by Irene Isabel das Neves, Associate Judge, President of the Administrative and Fiscal Courts of the Northern Area (Portugal)

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In the field of direct taxation, European law lacks concrete regulation, which leads to a lack of tax harmonisation, as opposed to indirect taxation, namely with the Value Added Tax (VAT) and Excise Duties (ED). However, several directives and the case law of the Court of Justice of the European Union (CJEU) itself are establishing a set of “harmonising” dynamics enforced at the level of direct taxation on the income of companies and individuals. In parallel, measures have been implemented to prevent and eliminate tax evasion and double taxation.

The proper functioning of a European internal market assumes a level playing field, i.e., it depends on tax neutrality arising from the standardisation of corporate taxes. The internal market is in fact the meeting point for European demand and supply: in this market, tax disparities disrupt trade and commerce, because even when similar products are involved, the most heavily taxed goods are less competitive and less attractive to consumers (distortion by demand); similarly, in the absence of uniformity of taxes, the choice of location of businesses within the Union may be linked to tax considerations (distortion by supply).

In the absence of lato sensu European taxes, i.e., taxes whose bases, rates and methods of collection are identical in all Member States (MS), the objective of tax harmonisation cannot be achieved. It is true that many tax obstacles to the proper functioning of the Internal Market have already been removed by prohibiting tax restrictions on the free movement of goods, prohibiting tax obstacles to the free movement of people, services and capital, and controlling state aid in the form of taxation. Similarly, approximation of national tax legislation in terms of VAT and excise duties (tobacco, alcohol, energy products) has already taken place and the acclaimed harmonisation of indirect taxation has taken place. In conclusion, although harmonisation exists in this area and has made it possible to reduce certain disparities, these remain significant.

However, it is desirable that this should not be the case and that a standardisation of taxes owed by companies should be achieved, for example, even if the proceeds of these taxes were and continue to be collected by the Member States and not by the Union.
But there are several obstacles to overcome.

Direct taxation, as we know, is related to the income earned by individuals and/or corporate entities (companies), in manifestation of their ability to pay, being taxed directly by the authorities of the MS, thus collecting revenue to meet their collective needs.

First of all, there is no explicit provision in the Treaty on European Union concerning legislative powers in the field of direct taxation. Company tax legislation is usually based
on Article 115 of the Treaty on the Functioning of the European Union (TFEU), which establishes the unanimity rule for the approximation of legislation in this field, allowing for the adoption of directives for the approximation of the laws, regulations and administrative provisions of the Member States which have a direct impact on the functioning of the internal market.

In the TFEU, the “harmonisation” of direct taxation has been settled in Chapter 3 (Approximation of laws), where Article 115 has been inserted: “(…) the Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, issue directives for the approximation of such laws, regulations or administrative provisions of the Member States as directly affect the establishment or functioning of the internal market”.

Article 113 of the TFEU, inserted outside of Chapter 3, adopts, expressly, a harmonisation of indirect taxation.

It establishes, in effect, that norm, under which: “The Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition.”

It is certain that, in spite of the established approximation of legislation for direct taxation, the role of the institutions that could be more active, is, in practice, more intentional and of suggestion through, essentially, the presentation of proposals of Directives, Communications and Recommendations, and less in terms of concrete advances at the level of a real and achieved direct harmonization. Although in a scarce and timid way, the European institutions certainly play their role. See, for example, 1) Directive (the quintessential act to achieve, in casu, tax harmonization) 2011/96/EU of 30.11.2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, which deals with the taxation of dividends distributed between parent companies and subsidiaries; 2) Directive 90/434/EEC of 23.07.1990 on the tax framework applicable to mergers, divisions, transfers of assets and exchanges of shares; Directive 2003/49/EC of 03.06.2003 concerning the payment of interest and royalty payments between associated companies; 3) Council Directive 2014/86/EU, of 18 July, which adapted the STSCG (Special Taxation System for Company Groups), making it possible for companies not resident in Portugal, and resident in another EU MS or in the European Economic Area (EEA), which are not owned, directly or indirectly, by companies resident in Portuguese territory, to be considered dominant companies of a group subject to this regime in Portugal.

All this has effectively constituted an important pillar in terms of direct harmonisation at (only) the level of group companies.

In addition to this modest action through the directives, exclusive to the corporate area, we have, on the other hand, the exercise of the fiscal competence in which the MS are anchored. Now, income taxes, which are the object of direct taxation, are closely linked to each MS, constituting their own revenue to finance their national policies and which, for political, economic and social reasons, they cannot abdicate.

In view of this, there is also the fact (which we absolutely must not forget) that several different tax systems coexist at Union level, entailing many different tax authorities, different tax bases with the resulting different tax burdens. This coexistence means that harmonisation must move away from this and that the tax policy of each Member State must become increasingly competitive, which affects the structure and investment of companies, creating barriers to the internal market.

There remains, however, the role of the CJEU in this harmonisation, which it has, through its case law arising from the reference for a preliminary ruling under Article 267 of the TFEU, devised as preponderant whenever there is a conflict between the principles of European Union law and national tax rules.

Although MS have the sole power to determine the tax base and the rates of direct taxes, the CJEU has interpreted through its case law that MS must exercise that power in accordance with EU law, avoiding discrimination on grounds of nationality which constitutes an infringement of any of the fundamental freedoms, in particular the free movement of goods (as set out in Articles 28 and 29 of the TFEU), the free movement of workers (as set out in Articles 45 et seq. of the TFEU), the freedom of establishment (as set out in Articles 49 et seq. of the TFEU), the freedom to provide services (as set out in Articles 56 et seq. of the TFEU) and the free movement of capital (as set out in Articles 63 et seq. of the TFEU), with the protection of these freedoms (in particular of the last four listed) occurring through “indirect harmonisation” which is still partial and limited in the face of the issues requiring a solution.

In conclusion, harmonisation of direct taxation in the EU is the poor relation of harmonisation by virtue of: (i) the scarce existence of Directives in this area, with the existing ones referring to specific situations; (ii) the existence of proposals for Directives stagnated for several years; (iii) the non-existence of rules in the Treaties that expressly refer it, contrary to what happens in indirect taxation (cfr, in this matter Articles 110 to 113 of the TFEU), despite the reference made in Article 115 of the TFEU to an approximation of legislation in such matters; (iv) the unanimity rule enshrined in the special legislative procedure for harmonisation in this area (Article 115 TFEU); (v) the non-abdication of tax competences by Member States; (vi) the lack of sensitivity of Union law to changes in today’s society, particularly globalisation and strong external competition; (vii) the inadequacy of negative harmonisation which, as only achieved through the case law of the CJEU, ends up being preponderant on a case-by-case basis, limited to the case subject to a reference for a preliminary ruling, and which in the end cannot be considered in other situations.

In the times in which we live in, crying out for a more united and cohesive European Union, post-Brexit and in the face of economic and social collapse as a result of the Covid-19 pandemic, possible solutions must be sought.
One could concern the reformulation the legislative process on direct taxation, giving the European Parliament a decision-making role and not just a consultative one, so as to guarantee democracy, while also enshrining in this area the requirement of a qualified majority, as it has been achieved over time in other sensitive areas, so as to strengthen and solidify the growth of the internal market, for it would not be justified, in the current economic and social context, for direct taxation to remain segregated, being the poor relation of harmonisation.

To this end, it is necessary that the unanimity rule in this area, as laid down in Article 115 of the TFEU, should be overcome and, in conjunction, that the Parliament (elected by suffrage, giving a voice to the Member States it represents, in the interests of plural democracy) should be given an active role in this legislative process.

Another possible solution – albeit also within the European legislative process – would be to create a single European tax, as the culmination of the whole process of tax harmonisation that is envisaged, although this could only happen if and when the Union had fiscal competence and effective fiscal power over all European taxpayers. To this end, perhaps the emergence of an effective European tax citizenship based on the Union’s eurozone could prevail.

Pictures credits: Taxation with representation by Dayna Bateman.