Panel 3 Acte Clair in ECJ Decisions on justifications for direct tax discrimination

1. Panel 3Acte Clair in ECJ Decisions on justifications for direct tax discrimination By Servaas van Thiel

2. A. Introduction • Wide interpretation of freedoms and strict interpretation of justifications and derogations • Discriminatory restrictions on free movement can be justified only on grounds mentioned in the Treaty • Non discriminatory restrictions on free movement can be justified on other grounds of overriding public interest if they are proportional (Cassis de Dyon)

3. B. EC Treaty justifications have no use in tax discrimination cases • the exercise of official authority • public policy • public security • public health • explicit capital related exceptions: distinctions between taxpayers on grounds of residence, place of investment, anti abuse (Verkooyen).

4. C. Overriding public interest justifications for tax discrimination • Why the Court allows overriding public interest justifications for discriminatory tax measures (Avoir fiscal, Daily Mail, Bachmann) • Legitimacy test: the ground on which the contested measure can be justified • Proportionality test: can the contested measure serve the public interest and does it not go beyond what is necessary

5. D. Justifications that were often argued but never allowed • disadvantage was very small (de minimus), avoidable (taxpayer should have made another choice) or compensated by other advantages • economic justifications such as loss of revenue, or maintaining employment • administrative justifications such as administrative difficulties (to obtain info or to control), administrative convenience

6. E. Justifications that were once allowed, but never again • Coherence: applied in Bachmann, but subsequently interpreted so strictly (direct link between initial tax deduction and subsequent advantage, same tax, same taxpayer, no tax treaty) that it could not be applied anymore • effectiveness of fiscal controls: was mentioned by the Court in 1979 Cassis de Dyon, but always rejected in tax cases because of the subsequent administrative assistance directives (and possibility to ask the taxpayer)

7. F.Justifications that were once rejected but than allowed Allocation of tax jurisdiction/interjurisdictional equity • Rejected in Avoir Fiscal (St Gobain) • nuanced in Gilly: tax treaty rules on allocation of tax jurisdiction lead to disparities. Pushed too far in D (all tax treaty rules), ACT Test Claimants (limitation on benefit rules) and Franked Investment Income Test Claimants (choice for exemption or imputation credit)

8. Nuanced in M&S: refusal of cross border loss offset is justified by need to ensure a balanced allocation of tax jurisdiction, and prevent tax avoidance and double dip. But in OY AA only two are left, and proportionality could favour a claw back rule (Krankenheim Wannsee). • Nuanced in Denkavit: agreed combination of source state WT and residence state foreign tax credit may reflect an agreed allocation of tax jurisdiction, but discriminatory nature of the WT is taken away only by full credit (AG in Orange Small Cap)

9. G. Conclusions • The Court assesses overriding public interest justifications for discriminatory direct tax measures • disallowed are economic (revenue loss, employment or budgetary policy) and administrative (difficulty to obtain info or to control) grounds for justification; • Allowed are grounds that relate to the balanced allocation of tax jurisdiction and to the need to prevent tax avoidance and abuse (but limits to be clarified)