TAX HARMONIZATION VERSUS TAX COMPETITION:A VIEW FROM THE PERIPHERY

J. L. SALDANHA SANCHES (I)

A política fiscal portuguesa atravessou diversas fases. Mesmo não tendo a existência destasfases correspondido a um objectivo pré-determinado, podem ser identificadas nas posiçõesportuguesas assumidas na Comunidade Europeia e na OCDE. São essas fases e as suasrazões que procuremos identificar de forma sintética.

Portuguese foreign fiscal policy has gone through various different phases. Even if therewas no set purpose in the exístence of such various phases, such existence may be detectedin the positions expressed by Portugal both in the European Community and in the OECD.We shall seek to synthesize such various phases and the reasons behind thern.

ÍNDICE:

I. The revenue safeguarding phase. 2. The holdings from Madeira and Portu-guese fiscal policy. 3. The ECl and the specific anti-avoidance provisions. 4. Thedual income tax: [rom the taxation of capital to the optimization of capital flows.5. A Common Consolidated Corporate Tax Base (CCCTB).

1. THE REVENUE SAFEGUARDING PHASE

ln the negotiation of the double taxation treaties which Portugal has entered intosince the 60s (when the Portuguese economy opened up to the exterior), there weretwo main aspects to its external fiscal policy.

The first was to attract foreign capital by means of a low taxation and a policyof fiscallbank secrecy. This goal led to the formulation of a reserve in the Com-mentary to the "Model Tax Convention" regarding lhe exchange of information, suchreserve having determined a policy which made it difficult to enter into some treaties (2).

(I) Lecture delivered at the "Intemational Conference: Europeanizing Company Taxation Towardsa Common Consolidated Tax Base? - Reality Check in the EU Member States", organized by theFriedrich Ebert Foundation.

(2) M. MARGARIDAMESQUITA,As Convenções sobre Dupla Tributação (Lisboa: 1998), 48-49and 343. criticizing this measure being maintained.

Fiscalidade 35

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111'1which wax not vcry COlIl'ICll1. 1':""11 11;1 ,';1111'1"ali" S('('Il'('y ,';y"II'111 would prevent1111'jllIlvidillg of inforrnation on dl'jHIsits to IHlIll'CsidCIlIS, sue.h deposilS wcrc taxcd inI', 11III!';J!, which made ir impossiblc for such bank sccrccy to attract capital.

l lowcver, the policy of maintaining fiscal and bank secrecy was only abandoned111111't imc 01' lhe negotiation of the Savings Directive (4), which was partial1y con-lill"'tI during the second Portuguese presidency of the European Union. The much

"" hroad conception of permanent establishmeru disappeared from internal Portu-'11(':,,' kgislation following a revision of the then current policy.

As rcgards the provisions intended to attract revenue, it took quite some effort toI;I\',' I 'ortugal surrender to the home state taxation principIe adopted by the "parent com-',1111(','"controlled companies" Directive (5) (Portugal having managed to postpone its'I'plll';llion) and it resisted the Directive on interest and royalties (6) for as long as it\,1', ;1"1c to, In this phase, however, its resistance was only to the loss of revenue, as111'1"was already an openness as regards European tax harmonization.

.. TirE HOLDINGS FROM MADEIRA AND PORTUGUESE FISCAL1'(HJCY

As a distorting factor of Portuguese foreign tax policy there is the creation of the'I\hl,'ira Offshore", which was clearly a regional imposition to central power, expli-,II1/t' only hy Madeira's electoral importance in Portuguesc political life.

Thc "Madeira Offshore" started off as an industrial area, but with no success. The1I111/,;llliL'Scornprised in such offshore either cxisted only for as long as they would,'. ,'IVt' subsidies 01' were companies already in the region prior to the creation of the,'\I' :,YSIL'Jl) of taxation (beer producers, concrete).

TIIt' ncgotiation with Brussels of permission for the Madeira Offshore to move tolu IlIla 11L'ial arca represented therefore a mad headlong i1ight. Instead of ind ustries,

I'1 ()I' llil' rnanner in which such concept was dealt with in Portugucsc tax legislation, seeMANl:ELA" ",11 1\111(;\,;\ Dctcrminaçâo do Lucro Tributável do Estabelecimento Estável de Não Residentes (Coim-" '1111/),,',' 27,

111 ('olllll:il Dircctivc 2003/48/EC, of 3 June 2003, on the taxation of savings incorne in the formI 111""",1 I'''YIIIl'11Is,transposcd to the national legislation by Dccrce-Law 110,62/2005,01' I l th March.

I') (ruuuil l rircctivc 90/435/EC, 01' 23 July 1990, on lhe common systern 01' taxarion, applicablc, 11u- , ;,.,,' 01 p.m-nt companics and subsidiaries 01'differcnt Mcmber Statcs.

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I". ',t'l til rlouhlc taxauon convcntioux cntcrcd into by Portugal - of course, while such, 11111"'111i()IIS wcrc not dcnounccd, as was thc case with Brazil and Denmark, and pro-I ,,"'d IIIl' wording 0/' thc convcntion did not preclude its application, as happened at111',1\\11111thc agrccments entered into following the creation of the Offshore (1),

TIIl' aims 01' the amcndments to the system were not, however, achieved. TheI' ,'III:llioll of thc Offshore was a result of the pressure exerted by the Madeira Regio-u.i] ( .ovcrnmcnt on the Ministry of Finance which led to such regulation not having1""'11 .-arricd out so as to maximize the advantages to Madeira of creating such tax pri-1dt')'(' xystcm. For example, it is not demanded that the companies located in thet\bd('ira Offshore" have a permanent physical corpus in the Region.

lunhcrmore., the "Madeira Offshore" was a very poor instrument for the tax, .unpctition it was intended to achieve. This was due to having come into existence,IIII'J Illal1y other financial centres and to its unfavourable geographic location.

Thc main advantages ended up being to the benefit of Portuguese banking insti-

1IIIItlllS, For a long while, the companies located in Madeira benefited from an admi-1Il',ltalive understanding which allowed significant fiscal benefits from the simple for-III,tI displacement of financial flows to the Region. When such understanding changed,

1111'«ompanics were shut down.It should be noted, however, that the existence of the "Madeira Offshore" crea-

1".1 ;1 tcndency towards tax competition in Portuguese fiscal policy. It was the Euro-11l';1I1Commission that, from the year of 2000, limited the establishing of new com-1,;lIlics in Madeira, At present, however, the joint influence of the need to increaseI"I/Jlic rcvcnue and the taxation of the banking sector, and Madeira's loss of political1It1ll1l'I1Ceresulted in this region being less important than it once was as regards Por-

111)'IICSCforeign fiscal policy.

,\. TIIE ECJ AND THE SPECIFIC ANTI-AVOIDANCE PROVISIONS

Up until now, the decisions of the European COUlt of Justice only touched minor

(111clcarly archaic) issues conceming the Portuguese fiscal systern.'l'hc MODELO, SGPS, SA (8), MODELO CONTINENTE, SGPS, SA (9), and

(I) On its functioning, see RICARDO BORGES, A Zona. Franca da Madeira entre a Isenção e a Eli-,,,,, 11111 Contributo por« (I Estudo do Direito Tributário Internacional Português, Biblioteca da FDUL,I \,1I';, ÁIIII'KIO X» VII:R, Dirrito Tributário lnternacionali (Coirnbra: 2007), 563 ff.

(X) 1':<'.1I kl'isioll of 0>') S"plt'llIhl'r 1()')t), P. C-56/98 - MODELO SGPS SA VS, Director-Gerald••" "t')',i\IIIS " Nolariadll, 111111111;11y I,','s d"llIalldl'd for a puhiic dccd conccrning a sharc capital increase-.nu] :111;,111<',"11111'111111111<'101'(;111",••I :o J>lIl>liclilllill'tl <'IIl1lpally,

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111ali thcsc cases, the decisions of the ECJ did not question any c1efence mecha-111:;111(lI' lhe Portuguese fiscal system. Decisions such as the one in the Lasteyrie duSlIilllll1/ (11) case are also unlikely to have any consequences in Portugal due to theIllillO)' significance of the taxation of capital gains of individuaIs. However, the Por-11I!'1I1'Sefiscal systern, as the remaining European systems that do not want or that can-11l11opl for tax competition and for the race to the bottom, is also under threat by deci-:,fIIlIS xuch as the CADBURY SCHWEPPES (14) decision. In this case, it is not a:,pI'cilic Portuguese problem but the more general matter of knowing what the replywrl l I]L' lo the question asked a few years back: "Is tax [airness in Europe under,\I, ',1:/''1'' (1.1).

II tax competition regarding cornpany tax rates continues and the principie ofI"'I'dtllll 01' establishment is interpreted in accordance with the CADBURY SCHWEP-rt: 1';lse, we shall end up with fiscal systems in which, basically, only consumption.uu l II)('UIlIC from work are taxed. It will be impossible to tax both capital gains and, "lllp;lIl1CS.

Tax harmonization should, therefore, include the common tax base, but also the1I11111111l11llrate. Without the minimum rate, the only point of balance between thev.u iOllS European rates shall be the zero rate.

Also, Portugal shall end up having the same difficulty in keeping its numerous,';Ill'('ific anti-avoidance pravisions, since the ECJ has reaffirmed its hostility as11'!';JI'(ls lhe provisions of automatic application which do not imply the need for the'1';1\ Ádlllinistration to prove that there was an avoidance purpose on the part of the1;1.\ paycr. Ir cfid so, for example, in the Lasteyrie du Saillante (16) case and even111Illl' (';\/)BURY SCHWEPPES case, subjecting the application of the CFC rules

(10) J-:('.1Dccision of 21 lune 2001, P. C-206/99 - SONAE - TECNOLOGIA DE INFORMA-I ','\( I .'lA vx Direcção-Geral dos Registos e Notariado.

(11) 1':('.1Dccision of 8 June 2000, P. C-375/98 - Ministério Público e Fazenda Pública vs.1'1',';(IN 1':III{OI'EBV.

(I') I~('J Dccision of I I October 2007, P. C-443/06 - Erika Waltraud IIse Hollmann vs. Fazenda1'11101" '"

II ') I~('J Dccixion 01' 11 March 2004, P. C-9/02 - Hughes de Lasteyrie du Saillant vs, Ministêre,I.- 1·1·•.•uunuir-, dcx Financcs ct de l'Industrie

(11) H 'J Drcision of 12 Septcmber 2006, P. C-196/04 - CADBURY SCHWEPPES PLC c CAD-ru u: Y S( 'IIWI~I'I'I~S OVERSEAS LTD vs. Commissioners of Inland Revenue.

(I'.) ('lnsT/NÁ (iÁI('/A-IIt:RI(ERÁ/ PEDRO M. HERRERA, "Is tax fairness in Europe under siege?:;".lIl1'.h l.rw ;11111allli avoid.mcc provixions", EC Tax Review, Vol. 13 (2) (2004), 57-64.

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1.1\;t1111/1;1I('óI, whir-h radil'óllly alll'ls 111\' manucr in which rhcsc rufes are usu'1/'1"11'1/ (I I).

Tlu-rc may cvcn hc a changc in altitude by some Member States regarding( '1,( 's. IIlSIL~,\(1of rules intended to avoid company groups frorn placing their pl111low rux.uion arcas, we might start having rules intended to devoicf such finar:'I uupauics of their artificial nature. The States shall compete among themselves te,IIOSCIl as thc country for such companies' registered offices.

Thc COLUMBUS CONTAlNER SERV/CES BVBA & COo (18) case is yet ano«.tsc whcrc the ECJ wiU have to decide whether a measure unilateral1y taken by a cc!ly lo neutralize structures intended to encourage harmful tax competition are compawith European Law. It should be stressed, however, that if unilateral measures eIIi;tl is because tax competition is possible and because there is no agreement on rIil.ucral measures.

..•. THE DUAL INCOME TAX: FROM THE TAXATION OF CAPI1TO THE OPTIMIZA TION OF CAPITAL FLOWS

Portuguese fiscal doctrine has found support up until now in German doctlo defend a tax system having as its guiding light the ability to pay principle, wl'lllails a taxation at least equivalent between revenue from work and revenue j

capital. The creation of a dual income tax system, as was started in Scandinavia,Áustria, initially seemed a mere reaction to moderate the previous excesses in tIiOI1, considering the indisputable fact of the mobility of capital as a producI;)clor.

However, the stand taken at present by German doctrine with the new dualisIIIL~taxation of income seems to reflect to a great extent the victory of competitionharmonization (19), since the inevitability of taxing capital more favourably than .•IS accepted basecf 011 the argument that this kind of taxation will favour a more.icnt allocation of capital eo).

The existence of an agreement at the European levei on the minimum taxation(d' companies would probably allow an equal taxation of capital and work to be r:t.rincd. The differencing would result from the level of income (with its inevitable,';cquences on the ability to pay) and not frorn the nature of the income.

(I") STIJ'I\NWI\l.Ill'NS,"Stcucrn steucrn durch Prinzipalstrukturen: Ist naeh Cadbury Schweppe,1111'111rast alb Illiiglich·'''. ISII{ 11 (2007). Dcfcnding, prior to this deeision, the eompatibility o:w ill: 1-:(' l.aw, W, SI'IIIIIN. "('1'(, I.t'p,i.slalion anel Europcan Community Law", BTR; 4 (2001)

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S. i\ ('OMMON ('ONSOLII>A'J'Jt:1> ('Onp()I{A'n: '1':\:\ n:\,~I'; ( '( '( ''J'B)

Contrary lo what happcns with lhe discussion on lhe miuinuun 1;11,'otthc corporatctax in Europc, lhe common tax base already has a well-establ ishcd starting point: thcadoption of the IFRSIIAS. The deterrnination of lhe taxable profit based on the cor-rections to the tax balance sheet is the rule in continental Europe and, thus, the COIll-

mon rules 011 financial information are the starting point for the establishment of ruleson the definition of taxable profit - with a11 that this might entail as regards sim-plification.

Now, as is stated in the 2006 (21) document, the Commission does not intend toinclude the question of the rate in the discussion on the base. Thus, even though, aswe alI know, the quantification of the taxable profit can be affected both by the deci-sions on the base and by the decision on the rate, the existence of common rules onthe base wilI not prevent the tax burden from differing from country to country. Thetax rate is left out of the agreement - tax competition will continue to exist.

It is, in faet, likely that it even increases with the continuous arrival of newcountries. As is shown in a KPMG survey, there is widespread support aeross Europeto the simplification of rules, but not on quantifieation, which justifies the Commis-siori's caution. A more useful discussion thus lies in the relation between the finan-cia] information rules and the provisions for the determination of the tax base, and somefundamental principIes must be defined as regards this matter.

The Commission's last information (22) seems to accept that the financial infor-mation rules are not directly transposabIe to lhe tax balance sheet. It will be neces-xary to create specific rules for lhe tax balance sheet containing definitions based onn.uional accountancy and national rules for determining the tax base.

However, there is a difficulty here: the creation of specific rules and definitionsIor the determination of the deductible costs. For example, specific mies concerningprovisions,

Essentially, this corresponds to the problems of the Tax Administrations, who arenlways worried with the decrease in revenue and fearful that the much too broadrvIcrral to the IFRS/IAS might be a way to undermine their authority.

Ilowever, the rule of the predominance of the commercial balance sheet , eveniI it is just the continental systern and not the system of the whole Europeanl luiou (23), is probably the only way of unifying the principIes of company taxa-I ion iu Europe.

('I) C'ommisxion Communication no. 157/2006.(.'.') Counnission Cornrnunication no. 157/2006,13.('I) 'lln- (kgrL'l~. of divcrgcncc bctwccn thc two in the Unitcd Kingdom C<1I1Ill' S(TIIin ('IIIUSIIAN

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