Academic Year 2018-2019 Prof. Pietro Boria

1. European Tax Law The HarmfulTaxCompetition Academic Year 2018-2019 Prof. Pietro Boria

2. The harmful tax competition as an emerging value of EU legal system – The notion of ‘harmful tax competition’ • According to Protocol n. 27 annexed to the Treaties the Internal Market includes a system ensuring that competition is not distorted; • To this end, the Union shall, if necessary, take action under the provisions of the Treaties, including under art. 352 TFEU; • Art. 352 TFEU states that if action by the Union should prove necessary, within the framework of the policies defined in the Treaties, to attain one of the objectives set out in the Treaties, and the Treaties have not provided the necessary powers, the Council, acting unanimously on a proposal from the Commission and after obtaining the consent of the European Parliament, shall adopt the appropriate measures; • Where the measures in question are adopted by the Council in accordance with a special legislative procedure, it shall also act unanimously on a proposal from the Commission and after obtaining the consent of the European Parliament; The Harmful Tax Competition

3. The harmful tax competition as an emerging value of EU legal system – The ‘harmful tax competition’ as a paradigm of the limitation of national taxation • In this perspective promotional tax policies aiming to attract foreign business and capital allocation were considered ‘harmful’ to the European economic integration process; • Such policies, indeed, distort competition in the internal market, involving Member State in ‘race to the bottom’, pushing each State: • to lower tax rate on business and capital; • to introduce preferential tax regimes whether reserved or opened to foreign operators and investors; • Such policies induce a tax burden shifting from capital to labour; The Harmful Tax Competition

4. The harmful tax competition as an emerging value of EU legal system – The ‘harmful tax competition’ as a paradigm of the limitation of national taxation • Indeed, preferential tax regimes usually attract high mobility inputs (capital and corporates); • This phenomena trigger a vicious circle: in order to counteract the profit shifting and base eroding effect of the said regimes Member State are forced to: • decrease taxation levels on capital and corporates; • increase the tax burden on labour; • Therefore, contrasting harmful tax competition also aims to balance capital, corporate and labour taxation in the European contest; The Harmful Tax Competition

5. The fight against harmf - ul tax competition within the EU legal system – The Monti Package and the introduction of the Code of conduct • In order to fight harmful tax competition, in 1997 Member States adopted the Code of Conduct for business taxation; • The Code was included in the so-called Monti Package, ECOFIN Council Resolution of January 12th 1997; • In that occasion the ECOFIN Council held a wide-ranging debate on harmuful tax competition, highlighting the need for a coordinated action at European level in order to tackle the phenomena, helping to achieve the following objectives: • Reducing the continuing distortion in the single market; • Prevent excessive losses of tax revenue; • Get tax structures to develop in more employment friendly way; The Harmful Tax Competition

6. The fight against harmf - ul tax competition within the EU legal system – The content of the Code of conduct • In this perspective, three tax areas were spot as the most critical: • Business taxation; • Taxation of savings income; • Withhold taxes on cross-boarding interest and royalty payments between companies; • The Code covers business taxation and concerns measures which affect or may affect in a significant way the location of business activity in Europe; The Harmful Tax Competition

7. The fight against harmf - ul tax competition within the EU legal system – The content of the Code of conduct • The Code is not legally binding, representing a political commitment assumed by Member State without an actual enforcement system; • According to the Code Member States: • were forbidden to introduce new harmful tax provisions and regimes (standistill clause); • had to abolish all existing harmful tax provisions and regimes (rollback clause); The Harmful Tax Competition

8. The fight against harmf - ul tax competition within the EU legal system – The content of the Code of conduct • Within the Code scope, tax measures which provide for a significantly lower effective level of taxation, including zero taxation, than those levels generally applied in Member States are to be regarded as potentially harmful; • Such level of taxation may operate by virtue of the nominal tax rate, the tax base or any other relevant factor; • When assessing whether a certain measure is harmful account has to be taken of, inter alia whether fiscal advantages: • are accorded only to non resident or in respect of transaction carried out with non residents; • are ring fenced from the domestic market, so they do not affect national tax base; The Harmful Tax Competition

9. The fight against harmf - ul tax competition within the EU legal system – The content of the Code of conduct • are granted even without any real economic activity and substantial economic presence within the Member State offering such tax advantages; • the rules for profit determination in respect of activities within multinational groups departs from OECD principles; • tax measures lack transparency, including where legal provisions are relaxed at administrative level in a non transparent way; The Harmful Tax Competition

10. The fight against harmf - ul tax competition within the EU legal system – The content of the Code of conduct • Thus is useful in the Internal Market protection perspective, the contrast to Harmful tax competition clashes with national fiscal sovereignty; • The harmful tax competition perspective supposes the existence of standard tax level on business and capital Member State have to align with; • Nevertheless, the introduction of favorable tax regimes represent indeed a mean to ensure: • the economic recovery of depressed areas; • the development of specific undertakings; • In this case, tax relives on business pursue the achievement of essential constitutional values (equity); The Harmful Tax Competition

11. The fight against harmf - ul tax competition within the EU legal system – The BEPS Project • Since the Code had no legal enforcement, being a soft law act, it mostly failed its objectives; • Nevertheless the contrast to harmful tax competition kept on being the center of European and international institutions’ concerns; • The spread of the digital economy also posed challenges for international taxation; • In 2012 the G20 finance ministers called on the OECD to develop an action plan to address BEPS issues in a coordinated and comprehensive manner; The Harmful Tax Competition

12. The fight against harmf - ul tax competition within the EU legal system – The BEPS Project • In 2013 the OECD released the first Action Plan to effectively prevent double non-taxation, as well as cases of no or low taxation associated with practices that artificially segregate taxable income from the activities that generate it; • In order to achieve such aim, the Acton Plan designed 15 different actions in order to realign taxation with substance: • Address the tax challenges of the digital economy; • Neutralize the effects of hybrid mismatch arrangements; • Strengthen CFC rules; • Limit base erosion via interest deductions and other financial payments; • Counter harmful tax practices more effectively, taking into account transparency and substance; The Harmful Tax Competition

13. The fight against harmf - ul tax competition within the EU legal system – The BEPS Project • Prevent treaty abuse; • Prevent the artificial avoidance of Permanent establishment status; • Assure that transfer pricing outcomes are in line with value creation; • Establish methodologies to collect and analyse data on BEPS and the actions to address it; • Require taxpayers to disclose their aggressive tax planning arrangements; • Re-examine transfer pricing documentation; • Make dispute resolution mechanisms more effective; • Develop a multilateral instrument; The Harmful Tax Competition