Judicial cooperation and legal interpretation in European Union tax law.

Author:van Brederode, Robert F.
 
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  1. INTRODUCTION

    The relationship between European Community (EC or Community) law and the national laws of its member states is complicated. The treaties establishing the European Communities (2) have created a law system sui generis, i.e., separate from that of the individual member states, with its own terminology and underlying legal principles. (3) Community law is the common internal law of the member states rather than a law between the states, as is the case in traditional international law. Beyond the mere creation of mutual rights and duties between the states, as under traditional international law, Community law regulates the relation between the Community and its subjects, including member states and private and legal persons, and between these subjects amongst themselves. (4) As a distinctive legal order, Community law regulates the powers, rights, and obligations of the Community and its subjects. Community law also provides for the procedures required for determining, adjudicating, and sanctioning infringements of the law. (5)

    Community law is not common law or civil law; therefore, legal principles and precedent developed under common or civil law have no direct bearing on Community law. (6) Even if the same legal terminology is used, the meaning is not necessarily the same. (7) According to established case law of the European Court of Justice (ECJ), Community law has priority over the national laws of the member states. (8) Primacy of Community law arises from the treaty itself, because realization of the objectives of the EC, particularly the establishment of a common market, would be illusory without the treaty. (9) Primacy in this context should not be read as hierarchy, but be understood in terms of substitution. When a country accedes to membership of the Community, it voluntarily limits its sovereign rights in favor of the Community it has decided to join.

    In interstate legal transactions, interpretation of the agreement is a matter for the contracting parties. However, the actions of the contracting parties of the EC and their subjects are supervised by the ECJ. Therefore, the ECJ has a unique role. National courts operate within, and can rely on and refer to, their national legal tradition, but that was not the case at the European level. The ECJ had to create such a legal order from the texts of the treaties, while referencing general principles of law, such as good faith, legal certainty, equality, legitimate expectations, proportionality, (10) and abuse of rights. (11) These principles are derived directly from the treaties, or are common to the legal systems of the member states.

    There also exists a cooperative relationship between Community law and the laws of the member states. Community law may refer to national law (12) and national law may supplement Community law (13) or serve to implement it. The extent to which Community law affects member state national laws depends on the legal instrument applied to shape Community policy. The most important legal instruments are regulations and directives. A regulation is directly applicable in every member state (i.e., it does not require any action by the national legislature), and it can convey rights to, and impose obligations on, the member states, their bodies, and individuals. (14) A directive, however, is only binding on each member state as to the result to be achieved, and leaves to the national authorities the choice of form and methods. (15)

    Member states are required to loyally cooperate with Community law, a principle derived by the ECJ from article 10 of the EC treaty. This principle includes the legal obligation of the states to pay damages for losses incurred by individuals as a result of the non-compliance of a state with Community law. (16) Private parties may invoke directly effective provisions of Community law before their national courts, even in cases where national rules conflict with, or deviate from, Community law. In the latter case, national courts must refrain from applying these national legal measures; not because Community law is of a higher order, but because the national legislature has acted ultra vires. (17) The national courts are entrusted with the legal protection of citizens under Community law (18) and legal actions must follow national legal procedures and national rules on court jurisdiction. In this sense, national courts also act as Community courts. As a general rule, a litigant who wishes to invoke Community law must approach a national court. There exists no direct access to the ECJ for private parties, with respect to Community regulations and directives. Therefore, the impact of Community law on the national systems of law is, first and foremost, in the hands of the national courts.

    The ECJ is not placed above the national courts. The ECJ and the national courts have distinct jurisdictions, but they cooperate where Community law overlaps national law. Judicial cooperation is a key element in assessing the extent to which Community law affects national law or, from a different perspective, measuring the effectiveness of Community law. Section III of this article addresses these distinctions. Another determining factor of Community law effectiveness is the method of interpretation used by the courts when called to explain Community law. Section IV covers the methods of interpretation, with an emphasis on tax case law. Section II explains how the choice of tax case law is a natural one because taxation, particularly value added tax, plays a crucial role in realizing the common market. When discussing the methods of interpretation, we will focus on the guidance provided by the ECJ and then examine, through a limited number of examples, the judicial practice in the UK and the Netherlands. Summary and conclusions are found in the final section.

  2. THE ESSENTIAL ROLE OF TAXATION IN REALIZING THE COMMON MARKET

    The EEC treaty specifies the political and economic objectives of the Community as: (1) the promotion of a harmonious development of economic activities throughout the community; (2) a continuous and balanced expansion; (3) an increase in stability; (4) an accelerated raising of the standard of living; and (5) closer relations between the states. The most important tool to realize this is the establishment of a common market. The common market has internal and external components. Externally, its aim is to create equal treatment of foreign trade among the member states. This is realized by the introduction of a common customs tariff. Internally, a single economic area including all member states, would be created, establishing free competition among businesses regardless of their location or nationality.

    The foundations for the internal component are laid down with the formulation of the so-called four freedoms--the free movement of persons, services, goods and capital. (19) The free movement of goods, the most important of the four freedoms, implies the abolishment of existing and prevention of future trade barriers. This is partially accomplished by founding the common market on a customs union. A customs union (20) implies the establishment of a common outer tariff--replacing the preceding tariffs of the different states and preventing the diversion of trade (21)--and the abolishment of internal import and export duties among the member states.

    Nevertheless, distortion of intra-community free trade by individual member states would remain possible through discriminatory border tax adjustments (BTAs) for other indirect taxes. Under the destination principle, applied with respect to indirect taxes in the EU as well as in almost all other countries, goods and services should be taxed where they are used, consumed, or enjoyed. Therefore, imports are taxed and exports need to be relieved from indirect tax. It would be relatively easy to sponsor domestic production by combining a prohibitive import tax with a generous export restitution system. In this sense, the tax provisions of the treaty serve to guarantee the proper functioning of the common market, particularly the free movement of goods.

    The founding states realized that differences between the states in indirect tax systems could be the route to distortion of competition. Based on past experience, (22) they feared that the abolishment of internal customs tariffs, required to constitute the customs union, would simply trigger replacement by discriminatory BTAs for other indirect taxes. One of the problems was that all of the founding member states, with the exception of France, applied gross receipt taxes (GRT). A gross receipt tax is levied at each stage of the supply chain, from manufacturer to final consumer. Under the assumption of the forward shifting of taxes, exact calculation of the domestic tax burden on a certain product cannot be accommodated under a GRT system because the tax actually incurred will depend on the length of the supply chain and the level of vertical integration. (23) As a result, it is equally impossible to determine the tax rate to be levied on importation, or to be rebated on exportation, in order to create a level playing field of competition.

    It was clear to all involved that BTAs based on estimations were in violation of the principles of neutrality and fair competition and, therewith, would threaten the realization of the common market. Harmonization of the general sales tax systems would be required to avoid tariff manipulation at the border, in an effort to create competitive advantages for domestic traders. (24) The choice was eventually made to replace the existing GRTs with a non-cumulative sales tax system, the value added tax (VAT), that al lows exact calculations of border tax adjustments. (25) Like the GRT, a VAT is also levied on the sales that occur at each stage of the supply chain; however, unlike the GRT, a VAT provides a credit for the tax incurred on procurement.

    A...

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