EU tax developments, ECJ cases highlight European Chapter meeting.

On February 15 and 16, TEI's European Chapter met in London to provide participating tax executives with an update on the tax developments in the European Union, including emerging European Court of Justice (ECJ) case law, and to provide a framework for assessing the potential effect of the developments on their companies. The host of the two-day meeting was the Richemont Luxury Group, and the sponsor was PricewaterhouseCoopers LLP.

The first day of the meeting featured a presentation on compensation trends in the EU and a provocative and candid members-only roundtable. PricewaterhouseCoopers then hosted a fabulous dinner at the historic Langham Hotel (the location of the meeting as well). On the second day, the program was moderated by Susan Symons of PwC, who set the stage for the discussion and then introduced Rosemary Radcliffe, PwC's former chief economist and now a leading economist and business adviser, who discussed the economic factors influencing member states' stance on tax policy. She observed that corporate taxes make up a relatively small proportion of tax revenue but raise some special issues. Tax revenues have fallen significantly in Europe as a result of the general economic performance of the member states. The current trend is toward lower corporate tax rates with fewer tax reliefs and allowances in order to protect tax revenues and harmonize tax bases.

In the short term, she explained, governments will not want to prejudice economic recovery with either tax increases or spending cuts. In the longer-term, fiscal consolidation is needed through lower spending, structural reforms to state pensions and other age-related spending, and greater public sector efficiency. But governments will also be seeking to improve tax yields: "tax by stealth," that is to say, widening the tax base (where possible) to protect revenues and boosting competitiveness with lower marginal tax rates. Taking the United Kingdom as an example of how ECJ decisions might affect the public finances, Ms. Radcliffe said that she believed that the 20 bn GB pound in costs for the U.K. Treasury as estimated by Accountancy Age was too high and that a figure below 10 bn GB pound might be more plausible, which is only 2 percent of estimated government revenue and less than 30 percent of estimated public sector net borrowing in 2004-2005.

Next up was Juergen Luedicke, who presented an overview of the leading ECJ direct tax cases. He highlighted a number of problems in certain member states pertaining to inbound dividends, for example, prohibited discrimination of "foreigners" involving either non-residents or of resident companies controlled by non-residents. He also cited examples of ECJ cases touching on outbound dividends, such as prohibited barriers to cross-border activities involving foreign investments and foreign activities and migration. He then discussed pending cases relating to the Most Favored Nation (MFN) treatment and free movement of capital to and from "Third" states.

Rene Beltjens analysed the response of the member states to ECJ cases and changing corporate local tax laws, noting that the number of cases brought before the ECJ has grown substantially in the last decade, and with it, the number of reactions to them by the member states. Even some of the "older" ECJ cases are still not fully applied by some of the founding member states, which is evidence of many member states' reluctance to accept the primacy of EU law. Also hampering the full application of EU law is the differing degree of awareness of ECJ decisions in the member states. As a result, the number of infringement procedures initiated and also pursued by the Commission against individual member states has grown substantially as well, and in certain cases this leads to a politicisation of EU procedures and ECJ cases by the member states.

Ine Lejeune provided an overview of leading ECJ cases on indirect tax explaining that EU VAT rules are based on Directives, which do not have direct effect but must be locally implemented. This means that taxable persons in the EU can contest discrepancies between the Directives and local implementation. In 2004, less than three decades after the first VAT case was referred to the ECJ, more than 300 indirect tax cases have been decided. The response of the member states to ECJ cases and their full implementation into national legislation remains mixed. In most cases, the local VAT rules are in line with ECJ decisions or there are no specific guidelines in local legislation beyond the verbatim implementation of the relevant provisions of the Directives. In some instances, however, local VAT rules are not in line with ECJ decisions or the local VAT treatment depends on a ruling from the VAT authorities or a ruling is recommended because of uncertainty. Examples of this mixed picture were provided on fixed establishment, taxable transactions, VAT exemption, and VAT deduction.

Following these excellent PwC presentations, there was a panel discussion of tax directors. Thom Coenen of Kappa Packaging, Iain MacLean of Richemont Luxury Group, and Jean Daniel Rouvinez of Tetrapack demonstrated how their companies are anticipating and capitalizing on ECJ case law through a multi-faceted approach covering appeals and litigation, planning and risk management, benefiting from (future) changes, identifying the preferred goal based on a long-term strategy--be it harmonization or a common tax base--and a thorough analysis of the effects of EU developments and potential benefits. These companies' strategies include lobbying and consultation efforts at national, European, and OECD level. Collective action is also undertaken in national lobby groups of employers and tax directors, as well as in business representations such as the European Business Initiative on Taxation (EBIT) and UNICE, the European Confederation of Employers' Federations. According to these companies, businesses need to take the initiative to capitalize on ECJ case law, with anticipation (not reaction) and a proper EU tax policy being the keys to success.

Peter Cussons of PwC discussed the opportunities and risks for U.K. and Irish companies with respect to which options are open to them in a number of concrete pending cases including legal claims, treaty based filing, complaints to the EC, lobbying, and related practical aspects of responses to ECJ decisions. He covered inbound cases, for example, Fokus Bank; withholding tax on only cross-border dividends contrary to EEA free movement of capital; outbound cases, including Marks & Spencer on crossborder loss relief, Cadbury Schweppes plc on CFC legislation applied intra-EU; and de Lasteyrie and other cases involving MFN.

Frank Engelen analysed the risks and opportunities for companies in other EU countries. Regarding the MFN doctrine, the imputation credit in the tax treaty between Italy and France and the lack of a comparable credit in the tax treaties between the Netherlands and Italy and France, respectively, may have the effect of dissuading Dutch companies from establishing in Italy or France, and may also constitute an obstacle for French or Italian companies raising funds in the Netherlands. In addition, the tax sparing credit for EU interest and royalties with Brazil and Greece may have the effect of dissuading Dutch companies from investing their capital in debt securities issued by companies that have their seat in EU Member States in relation to which no tax sparing credit is agreed upon, and may also constitute an obstacle for those companies raising debt capital in the Netherlands. Apropos dividend withholding tax on income pension funds, the exemption in withholding tax act for dividend distributions from Dutch companies to Dutch pension funds may have the effect of dissuading Dutch pension funds from investing in companies which have their seat in EU Member States, and may also constitute an obstacle for those companies raising funds in the Netherlands. In the Italian IRAP case, this national taxation arguably contravenes article 33 of the Sixth VAT Directive prohibiting Member States to introduce "taxes, duties or charges which [can] be characterized as turnover taxes" (as the Advocate General has confirmed since the meeting). Other points of interest included the EU and third countries, outbound dividends, inbound dividends, thin capitalisation, cross-border loss relief, controlled foreign companies, and exit taxes.

Ine Lejeune provided practical guidelines on how companies can use ECJ cases on indirect tax to their benefit by analyzing their transactions based on provisions of the VAT Directive and ECJ case law and testing these in relevant Member States. If there are conflicting rules but to the company's benefit, they should take advantage of national provisions; if there are conflicting rules in respect of EU provisions with adverse effect, companies should review their business model and could ask the Commission to start an infringement procedure or court proceedings against the relevant member state. She then explained the pros and cons of access to the ECJ and the need for a clear strategy and action plan.

Calum Dewar addressed the implications of ECJ case law and related issues for U.S. companies and other companies based outside the EU. This focused on U.S. MNCs' access to ECJ cases, which depends on (among other things) jurisdiction of the relevant EU subsidiary, the relevant Double Tax Treaty, the nature of the case, and the structure of the company. He noted that the American Jobs Creation Act of 2004 and the likely resulting extraordinary levels of repatriation to the United States required U.S. MNCs to really understand their foreign tax profile having regard to the potential effect of ECJ case law. Mr. Dewar highlighted a number of challenges for U.S. MNCs including uncertainty, complexity, and lack of knowledge, questioning whether there is potential for a voluntary tax issue if U.S. MNCs fail to protect their position regarding EC Treaty claims as well as opportunities including business restructuring, reduction of the tax burden, withholding taxes and income taxes and the mobility of income and assets.

Ivar Tuominen of the European Commission summarized the EC's priorities for European Tax Policy, which include focusing on the removal of tax obstacles to the exercise of the Treaty freedoms, underpinning the EU's "Lisbon goals" on overall competitiveness, the fight against "harmful" tax competition, and striking a balance between cutting taxes, investing in public services, and sustaining fiscal consolidation to achieve a durable reduction in the overall tax burden. The Commission approach combines elements of coordination of national tax policy decisions, cooperation in international forums (e.g., the OECD), the use of traditional Directives, soft law, peer pressure, and intensified action via the ECJ, and possibly "Enhanced Cooperation" among member states. The Commission uses a "twin-track strategy" for company tax consisting of "targeted measures" and "comprehensive solutions." It currently focuses on competitiveness, the VAT One-Stop-Shop initiative, the Common Consolidated Corporate Tax Base, and a tax framework for R&D. Mr. Tuominen said that the Commission is committed to a more active strategy on tax infringements and ensuring the correct application of judgments of the ECJ. In doing so, the Commission will aim to find a balance between the legal approach and negotiated policy and legislative solutions. The Commission will therefore also provide non-binding and interpretative guidance to Member States on the application of the Treaty principles. In terms of resources, there are currently more than 120 open cases, and more than 100 "receivable" complaints each year (petitions, briefings, etc.). Companies can assist the Commission by presenting it with solid, well prepared, cases and assistance with convincing the member states of the need to find positive solutions.