ARTICLE CONTENTS INTRODUCTION I. COMPANY TAXATION IN THE EUROPEAN COURT OF JUSTICE A. Discrimination Against International Commerce Under International Trade and Tax Treaties B. The Corporate Income Tax Decisions of the ECJ II. IMPLICATIONS OF THE ECJ DECISIONS A. Legal Implications 1. The Demise of Imputation 2. The Future of Tax Incentives and International Double Taxation B. Fiscal Policy Implications III. THE FORK IN THE ROAD A. The Path of Greater Harmonization B. The Path of Greater Autonomy IV. THE UNITED STATES: SIMILARITIES AND DIFFERENCES A. Comparable Decisions of the U.S. Supreme Court B. Implications of the ECJ Decisions for the United States CONCLUSION INTRODUCTION
Whither Europe? That is the question newspapers and pundits asked repeatedly after the French and the Dutch rejected the proposed European Constitution in the summer of 2005. But that question was a perplexing one long before these summer setbacks. And, even if the new constitution is ultimately approved, the question will persist. Here, we explore one critical aspect of European integration, focusing on the tax aspects of European constitutional arrangements set out in the European treaties-arrangements that will remain unchanged under the new constitution if it is eventually ratified. Our principal conclusion is that the European Court of Justice (ECJ) is undermining the fiscal autonomy of member states by articulating an interpretation of income tax arrangements that is ultimately unstable. In particular, the court has invalidated a number of European Union (EU) member state tax provisions in a manner that unsettles member states' longstanding mechanisms for both avoiding international double taxation and protecting against international tax avoidance. The court's decisions also threaten the ability of member states to use tax incentives to stimulate their economies.
The actions of the ECJ must be understood within Europe's broader institutional context. The court's tax doctrine rests on its interpretation of the central freedoms guaranteed by Europe's governing treaties. With the Treaty of Rome in 1957, six countries--Belgium, France, (West) Germany, Italy, Luxembourg, and the Netherlands--came together to form a "common market" known as the European Economic Community. (1) In addition to "mak[ing] war unthinkable" in Western Europe, (2) the motivating idea of this treaty was to increase economic interdependence, primarily through increased trade between these member states. In 1973, the United Kingdom, Ireland, and Denmark joined; Greece entered in 1981 followed by Spain and Portugal in 1986. These twelve members agreed to the Single European Act of 1986, which defined an area committed to "the free movement of goods, persons, services and capital." (3) These are frequently labeled the "four freedoms," and they are now incorporated into the European Community (EC) Treaty and included in the proposed European Constitution. (4)
Subsequent treaties expanded the European experiment and established various institutions to advance its mission. In 1992, the Treaty of Maastricht created the EU-a political union cooperating in foreign policy, defense, and criminal law, in addition to economic relations. (5) The same year, a majority of member states adopted the Euro as the EU's currency and established a new European central bank to supply a common monetary policy throughout most of the Union. The monetary union agreement also imposed specific budgetary responsibilities on the member states. Through the Stability and Growth Pact, these countries agreed to limit their fiscal deficits to three percent of GDP-a limitation that has proved unenforceable. (6) Membership in the EU now stands at twenty-five, and twelve member states use the Euro as their common currency. (7)
The political and legal institutions that govern the EU do not fit easily into familiar categories. Some scholars describe the EU as a pooling of sovereignty. (8) Others regard it as a blend of international law, national constitutional law, and federalism. (9) In any event, the rights and obligations of the treaties apply to the member states and to the citizens of those states, as well as to the EU's governing institutions. (10)
There are four organizations that promulgate and enforce EU rules: (1) the European Parliament (Parliament), which is the only EU governing institution whose members are directly elected by the people; (11) (2) the European Council of Members (Council), which is composed of sitting ministers of member state governments who have the authority to bind their member states; (3) the European Commission (Commission), which has the exclusive power to draft and propose legislation and to implement EU policy; and (4) the ECJ (formerly the Court of Justice of the European Communities), which serves as the EU's constitutional court.
The unique institutional structure of the EU has limited the ability of legislative bodies to formulate member state income tax policy while permitting the ECJ to take a prominent role. In sum, neither the Parliament, the Council, nor the Commission has the authority to adopt Europe-wide income tax measures without a level of consensus that is typically not achievable except in technical and relatively uncontroversial matters. Although the treaties have increasingly involved the Parliament in legislation and have expanded its powers over time (as a way of narrowing Europe's democracy deficit), its authority remains limited. Most of Parliament's enactments must be approved by the Council before taking effect. (12)
Though the Council-considered the EU's "intergovernmental center of gravity" (13)--has the power to regulate commerce among member states and to decide other issues, its authority is also circumscribed. The finance ministers of the member states make up the Economic and Financial Affairs Council (ECOFIN), which has responsibility for tax matters, (14) but they cannot act on income tax issues without unanimous agreement. Consequently, any member state can veto any proposal. (15) In addition, before issuing "directives" or regulations on tax matters, the Council is required to consult with Parliament and the Economic and Social Committee, which is an advisory body consisting of 350 people who represent "various categories of economic and social activity." (16)
The Council is further constrained by the fact that it can act only on proposals of the Commission (although it can request that the Commission study specific issues). There are twenty-five commissioners, one from each member state. Rather than representing a particular country, each commissioner is responsible for a substantive area of EU legislation and regulation. The Commission is the moving force behind most policy initiatives and has often announced its tax policy goals in communications to the Council, the Parliament, and the Economic and Social Committee. (17) The Commission also represents the EU in international organizations including the Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO). Upon a recommendation of the Commission, the Council-subject to the unanimity and consultation requirements-may issue directives on tax matters. Needless to say, adopting directives is a slow and cumbersome process, subject to the veto of any member state, and, as a result, only a few income tax directives have been issued. (18)
However, the Commission does have an alternative to these labyrinthine procedures. The Commission-whose members are required to act independently of their member states' governments and to promote the EU's interests (19)--has the power to initiate enforcement actions against member states and oren brings cases to the ECJ.
The ECJ has jurisdiction to resolve disputes between member states, between EU institutions and member states, and between the various EU institutions. Its twenty-five judges also hear cases involving issues of European law referred to it by the national courts of the member states. Judges are appointed by each of the member states for a renewable six-year term. The ECJ cases we shall discuss here are generally either (1) actions brought by the Commission against a member state claiming that the member state's law violates one or more of its obligations under the EC Treaty or (2) requests by national courts for an ECJ ruling interpreting European legal or treaty requirements in lawsuits involving private parties. Eight advocates general serve the court by issuing opinions on cases before the court itself acts. Much of the time the court follows the opinion issued by the advocate general. ECJ decisions are rendered by a majority vote, and neither the vote nor any dissenting opinions are published. (20) To date, the ECJ has decided more than one hundred cases involving income tax issues, with the vast majority striking down member states' tax provisions on the ground that they violate either one of the four freedoms guaranteed by the treaties or the treaties' bar against discrimination on the basis of nationality.
While the EU's basic separation of powers is familiar to Americans, its specific contours are not. Stripped of all political, social, and economic context, one would be hard pressed to predict whether these institutions would generally operate to expand supranational governance over the member states or to inhibit it. But-at least until the ratification setbacks of the summer of 2005-both European politics and the growing social and economic interdependence within the EU have promoted integration, with greater power and control moving toward the center. Removing barriers to trade, investment, work, and immigration within the EU, along with unifying most of its monetary system, has produced enormous momentum toward the political center.
The institution that has, so far at least, most spurred such centripetal force has been the ECJ. We agree generally with Alec...