,that is the treaty on the European Union.And the treaty on the functioningof the European Union.And the legal provisions basedon the few legislative powers inthis field delegated to the European Unionby the founding treaties.The provisions of EU law that may havean effect on taxes are referred tocollectively as EU tax law.After the entry into forceof the Lisbon Treatythe European convention on humanrights also became a part of EU law.And of course,the Court of Justice of European Union,

the CJEU, has had many opportunitiesto interpret these sources of EU law.Any response to preliminary rulingrequests referred by domestic judges andin enforcement procedures initiated bythe commission against member states.As you might imagine, some taxes are moreharmonized than others, depending on theirimpact on the integration process, andmy goal is to explain to you now, and why.And how this has come about.So let's start with what's been achievedin the EU in the area of tax law,

and especially withthe sources of primary law.To start with,it is often said that the main idea fora European Union is actually fiscal.The European Unions mission statement,article 3.3 of the TU provides forthe establishment of a common market andthe implementation of common policies.This requires conditions of competitionelimination of disparities as wellas the abolition of obstacles to cross borderactivities within the common market.

However, the proper functioning ofthe internal market may be hampered forinstance by differential tax treatmentsof domestic and imported goods.Tax burdens on cross bordertransactions and the administrativedifficulties in dealing with severaldifferent systems all over the EU.These obstacles may influencean economic operator's behavior.


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And therefore, create a hindrance tothe free movement in the internal market.Custom union is therefore an essentialelement in the functioning ofa single market.The single market can onlyfunction properly whenthere is a common application ofcommon rules and it external borders.This implies that the 28 customs andadministrations of the European Unionmust act as though as they were one.Article 28 of the Treaty ofthe Functioning on European Unionprovides for this.One it therefore states that the unionshall comprise a customs union.Obviously a custom union also impliesa common customs tariff applyingoutside the border of the union which isprovided for in Article 31 of the TFEU.The common customs tariff came intoforce on the first of July 1968.So, except for these custom unions, what

has the European Union achieved so far?Curiously, or perhaps not, not much issaid about taxes in the primary EU law.But there are lots of rulesthat apply indirectly to taxes.Either granting a mandate to the EUinstitutions to harmonize taxes,that's what we call positive integration,or to disallowtaxes which amount to obstacles to crossborder transactions, which is referred as.Negative integration.The only article in the TFEU that

actually deals specifically withpositive integration andtaxes, article 113.Which states that the European Union hasthe power to harmonize turnover taxes,excise duties andother forms of indirect taxation.To the extent such harmonization isnecessary to ensure the establishment andthe functioning of the internal market andavoid distortion of competition.There are other rules dealing withthe fundamental freedoms and they are.

Article 28, 30, 34 and110 of the TFEU for indirect taxes.And article 39 to 64 of the TFEU fordirect taxes.But none of these provisions directly mentions the word tax.They're also supporting that references totaxation in TEFU,such as Article 65.1,on the free movement of the Capital,or Article 179.2 to190 on research and


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development and on space.And Articles 191 (2) to 194 (3),on environment andenergy, which reserve competence tomember states in the area of taxation.So in a nutshell we can say thatharmonizing taxes is possible,since the union'sinstitutions are granted.The necessary powers toharmonize indirect taxes in sofar as necessary for the establishment andthe functioning of the European Union.But the same is not true for direct taxes.Indeed, as far as taxes,which are not indirect orare concerned, Article 115 ofthe TFEU provides for the council.Acting unanimously in accordance witha special legislative procedure,and after consulting the EuropeanParliament and the Economic andSocial Committee to issue directives forthe approximation of such laws,

regulations, or administrativeprovisions of the member states.As directly effect the establishment ofthe functioning of the internal market.Only a few of these directiveshave been so far enacted.These have been in the fieldof mutual assistance andcooperation in tax matters oreven in the field of savings taxation orcorporate income taxation forgroups of companies.Thank you for your attention.

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7 - 1 - Tax Law in General (14-35)

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