"Where next for European Tax? A review of European Tax Law by Ben JM Terra and Peter J Wattel, 4th Edition, published by Kluwer Law International," The Tax Journal

Cross-border tax issues are of increasing importance to multinational corporate decisionmaking in the developed world. Services, goods, and capital are increasingly streams of electrons rather than physical goods. So location can be driven by considerations other than where the market is. The marketplace is global rather than national, so it’s necessary to have the ruthless paring of costs that global competition entails. Many more of us work for very large companies which operate in multiple jurisdictions, as opposed to the national giants of the past. So cross-border tax issues arise more commonly.

All of this means multinational companies are now firmly wedded to viewing tax as a cost to be managed rather than a levy to be accepted. One of the ways to manage tax cost is to find parts of existing rules that may not be legal and to challenge them, either politically or in the courts.

This developing and changing tax landscape means that the huge specialism that is European tax is growing at an exponential rate. A new book on the subject is of great assistance. The fourth edition of one of the very few books that attempts to cover the totality of European tax law in any detail, authored by Ben Terra and Peter Wattel, has now appeared. They are familiar names: both professors at the University of Amsterdam. Ben Terra is also the professor of international tax law at the University of Lund and Peter Wattel is Advocate-General in the Supreme Court of The Netherlands.

There are no provisions in the EC Treaty which directly abrogate the right of Member State governments with regard to direct tax. But nevertheless governments do not have very much room to arrange their tax systems. There are European legal provisions in the field of VAT, excise taxes, mergers, arbitrations, savings interest, and more. Even outside these areas, looming over all national law are the ‘four freedoms’ of goods, services, persons and capital enshrined in the Treaty. Many courts in Europe, the ECJ in particular, have interpreted these freedoms to mean that Member States may not have discriminatory rules of taxation that fetter those rights. The beneficiaries of those judgments have often been companies, because individuals can rarely afford to uphold their rights by litigation.

Governments are rarely inclined to accept that any part of their existing legislation might be open to challenge. National governments must have sound public finances. They have expensive social agendas to fund. Raising tax rates is not popular. They are not anxious that a greater part of the burden of taxation should fall on the shoulders of (voting) citizens as opposed to (non-voting) companies. So they are fighting back. Successful legal action by companies is met with ever-increasing volumes of legislation.

There are two major concerns with using the ECJ to strike down rules of national law. Firstly, the ECJ can only decide whether a provision is legal or not. It cannot decide what it should be replaced with. Secondly, courts decide cases brought before them on the basis of the facts presented to them. They are rarely able to take account of the possibility of other factual situations. The ECJ has the extra problem that preliminary questions referred to it arise within an individual national legal framework. The same question may look different if arising in the other jurisdiction involved, or in a third Member State. Thus a decision that is correct on the facts in one case may have an anomalous effect when an attempt is made to apply it to similar situations.

The authors’ attempt is to produce a comprehensive work. Negative integration in the field of direct tax; positive harmonisation and integration in the field of VAT; excise taxes and capital duty; and directives on mergers, interest and royalties, savings interest, and mutual assistance are all discussed at length. In the main this is an impressively lucid commentary on a complex range of subjects. The occasional indigestible section or stylistic failure (‘let alone … let even more alone’) can be forgiven. And the price is keen for a legal reference book.

Some criticism may be made of the authors’ approach. Although the authors suggest otherwise this is designed primarily as a reference book for the tax professional. The index is not so comprehensive as the graduate student might wish and, as with earlier editions, there is little attempt to put the study of tax law in its economic and political context. So it’s essential reading for the professional specialist in the field of EU or international taxation but of limited relevance to the wider tax market.

The basic discrimination questions in cross-border tax are either being litigated at the moment or have now been answered. The problem for EU governments is that discrimination is not the end of it. The common response of EU governments to successful challenges to discriminatory rules, such as the German thin capitalisation rules in the Lankhorst-Hohorst case,¹ is to extend the discrimination to everyone. There’s no discrimination, so there’s no problem, right? But the authors point out:

‘The free movement of goods, services and capital not only prohibits (unjustified) unequal treatment of products, capital and economic operators of other Member States, but also prohibits (unjustified) restrictive measures without distinction.’ (p53)

This will be the battleground of European tax in the next few years. The authors of this impressive work offer not only a review of the current law but predictions for the future, analysis of the problems caused by those predictions, and, bravely, solutions.

           
A review of European Tax Law by Ben JM Terra and Peter J Wattel, 4th Edition, published by Kluwer Law International, 2005, 756pp, 110 euro, ISBN 9041123865. Originally appeared in The Tax Journal, 26 September 2005. Reprinted with permission.