Taxation in the EC:
The Process of
Corporate Tax Harmonisation in the EC
Jean-Philippe Chetcuti. All Rights Reserved.
is the legal basis for the recent EC [i]
measures regarding direct taxation and company law measures?
What legislative means does the Treaty contemplate and what is the role
of legislative bodies in the evolving process of corporate and direct tax
The EC Treaty
does not provide for the harmonisation of direct taxation.
MSs are merely obliged to abide by the principles of Community Law in the
exercise of their direct-taxing sovereignty.[ii]
Thus, taxation by MSs must not:
impede the freedom of movement of persons, businesses and capital
and the freedom to provide cross-border services as guaranteed by the treaty[iii];
distort conditions of competition through the provision of tax
breaks and reliefs to national businesses in the form of state aid as opposed to
general measures of taxation[iv];
infringe the central principle of EC law prohibiting
discrimination on the grounds of nationality in areas falling within the scope
of the treaty.[v]
In fact, the
cases involving discriminatory direct taxation that have come before the Court
of Justice have mainly been concerned with free movement, either of employees
– entitled to freedom from discrimination in terms of remuneration and other
conditions of work, or of businesses – the freedom of individuals and
companies to set up in business in another MS or provide cross-border services
in another MS under the same conditions as local businesses.
These freedoms constitute specific applications of the general principle
against discrimination on the grounds of nationality.[vi]
Community shall adopt measures with the aim of progressively establishing the
internal market over a period expiring on 31 December 1992,…
internal market shall comprise an area without internal frontiers in which the
free movement of goods, persons, services and capital is ensured in accordance
with the provisions of this Treaty.[vii]
Single European Act poses a great challenge to the MSs of the EC.
As the Treaty suggests, the concept of an internal market depends on the
free movement of goods[viii],
the free movement of persons[ix],
the right of establishment[x],
the supply of services[xi]
and the free movement of capital[xii].
It is on these provisions that proposed measures for corporate tax
harmonisation are sought to be made.
249 (ex-Art. 189) of the Treaty lays down the legislative means available
to fulfil the objectives of the Treaty and these are regulations, directives,
decisions and opinions.[xiii]
The Commission contributes to the legislative process by acting as the
initiating institution. The
European Parliament merely delivers its opinions on the measures proposed by the
Commission. It is the Council, the
legislative body of the EC, that actually adopts Community measures.
Commission consists of 17 members, at least one but no more than two nationals
of each MS.[xiv]
Article 213(2) of the Treaty provides that the members of the Commission
shall be completely independent in the performance of their duties.
Proposals made by the Commission are sent to the European Parliament
which has the power to amend proposals of the Commission.
European Parliament (EP) consists of members who are elected in the MSs.
The number of representatives per MS is determined in the act concerning
the election of the representatives of the EP.[xv]
The primary function of the EP is to deliver opinions on proposals and to
submit amendments to proposals. The
EP may amend proposals submitted by the Council or reject the position of the
Commission. An amendment passed by
the EP is first sent to the Commission which decides whether or not to include
the amendment in the proposal. If
it does not amend the proposal, it is sent to the Council for adoption.
A proposal that is rejected by the Parliament may still be sent to the
Council if the Commission chooses to do so.
If the Council seeks to amend the proposal, it is sent back to the
Parliament for its opinion.[xvi]
Council is the legislative body which adopts community measures and is composed
of representatives from the MSs. The
Council may adopt proposals by majority, qualified majority,[xvii]
or unanimous decision, depending on the subject matter.
If the European Parliament has rejected the position of the Commission,
then the Council may only adopt the proposal of the Commission by unanimous
The Council may amend the proposal of the Commission, but only
I. Table of enabling treaty provisions
93 and 94
93 and 94
directive on interest/royalties
directive on the taking into account of losses
European company regulation
European company directive
variety of Articles can be used as the basis for EC measures as can be witnessed
from the table above.
93 of the EC Treaty provides the legal foundation for measures harmonising
indirect taxation in the Community. In
terms of this Article, the Council “shall … adopt provisions for the
harmonisation of legislation” in the form either of regulations or of
directives. In effect, regulations
are instruments more of unification than of harmonisation as they take immediate
effect as law in each and every MS. The
choice of the regulation for harmonisation measures in matters of taxation is
not popular with MSs; a regulation does not allow national parliaments to modify
its scope or add provisions to it. On
the other hand, directives, such as the Sixth Directive of 17 May 1977, are
implemented by the national legislator but, considering their detailed form,
leave only limited scope for national legislative discretion.[xx]
provisions of the Treaty of Rome[xxi]
that provide the legal framework for the actions of the EC in respect of company
law and direct taxation are different from those utilised for VAT purposes.[xxii]
The EC measures that form the basis for VAT and capital duties are formed
by Articles 90 – 93 of the Treaty of Rome. These Articles apply to
turnover taxes, excise duties and other forms of indirect taxation.
Directives regarding VAT and capital duties are issued on the basis of
Article 93 and/or Article 94 of the Treaty.
provides the legal authority for harmonising direct taxes and only provides for
directives. Direct tax issues are
only tackled by regulation when they constitute an accessory provision among the
non-tax rules of some (corporate, etc.) regulation.[xxiii]
date only three Directives have been adopted, only one of which (90/435 on
parent/subsidiaries) is fully operative and has significant bearing on
international tax practice. The second one (90/434 on mergers) is only partially
implemented. The third one (77/799 on mutual administrative assistance) deals
with procedures to fight tax evasion but receives, in that common fight, limited
application beyond that already promised by existing bilateral agreements.
293 of the EC Treaty provides for still another instrument where it requires MSs
to come or to try to come to a common agreement concerning a given (tax) subject
matter throughout the Community so as to achieve its goals. However, to date
only one convention (90/436 on arbitration) has been concluded on this basis in
the field of direct taxation. The national governments may like the legal instrument
as it is, in essence, their collective decision-making, not that of
a Community institution. By the same token it is less effective than a
directive. Indeed, since the entry into effect in 1995 of the arbitration
convention, not a single decision has been handed down, principally because to
date in most MSs the national arbitration commission is still not established
under the Convention.
and the Parent-subsidiary Directive[xxv]
are based on Article 94 of the Treaty, which addresses the approximation of laws
and reads as follows:
Council shall, acting unanimously on a proposal from the Commission, issue
directives for the approximation of such provisions laid down by law, regulation
or administrative action in Member States as directly affect the establishment
or functioning of the common market.
European Parliament and the Economic and Social Committee shall be consulted in
the case of directives whose implementation would, in one or more Member States,
involve the amendment of legislation.
Article makes it clear that measures concerning direct taxation require the
unanimous adoption of the Council and that on such matters, the Council is
obliged to consult the European Parliament and the Economic and Social
Convention on the elimination of double taxation in connection with the
adjustment of profits of associated enterprises (hereinafter, the Arbitration
is based on Article 293 of the Treaty that reads as follows:
States shall, so far as is necessary, enter into negotiations with each other
with a view to securing for the benefit of their nationals:
the protection of persons and the enjoyment and protection of rights under the
same conditions as those accorded by each State to its own nationals;
the abolition of double taxation within the Community;
the mutual recognition of companies or firms within the meaning of the second
paragraph of Article 48,[xxviii]
the retention of legal personality in the event of transfer of their seat
from one country to another, and the possibility of mergers between companies
or firms governed by the laws of different countries;
the simplification of formalities governing the reciprocal recognition and
enforcement of judgments of courts or tribunals and of arbitration awards.
293 thus provides the legal framework for establishing a tax treaty for the
avoidance of double taxation. MSs
are also presented with the option of reaching agreement on mutual recognition
of specific legal entities; only a limited number of legal entities are
recognised for the purposes of the Parent-subsidiary Directive.[xxix]
Some argue that even the content of the Mergers Directive could have been
realised through negotiations on the basis of Article 293.[xxx]
94 of the Treaty also provides a legal basis for the Proposal for a Council
Directive on a common system of taxation applicable to interest and royalty
payments made between parent companies and subsidiaries in different MSs[xxxi]
and the Proposal for a Council Directive concerning arrangements for the
taking into account by enterprises of the losses of their permanent
establishments and subsidiaries situated in other MSs.[xxxii]
54(3)(g) of the Treaty provides for the coordination of safeguards to protect
the interest of members and others in companies and other profit-making firms.
It therefore provides a basis for EC company law directives such as the
Proposed Tenth Council Directive[xxxiii],
the Council Regulation on the European Economic Interest Grouping (EEIG)[xxxiv]
and the Proposal for a Council Regulation on the Statute for a European company
which measures are relevant to the adoption of EC direct taxation measures.
Based on the said Article, the Proposed Tenth Council Directive concerns
international mergers of specifically listed types of public limited companies
and its adoption is necessary to enable complete utilization of all
possibilities in the Mergers Directive.
respect of taxation, the Regulation on the EEIG lays down that: “the profits
and losses resulting from the activities of a grouping shall be taxable only in
the hands of its members”.[xxxvi]
Article 308 of the Treaty, on which the latter regulation is based,
provides that if action by the Community should prove necessary to attain, in
the course of the operation of the common market, one of the objectives of the
Community and this Treaty has not provided the necessary powers, the Council can
take the appropriate measures acting unanimously on a proposal from the
Commission and after consulting the European Parliament.[xxxvii]
Unlike Article 293, Article 308 may only be applied if “this
Treaty has not provided the necessary powers”.
95 provides an exception to Article 94 and constitutes the basis for the
Proposed Regulation on the Statute for the European company.
The Council may adopt proposals from the Commission by a qualified
majority, provided these proposals do not relate to fiscal provisions,
provisions on the free movement of persons, or provisions on the rights and
interest of employed persons. The
accompanying Proposed Directive on employees involvement[xxxviii]
is based on Article 54 of the Treaty, which deals with the right of
establishment. The Proposed
Regulation on the Statute for a European company contains a specific provision,
Article 133, for the tax treatment of losses suffered by permanent
establishments of a European company in another MS.
legal effect of adopted measures depends only on the form of the measure
(regulation or directive), rather than the Article it is based on.
The factors that determine the choice of the measure to be taken are the
precise wording of the Treaty and probably the type of voting required to adopt
the measure, i.e. majority or qualified majority, or unanimous.
The economic justification of tax harmonisation in the EC