Flunking the ECJ's Tax Discrimination Test

Abstract

Under the standard the European Court of Justice (ECJ) uses to evaluate tax discrimination cases, a Member State discriminates when it taxes cross-border economic activities more than “similar” purely domestic activities. To determine when this occurs, the ECJ compares the complaining taxpayer, often a nonresident with economic connections to the defendant or “host” Member State, to a similarly situated resident taxpayer with only domestic economic activities. If the nonresident receives worse tax treatment than the similarly situated resident, the Court generally concludes that the host Member State discriminated against the nonresident. However, the ECJ has provided little guidance on how to select the appropriate internal taxpayer for comparison. Because the choice of taxpayers to is tantamount to deciding the discrimination question itself, failure to clearly articulate standards for identifying comparable taxpayers or situations renders the Court’s decisions arbitrary and unpredictable. This highly formalistic methodology for deciding controversial tax cases, allows the European Court of Justice to avoid the challenge of weighing the harms of tax discrimination against the benefits to Member States in retaining autonomy over their tax systems. By eschewing normative analysis in favor of formalism, the Court engenders significant legal uncertainty both for taxpayers contemplating intra-Community investment and for Member States dependent on tax revenues. This uncertainty tends to undermine the very economic integration the prohibition on tax discrimination was meant to foster.

Keywords: European Union, tax, international tax, tax discrimination, ECJ, Biehl, economic integration, protectionism, tax exportation, tax preferences, exit restrictions

JEL Classification: F15, H20, H24, H70, H77, K34, K35, P52