International and European tax law
General information Lecture 1 (14/2)
- Every Friday the professor will put the slides on canvas for the next class.
- This class is taught in English. The main language in the international and European
tax law is English. A big player in the international tax landscape is the OECD 1 and this
organization is the standard setter for international tax law and the main language
here is also English (as well as French).
- On the exam we will have to prepare a case (decision of the European Court of
justice) in advance. We will have to make a summary of this case and present it on
the exam. The second part of the exam consists of open questions without
preparation.
- We can bring the OECD model convention to the exam. We can also bring the
commentary on the OECD model convention, however the professor will be tempted
to ask questions about the commentary if we bring it. So, it’s best to leave the
commentary at home.
- The professor will not ask us to make difficult exercises on the exam, because it’s an
oral exam. He will question us about the different provisions (for example: what does
article 7 of the OECD MC say and how are the taxing rights divided? → You can use
the OECD MC as a starting point, but you also have to give examples that we have
seen in class).
- See end of summary for example questions for the exam.
Introduction
Governments need money and they need to find a way to get this money. Since 2008 there
is a lot of attention for the big multinationals who don’t pay their fair share of taxes.
Recently the international tax law is in the news a lot and the international tax law plays an
important role in our day to day lives and it’s a very relevant topic.
Ex. Person X (a Belgian resident) buys shares from tesla (a US company) and they
decide to give dividends to the shareholders. The question rises which country can
tax those dividends. The US will say that tesla is a US company and that they can tax
the dividends because the source is in the US. Belgium on the other hand will say that
it’s a Belgian resident who receives the dividends and they can tax the dividends.
Ex. Some people hide their money in tax havens (see: Panama papers, Pandora
papers,…). There are certain constructions in tax havens or countries that make
agreements (rulings) with taxpayers where they have to pay very little taxes.
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Organisation for Economic Co-operation and Development (Organisatie voor Economische Samenwerking en
Ontwikkeling).
,There is a lot of criticism on the fact that a lot of multinationals don’t pay their fair share of
taxes. But, in a lot of cases there are countries who offer benefits to these multinationals
where they have to pay verry little taxes. For example, a lot of multinationals have a
European headquarter in Ireland because Ireland has a corporate income tax of 12,5%,
whereas in Belgium it’s 25%. There is a lot of tax competition between countries to attract
investments.
Ex. In the news there is a lot of talk about a global minimum tax that they want to
introduce. The OECD wants to introduce a minimum tax of 15% for multinationals
with an annual revenue above 750 million euros. Wherever this multinational is
active, they should at least pay 15% of taxes. This idea is very easy to sell to the
public and most people would find this a good idea, but the downside of this idea is
that it takes away the sovereignty of member states to design their own tax system.
These examples are given to demonstrate that the international and European
tax law is a hot topic. Another important evolution in the international tax law is
the digital economy (ex. Google, Amazon, Facebook,… → these companies make
huge profits, but pay verry little taxes. We will address this evolution as well).
Part 1. Setting the scene
1.1 Taxation as an obstacle for cross-border economic relations
We are going to start with the basic principles of international and European tax law.
Example 1: individuals
Person X lives in Belgium. Person X recently graduated and receives a job offer in Germany.
Person X decides to keep living in Belgium and five days a week he will commute to work in
Germany. The question is where will person X pay taxes on his income?
→Germany will say that person X works in Germany and the source of the income is
Germany, so Germany should be able to tax the income. On the other hand, Belgium will say
that person X is a Belgian resident, and he lives in Belgium, so Belgium should be able to tax
the income.
Both countries will have a right to tax. If both countries tax at 40%, person X will be taxed
twice and there will be a double taxation. On an international level there are double tax
treaties to solve this problem, but within the EU, they want to create an internal market. If
there is a double taxation, this hinders the internal market and cross border business. So,
within the EU it’s important to look at the double tax treaties, but it’s also important to look
at the European framework.
,Example 2: legal persons
The problem of double taxation not only rises in the context of individuals, but as well in the
context of businesses.
Person X has his own company in State A (Belgium) and starts selling beer. The business is
doing well and person X wants to expand his business and he wants to open a store in State
B (France);
Belgium will say that it’s a Belgian company and they have a right to tax. However, State B
(France) will say that the store is located in France and French people buy the beers. France
will also say that they have a right to tax this. In this case we can end up with double
taxation, but this is not good for the economy. If you want to stimulate economic activities,
we need to find a solution to address this problem of double taxation.
1.2 Basic international principles
During the first lecture we will have a look at some basic principles of international and
European tax law.
1.2.1 Fiscal sovereignty of states and nexus
Every country has the right to design its own tax system and decide which activities they will
tax.
However, the fiscal sovereignty of states is not unlimited. For example, Belgium can’t say
that they will tax American citizens, because there needs to be a link between the state and
the taxpayer. This is called the “nexus requirement”. This nexus requirement can be a
subjective link or an objective link:
- Subjective link:
o Concerning individuals this subjective link means that the person needs to
have his domicile, residence, citizenship, nationality from that specific
country.
Ex. The US says that as soon as a person has the US nationality, this person
will be subject to taxes in the US, even if this person is not living in the US.
The reason for this is that the US protects its nationals wherever they are and
therefore they have a right to tax all the US nationals. In Belgium this is not
the case. If a person has the Belgian nationality and he moves to the US,
Belgium will no longer tax this person just because he has the Belgian
nationality.
, o Concerning legal entities/companies they will look at the place of effective
management (POEM) or the place of incorporation.
- There is also an objective link:
o This is when parts of the transaction or activity are connected to the taxing
state.
Ex. A US person buys a house in Belgium and he rents out this house. For the
US there is a subjective link, because it’s a US citizen. However, Belgium will
say that there is an objective link, because the house is located in Belgium.
Belgium will say that the rental income is taxable in Belgium because the
house is located in Belgium, although this person lives in the US.
Conclusion: countries are free to design their own tax system, but they need an objective or
a subjective link to be able to tax the income.
1.3 Sources of double taxation
1.3.1 Universality principle and territoriality principle
How can double taxation arise? There are 3 sources of international double taxation:
1. First situation where double taxation can arise: two countries tax on a worldwide
basis.
Many countries tax their residents on their worldwide income (we call this the
“universality principle” or the “full tax liability”).
Ex. If person X is a Belgian resident, Belgium will tax person X on his worldwide
income, no matter what the source of the income is.
It’s possible that a person has a connection with 2 countries and both countries want
to tax the worldwide income.
Ex. A company is incorporated in country A (the Netherlands), but the board
members are all sitting in Belgium. The Netherlands will say that the company is
incorporated in the Netherlands and they will tax the worldwide income. However,
Belgium will say that the board members are all located in Belgium and they will treat
it as a Belgian company and tax the worldwide income.
The same is possible with individuals: person X lives in Belgium, but he works 5 days a
week in Germany. During the week person X stays in Germany and in the weekends
he lives in Belgium with his family. Belgium will say that person X is a Belgian resident
because he spends his weekends in Belgium with his family. However, Germany will
say that person X lives in Germany and bought an apartment in Germany, so he is a
German resident. In this case two countries will tax person X on his worldwide
income.
