Globalisation of world trade is characterized by progressive liberalization and regulation of trade between states and by the formation and expansion of multilateral trade cooperation bodies, such as the World Trade Organization (WTO), the Organisation for Economic Cooperation and Development (OECD), the European Community, NAFTA and Ecosur. Taxation, which still is a largely national sovereignty, particularly in direct taxes, may conflict with these organisations’ objectives, especially as regards to free movement of goods, services, persons and capital.
The free movement rights enshrined in the treaties founding these organizations, and the standards set by them in hard law (e.g. EU-directives) and soft law (e.g. recommendations) have their impact on national taxation. This also applies to bilateral tax treaties concluded between states. Although bilateral tax treaties can also be considered an expression of tax sovereignty, at the same time they limit the tax jurisdiction of the contracting states. European law especially limits the (tax) sovereignty of Member States.
Globalisation and free movement rights have as a consequence that goods, services, persons and capital can move faster and to more destinations. On the one hand, this gives rise to the prospect of taxpayers trying to relocate their tax bases to jurisdictions with lower taxation, or to have them ‘disappear’ by international mismatches. States take all kinds of measures to protect their tax base. On the other hand, relocation of the taxpayer leads to ‘tax competition’ arising between states. Member States endeavour to make various aspects as attractive as possible, by introducing special regimes, low rates and certainty about the tax position in advance for example.
The aim of this research project is twofold: (i) to establish the limits on national tax sovereignty and tax jurisdiction set by international and supranational law, and (ii) to assess whether these limits should be narrowed or broadened on the basis of criteria such as level playing field, interjurisdictional equity, free movement of persons and capital, budgetary stability, tax base integrity and fair interstate policy competition. The emphasis in the research program lies on European law in light of its major influence on national and bilateral tax law in the EU. In this respect, a distinction is drawn between the impact of the EU Treaty freedoms (theme 2) and the impact of the various harmonisation measures in the area of tax law within the EU (theme 3).
Double taxation treaties can be considered an expression of tax sovereignty. By concluding tax treaties, the states can limit and allocate their tax jurisdiction. In some states (for example in the United States, Canada, Germany and Denmark), this limitation and allocation of the tax jurisdiction can be unilaterally overridden by national law (tax treaty override). Tax treaties are generally bilateral and provide for the avoidance of double taxation on income and capital, or on inheritance and gift tax. Theme 1 focuses on the bilateral tax treaties for the avoidance of double taxation on income and capital. These treaties are generally concluded on the basis of the model convention issued by the OECD. On the basis of a bilateral tax treaty, the state of residence of a taxpayer has the obligation, generally, either to exempt the income or capital which may be taxed in the state of source of the income or capital, or to credit the tax of the state of source, in situations where the state of source is allowed to tax the income or capital under the treaty. Research theme 1 will explore the extent to which tax jurisdiction is limited by those treaties. Issues that will be researched include:
i) The status in public international law of the official OECD Commentary to the Model Convention and the relevance thereof as a means of interpretation of treaties following the Model Convention;
ii) The relevance of national law of both states party to a bilateral treaty, both anterior and posterior law (i.e. prior to or after concluding the treaty, respectively) for the interpretation of these bilateral tax treaties;
iii) The relevance of justified expectations of both the contracting states and their residents for the interpretation of these bilateral tax treaties;
iv) The possibility to fight treaty abuse by taxpayers (the doctrines of fraus conventionis or fraus tractatus);
v) The phenomenon of tax treaty override.
Tax sovereignty is limited by EU law. As regards to direct taxes (e.g. income tax and corporation tax) this is predominantly due to the EU treaty freedoms. Although the tax sovereignty of Member States in the field of direct taxation is in general recognised by the European Court of Justice (ECJ), the ECJ case law has a huge impact on direct taxation. Research theme 2 will explore the extent to which the tax sovereignty is limited by the EU treaty freedoms. Issues that will be researched include:
i) The issue whether and under which circumstances it may be prohibited to grant differential treatment to taxpayers of various Member States (‘most favoured nation tax treatment’ within the EU);
ii) The influence of the EU treaty freedoms on the prevention of double taxation;
iii) The influence of Community law on the tax treatment of a permanent establishment (i.e. a branch of an enterprise in another Member State) as compared to a resident company;
iv) The correct balance between free movement within the EU and the right to levy tax, especially as regards to the following questions:
Disparities between national tax laws are an impediment to the common market. These impediments may be removed by positive integration. This has been done in the area of indirect taxation (e.g. VAT). There are, however, only a few harmonisation measures in the field of direct taxation. Research theme 3 will explore the correct scope and interpretation of the various EU-directives in the area of direct and indirect tax law, including the interpretation of the sixth VAT Directive, and the interpretation of the various directives in the area of direct taxation (the Merger, Interest and Royalty, Parent-Subsidiary and Savings Directives). Furthermore, this theme will assess the (un)desirability of harmonization or uniformity of detailed areas of national taxation, such as Cross border loss relief facilities, treatment of real estate, Home State taxation, Common Consolidated Corporate Base taxation, EU profits tax, and dividend tax.
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