THE CONSTITUTIONAL ROLE OF THE COURT OF JUSTICE IN THE INTERNAL MARKET POST-HARMONISATION TAX EXCEPTIONALISM OR JURIS

1. THE CONSTITUTIONAL ROLE OF THE COURT OF JUSTICE IN THE INTERNAL MARKET POST-HARMONISATION – TAX EXCEPTIONALISM OR JURISPRUDENTIAL CONSISTENCY? RITA DE LA FERIA (CENTRE FOR BUSINESS TAXATION, OXFORD UNIVERSITY) DIMITRIOS DOUKAS (SCHOOL OF LAW, QUEEN’S UNIVERSITY BELFAST) IECL SEMINAR 23 February 2011

2. May 19, 2010 Constitutional Role of CJ Post-Harmonisation OUTLINE I. Hierarchy of Norms in the EU Legal Order II. The Constitutional Role of the CJ A. Absence of harmonisation B. Partial and minimum harmonisation C. Exhaustive harmonisation III. Tax Exceptionalism or Jurisprudential Consistency? A. Absence of harmonisation B. Partial and minimum harmonisation C. Exhaustive harmonisation IV. The Sliding Scale of Judicial Review

3. Hierarchy of Norms in the EU Legal Order Rules on hierarchy of norms in a legal system Metarules, which arrange the decisions concerning the enactment of norms into a gradation of ranks or layers, and determine their interplay Raison d'être: a plurality of sources of law for the effective pursuit of the objectives of the legal system; this plurality refers to the norm-setting power or mandate, the institutions and procedures, the legal instruments, and their temporal dimension Dual function: (a) resolve conflicts of norms; and (b) serve as standards of interpretation

4. Hierarchy of Norms in the EU Legal Order Rules on hierarchy of norms in the EU legal order A shorthand of the EU order of competences given the dynamic nature of the interplay of the sources of EU law An autonomous and integrated legal order, where the supranational Union and the domestic legal systems are closely intertwined Pluralist reading of the EU legal order No strict, single pyramidal hierarchy of norms Dynamic, multidimensional network of norms and law-making instances at EU and national level, which co-exist without proper hierarchy EU legal order as “contrapuntal law” (Maduro)

5. Hierarchy of Norms in the EU Legal Order Internal hierarchy of norms within the EU legal order More straightforward despite lack of explicit provision Indirect answer provided by EU primary law Principle of conferral (Arts 5(2) and 13(2) TEU) Role and power of the Court of Justice (Arts 19(1) TEU; 263, 267, 277, 340(2) TFEU) Acts of EU institutions and law-making process (Arts 288 and 289-292 TFEU; 17 TEU) EU primary law: at the apex of the internal hierarchy Legal basis, framework and limits of secondary law (Viola) Primacy of Treaties (and general principles of EU law): invalidating effect AND standard of interpretation with regard to conflicting secondary law (and national measures falling within the scope of EU law)

6. The Constitutional Role of the Court of Justice  EU legal order based on the rule of law: Both the acts of the MS and those of the EU institutions are subject to review by the Court of Justice as to their compliance with the Treaty as the “basic constitutional charter” and the general principles of EU law (including fundamental rights) Right of individuals to effective judicial protection of the rights they derive from the EU legal order Arts 2; and 19(1) TEU Les Verts; Zwartveld; Opinion 1/91 …

7. The Constitutional Role of the Court of Justice  General rules of interpretation of EU law Where a provision of (primary or secondary) EU law is open to different interpretations, preference must be given to the construction which ensures that the provision remains effective (Saarland) In case of divergent language versions, the provision must be interpreted in the light of the purpose and the overall scheme of the rules of which it forms part (Borgmann) Where a provision of secondary law is unambiguous or open to more than one interpretation, preference must be given to the construction which renders that provision consistent with the Treaty and the general principles of EU law (Tretter; Rauh; Diageo) National courts and authorities must not only interpret national law in line with the relevant secondary legislation but also avoid relying on an interpretation of EU secondary law which would be in conflict with the Treaty or the general principles of EU law (including the EU fundamental rights) (Lindqvist)

8. Review of EU secondary law falling within the scope of free movement (General) EU secondary law implementing or allowing derogations from the free movement provisions Strict interpretation in the light of the Treaty But in reviewing compliance of secondary law with the Treaty, primary emphasis on harmonious construction as far as possible Only manifest excesses of the limits of EU harmonisation powers are declared incompatible with the Treaty Obstacles to the free movement arising from secondary law may be justified and proportionate (e.g. Denkavit; Meyhui) Exceptionally, invalidation if the relevant provisions cannot be saved by way of a consistent interpretation (e.g. Lancry)

9. Absence of Harmonisation  Absence of harmonisation or co-ordination at EU level Examination of national measures falling within the scope of EU law in the light of primary law Sliding scale of judicial review The extent or intensity of the review of compliance with primary law seems to vary, depending on the matter at hand, ranging from a more rigid (e.g. cases concerning the establishment and functioning of the internal market – see proportionality of product requirements potentially justified on grounds of consumer protection – or the protection of fundamental rights) to a less intensive and very deferential review (e.g. in matters of economic and social policy choices – see State monopolies on gambling).

10. Partial and/or Minimum Harmonisation  In areas of free movement subject to partial and/or minimum harmonisation, the intensity of the CJ’s constitutional review is less rigorous than in areas where there is no EU harmonisation Interaction of primacy and pre-emption But the CJ’s review is generally more rigorous compared to areas of free movement which have the subject of exhaustive harmonisation Primary emphasis on pre-emption

11. Partial and/or Minimum Harmonisation  In cases of minimum co-ordination (but not harmonisation): very rigorous review (e.g. Social security) In fields of partial and / or minimum harmonisation: relatively rigorous review of compliance of secondary law (and national measures) with the Treaty Interpretation of secondary legislation in the light of primary EU law Emphasis on harmonious construction of the provisions of secondary law and liberal interpretation of the “free movement clauses” of secondary legislation BUT

12. Partial and/or Minimum Harmonisation  Strict interpretation of any derogations or other provisions of secondary legislation leaving MS a margin of discretion to impose restrictions on free movement This ensures a similarly rigorous review of national measures in the light of secondary law and primary law, or only primary law Compliance of national measures with primary law= an essential corollary to compliance with secondary law – this may be explicitly be provided for in secondary legislation E.g. AVM services, Posted Workers, Various Goods ...

13. Partial and/or Minimum Harmonisation  Case Study: Broadcasting and free movement of services TWF Directive 89/552 (predecessor to 2010/13) Interpretation of the Directive in the light of Art. 56 TFEU and the public interest objectives that may justify restrictions on the free movement (KommAustria) MS discretion to impose stricter rules on broadcasters subject to their jurisdiction provided the comply with the Treaty (essentially corollary to compliance with secondary law) (Leclerc-Siplec, ARD) Interpretation beyond (and maybe against) the letter of secondary law Interpretation of Directive in the light of the Treaty to exceptionally allow MS to impose stricter rules on TV advertising broadcast from broadcasters in other MS provided that such rules do not involve secondary control in addition to the one carried out by the transmitting MS and do not prevent retransmission as such of TV broadcasts from other MS (De Agostini) If those conditions are satisfied, the Directive is not violated, and any resulting restrictions must comply with Art. 56 TFEU If those conditions are not satisfied (because the Directive’s minimum standards comprehensively cover the field), the Directive is breached

14. Partial and/or Minimum Harmonisation  Case Study: Posted Workers and Free Movement of Persons and Services Directive 96/71: nucleus of mandatory rules of minimum protection in the host MS Interpretation of secondary law in the light of primary law; and review of national law in the light of secondary law, or only primary EU law The Member States’ discretion to determine material or procedural aspects of the mandatory rules to be met by employers posting workers must comply with the Directive (as interpreted in the light of the Treaty) or, where appropriate, only with Art. 56 TFEU (Laval; Wolff and Müller) Partial or minimum harmonisation notwithstanding, the constitutional review remains relatively rigorous

15. Exhaustive Harmonisation  Areas of free movement subject to exhaustive harmonisation overall display the least rigorous level of constitutional review But there are some exceptions that confirm the rule: The CJ may strictly construe secondary law in order to rigorously examine national restrictions on the free movement that might have been permitted by derogations in secondary legislation Where harmonious construction is not possible in order to save secondary law, the CJ may declare a provision of secondary law invalid

16. Exhaustive Harmonisation  Case Study: Common agricultural policy or common organisation of markets and Free Movement of Goods Regulation 816/70 on common organisation of wine market Allowed MS to derogate from the Treaty (Arts 30 TFEU) Strict interpretation of such derogations The EU legislature’s extensive powers in the conduct of the CAP must be exercised from the perspective of the unity of the internal market and exclude any measures that compromise the abolition/prohibition of obstacles to the free movement of goods Invalidation (Ramel) – Compare: Diageo (invalidation of part of Dir 75/106 on pre-packaged liquids insofar as it involved an unjustifiable MEE) – BUT Contrast: Harmonious construction, where possible, in order to save secondary law (e.g. Reg. 1699/82 on rum quotas (Com v Council (rum) or Regs. 1493/99 and 753/2002 on wine market (Schneider)) Overall, not always a very rigorous review

17. Exhaustive Harmonisation  Case Study: Trade marks and Free Movement of Goods Directive 89/104 (Art. 7 on the principle of exhaustion and exceptions) Given the exhaustive harmonisation of the question of exhaustion of trade marks, national measures must be assessed in the light of secondary law only BUT Like any other secondary legislation, the Directive was interpreted in the light of primary law (Art. 36 TFEU and the relevant CJ case-law) The Directive did not intend to restrict the scope of the CJ case-law on Art. 36 TFEU and could not justify obstacles to the free movement save within the limits set by the Treaty Strict interpretation of secondary law in order to declare national restrictions incompatible with the Treaty (Bristol-Myers Squibb)

18. Tax Exceptionalism or Jurisprudential Consistency? Tax harmonisation under Treaties Harmonisation of turnover taxes (VAT) Perceived as fundamental part of achieving common market From ECSC (Tinbergen Report) to EECT (Art 99) From First and Second VAT Directives (1967) to Sixth VAT Directive (1977) From the abolition of fiscal frontiers (1992) to the current EU VAT system Currently harmonising legislation is very extensive Legal basis: Art 113 TFEU

19. Tax Exceptionalism or Jurisprudential Consistency? Harmonisation of direct taxes Debated as necessary step towards common market as early as 1962 (Neumark Report) No specific legal basis: fall-back rules Arts 114 and 115 TFEU [ex Arts 95 and 94 ECT] used Legislative instruments of limited scope: Merger Directive (Directive 90/434/EEC); Parent-Subsidiary Directive (Directive 90/435/EEC); Savings Directive (Directive 2003/48/EC); Interest-Royalties Directive (Directive 2003/49/EC) Legislation deals with either specific problems arising from cross-border transactions, or cooperation between Member States’ tax authorities Approving harmonising legislation still remains on policy agenda BUT it has been the Court that has primarily filled legislative gap through extensive case law

20. Tax Exceptionalism or Jurisprudential Consistency? Level of existing tax harmonisation: Indirect taxation (VAT): Exhaustive harmonisation? Direct taxation: Partial harmonisation Role of Court in tax area: Indirect taxation (VAT): Extensive level of case-law (approx. 7% of CJ overall activity) Indirect taxation (VAT): Interpretation of VAT Directives / National legislation reviewed in light of EU secondary legislation Direct taxation: Comparatively low level of case-law (approx. 2% of CJ overall activity) but with high-impact Direct taxation: Minimal case-law on interpretation of Directives / Bulk of case law concerns national legislation reviewed in light of fundamental freedoms

21. Tax Exceptionalism or Jurisprudential Consistency? B. Partial and minimum harmonisation Since the late 1980s Court has frequently assessed compatibility of domestic tax legislation with Treaty The case-law as regards compatibility of EU tax legislation, or national tax implementing legislation, with Treaty represents only fraction of it, but still significant one Key decisions of CJ in this area: Situations outside the subjective and objective scope of EU tax legislation are subject to review in light of Treaty, namely fundamental freedoms provisions ACT Group Litigation (C-374/04), as regards situations outside scope of Parent-Subsidiary Directive

22. Tax Exceptionalism or Jurisprudential Consistency?   “The mere fact that, for holdings to which Directive 90/435 does not apply, it is for the Member States to determine whether, and to what extent, a series of charges to tax and economic double taxation are to be avoided […], does not of itself mean that the Member States are entitled to impose measures that contravene the freedoms of movement guaranteed by the Treaty. Amurta (C-379/05), as regards situations outside scope of Parent-Subsidiary Directive “It is common ground that the situation in the main proceedings does not fall within the scope of that directive. […] in respect of shareholdings which are not covered by Directive 90/435, it is for the Member States to determine whether, and to what extent, economic double taxation of distributed profits is to be avoided […]. However, this does not of itself mean that the Member States are entitled to impose measures that contravene the freedoms of movement guaranteed by the EC Treaty” (paras 20, 24)

23. Tax Exceptionalism or Jurisprudential Consistency? National tax legislation exercising options granted by EU tax legislation are subject to review in light of Treaty, namely fundamental freedoms provisions Bosal (C-168/01) as regards option granted by Parent-Subsidiary Directive “in so far as [national legislation] merely implements the possibility offered by Article 4(2) of the directive to refuse the deduction of costs incurred by parent companies in connection with holdings in the capital of their subsidiaries, it is compatible with the directive. However, that possibility may be exercised only in compliance with the fundamental provisions of the Treaty, in this case Article 52 thereof.” (paras 25, 26) Keller Holding (C-471/04) as regards option granted by Parent-Subsidiary Directive “Irrespective of the question whether that directive applies to the present case, such an option can be exercised only in compliance with the fundamental provisions of the Treaty, in this case Article 52 thereof.” (para 45)

24. Tax Exceptionalism or Jurisprudential Consistency? EU tax legislation is subject to review in light of fundamental freedoms provisions? Bosal (C-168/01) as regards validity of provision in Parent-Subsidiary Directive “Although the directive permits Member States generally to disallow deduction of holding costs, it does not, however, provide for derogations. […] However, if it did lay down a derogation to that effect, it would then be necessary to examine whether or not the directive itself offended against the principle of freedom of establishment, a principle enshrined in primary legislation within the Treaty.” (Opinion AG Alber, para 58)

25. Tax Exceptionalism or Jurisprudential Consistency? Conclusions on the review of EU direct tax provisions in light of the Treaty: Significant minority of case-law reviewing national tax implementing measures in light of the Treaty However, all cases relate to situations falling outside scope of EU secondary legislation, or implementation of options granted by that legislation No EU direct tax provision has ever been struck-down by Court on the basis of its incompatibility with Treaty provisions

26. Tax Exceptionalism or Jurisprudential Consistency? C. Exhaustive harmonisation In over 30 years of VAT jurisprudence Court has only assessed compatibility of VAT legislation with Treaty on few occasions: Gaston Schul (15/81) concerned compatibility of Sixth VAT Directive provisions with Arts 34, 35 and 110 TFEU [ex Arts 12, 13 and 95 EECT] “[…] the tax in question must be considered as an integral part of a general system of internal taxation for the purposes of article 95 of the Treaty and its compatibility with Community law must be considered in the context of that article and not of that of Articles 12 et seq. of the Treaty.” (para 21)

27. Tax Exceptionalism or Jurisprudential Consistency? “the establishment of a system ensuring the complete neutrality of internal taxation with regard to intra-Community trade could take place only by strict application of the principle of taxation in the Member State of destination […]. It is for the political institutions of the Community to adopt such a solution since it involves a political choice” (para 37) Kieffer and Thill (C-114/96) concerned compatibility of Intrastat system (Regulation No. 3330/91) with free movement of goods provisions, Arts 34 and 35 TFEU [ex Arts 28 and 29 ECT] “it is common ground that the detailed nature of the declarations required and the fact that it is obligatory to make a declaration in both the Member State of consignment and that of destination of the goods have restrictive effects with regard to the free movement of goods” (para 28)

28. Tax Exceptionalism or Jurisprudential Consistency? “while the obligation to make declarations under the Regulation does specifically affect cross-frontier trade, and drawing up the declarations takes time and involves expense, particularly for small and medium-sized undertakings, it does not necessarily follow that those restrictive effects are disproportionate to the aim pursued.” (para 34) Société Générale des Grandes Sources d’Eaux Minérales Françaises (C-361/96) concerned compatibility of Eight VAT Directive provisions and national implementing legislation with principle of non-discrimination, Art 18 TFEU [ex Art 6 ECT] “Where a taxable person established in a Member State may prove his entitlement to a refund of value added tax by submitting a duplicate or photocopy of the invoice […], the principle of non-discrimination set out in Article 6 of the EC Treaty and referred to in the fifth recital in the preamble to the Eighth Directive 79/1072 requires that the same possibility be extended to taxable persons not established in that Member State if the transaction which led to the application for a refund occurred and there is no risk of further applications for a refund.” (para 38)

29. Tax Exceptionalism or Jurisprudential Consistency? Lease Plan (C-390/96) concerned compatibility of Eighth VAT Directive provisions and national implementing legislation with principle of non-discrimination, Art 18 TFEU [ex Art 12 ECT], and free movement of services Art 56 TFEU [ex Art 49 ECT] “It is contrary to Article 59 of the EC Treaty for national rules to provide that taxable persons not established in a Member State, who apply for a refund of VAT in accordance with the Eighth Council Directive […], are entitled to interest only from such time as notice to pay was served on that Member State and at a lower rate than that applied to the interest paid to taxable persons established in the territory of that State automatically on the expiry of the statutory time-limit for reimbursement.” (para 41) Teleos and Others (C-409/04) concerned VAT exemption applicable to intra-EU supplies of goods

30. Tax Exceptionalism or Jurisprudential Consistency? “Whilst it is true that the regime governing intra-Community trader has become more open to fraud, the fact remains that the requirements for proof established by the Member States must comply with the fundamental freedoms established by the EC Treaty, such as, in particular, the free movement of goods.” (para 63) Schmelz (C-97/09) concerned compatibility of Sixth VAT Directive provisions and with principle of equal treatment, Art 18 TFEU [ex Art 12 ECT], freedom of establishment, Art 49 TFEU [ex Art 43 ECT], and free movement of services, Art 56 TFEU [ex Art 49 ECT] “the prohibition on restrictions on freedom to provide services applies not only to national measures but also to measures adopted by the European Union institutions” (para 50)

31. Tax Exceptionalism or Jurisprudential Consistency? “the fact that small undertakings established outside Austria are excluded from the benefit of the VAT exemption renders the provision of services in Austria less attractive for those small undertakings. Consequently, it entails a restriction on the freedom to provide services.” (para 53) “at this stage in the evolution of the VAT system, the objective which consists in guaranteeing the effectiveness of fiscal supervision in order to combat fraud, tax evasion and possible abuse and the objective of the scheme for small undertakings, which is to support the competitiveness of such undertakings, justify, [limiting the benefit of the VAT exemption to small undertakings established in the Member State in which the VAT is due ]” (para 71)   “In those circumstances, it must be held that limiting the benefit of the VAT exemption to small undertakings established in the Member State in which the VAT is due does not go beyond what is necessary to ensure the attainment of those two objectives.” (para 72)

32. Tax Exceptionalism or Jurisprudential Consistency?

33. Tax Exceptionalism or Jurisprudential Consistency? Conclusions on the review of VAT provisions in light of the Treaty: Considering amount of case-law on VAT, 5 cases reviewing VAT provisions in light of the Treaty is (nearly) insignificant Schmelz (decided in 2010) is the first case applying the Court’s traditional fundamental freedoms’ step-approach to VAT – discrimination/restriction, justification, proportionality No EU VAT provision has ever been struck-down by Court on the basis of its incompatibility with Treaty provisions

34. The Sliding Scale of Judicial Review Judicial review and constitutional role of the CJ – tax and other policy areas compared: Jurisprudential consistency between tax and other internal market policy areas: areas subject to partial or minimum harmonisation have lower level of constitutional review than areas where harmonisation is absent, but higher level than in areas of exhaustive harmonisation (sliding scale of judicial review) Jurisprudential exceptionalism between tax and other internal market policy areas: internal market areas subject to partial harmonisation have lower, but still rigorous, level of constitutional review; where tax has been subject to partial harmonisation (direct ) judicial review is existent, but no invalidity ever declared internal market areas subject to exhaustive harmonisation have lower, but still existing, level of constitutional judicial review; where tax has been subject to exhaustive harmonisation (VAT) judicial review almost inexistent

35. The Sliding Scale of Judicial Review Rationale for sliding scale of judicial review and lower standards of judicial review for harmonised areas: EU legislator’s discretionary power and presumption that EU secondary law is in line with primary EU law (pre-emption) Need to ensure certainty and confidence in EU secondary legislation for both Member States and individuals (taxpayers) Political bargaining reality Rationale for tax exceptionalism: Unanimity voting means harder political bargain Particularly sensitive area HOWEVER

36. The Sliding Scale of Judicial Review Conclusions: Jurisprudential tax paradox: connection between harmonisation and standards of judicial review means higher level of judicial review for tax areas less relevant for internal market (direct taxation), than for tax areas supposedly more fundamental to the internal market (VAT) Exemption from judicial review for harmonised areas of tax: is the Court still a constitutional court? “The duty of the Court of Justice is to act as the constitutional court of the municipal legal order that is the Community” (AG Poiares Maduro, C-402/05 and C-415/05, Kadi, para 37) Effectiveness and uniform application of EU law: risks (including sliding scale of review even within same level of harmonisation)