tax coordination between eu

Part I: General Report

Chapter 1: Tax Coordination between Member States in the EU Role of the ECJ

Author

Joachim Englisch

1.1. Introduction

The coordination of different taxes has many facets that range from the avoidance of inconsistencies within a

national tax system [1] to the international allocation of taxing rights between different sovereign states. From a

federalist perspective, tax coordination has two dimensions: vertical coordination of tax competences between

different levels of government [2] and horizontal coordination of the taxing powers of different jurisdictions at the

same level of government. In general, a lack of coordination within the federal framework entails the danger of

excessive tax or tax compliance burdens. With respect to horizontal tax coordination in particular, inadequate

coordination may also lead to distortions that prevent the optimal allocation of economic resources and thus

reduce social welfare. Moreover, insufficient vertical tax coordination may undermine the fiscal autonomy of

certain entities that form part of the federal system, typically the sub-national levels of government.

As is well known, the European Union today is neither a confederation nor a federation within the traditional

meaning of this concept, but it has indeed charted its own brand of constitutional federalism. [3] One of its most

important objectives is economic integration through the creation of an internal market that comprises the

economies of all 27 Member States and that resembles, as closely as possible, the ideal of a single market. [4]

However, Europe still has a highly fragmented tax landscape. [5] Against this background, the quasi-federal

European Union, too, is confronted with the challenge of coordinating legislative and administrative competences

in order to remove barriers to interstate commerce and avoid distortions within the internal market. As the

Commission has aptly pointed out, the present lack of coordination may also lead to an erosion of tax revenues

through the exploitation of tax arbitrage or loopholes, interfering with the ability of the Member States to operate

efficient and balanced tax systems. [6] It also entails higher administrative complexity, especially due to various

anti-avoidance measures. [7]

Even though vertical coordination also raises many critical issues in the EU context, the present contribution will

only be concerned with horizontal tax coordination between Member States, since it focuses on the role of the

European Court of Justice (ECJ or Court) in this context. And the Courts jurisprudence is far more extensive and

controversial with respect to the horizontal aspect of tax coordination within the EU. For the purposes of this

study, the notion of horizontal tax coordination between Member States will be understood to encompass all

measures intended to promote tax neutrality for economic transactions within the internal market [8] by removing

obstacles resulting from the parallel existence and the interaction of different national tax systems. In essence,

horizontal tax coordination between Member States thus has two dimensions: first, the approximation of

substantive tax law and related procedural rules of the Member States in order to overcome or at least reduce

disparities between national tax systems in so far as these disparities lead to distortions of competition or

increased compliance and administrative costs and second, the coordination of competing tax claims of the

Member States so as to avoid double burdens on cross-border commerce.

The concept of horizontal tax coordination between Member States is thus distinguished from the removal of

barriers to market access and of distortions of competition caused by discriminatory and restrictive tax provisions

that form part of the tax system of one and the same Member State. [9] Of course, it cannot be disputed that such

obstacles also need to be tackled as a necessary precondition for facilitating access to foreign national markets

within the European Union and for ensuring that competition within the internal market is not distorted by

taxation. [10] However, the equal playing field within a national tax jurisdiction is not as yet a sufficient condition

for a level playing field within the entire European internal market as long as disparities and double burdens

persist. [11] Notwithstanding this conceptual distinction, it cannot be precluded a priori that a uniform non-

discrimination standard may also have an impact on the horizontal coordination of Member States tax systems.

This study will examine the role that the ECJ plays with respect to promoting or complicating tax coordination

between the Member States of the EU. It will also draw some tentative conclusions regarding the implications of

the Courts case law for future EU tax policy. In this context, it is useful to distinguish between non-harmonized

and harmonized areas of taxation, because the impact and relevance of the Courts jurisprudence is quite

different in the two fields. It is acknowledged that scholars [12] and also the European Commission [13] and the

ECJ [14] tend to distinguish between tax coordination, on the one hand, and harmonization through European

legislation, on the other hand. [15] According to their terminology, tax coordination only refers to legally non-

binding instruments of soft law or soft legislation, such as recommendations, communications, codes of

conduct, etc. [16] However, for the purposes of this paper, harmonization will be regarded as a specific form of

horizontal coordination within the above meaning. [17] A chief objective of tax harmonization by acts of the EU

institutions, too, is to reduce disparities between national tax systems and allocate taxing rights between Member

States. [18]

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1.2. Non-harmonized areas of national tax law

1.2.1. Role of the ECJ

With respect to national tax rules that do not implement European tax directives, the ECJ has consistently held

that from the perspective of European law, Member States are, in principle, at liberty to design their tax system

as they see fit in order to meet their domestic policy objectives. However, the powers retained by the Member

States must be exercised consistently with Union law. [19] More specifically, the tax sovereignty of the Member

States is limited by two categories of directly applicable provisions of the EU Treaties: on the one hand, the four

free movement guarantees listed in article 26 of the TFEU, also referred to as fundamental freedoms, [20] and

on the other hand, the prohibition of State aid enshrined in article 107 of the TFEU. These quasi-constitutional

requirements are directly applicable within the national legal orders of the Member States [21] and render any

non-complying norms inapplicable [22] or, in case of article 107, any implementation measures invalid. [23]

Furthermore, the Member States procedural autonomy [24] is limited by general principles of Union law, and in

particular the principles of equivalence and effectiveness, [25] and protection of legitimate expectations, [26] with

respect to procedural and administrative remedies against infringements of the aforementioned Treaty

guarantees within the framework of the national legal system.

The Courts tax-related case law on the aforementioned primary Union law provisions now comprises far more

than 100 rulings, most of them concerning direct tax matters. Its jurisprudence is credited with achieving

negative integration through enforcing quasi-constitutional Treaty limits on Member States sovereign discretion

in tax matters, as contrasted with positive integration through legislation enacted by the competent institutions

of the Union. [27] The ECJ has accordingly been referred to as an engine of integration when it removed

unilateral obstacles to market access and to a level playing field based on the fundamental freedoms and article

107 of the TFEU. However, the question that arises in the context of the present study is whether the Court also

played the role of an engine of international tax coordination by doing so. The topics to be discussed here are:

Does case law promote real or at least de facto harmonization of Member States national tax systems? Does it

contribute to the coordination of competing tax claims of the Member States? And does the ECJ harden the

Commissions soft-law approach towards horizontal tax coordination, which has become increasingly popular

since a 2001 shift in the Commissions strategy on tax policy? [28]

1.2.1.1. Non-discrimination approach: Varying impact on the approximation of Member States tax systems

The ECJ relies primarily on the free movement guarantees enshrined in article 26(2) of the TFEU, and specified

in subsequent sections of the Treaty, when it scrutinizes national tax systems as regards their compatibility with

primary EU law requirements. As a tribute to the wording of some of the provisions governing these fundamental

freedoms and to the historical development of its related jurisprudence, [29] the Court still tends to frame its free

movement test of home state tax scenarios (concerning the taxation of outbound investments, outbound services

or outbound free movement in general) in terms of a restriction analysis, without making explicit reference to

discriminatory effects of the tax provision at issue. [30] Occasionally, the same approach can even be observed in

host-state tax scenarios, where the Court traditionally [31] referred to the prohibition of indirect discrimination on

grounds of nationality when a national tax norm was suspected of infringing a fundamental freedom.

But despite the Courts fuzzy rhetoric, it cannot be denied that virtually all ECJ decisions on the incompatibility of

national tax rules with EU fundamental freedoms have been based on a discrimination analysis, regardless of

whether the disputed provision formed part of the tax system of the Member State of origin of the cross-border

transaction (i.e. the state of residence of the taxpayer) or of the Member State of destination (i.e. the state where

the income is sourced). [32] There is always a comparative or relative element inherent to the restriction

analysis, which indicates that the ECJ is really looking for a discrimination of cross-border activities as compared

to purely national activities that are carried out within the boundaries of one and the same Member State. [33] If

outbound or inbound activities are not rendered less attractive than wholly domestic ones, the measure at issue

will not found to be restrictive. [34]

This approach differs markedly from the more extensive, genuine restriction analysis practiced by the ECJ in

other non-harmonized areas of law. In general, the Court will find a national legal system to constitute a

restriction of free movement whenever it is likely to prevent, limit or deter cross-border movement of products or

factors of production. [35] It is settled albeit questionable [36] case law that the restrictive nature of such a

national measure will be affirmed even when it applies without distinction to both cross-border and purely internal

transactions if the measure is liable to affect the market access of potential free movers. [37] National tax

regimes are certainly liable to constitute an obstacle to the exercise of economic free movement rights and thus

affect market access, in particular when the tax burden imposed in the intended Member State of destination is

higher than the domestic tax on proceeds from similar activities carried out in the Member State of residence, or

when international double taxation is not fully avoided. However, the Court has been extremely reluctant to apply

its standard approach to tax-related disputes, presumably because this would potentially entail the need for

Member States to justify all provisions of their national tax law before the ECJ; such a degree of quasi-

constitutional control at Union level would imply a serious curtailment of national sovereignty in a sensitive policy

area. Regarding direct taxation in particular, the Court so far has not even conducted an analysis as to whether

seemingly neutral tax regimes such as e.g. thin capitalization rules or interest deduction barriers also



applicable for domestic groups of companies are nevertheless liable to predominantly affect cross-border

situations or transactions. [38]

The judicial restraint exercised by the ECJ in tax matters has important consequences for the spectrum of

political options available to each Member State after a negative verdict on certain discriminatory features of a

national tax system: A Member State may chose to altogether abolish the detrimental tax regime at issue, or at

least limit its territorial scope to third-country relationships not covered by the relevant fundamental freedom and

its EEA counterpart. [39] Conversely, it could be decided to extend the scope of the disputed tax regime to purely

domestic scenarios in order to sidestep the Courts non-discrimination analysis. Mutatis mutandis, the same

alternatives exist with a view to beneficial tax regimes that were formerly limited in scope to purely internal

constellations. Depending on the circumstances, namely on the availability of a justification for the discriminatory

tax law provision that was dismissed by the Court merely on grounds of a lack of proportionality, [40] the national

legislator may even have a third option: the discriminatory tax regime could be modified, or its substantive scope

could be scaled back, so that the remaining restrictive effects will no longer be out of proportion to its legitimate

objectives.

In general, the following reactions can be identified. [41] If the extension of a tax concession or another favourable

tax regime to cross-border scenarios would be fiscally costly, or if the discriminatory limitation to domestic

situations served protectionist motives, Member States will tend to either abolish or modify it rather than grant it

in the case of a cross-border situation as well. An exception is made where the tax relief is considered to form a

core aspect of tax justice or a key element of a cherished national policy. As became obvious in the wake of the

Marks & Spencer judgment and subsequent decisions concerning intra-group or intra-company loss relief

schemes, the tendency to merely introduce modifications and uphold discriminatory elements will increase when

only minor amendments are needed in order to shield the provision from future findings of lack of proportionality

and from the ensuing incompatibility with fundamental freedoms. In relation to detrimental tax regimes that seek

to protect the national revenue base, such as thin capitalization rules or exit taxes, Member States will tend to

chose the opposite strategy: The more important the objectionable norm is fiscally for the respective treasury, the

stronger the incentive will be to extend the tax law provision at issue also to domestic cases so as to elude the

standard non-discrimination analysis. If such an approach is unfeasible because its consequences would be

administratively or economically unsustainable in a domestic scenario, Member States will frequently try to adapt

the discriminatory tax regime to the Courts justification requirements rather than abandon it outright.

Obviously, the fiscal significance of certain tax regimes varies from Member State to Member State, and so do

political priorities with respect to conflicting interests that have to be balanced when deciding about the options

described above. Therefore, the impact of an ECJ ruling will often differ among the 27 tax jurisdictions affected

within the Union. [42] The changes enacted in the Member States tax systems with respect to thin capitalization

and CFC regimes after the Court had handed down its Lankhorst Hohorst [43] and Cadbury Schweppes [44]

judgments, respectively, are paradigmatic. This means that it is far from certain that the standard fundamental

freedom scrutiny of the ECJ in the area of non-harmonized tax law will, by itself, enhance de facto

harmonization, understood as approximation of national tax systems. [45] To the contrary, the Courts rulings may

even spark or increase legal diversity in certain parts of national tax systems that were formerly aligned to

internationally accepted models and thus quite congruent.

Two more aspects add to the centrifugal tendencies that can often be observed after landmark cases of the

Court. First, Member States national governments will tend to show different standards of compliance with such

a ruling. [46] Some will change their tax systems based on mere precedence in anticipation of a probable

condemnation of their own, similar regime; e.g. this could often be observed in Austria. Other Member States are

less inclined to question their own tax system in the light of a judgment concerning legislation of another Member

State, even if the essential elements of both national tax regimes are quite similar; they prefer to wait and see

whether the Court might not hold minor distinctions relevant enough to eventually reach a different verdict in their

case. The Courts sometimes erratic [47] and ambiguous [48] case law promotes such a strategy. Second, most

landmark cases do not provide detailed guidance as to all of their ramifications for national tax systems, so that

different Member States might reach different conclusions as to the required changes.

Hence, all that negative integration by ECJ rulings does accomplish per se with a view to intra-Union tax

coordination is to set certain but sometimes indeed not overly certain minimum standards for Member States

that do not opt out entirely of a tax regime whose characteristic features have been held to be incompatible with

the EU fundamental freedoms. However, these minimum requirements can be sidestepped by extending the

substantive scope of the provisions at issue so as to make them at least seemingly neutral regarding

domestic and cross-border scenarios. [49] Moreover, even when Member States show a uniform response to

certain developments in the Courts jurisprudence the disappearance of almost all dividend imputation systems

across the EU in the wake of the Verkooijen [50] and Manninen [51] rulings is the most prominent example the

ensuing approximation of national tax systems does not ensure a more level playing field for investors, business

and migrant workers within the Union. The inherent limit to negative integration is the persisting disparities

between the national tax systems, [52] especially regarding tax base, tax rate, and extra-fiscal objectives, [53]

which could only be overcome by comprehensive positive integration through EU legislation. As the ECJ itself

has repeatedly emphasized:

[T]he Treaty offers no guarantee to a citizen of the Union that transferring his activities to a Member

State other than that in which he previously resided will be neutral as regards taxation. Given the



disparities in the tax legislation of the Member States, such a transfer may be to the citizens advantage

in terms of taxation or not, according to circumstances. [54]

It has even been demonstrated that a European-wide abolition of certain, typically discriminatory tax regimes that

are intended to curb international profit shifting (such as e.g. thin capitalization rules) could enhance rather than

reduce the distortions caused by different national tax burdens on corporate profits. [55]

Against this background, one could imagine that the real contribution of the Courts jurisprudence on

fundamental freedoms in the area of non-harmonized taxation to the improvement of tax coordination between

Member States is a merely indirect one. By imposing strict limits on discriminatory measures intended to protect

national tax revenue, the ECJ could step up the pressure on reluctant Member States [56] to finally reach

agreement on harmonization proposals of the Commission that address these concerns. The alternative of

abolishing favourable tax regimes limited in scope to purely internal situations or of extending a detrimental tax

rule to domestic scenarios without real need will often be less attractive options for many Member States.

However, in practice, the Court does not seem to be paving the way for positive integration, either: none of the

only six EU Directives concerning aspects of direct taxation have been passed in the wake of a relevant Court

decision, nor any of the main directives on indirect taxation. This may partly be due to the moderating effect of

the rule of reason based upon which the Court has assumed certain discriminatory tax regimes to be justified,

thus taking some heat off Member States to cooperate in order to maintain their revenue base. Such a possible

effect will be assessed in closer detail below. However, the main reason for the apparent lack of significant

influence of the Courts case law in the process of negotiating new tax legislation at the Union level is probably a

different one. Frequently, some, if only a few, of the 27 Member States will benefit revenue-wise from an

uncoordinated state of affairs after a ECJ ruling where profits may more easily be shifted to low-tax jurisdictions.

Hence, it will often be difficult to reach the required unanimity for a more balanced European legislation.

1.2.1.2. Rule of reason: A disincentive for tax coordination

According to settled case law, a restrictive national measure may be justified by an overriding reason of public

interest acknowledged by the Court. However, in order to be justified, a restrictive measure must comply with the

principle of proportionality, in that it must be appropriate for securing the attainment of the objective it pursues

and must not go beyond what is necessary to attain it. [57] This rule of reason had been developed in the Cassis

de Dijon decision of the Court [58] in 1979 in order to counterbalance the extensive interpretation of the

guarantees on free movement of goods based on the Dassonville-formula, [59] and it has subsequently been

extended to all fundamental freedoms. [60] Since the 1990s, the rule of reason has attained considerable

significance in the area of non-harmonized taxation as well, [61] where the unwritten public policy reasons

accepted by the Court are far more relevant than those explicitly mentioned in the Treaty, with the exception of

articles 64 and 65 of the TFEU regarding the free movement of capital. In the last 5 years, starting with the

famous Marks & Spencer ruling, [62] the ECJ has been particularly inclined to uphold discriminatory tax provisions

based on the rule of reason.

Essentially, the rule of reason seeks to strike a reasonable balance between national (tax) sovereignty, on the

one hand, and the requirements of the EU internal market for the establishment of which the fundamental

freedoms are instrumental, on the other hand. It prevents the fundamental freedoms from becoming absolute

prerogatives; instead they will be qualified or, more precisely, relativized by values that are championed by the

respective national legislator and not per se incompatible with primary or secondary Union law. This implies that

the principles of free market access and undistorted competition inherent to the internal market concept of the

Union will have to be balanced against certain national tax policy preferences. In so far as the latter may

legitimately be pursued in a restrictive manner, the Courts already limited role for the promotion of tax

coordination between the Member States may be further diminished. There are two possible ways in which the

rule of reason could have a negative impact on tax coordination between Member States: First, it has already

been pointed out that the possibility to justify only some elements of the discriminatory tax regimes under the

proportionality condition leaves Member States with additional options after a negative verdict of the Court.

National reactions and the ensuing tax landscape might thus be more heterogeneous across Europe. Second,

Member States will be less incentivized to cooperate and reach consensus on measures of positive integration if

they can cling to well-established albeit restrictive tax regimes with only minor amendments.

However, a closer analysis of the various public interest arguments that have been brought forward by Member

States in defence of their restrictive tax regimes and of the Courts assessment of these arguments reveals that

their respective relevance from a tax coordination perspective is quite diverse. It is also remarkable that the two

aforementioned effects have intensified considerably after the Courts rapprochement to the position of the

Member States initiated by the Marks & Spencer judgment.

First and foremost, the Court has consistently held that the desire to avert a loss of tax revenue will, by itself,

never serve as a valid justification for continued tax discrimination. [63] However, since Marks & Spencer,

revenue concerns may be regarded as an overriding reason of public interest if they can be framed in terms of

preserving a balanced allocation of taxing powers as between Member States. [64] The ECJ has repeatedly held

that Member States should not be forced to forego revenue that they may regard themselves entitled to in the

light of internationally accepted substantiations of the territoriality principle. [65] This argument has proven

particularly important with respect to three types of national tax rules. First, loss consolidation regimes which do

not permit cross-border importation and offsetting of losses that have been incurred through activities carried

out abroad, on grounds of a symmetrical exemption of foreign-sourced profits. [66] Second, the imposition of exit



taxes aiming at an ultima ratio taxation of accrued but as yet unrealized capital gains upon the imminent loss or

impairment of the internationally allocated power to tax these gains. [67] Finally, specific tax clauses designed to

prevent economically unsubstantiated or unfair profit shifting and related tax evasion strategies, such as CFC

rules, thin capitalization rules and provisions on transfer pricing adjustments. [68] With respect to all three of these

sets of discriminatory tax rules, the Court has now acknowledged that Member States may have a legitimate

interest in implementing them, and the ECJ has therefore merely elaborated on the limits imposed by the

proportionality requirement.

Some aspects of this relatively new development deserve special attention in the context of international tax

coordination efforts. In some areas it has undermined to a certain degree the Commissions efforts to

approximate the business tax systems within the EU. From the perspective of the Member States, the Courts

now consolidated case law on losses is so generous that they feel little inclined to fundamentally change their

respective national systems or to even discuss the Commissions proposal on harmonizing cross-border loss

relief. Most Member States have introduced no or only minor changes in reaction to the ECJ jurisprudence, [69]

especially since the Court itself has explicitly stated that less restrictive measures in any event require

harmonisation rules adopted by the Community legislature. [70] Together with the Courts broad acceptance of

transfer pricing adjustments based on the arms length principle, this case law has also taken some pressure off

Member States to push forward the ambitious agenda of a common consolidated corporate tax base (CCCTB). [71]

Moreover, the Court has, in principle, accepted that Member States may try to remedy inadequate features of

their tax treaty law such as a divergent allocation of taxing powers regarding profits as returns on equity capital

investments, on the one hand, and regarding interest payments as returns on debt capital investments, on the

other hand through discriminatory provisions such as thin capitalization rules rather than through a change

of the treaty provisions. As a consequence, and for some other reasons discussed below, the Courts

jurisprudence does not suggest that Member States should multilaterally coordinate a reform of their conventions

on the avoidance of double taxation. It should be noted, though, that the ECJ has frequently had recourse to

OECD standards in order to determine whether an allocation of taxing rights was indeed balanced and its

preservation thus an overriding public interest. [72] As a result, national governments might intensify their

cooperation at the OECD level and develop new recommendations aimed at protecting the national revenue

base, such as in the context of company reorganization, in order to influence European jurisprudence in their

favour. Since the Court will seek inspiration from OECD recommendations, Member States may indirectly

increase their room to manoeuvre by having the OECD declare certain practices as acceptable or even

commendable. The integration of a new chapter IX on the transfer pricing aspects of business restructurings into

the 2010 version of the OECD Transfer Pricing Guidelines can be seen as a step in this direction. [73]

As regards the remaining justifications available to Member States, even before the Marks & Spencer

realignment of the Courts case law, their impact in terms of reducing the impetus for European tax coordination

is considerably smaller. The ECJ has consistently rejected the contention that discriminatory national tax

measures should be justified on grounds of the promotion of national economic interests [74] or other public policy

objectives with a bias towards domestic rather than internal market effects, [75] such as tax expenditures in

support of the national education sector [76] or the domestic supply of housing. [77] By contrast, the preservation

of the cohesion of the national tax system, in the sense of an intrinsic compensation for detrimental taxation of

cross-border transactions through directly linked tax burdens only affecting domestic transactions, has in theory

been accepted as a valid justification by the Court. [78] However, in practice, Member States have hardly ever

succeeded with that argument. [79] As regards measures designed to combat fiscal elusion and tax avoidance

through abusive tax schemes, the abuse argument has only become a striking one in the Courts case law

when it could be invoked in combination with the interest in preserving a balanced allocation of taxing rights

discussed above. [80]

Finally, the need to guarantee the effectiveness of fiscal supervision and of the tax collection have been

accepted as overriding requirements of general interest capable of justifying a restriction on the fundamental

freedoms. [81] However, at least within an intra-Union context, the Court has established strict proportionality

requirements in this regard, to the effect that substantive tax law must not discriminate on these grounds. [82]

Member States may only maintain, under certain conditions, asymmetrical (but not final) withholding taxes, [83]

and their tax authorities may require the free mover to provide any evidence that they may consider necessary

for assessing the tax liability. [84] Hence, the only real obstacle to an approximation of Member States tax

systems brought about by the traditional application of the rule of reason in the area of non-harmonized tax law is

that it leaves Member States with considerable freedom regarding discriminatory requirements in their national

tax procedure. Consequently, and regrettably, the Courts case law on fundamental freedoms so far has not

contributed to the emergence of minimum standards for taxpayer compliance burdens. In particular, the

principles of equivalence and effectiveness cherished by the ECJ as controls on national procedural autonomy

with respect to other Union law standards impinging on national tax law [85] such as the State aid prohibition of

article 107 of the TFEU, or secondary Union law have so far not gained much traction within the fundamental

freedom framework. The recently decided case Meilicke II has not significantly improved this state of affairs. [86]

Notwithstanding the general statement that the rule of reason tends to operate as a disincentive for further tax

coordination between the Member States, there are two aspects related to it that counteract, to a certain degree,

these adverse effects. First, the ECJ has consistently denied Member States any margin for generalizing

assumptions, e.g. in the context of the fiscal cohesion argument or with a view towards identifying abusive tax



schemes. [87] To put it differently, the administrative efficiency of a restrictive tax regime has not been accepted

as an overriding reason of public interest that could shield it from amendments required by the fundamental

freedoms. By contrast, the Court tends to be significantly more generous with the Union legislator in this regard.

[88] While this double standard is certainly questionable, [89] it nevertheless could provide an enticement for

Member States to harmonize their legislation in order to have greater latitude for generalizing tax law provisions.

Second, the Court has repeatedly held that national legislation is appropriate to ensuring attainment of the

objective pursued only if it genuinely reflects a concern to attain it in a consistent and systematic manner. [90] As

a consequence, a Member State will find it difficult to defend certain restrictive measures, which judged in

isolation could be considered justified and proportional, if it has adopted such measures only with regard to

some, but not all other Member States. This will serve as an incentive for a Member State to unilaterally ensure a

coordinated approach in its relationships to the other Member States but, of course, it also implies less room to

manoeuvre in tax treaty negotiations.

1.2.1.3. No incentives for the harmonization of tax treaty law

The ECJ has (almost) consistently refused to conduct a most-favoured-nation test of bilateral or unilateral

measures aimed at the avoidance of international double taxation and a fair allocation of taxing rights. [91] In

particular, the disparities between the allocation rules of tax treaties concluded by a Member State with a variety

of other Member or non-Member States do not, by themselves, constitute a restriction of the free movement

guarantees. [92] Hence, there is no primary law obligation of a source-country Member State to extend the lowest

withholding tax rate negotiated in any of its tax treaties for certain types of income to residents of all other

Member States that receive such income, nor is there an obligation for the Member State of residence to apply

the exemption method with respect to all income sourced in another Member State if this method is applied with

respect to only some source countries.

In the authors view, this highly disputed jurisprudence is indeed well founded, because the imposition of a most-

favoured-nation obligation with respect to maximum withholding tax rates in the source country, the application of

the exemption method in the country of residence and other allocation rules cannot even theoretically promote

the internal market objective of equal conditions of competition (the level playing field): [93] Neither within the

jurisdiction affected, where differences in treatment between domestic and cross-border activities would deepen,

nor from a supranational viewpoint, which must take into account the disparate tax burdens imposed in the other

jurisdiction involved in the cross-border activity. [94] This is obvious in the case of a reduction of source-country

(withholding) taxes, but applies equally in the context of avoidance of international double taxation in the

residence state. Admittedly, the uniform application of the exemption method in the Member State of residence

would realize capital import neutrality within the European Union. However, this will only enhance the ultimate

objective of an optimal allocation of economic resources within the EU internal market under the premise that the

taxes imposed in the respective source country can be regarded as direct consideration for government services,

infrastructure, employment opportunities etc. financed through these taxes. In the authors view, though, only the

allocation of taxing powers tends to be based on the benefit principle, whereas the ability-to-pay principle does

and indeed should influence the respective tax burden. [95]

Far less convincing, but equally consolidated is the Courts refusal to characterize international double taxation

as a restriction of the free movement guarantees. [96] While there should be no doubt that from an internal market

perspective, the avoidance of international double taxation would ensure equal taxation at least from the

perspective of one of the two or more jurisdictions involved, the ECJ obviously does not feel competent to

establish provisional allocation rules, or to at least interpret existing tax treaty rules, in order to determine which

Member State must waive its tax claim. [97] The Courts potentially important role in coordinating Member States

tax systems with a view towards avoiding international double taxation is therefore actually nil. In combination

with the dismissal of a most-favoured-nation approach, this also implies that the Courts jurisprudence does not

provide any incentives for the harmonization or multilateralization of tax treaty law between Member States. [98]

1.2.1.4. Limited admission of a supranational perspective on discriminatory effects

In the last 5 years, the ECJ has repeatedly held that a discriminatory taxation of cross-border transactions in one

Member State can be offset by tax privileges granted in the other State with links to the transaction at issue. The

Court has thus practised a supranational analysis of discriminatory effects (sometimes also referred to as overall

approach or internal market approach), and it has ruled them out, or at least it has considered them justified, if

a detrimental tax treatment in one jurisdiction was matched by an exactly [99] corresponding reduction of the

taxable base or of the tax burden in the other jurisdiction, as compared to the taxable base or tax burden

applicable for purely domestic transactions in that other jurisdiction. Initially, the Court was content if such a

neutralizing effect could be proven to occur by the Member State whose discriminatory tax regime was at issue,

irrespective of whether the compensatory mechanisms were agreed upon bilaterally or granted unilaterally. [100]

But for the sake of legal certainty, [101] this approach was subsequently modified in favour of limiting the

consideration of compensatory effects to those negotiated in binding agreements between the Member States

concerned. [102] This approach also avoids an overt contradiction to the well-established general prohibition of

counterbalancing tax disadvantages with unrelated tax advantages in other jurisdictions. [103] Only an

internationally coherent compensation is admissible. [104] In the Burda decision, the Court clarified that

compensating effects secured by secondary EU law will also be taken into account on this basis. [105]



The Courts jurisprudence thus leaves Member States an alternative to the traditional approach of allocating

taxing rights through a reciprocal limitation of taxing powers. [106] Instead, they can shift sources of revenue

through reciprocal modifications in the factors that are relevant for the determination of the tax liability, provided

that these modifications have been agreed upon in a bilateral or multilateral treaty, or in secondary EU law. For

instance, if one were to assume as the Court does in the context of individual shareholdings [107] that a

Member State levying an exit tax is responsible for taking into account subsequent capital losses arising after the

transfer, because the latter would also be relevant for the assessment of capital gains tax in the case of

taxpayers or assets that did not move cross-border, aspects of practicability of taxation as well as the territoriality

principle would suggest an agreement pursuant to which the receiving state takes over that responsibility in the

context of its own capital gains taxation by granting a step-up in value at the time that its tax jurisdiction is

established. The combination of strict standards with respect to the avoidance of discriminatory effects in

domestic tax law, on the one hand, and an international escape through coordinated compensatory mechanism

may thus offer an incentive for Member States to engage in targeted coordination efforts in certain fields of

international tax law.

1.2.1.5. Curbing unfair tax competition

Apart from the fundamental free movement guarantees, there is a second kind of primary EU law control of

national tax regimes: the Treaty prohibition of State aid, enshrined in article 107 of the TFEU, imposes additional

quasi-constitutional limits specifically for tax expenditure rules or other forms of tax relief. While the Commission

is authorized to monitor compliance with the State aid rules pursuant to article 108 of the TFEU, it is the ECJ that

ultimately decides whether a national measure constitutes State aid. [108] In a series of judgments, the ECJ has

left no doubt that the State aid rules of the Treaty also apply in the context of tax expenditure rules, because the

ensuing waiver of tax revenue is equivalent to fiscal expenditure in the form of direct subsidies. [109] In general,

any form of tax relief that is accessible only for certain undertakings or economic sectors in a Member State and

that cannot be regarded as merely a specific expression of the guiding principles of tax justice underlying the

respective national tax system or the respective tax, but rather is a derogation from the ordinary tax system and

the rationale of the particular tax at issue, will constitute forbidden State aid according to the ECJ. [110] In

particular, ring-fenced tax regimes [111] that intend to attract foreign investment by providing a significantly lower

level of taxation than the one that generally applies in the Member State concerned (only) for certain activities of

multinational groups will accordingly be regarded as State aid by the Court.

Obviously, the prohibition of State aid pursues the same objective that is also underlying the fundamental

freedoms: to promote equality of competition [112] and thus a level playing field for all economic agents at least

within one and the same jurisdiction. [113] While more limited in substantive scope, the restrictions imposed on

national tax sovereignty by article 107 of the TFEU are more severe, because its application does not require

that the distortions of competition associated with a beneficial tax regime have an adverse effect exclusively or at

least predominantly on cross-border commerce. [114] Notwithstanding this important difference, the Courts case

law on the implications of the prohibition of State aid for national tax subsidies has had hardly any direct impact

on the tax coordination between Member States, for reasons similar to those discussed above in the context of

the fundamental freedoms. On the one hand, Member States still retain the option to remove the selective

character of a preferential tax regime by extending it to all enterprises and sectors of the economy, thereby

avoiding its characterization as forbidden State aid favouring certain undertakings or the production of certain

goods. [115] On the other hand, even if a Member State decides to abolish certain forms of biased tax relief,

significant disparities with respect to the tax systems of the other Member States will remain. The national

differences in effective tax burdens may even increase for the formerly privileged group of taxpayers, especially if

the tax concession at issue intended to bring charges in the relevant sector more into line with those of

competitors in other Member States. [116]

However, the Court rulings on State aid in the area of non-harmonized tax law were certainly instrumental for the

efforts of the European Council and the European Commission to curb harmful or unfair tax competition within

Europe. [117] In December 1997, the Council had adopted a resolution on a Code of Conduct for Business

Taxation. [118] Pursuant to this political, non-binding agreement, ring-fenced tax regimes of the Member States

which significantly affect the location of business activity within the internal market should be rolled back under a

peer review process, and Member States should refrain from introducing any new measures of this kind. This

initiative motivated the Commission to substantiate the fact that it would apply the State aid rules strictly with

respect to direct business taxation and to draw up guidelines for that application. [119] So far, over 400 business

taxation measures have been assessed under the Code of Conduct and over 100 of these, being considered

harmful, have been removed or amended. [120] In a significant number of cases, the Commission took action

under the State aid rules when Member States were reluctant to alter their preferential regimes, and it could rely

on the authoritative rulings of the Court in doing so. [121] The Courts case law thus made Member States realize

that the intentions they had expressed in the Code of Conduct were not merely subject to peer pressure, [122] and

thereby ensured that the Code would have the desired broad effect.

Notwithstanding this positive indirect effect of the Courts jurisprudence in the context of a coordinated initiative

to moderate tax competition between the Member States, it has to be recalled that there are clear limits to the

Courts role in this regard, too: the State aid rules prohibit only selectively granted tax relief, hence they do not

provide a remedy against tax competition between Member States in general. [123] In particular, even extremely

low corporation tax rates will as such never constitute State aid within the meaning of article 107 of the TFEU.



[124] The Court therefore cannot motivate Member States to coordinate their tax systems so as to mitigate

disparities in effective national tax burdens and the ensuing distortions of competition within the internal market.

Admittedly, it is disputed among scholars and politicians whether such coordination would be desirable at all, [125]

and the European Commission has until recently been tellingly silent when laying down its coordination

objectives. [126] Since this topic would merit a study of its own, the author would only like to point out that while

so-called fair tax competition may provide an incentive for national governments to trim public spending and

offer an attractive ratio between cost (taxes) and benefits (public services, etc.) for investors, business and other

free movers, [127] the benefit principle alone does not adequately reflect the social solidarity dimension of the

imposition of taxes in modern welfare states. [128] National tax systems also pursue social and redistribution

policies at the national level, and business or capital income should contribute to these objectives, too. However,

fair international tax competition tends to favour the latter kind of income and its mobile sources to the

detriment of less mobile sources of revenue, and wage income in particular, [129] which may eventually

undermine the ethical and social foundations of society.

1.2.2. Some tentative conclusions for EU tax policy

In the light of the above deliberations, it is suggested that the Commission should focus on streamlining the

reaction of the Member States to significant developments in the Courts case law through the timely use of soft-

law instruments, which constitute a pragmatic second-best choice [130] as long as genuine Union legislation

cannot be achieved. These non-binding communications or recommendations should provide sufficiently clear

and detailed guidance on the conclusions drawn by the Commission from the case law with respect to existing

tax regimes of the Member States, and they should indicate an alternative that the Commission considers

admissible. To facilitate compliance, [131] such an approach would then have to be flanked by the initiation of

infringement procedures against Member States that after a certain period of time have not adapted their tax

systems. [132] Considering the limited resources of the Commission, [133] it should rely more on private sector

agents to monitor compliance with its interpretation of the Courts case law. A model approach for this could be

the surveys sometimes commissioned in the area of harmonized taxation [134] or public consultation procedures

that are now often initiated before legislative initiatives. [135] Through these concerted efforts, the Commission

could likely reduce the risk of a very heterogeneous tax landscape after a negative verdict of the ECJ. In the

same vein, the Council should consider amending the Statute of the Court of Justice so as to allow the latter to

also hear the national courts that referred questions for a preliminary ruling. This would provide the ECJ with a

fuller picture of the dispute at issue and raise its awareness of the reverberations that a ruling might have in the

entire tax system, and thus enhance the quality and acceptance of its decisions.

The Commission has indeed already set out to pursue the above strategy, as it announced in December 2006.

[136] However, not much progress has been made after some initial communications, [137] probably because the

Commission was engulfed by the financial crisis and the preparation of the Proposal of a Directive for a Common

Consolidated Tax Base. [138] This vacuum has spurred the Council to step in, and it has recently adopted a

resolution on the coordination of the CFC and thin capitalization rules within the European Union based on the

Courts case law. [139] The author would prefer to see the momentum shift back to the Commission because the

Councils suggestions are less likely to be impartial, and the Commission should not let the fox guard the hen

house. Instead, the Commissions conclusions should be discussed with representatives of the EU Finance

Ministers after having been drafted, which could be done in the newly recreated Tax Policy Group [140] and

preferably also in the European Parliament. [141] They might then be reinforced by a political commitment of the

Council. [142] Furthermore, the Commission should also issue guidelines on an adequate balance between the

desire to reduce administrative costs of national tax authorities with respect to cross-border transactions, on the

one hand, and compliance burdens for taxpayers, on the other hand. As has been discussed above, the ECJ has

so far failed to elaborate on this and has merely stated that compliance burdens must not be excessive or overly

formalistic.

Besides the enhanced use of soft guidance combined with hard enforcement measures, the Commission

should consider intensifying its collaboration with the OECD in order to raise awareness for the interaction

between the Courts case law and the rule of reason in particular, on the one hand, and OECD initiatives and

recommendations, on the other hand. Considering the deficiencies of the still prevailing mutual agreement

procedure without mandatory arbitration in most of the bilateral tax treaties of the Member State, as well as the

lack of a comprehensive treaty network in some areas such as inheritance taxation, the Commission could also

try to introduce a binding dispute settlement mechanism at least for selected areas of taxation. [143] The EU

Arbitration Convention could serve as a model in this regard. Finally, the Commission must not, and apparently

will not, cease to apply the State aid provisions strictly in cases of harmful tax competition within the meaning of

the Code of Conduct on business taxation. Since the Commission has considerable discretion in this field, it

should regularly update the relevant guidelines for fiscal aid so as to enhance legal certainty for Member States. [144]

It is furthermore respectfully submitted that the Commission should realign its approach towards ambitious

harmonization projects such as the creation of a Common Consolidated Corporate Tax Base (CCCTB). [145]

Such bold initiatives will tend to meet resistance at least from some Member States, because they fear to lose a

competitive edge or revenue, and the ECJ does not and indeed cannot build up sufficient pressure based on

primary Union law to overcome this resistance. It may take decades before the necessary consensus is finally

reached, and scarce Commission resources will have been bound over a very long period of time for a project



with an uncertain outcome. A viable alternative to the ab initio elaboration of a detailed and highly complex and

thus also highly controversial set of rules could be the formulation of mere framework directives that are

confined to stipulating some basic principles and general rules as a broad framework for the approximation of

national tax legislation and thus leave Member States with considerable discretion as to their implementation, in

order to facilitate unanimous agreement on the proposal. Once adopted and implemented, the ensuing directive

might then become more detailed and more comprehensive in subsequent rounds of harmonization. Such a

gradual and tentative approach towards substantive harmonization would also spare Member States a choice

between the Scylla and Charybdis of either risking petrification of a detailed compromise once adopted, [146] or

relinquishing democratic legitimization of taxation to the obscurities of the comitology procedure (art. 291 TFEU)

or even to delegated law-making powers of the Commission (art. 290 TFEU). [147]

In the context of corporate taxation, this could imply formulating only basic principles and uniform standards for a

common tax base, while initially refraining from promulgating an all-encompassing concept of a perfectly

harmonized tax base and also from introducing full consolidation. A similar approach has already been tried in

the context of indirect taxation, where the First and Second VAT Directives were also confined to the essentials

of the VAT system, and a more detailed layer of European harmonization was only enacted 10 years later in form

of the Sixth VAT Directive. Should the 27 Member States refuse to agree even on basic principles, then some of

them might consider, and the Commission should support, proceeding through enhanced cooperation based on

article 20 of the TEU. [148] If a sufficient number of economically potent Member States partakes in such an

endeavour, it could also serve as a possible nucleus for broader coordination. [149]

Finally, it is suggested that harmonization should also extend to tax rates, in particular when it becomes more

comprehensive and more detailed, and, hence, tax competition based on rate differentials becomes more

transparent and effective. Obviously, it is neither desirable nor politically feasible to have uniform tax rates for all

27 national tax systems as long as the Union has not evolved into a real federation, which it quite possibly never

will. But the Union legislator could set minimum rates so as to avoid excessive competition for mobile sources

of revenue and economic growth, [150] a competition that also tends to distort Member States tax systems from

within and thus erodes traditional concepts of tax justice. Harmonization of direct taxes, and the CCCTB project

in particular, should therefore not merely be concerned with reducing compliance costs and eliminating the

danger of international double taxation. [151]

1.3. Harmonized areas of national tax law

1.3.1. Role of the ECJ

As can be inferred from the deliberations above at 1.2., the role of the ECJ in fostering tax coordination between

Member States in the EU is a rather limited one in the absence of positive integration by way of EU legislation.

As will be demonstrated in the following sections, this changes significantly once a certain area or certain

aspects of taxation have been harmonized at Union level.

1.3.1.1. Enhancing positive integration through uniform interpretation of harmonized tax concepts

Aside from customs law that has been unified by way of regulations, the body of EU tax legislation so far consists

almost exclusively of directives within the meaning of article 288 of the TFEU. With respect to the harmonization

of direct taxes, no other legally binding instrument is available according to articles 114(2) and 115 of the TFEU;

but directives are also the measure of choice for the harmonization of indirect taxes. [152] As a general rule,

directives are not directly applicable within the Member States. For that reason, they need to be transposed into

national law through the adoption of tax statutes or other legal acts by the national parliaments or by other

competent legislative bodies in all 27 Member States. Furthermore, the respective national provisions are applied

and interpreted by the national tax administrations and by the national courts of each Member State. Obviously,

this can lead to a situation where one and the same provision of a European directive is applied differently in

several Member States, especially considering the different legal traditions of the Member States. [153]

However, most of these centrifugal tendencies will eventually be countered by the jurisprudence of the ECJ, [154]

which by virtue of article 19 of the TEU is ultimately competent to interpret all EU directives. It is settled case law

of the Court that Union law must, in principle, be applied uniformly and equally in all Member States. Therefore, it

is not feasible to define EU law concepts on the basis of one or more national legal systems unless there is

express provision to that effect. [155] Instead, the terms of a provision of Union law which makes no express

reference to the law of the Member States for the purpose of determining its meaning and scope must normally

be given an autonomous and uniform interpretation throughout the Union. [156] Moreover, every provision has to

be interpreted in the light of the versions existing in all the official languages of the Union. [157] In this context, the

ECJ has therefore also developed a legal methodology of its own, notwithstanding its foundation in familiar

concepts of national legal systems. [158]

By virtue of the principle of Union loyalty enshrined in article 4(3) of the TEU and now specified in article 291(1)

of the TFEU, Member States are obliged to adhere to the Courts autonomous interpretation of secondary Union

law. In particular, national authorities and courts must interpret domestic legislative provisions adopted for the

purpose of implementing an EU directive in the light of the wording and the purpose of this directive, as

construed by the ECJ. [159] In so far as an interpretation in conformity with Union law cannot be achieved by



applying the interpretative methods recognized in the domestic legal order, [160] the national legislator can be

coerced to amend the tax law at issue through infringement and enforcement procedures initiated by the

Commission before the Court, as stipulated in articles. 258 and 260 of the TFEU. National courts that ask for

preliminary rulings of the ECJ regarding the compatibility of domestic legal provisions with the relevant

secondary Union law based on article 267 of the TFEU, and that are expected to eventually put aside the

domestic provisions in case of conflict, [161] provide the Court with another very effective possibility to indirectly

enforce national compliance with its understanding of the harmonized aspects or systems of taxation. [162]

Against this background, the ECJ plays an eminent role in the effective coordination of the harmonized tax

systems of the Member States. It has to be borne in mind, though, that both the opportunities and the capacities

of the Court to act as supreme guardian of the faithful implementation of EU tax legislation are subject to legal

and factual restraints: usually, questions surrounding the correct implementation and interpretation of EU

directives are brought before the Court by one of the two ways mentioned above, i.e. either by request of a

national court for a preliminary ruling under article 267 of the TFEU or by the Commission through the

infringement procedure contemplated in article 258 of the TFEU. Individual taxpayers cannot file a case before

the ECJ on their own motion. [163] However, as regards the infringement procedure, the capacities of the

Commission to initiate the corresponding proceedings are limited. As a consequence, not every complaint from

interested parties or other information that the Commission receives with respect to a possible non-compliance of

national law with the requirements of EU tax legislation will give rise to a formal infringement procedure. [164] And

even in so far as this happens, a majority of cases never reaches the ECJ, because the Member State chooses

to amend its legislation based on the Commissions interpretation of secondary EU law, as is apparent from the

Commission archives. [165]

Moreover, the Court has repeatedly held that the Commission enjoys a discretionary power as to whether it will

bring an action for failure to fulfil obligations and it is not for the Court to judge whether that discretion was wisely

exercised. [166] It is unfortunate that the Commission has thus been granted carte blanche to refrain from

initiating proceedings even in cases of severe or obvious failures of a Member State to correctly implement a

directive and interpret its national law accordingly, [167] because the preliminary ruling procedure does not

actually accommodate a lack of Commission enforcement. Theoretically, any national court or tribunal of last

instance is under an obligation to bring any question of the compatibility of national law and its application with a

European directive before the ECJ, pursuant to article 267 of the TFEU. However, it is well known that the

willingness of national courts to comply with that obligation varies among Member States [168] and even among

branches of the national judiciary. Therefore, the Courts jurisprudence on matters of harmonized tax law is far

from comprehensive.

Finally, the ECJs eight chambers are competent not only for the interpretation of harmonized tax law, but indeed

they are responsible for interpreting the entire and still expanding body of primary and secondary Union law.

Even though some competencies but not in tax matters have been delegated to a second EU tribunal created

in 1988 (the General Court, formerly Court of First Instance) in order to relieve the ECJ from its increasingly

heavy workload, the ECJ still has been confronted with between 550 and 600 new proceedings annually in

recent years, or around 70 per chamber. The Court therefore encourages national courts to refrain from referring

when there is no serious doubt as to whether an ECJ precedence may be applied in the case at hand or when

the correct interpretation of the rule of law in question is obvious. [169] In other words, there may be doubtful but

not seriously doubtful questions of interpretation that never reach the Court.

1.3.1.2. Avoidance of international double taxation

To the extent that the substantive rules of EU tax legislation are designed to avoid international double taxation

or unintentional double non-taxation such as, for example, the place of supply rules in the VAT System

Directive [170] it is particularly important to construe and apply these rules uniformly within all Member States so

that they may achieve their purpose. As is well known in international direct tax law, conflicting interpretations of

tax treaty provisions or conflicts of qualification when applying those provisions will frequently undermine the

treatys aim to ensure a balanced allocation of taxing rights without overburdening the taxpayer. These conflicts

and thus international double taxation or double non-taxation contrary to the objectives of international tax

coordination through EU directives are supposedly avoided with respect to intra-Union commerce by the

jurisprudence of the ECJ. Since the ECJ acts as a supreme supranational court vested with ultimate authority to

interpret the relevant concepts, its judgments have binding and harmonizing effect for all national jurisdictions

linked to the cross-border transaction at issue. [171]

Moreover, in the field of comprehensively harmonized tax law, and regarding VAT in particular, the Court has

repeatedly gone so far as to demand the abolition of international double taxation even in scenarios not

contemplated in the relevant directive. To this end, the Court has relied on the special prohibition of

discriminatory and protective taxation of imported goods, [172] as well as on the acknowledgement that the

prevention of international double taxation is one of the fundamental objectives of the harmonization of VAT.

[173] While the latter line of reasoning is certainly more convincing than the former, which may lead to

inappropriate taxation of consumption based on the origin principle rather than on the destination principle, [174] it

is nevertheless remarkable that the ECJ is endeavouring at all to coordinate the tax claims of Member States

beyond the explicit provisions of the Directive. The Court also shows sufficient deference to the political primacy

of the Union legislator by pointing out the provisional character of the indeed not so convincing allocation

rules established by its jurisprudence. [175]



Obviously, the legal and factual restraints of the Courts contribution to international tax coordination in the field

of harmonized taxation that have been discussed above apply in the context of the avoidance of double taxation

as well. The Courts opportunities to resolve potential jurisdictional conflicts that arise because the relevant

taxing power allocation rules in a directive are implemented or interpreted differently across Member States may

be even scarcer. Since it takes years to obtain a ruling of the ECJ after the completion of a disputed transaction,

business will a priori tend to avoid transactions that might foreseeably give rise to double taxation. Moreover, it

must not be overlooked either that the Court has occasionally and inconsistently tolerated international

double taxation as a consequence of a lack of full and comprehensive harmonization; [176] and it has recently

even backed away from resolving an apparent conflict of qualification with respect to a fully harmonized concept

of VAT. [177] Notwithstanding these reservations, however, the Courts role in the coordination of potentially

overlapping tax claims of the Member States is certainly more constructive in harmonized than in non-

harmonized fields of taxation.

1.3.1.3. Standard-setting through general principles of EU law and fundamental tax principles

The European directives on taxation are not all-encompassing; they do not constitute conclusive codifications

that cover all substantive and procedural aspects of a certain type of tax. This is obvious in the field of direct

taxation where the existing rudimentary directives do not pretend to establish a common, internationally

approximated system of taxation, [178] but instead merely address selective issues where a lack of coordination

caused particularly severe distortions of competition or tax fraud opportunities in the past. But the levy of

harmonized indirect taxes is not entirely streamlined by European secondary law, either, even though the indirect

tax directives represent a more comprehensive approach towards modelling the tax system as such. Member

States sometimes have the option of derogating from the standard rules of the directive, they may introduce

optional special regimes or keep certain national rules as transitional regimes, [179] and some aspects of indirect

taxation are only broadly approximated or not harmonized at all, such as tax rates or tax procedure.

However, the Court has clarified that in conformity with its settled case law in other areas of harmonized law,

Member States may not exercise their discretionary power in an arbitrary fashion. The constraints formulated by

the Court go beyond the limits imposed on the Member States sovereign discretion in non-harmonized parts of

their national tax systems by the four freedoms and the prohibition of State aid: Member States and especially

national parliaments are subject to review of the conformity of their acts with the Treaties and with the general

principles of Union law, when national rules fall within the scope of Union law as measures to implement the

law of the Union. [180] Based on these premises, the Court has carried out a rather strict scrutiny of observance

of these principles when Member States make use of options granted by EU tax directives, when they flesh out

framework provisions contained in a directive, or when they enact procedural, enforcement and punitive rules in

the context of harmonized taxation. The most relevant general principles relied on by the Court to limit the

remaining sovereign powers of the Member States have been the principle of proportionality, the equality

principle and other fundamental rights, the principle of legal certainty and its corollary, the principle of protection

of legitimate expectations. [181] With respect to all these principles, the Court has applied a stringent standard of

review, especially if compared to the more lenient approach towards acts of EU legislation. The ECJ has

furthermore developed a so-called general principle of prohibition of abuse of law to be respected by Member

States also when they implement or apply harmonized tax law. [182] By way of this quasi-constitutional control of

national legislators, administration and courts based on general principles of Union law, the Court has

established certain minimum standards in areas of harmonized tax law that are characterized by a remaining

margin of sovereign discretion of the Member States. In doing so, the ECJ has further approximated harmonized

national tax systems even beyond the scope of positive integration and has thus enhanced the creation of a level

playing field within the internal market and tax coordination between Member States.

Besides these general principles, the Court has also invoked the principles of effectiveness and equivalence as

additional requirements to be observed by Member States with respect to tax administration procedures [183] and

tax litigation procedure. [184] The principle of equivalence is less relevant from the point of view of international

tax coordination, since it requires that procedural rules applicable in a Union law context must not be less

favourable for taxpayers than those governing similar scenarios under non-harmonized domestic legislation.

However, minimum standards throughout the Union are again promoted by the principle of effectiveness, which

stipulates that national procedural rules must not render virtually impossible or excessively difficult the exercise

of rights conferred by Union law. [185]

Finally, the ECJ has elaborated fundamental principles of substantive taxation with respect to the indirect taxes

that are comprehensively harmonized by Union law, i.e. for those taxes that are covered by directives aimed at

aligning an entire tax system of Member States rather than coordinating isolated aspects. Member States are

required to respect these principles when they exercise their remaining legislative discretion or when they apply

the national laws that implement the European directives on indirect taxation. [186] In particular, the Court has

demanded that VAT and excise tax rules must, in principle, guarantee neutrality of taxation for business. [187] The

most important corollaries of this principle are the principle of equal conditions of competition that are undistorted

by the harmonized taxes [188] and the requirement that in a multi-stage tax such as VAT taxable persons not

acting in their private capacity must be relieved from any input tax burden. [189] Moreover, the ECJ has

established the principle that the final VAT burden must correspond to the expenditure of the final consumer,

since VAT is a tax on consumption. [190]



The aforementioned fundamental guidelines are also instrumental in effectively streamlining and thereby

coordinating the respective national tax systems. However, it is necessary to point out that the ECJ is not a tax

court and it does not even have a chamber that is specialized in tax law. Hence, its judges are, in general, not

too familiar with legal and economic debate on concepts of tax justice, equality of taxation, optimal taxation, or

with scholarly discussion of the ensuing framework of principles that should underlie indirect taxation in

particular. There is thus a certain danger that the Court will shape the fundamental principles of substantive

taxation more from an integrationist or internal market perspective than from the point of view of their impact on

final taxpayers, as evidenced by the dominance of the neutrality principle in its jurisprudence. [191]

1.3.1.4. Streamlining and restraining constitutional control

As early as 1970 the ECJ held that secondary Community law enacted by the (then) EEC institutions must not be

subject to judicial review based on national constitutional law. [192] For the sake of an equal and uniform

application of EU law, the constitutional control of secondary law will instead be carried out exclusively by the

ECJ [193] and the standard of review will be primary Union law. In particular, the ECJ will test the conformity of

secondary EU law for its compatibility with the individual rights enshrined in the Charter of Fundamental Rights of

the European Union and with the general principles of Union law such as legal certainty. [194] Moreover, the

Court has by now clarified that the Union legislator must also respect the free movement guarantees of the

Treaty. [195] In a similar vein, the ECJ has recently held that a national provision which merely transposes the

mandatory provisions of a European Union directive cannot be subject to national constitutional review; instead,

the ECJ will carry out a constitutional scrutiny of the underlying provisions of the directive based on primary EU

law requirements. [196]

As a consequence, the constitutional standards for the levy of taxes within the EU will be streamlined by the ECJ

in so far as national taxes are harmonized by European directives. Obviously, this centralistic approach towards

constitutional review preserves the integrity of EU legislation and prevents uncoordinated derogations by single

Member States. [197] In theory, it also provides the Court with the opportunity to substantially advance tax

coordination between the Member States. By specifying and enforcing the tax-specific requirements of the

equality principle and other fundamental rights and general principles of EU law, the Court could and indeed

should establish a constitutional framework for future amendments of EU legislation on taxation. The Court could

thus raise the standards of tax fairness and equality as well as neutrality of taxation, and ensure proportionality of

compliance costs and risks, throughout the internal market and thus positively influence the very substance of

tax coordination between Member States.

But so far, this has been a lost opportunity. Admittedly, the ECJ has elaborated on some tax-specific implications

of fundamental rights and general principles of EU law. A striking example is the Courts acknowledgement that

in the area of indirect taxation, the principle of neutrality is the reflection of the equality principle, [198] the latter,

of course, being binding also upon the Union legislator. However, and contrary to its rigid review of national

measures, the ECJ practises a very lenient constitutional scrutiny of secondary EU law on taxation; indeed, no

provision of a tax directive has ever been held to have been enacted in breach of primary law. Of course, the

Court should be mindful of the institutional balance of the Union and show deference to the Union legislator by

having recourse to reconciliatory interpretation of secondary EU law whenever this is possible without

contradiction to established methods of statutory construction. [199] But to the extent that such a solution is not

feasible, [200] the ECJ so far has failed, with respect to tax legislation, to deliver its promise to act as a substitute

organ of constitutional review in the place of national constitutional courts which have been barred from such a

review by the very Courts own jurisprudence. [201] This judicial control deficit has materialized in certain patterns

of the ECJs jurisprudence.

Occasionally, the Court has explicitly held that eventual infringements of a fundamental right in the case

concerned, the equality principle constituted a consequence of a deliberate choice on the part of the

Community legislature, [202] without raising any objections as to this choice. In other instances, the ECJ has

defended a lack of tax neutrality or other inequalities in substantive taxation or in tax procedure by pointing to

certain shortcomings of other elements of secondary law that inhibited a more neutral or fairer tax regime. [203]

Obviously, such an approach is inadequate, because the Union legislator itself is responsible for the secondary

law imperfections cited in its defence. In a similar vein, an isolated option to derogate from a comprehensively

harmonized tax system that would inevitably lead to unequal taxation has been veiled by the Court as an

inevitable consequence of the progressive nature of the harmonization process. [204] In fact, such reasoning

amounts to sugar-coating phoney compromises during negotiations between Member States, [205] and it also

leads to apparent contradictions in the Courts case law. When a directive grants Member States the option of

implementing and fleshing out entire tax subsystems such as VAT grouping regimes, any Member State making

use of the option will be held accountable for a lack of equality or neutrality by the Court, even though the

harmonization process has progressed less in these scenarios than in the case of an isolated derogation from

the directive.

But most often, the Court has tacitly lowered its standard of review, so that European legislation on taxation will

pass the test of primary Union law compatibility. In particular, the Court has frequently relaxed its proportionality

requirements as compared to the stricter approach towards national legislation. For instance, the Court has

accepted generalizing presumptions of abuse in the Parent-Subsidiary Directive that would have been rejected if

implemented by a Member State at its own discretion. [206] The ECJ has also consistently held that in a VAT

context, the principle of fiscal neutrality as a reflection of the equality principle requires deduction of input tax to



be allowed if the substantive requirements are satisfied, even if the taxable person has failed to comply with

some of the formal requirements set up by a Member State. [207] By contrast, the Court has never questioned the

rigidity of the formal requirement of certain particulars on the invoice set out in the VAT Directive as an

indispensable precondition for the exercise of the right to deduct. [208] And recently, the Court has held that a

restriction of the freedom to provide services that is caused by a provision of the VAT Directive could be justified,

inter alia, by the objective to spare the tax authorities administrative difficulties. [209] Compare this to the settled

case law according to which administrative difficulties cannot justify a restriction of fundamental freedoms in the

context of non-harmonized national taxation. [210]

There is no valid reason why the discretion of the Union legislator in a given policy area should be broader, and

the standard of constitutional review correspondingly more relaxed, than that of the individual Member States in

that same area. Since the Court convincingly does not see fit to apply the minimalist and indeed

unsatisfactory manifestly inappropriate test that it sometimes refers to in areas which involve political,

economic and/or social choices [211] as standard of review for national measures regarding particular aspects of

harmonized taxes with respect to which Member States still enjoy discretion, the Court should also apply a strict

level of scrutiny when testing secondary EU tax legislation.

It is acknowledged that the present state of affairs offers an incentive for Member States to coordinate their

individual interests in safeguarding certain problematic features of their national tax regimes and to transpose

them into European tax legislation. A cartel of Member States might be able to bend the European constitutional

rules if the Commission that has the exclusive right to make legislative proposals supports them for the sake of

progressing with harmonization. Moreover, the Courts biased judicial restraint also helps to stabilize the existing

body of harmonized law on taxation. This could be regarded as a contribution to the persistence of tax

coordination between the Member States in a policy field where progress is hard to obtain due to a unanimity

requirement. However, in the authors view insufficient respect for human rights and general EU law principles is

too high a price for a Union that claims to be built on these very values. [212]

1.3.2. Some tentative conclusions for EU tax policy

The above analysis permits some tentative conclusions as to how the Commission could further enhance the

Courts positive role in coordinating the harmonized parts of Member States tax systems. The Commission could

tax coordination between eu

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