Academic Year 2018-2019 Prof. Pietro Boria

1. European Tax Law The principle of Tax non-discrimination Academic Year 2018-2019 Prof. Pietro Boria

2. The principle of Tax non-discrimination – The centrality of the principle in the EU legal system • Articles 110-112 TFEU lay down the principle of tax non discrimination, prohibiting Member States to assume protectionist positions which would compromise the internal market, creating internal barriers equivalent to custom duties; • The principle of Tax non-discrimination has a central role in the development of the EU legal system; • Such principle expresses the need to assure commercial interstate transactions a neutral fiscal treatment, preventing the adoption of protectionist/interventionist measures by Member States; • The principle of Tax non-discrimination has negative substance, since it does not impose to Member State to ensure an equal taxation of national and foreign goods/operations (substantial equality), but merely the elimination of fiscal distorting factors of access to the market (such as national-oriented favourable tax regimes); The principle of Tax non-discrimination

3. The principle of Tax non-discrimination – Types of discriminatins • The ECJ has detected three types of discrimination: • Overt discriminations; • Covert discriminations; • Reversed discriminations; • An overt discrimination occurs when national tax provisions provide a less convenient treatment for foreign operators/goods; • A covert discrimination occurs when national tax provisions regulate relevant fiscal elements introducing conditions which foreign operators are not enabled to satisfy (i.e. residence, ECJ, May 16th 2000, Zurstrassen, Case C-87/99); • A reversed discrimination occurs when national tax provisions provide a less convenient treatment for national operators/goods (also conventional rules according to ECJ, September 21st 1999, Saint Gobain, Case C-307/97); The principle of Tax non-discrimination

4. The principle of Tax non-discrimination – The judgment of discrimination • In order to assess whether a certain measure is discriminatory (judgment of discrimination), the following aspects have to be considered: • The comparability of the situation involving resident and foreign operators; • The introduction of differential treatment towards the two comparable situations; • The existence of a reasonable justification; • The judgment of discrimination has benne repeatedly adopted by the ECJ in taxation matters as a criteria to assess the comparability of national legislation with the respect to the EU order; The principle of Tax non-discrimination

5. The importance of the principle of non-discrimination in direct Taxes – The juridical clarification of the principle • The principle of tax non discrimination it has been increasingly applied by the European Court of Justice to income tax matters; • The European Court of Justice has allowed this extensive application of the principle of tax non discrimination since the leading case Avoire fiscal (ECJ, 28 January 1986, Case 270/83); • In that case the Court stated that excluding permanent establishment of foreign companies from the benefiting of a tax credit recognized to French corporates would be inconsistent with the Treaty tax non discrimination principle; The principle of Tax non-discrimination

6. The importance of the principle of non-discrimination in direct Taxes – The juridical clarification of the principle • In the leading case Biehl (ECJ, May 8th 1990, Case C-175/88), the ECJ examined the issue of indirect discrimination, affirming the incompatibility with the non-discrimination principle of a national regulation which prevented the payback of the taxes paid in excess by an employee which had left the State territory during the tax year; • The ECJ has figured the principle of non-discrimination in terms of potential risk of producing an alteration of competition; so there is no need to verify and prove the existence of an objective damage determined by the discriminatory regulation but merely the existence of a discrepancy in the fiscal treatment of resident/non-resident operators; The principle of Tax non-discrimination

7. The importance of the principle of non-discrimination in direct Taxes – The comparability of situations • According to the principle of equality, to affirm the incompatibility of a discriminatory regulation it is necessary to assess the similarity of compared situations; • Indeed, a discrimination can arise only through the application of different rules to comparable situations or through the application of the same rule to different situations (ECJ, February 14th 1995, Schumacker, Case C-279/93); • The judgment on comparability can be performed through a dual approach: • taking in consideration a single and specific aspect of the legal relationship (limited comparison); • Taking in consideration the entire position of the taxpayers (overall comparison); • The ECJ has mostly adopted the overall approach; The principle of Tax non-discrimination

8. The importance of the principle of non-discrimination in direct Taxes – The evolution of the ECJ jurisprudence • The ECJ has gradually shifted its focus from the principle of non-discrimination to the principle of non-restriction; • This has determined a significant enlargement of the judgment on national tax laws compatibility; • At the same time, this approach has induced an extended application of the rule reasonableness to non-discrimination matters; The principle of Tax non-discrimination

9. The relevance of the principle of non-discrimination in the regulation of indirect Taxes – The EU regulation • The principle of tax non discrimination mainly refer to indirect taxes imposed on business interstate transactions (indirect taxes); • Indirect Taxes may indeed create an immediate obstacle to the free movement of goods and the free supply of services within an Internal Market; • Indirect Taxes may also create distortions of competition; The principle of Tax non-discrimination

10. The relevance of the principle of non-discrimination in the regulation of indirect Taxes – The EU regulation • Article 110 TFEU - Member States cannot impose, directly or indirectly, on the products of other Member States: • any internal taxation of any kind in excess of that imposed directly or indirectly on similar domestic products; • any internal taxation of such a nature as to afford indirect protection to other products; • Article 111 TFEU - Where products are exported to the territory of any Member State, any repayment of internal taxation shall not exceed the internal taxation imposed on them whether directly or indirectly. The principle of Tax non-discrimination

11. The relevance of the principle of non-discrimination in the regulation of indirect Taxes – The EU regulation • Article 112 TFEU - In the case of charges other than turnover taxes, excise duties and other forms of indirect taxation, remissions and repayments in respect of exports to other Member States may not be granted and countervailing charges in respect of imports from Member States may not be imposed unless the measures contemplated have been previously approved for a limited period by the Council on a proposal from the Commission; • These regulations show a common ideological background: the pursuit of a neutral treatment of the commercial transactions within the Internal market; • These regulations are, indeed, clearly designed to contrast national discriminatory Tax policies; The principle of Tax non-discrimination

12. The relevance of the principle of non-discrimination in the regulation of indirect Taxes – The prohibition of discriminatory internal taxation • Article 110 TFEU, forbids the introduction of internal discriminatory taxes on other Member States’ products; • The prohibition is complementary to abolition of custom barriers stated by articles 23 and 25 TFEU; • The prohibition has a direct effect (ECJ, December 14th 1962, Lütticke GmbH, Joined Cases C-31 and C-33/62),which can be invoked by Member States or by individuals; • However, the introduction of internal discriminatory taxes may be justified by national tax interests or other national general interests (ECJ, January 14th 1981, Chemical Farmaceutici Spa, Case C-140/79); The principle of Tax non-discrimination

13. The relevance of the principle of non-discrimination in the regulation of indirect Taxes – The prohibition of discriminatory internal taxation • The products covered by the prohibition are, primarily, the imported ‘similar products’, which in the perception of consumers show similar characteristics and meet the same functions of the national ones; • The prohibition also cover the imported ‘competing products’, which although significantly different from domestic product, express a competitive position; • According to the ECJ the discriminatory effect has to be detected on the base of: • rules on tax base and tax rate; • rules on tax relief; • procedural rules which impose additional burdens in imported products; The principle of Tax non-discrimination

14. The relevance of the principle of non-discrimination in the regulation of indirect Taxes – Prohibition of Taxes with equivalent effect to custom duties • Article 110 TFEU also forbids the introduction of national Taxes with equivalent effect to custom duties; • The prohibition of Taxes with equivalent effect to custom duties refers typically to charges applied on imported products (while the principle of fiscal non discrimination concerns internal regulations applied to both domestic and imported products); • The prohibition of Taxes with equivalent effect to custom duties not only has a direct effect but also a radical and stronger consistency than the principle of fiscal non discrimination, since conflicting national regulations have to be immediately abolished (while rules conflicting with the principle of fiscal non discrimination may be interpreted and applied as to avoid the tax discrimination); The principle of Tax non-discrimination

15. The relevance of the principle of non-discrimination in the regulation of indirect Taxes – The choice of the country of taxation • The prohibition of tax discrimination shows how differences in the fiscal treatment of products are capable to produce harmful effects on competition; • In order to prevent such distortion and neutralize the differences in national tax systems the Treaties have adopted the principle of taxation in the country of destination; • However the adoption of the opposite principle of taxation in the country of origin would better prevent said phenomena; • Although the application of the principle of taxation in the country requires a further level of harmonization in indirect taxation (connection between principle of non discrimination and principle of harmonization); The principle of Tax non-discrimination