1. The Balanced Allocation of Taxing Powers in EU Law
Marcel Schaper LL.M M.Sc
Junior Researcher, Maastricht University
Ius Commune Conference 2009
Workshop Tax Law, 26 November 2009

2. Introduction – Literature Review
No preferred interpretation of BAOTP in literature
Inter-personal equity
Inter-nations equity
Tax Avoidance/Evasion
Loss of tax revenue
Jurisdictional/territorial coherence
Jurisdictional comparability
Double relief / advantages

3. Research questions
What is the ECJ’s interpretation of the concept of BAOTP?
How does that interpretation fit into the constitutional system of EU law?
BAOTP as argument within the limits of negative integration
BAOTP as justification of private right infringements
BAOTP compared to other justification grounds

4. Method Social Network Analysis Legal analysis
Case law as network of precedents
Citations to precedents in judgments
Legal analysis
Interpretation of evolution of conditions for applicability following evolution of precedent
Method of distinguishing of precedent
Conceptual analysis
Common Core in precedent
Coherency

6. Preliminary findings BAOTP is:
Protecting the legitimate competence of Member States to levy tax
On income generated by activities undertaken in their territory
Only if that claim is asserted against all taxpayers in a consistent, systematic and non-discriminatory manner
Necessary, suitable and proportionate
Or by combating wholly artificial arrangements not reflecting economic reality, set up by the taxpayer to avoid/evade tax normally due in that Member State

7. Preliminary findings BAOTP is NOT:
Protecting the balanced allocation BETWEEN Member States
No trade-off or reciprocity element of inter-nations equity
Protecting the tax revenue
Opposed to protecting the general competence to tax
Carve-out for territorial tax systems
BAOTP specifically obliges to take into account extra-territorial activities

8. Constitutional fit of BAOTP
Not an external validation of private right infringements (OROPI)
Cf. Effectiveness of fiscal supervision, public health and safety
But, an intrinsic limitation of the right to free movement
Disadvantages from allocation of tax powers, versus
Beyond scope of free movement rights
Disadvantages resulting from the tax powers so allocated
Within scope of free movement rights

9. Framework of Constitutional Analysis
Step 1: is there a facial restriction?
Strict interpretation of private free movement rights
Step 2: What would the consequences be if EU law would eliminate the restriction?
Intrinsic limitation of free movement based on BAOTP
No right to double advantages
Losses cf. Marks & Spencer
Ability to pay cf. Schumacker
Step 3: If restriction is within scope of private right, is there an external justification of restriction (OROPI)?
For example, effectiveness of fiscal supervision

10. BAOTP as protection of source state capacity?
Discussion
BAOTP as protection of source state capacity?
Intrinsic limitation or external justification?
Negative integration cannot negate a Member State’s competence  intrinsic?
The competence in itself is an overriding reason of public interest  external?

11. Application – Case C-337/08 X Holding
Obligation of extra-territorial effect of fiscal unity?
General exclusion of non-resident subsidiaries
Specific inclusion of NL PEs of non-residents
Step 1: Difference based on place of establishment
YES, general exclusion
Difference in law
Cf. AG Kokott, para 29

12. Internal Legitimacy
Does NL have a right to tax the income of the BE sub?
Relation between DTC and national law
NOT a question of EU law
If yes
No a priori problem with including a non-resident subsidiary in a fiscal unity
Comparability within the scope of competence
If no
Disadvantage results from allocation of tax powers?

13. Competence of NL to tax a company established in BE
Internal Legitimacy
Competence of NL to tax a company established in BE
NO competence
7(1) DTC  exclusively Belgium
“latent” competence (Hoge Raad case law)
7(1) DTC  attribution of subsidiary assets and income to parent
7(1) DTC  Assets and income subsidiary = PE of parent (fictitious?)
7(1) DTC  Shared jurisdiction
23 DTC  Exemption (with recapture)

14. Nature of disadvantage
Group effective tax rate
Also on purely domestic income
ETR Disadvantage = cash flow disadvantage loss relief
Group income consolidation
Inter-entity income equalisation
= loss relief disadvantage
Elimination of inter-entity transactions (income)

15. Exclusion of non-residents
Purely domestic income is treated differently in effect
Higher ETR on income within taxation competence of NL
Different treatment of two resident parents based on p.o.e. of subsidiary
Different treatment of reorganisations and recapitalisations
Domestic: not taxable event (with FE)
Cross-border: taxable event (without FE)

16. Effect of obligatory general inclusion
Loss of tax revenue on domestic activity, with possibility to recapture
If BE has exclusive competence, then “no double advantages” may justify restriction
Cf. Lidl Belgium
Loss of competence on assets and capital transferred tax free abroad
i.e. exclusive jurisdiction to other MS according to DTC applicable
BAOTP may justify restriction
Cf. N.

17. Effect of obligatory general inclusion
Extra-territorial activities are taken into account to properly assess the tax burden due on income within taxing competence
General exclusion is discriminatory if NL has “latent” competence on BE subsidiary
Even discriminatory of NL has no jurisdiction?
Taking into account foreign losses does not render void any source state capacities
Only lowers effective tax rate = loss of revenue
Protecting taxing competence in reorganisations
General exclusion is suitable to obtain a legitimate purpose, but certainly not proportionate

18. Conclusion – Case C-337/08 X Holding
General exclusion is discriminatory in law and effect
Higer tax burden on income within taxing competence based on p.o.e. of subsidiary
BAOTP can theoretically justify mitigation of specific risks (reorganisations and transfer pricing)
General exclusion is disproportionate
No external justification (OROPI) proposed
Article 43 precludes Dutch system
NL IS NOT OBLIGED TO IMPORT LOSSES OR EXTEND ITS JURISDICTION BEYOND DTC!