The Contested Areas of National Tax Policy With EU Law

The Contested Areas of National Tax Policy With EU Law Presented by: Dr. Károlyi Date: 15 February 2024 Agenda - Compatibility issues of turnover taxes with various legal regimes • Progressive turnover-based business taxes  Characteristics of those taxes  Compatibility with fundamental freedoms  Compatibility with State aid rules - Tax rulings related to transfer pricing treatment • Rationale of transfer pricing rules • Challenges by the Commission and its main arguments • Approach of the CJEU Special Sectoral Taxes - Store retail trade - Energy - Telecommunication - Digital services taxes Compatibility With Fundamental Freedoms - CJEU Judgment - Disadvantage: higher level of average tax rate for high-turnover enterprises → what kind of correlation is required between the distinguishing criterion (level of turnover) and the prohibited distinguishing criterion (foreign ownership)? - Ability to pay principle • Main question: Can it also apply in the context of progressive turnover-based taxes? • Court: level of turnover is a neutral criterion of differentiation and it also constitutes a relevant indicator of a taxable person's ability to pay → no comparability - Quantitative outcome is a matter of chance→ • Actual tax burden falls on foreign-owned enterprises because of the market situation (same would occur in the case of proportional taxation) →Progressive rates do not inherently discriminate • „The fact that the greater part of such a special tax is borne by taxable persons owned by natural persons or legal persons of other Member States cannot be such as to merit, by itself, categorization as discrimination. [...] that situation is due to the fact that the Hungarian telecommunications market is dominated by such taxable persons, who achieve the highest turnover in that market. Accordingly, that situation is an indicator that is fortuitous, if not a matter of chance [...]" Vodafone-case, para. 52 - Majority rule versus inherent correlation / discriminatory intent State Aid - Core of fundamental freedoms and State aid provisions is the same: non-discrimination - Two sides of the coin → unfavorable treatment for one group (high-turnover, foreignowned enterprises), advantage to the other (low-turnover enterprises) - No indirect discrimination issue: the State aid rules do not only prohibit distinction based on nationality but all sort of advantages if granted selectively - Similar question to the one in fundamental freedom analysis • Does the different level of turnover indicate different ability to pay, thus rendering low turnover undertakings incomparable to high turnover undertakings? Commission's Pleas: - 1) progressive rate structure does not form part of the reference framework - 2) comparability of undertakings cannot be examined in light of a non-fiscal objective - 3) justification of a prima facie aid measure by an objective (redistribution) that is not/intrinsically linked to the measure is not possible ECJ Judgment – Progressive Tax Rate Structure - Emphasis on the tax sovereignty of Member States • In the lack of harmonization, MSs are free the establish their tax system as they deem most appropriate • Application of progressive taxation is in the discretion of the MS, just like designing any other characteristics of the tax provided that this discretion is exercised in conformity with EU law • State aid rules does not prohibit the application of progressive tax rates in principle to take into account the ability to pay of the taxpayers • Such a progression can also based on turnover (and not only to counterbalance externalities)  Amount of turnover is a neutral and relevant indicator of the ability to pay  Even if profit might be a more precise indicator, it is irrelevant from a State aid perspective which only prohibits the granting of selective advantages, i.e. discrimination - Unless there are manifestly discriminatory elements → must be proven by the Commission • Gibraltar-case: manifestly discriminatory tax system  Choice of tax criteria resulted in favoring offshore companies and it was inconsistent with the objective: general corporate taxation • Simply prevented abuse of the Member State purported by way of a manifestly inconsistent design - Conclusion: reference framework: the advertisement tax in itself, including the progressive tax rates Rationale Of Transfer Pricing Rules And Cases - 70% of international trade takes place between associate enterprises • Controlling interest belonging to the same group benefit at group level and their interests coincide they want to achieve the greatest • TP rules: these intragroup-transactions must be treated for tax purposes as they had been concluded between independent parties as if market price has been applied  ALP - arm's length principle  OECD TP Guidelines - non-binding - Tax rulings: as a tool for legal certainty: the tax treatment of a future transaction is confirmed by national tax authorities - The challenges of the Commission following LuxLeaks scandal • Apple, Amazon, Starbucks, Fiat/Chrysler etc. always concluded that State aid was granted Apple Structure ΑΟΙ - Holding activity - No physical presence, 0 employee 3 directors, meetings in the US Assets (cash) kept in US banks • Source: dividend income from subsidiaries (USD 30 billion within 3 years) • Overall tax liability: USD 0  No tax residency anywhere:  US: place of incorporation  Ireland: place of effective management and control ASI: - Incorporated in Ireland and tax resident nowhere - 0, later 250 employees worked at the branch in Ireland Check-the-box rule: - Check-the-box rule: the companies are „looked through" subsidiaries of AOI for US tax purposes→ as if they formed a single entity - Outcome: transactions between these group companies (dividend distribution, royalty payments) are ignored→ treated as if AOI received income from sales from the final customers → active business income→ Subpart F (CFC rule) is not applicable Final result: - Apple's effective tax rate in the US: 20% - Foreign effective tax rate: 2% - - • Ireland: less than 1% • UK: less than 2% • DE, FR: 0% Income (within four years): • ASI: USD 75 billion • ΑΟΙ: USD 30 billion Cash stashed outside the US: • USD 145 billion Commission: - Ireland granted unlawful State aid to Apple in the form of decreased tax burden by means of advanced pricing agreement (EUR 13 billion) - Exclusion approach: Apple IP licenses should have been allocated to the Irish branches instead of their artificial allocation to non-resident Irish subsidiaries as no relevant functions were performed by the head offices - Profit allocation argument: wrong method and technical application of ALP deviated from the ALP as interpreted in the light of the TP Guidelines General Court ruling - Annulled the Commission decision reference framework must be determined in the light of the applicable domestic rules + no manifest error in the determination of the ALP • - → Appeal to the ECJ Expected results: • ECJ is likely to uphold the GC's judgment → Fiat judgment points to this direction • Very low added value activity in Ireland at group level reasonable to allocate low profit there • Problem: due to mismatches in the domestic rules, huge income was allocable nowhere taxation nowhere real economic activity in the US this structure was used primarily to avoid US taxation and not Irish tax Fiat Judgment - Tax ruling on the pricing of Intra-group financing and treasure activities • How much profit can be allocated to this Luxemburgish financing company for tax purposes? • Estimated level of remuneration with reference to a percentage of a hypothetical, regulatory capital - ECJ • An abstract, autonomous ALP is not inherent in Art. 107 TFEU • only the national law applicable in the given Member State could be taken into account for determining the reference framework • only national transfer pricing rules should have been examined and without reference to an abstract ALP • mere inaccuracies and methodological inconsistencies in the applied transfer pricing method were hot sufficient to prove the existence of State aid. • OECD TP Guidelines  Does not bind the Member States  Even if it incorporates some sort of international consensus on taxation of associated enterprises, the given transactions could only be examined in the light of national provisions Conclusions Waves of cases with seemingly different approach by the CJEU - Currently: More deference to the tax sovereignty of Member states • Fundamental freedoms: stricter interpretation of indirect discrimination inherent discrimination? • State aid:  Reference framework is primarily determined by the Member States themselves accepted both in the case of turnover taxes and transfer pricing rules o No hypothetical or external reference framework can be determined by the Commission  If no derogation: de facto selectivity only in the case of manifest discrimination → very heavy burden of proof is placed on the Commission - Commission is losing in all of the important cases • But! Raised awareness of extremely low taxation of some companies and harmful tax competition • Catalysator to the successful harmonization processes of the last decade?  ATAD, GloBE, BEFIT?