International and European tax law 2020-2021
Chapter 1: Introduction
→ Goal of the course: giving an introduction to the field of the European and international tax
law, with sometimes a bit more detailed topics.
→ Exam: Oral exam, but practicalities to be confirmed (maybe teams, maybe campus).
→ BE AWARE: you have to prepare a short presentation of 5 minutes about a case of the CJEU
for the exam!! (more info on page 130)
1. Taxation
1.1 Tentative definition
What is taxation?
It’s traditionally defined as something we can qualify as a transfer of monetary resources.
→ Most of the taxes are paid in money, but sometimes they are paid in rem (e.g. inheritance tax).
→ It’s a compulsory transfer: you HAVE to pay your taxes, even if you don’t agree with them and
there’s a privilege of the administration to levy the taxes.
→ It’s a payment from the private sector to the public sector (the state, the regions).
→ There’s by definition no individual counter performance, meaning: you pay taxes but you can’t
individually claim that you should get something in return. However, people do receive things
in return.
Normally when you buy something, you know what you get for your money. With
taxes it’s different, you do not always know what you get, but you know that the taxes
are used to provide a lot of different public supplies.
What you receive is not determined by how much you pay to the state! You are not
entitled to more or higher quality services if you pay more taxes.
This is how we can achieve redistribution with taxation: we all pay taxes and then
people receive in return what they need.
There are some things everyone receives in return; for example public infrastructure.
There are some things only some people receive (the ones who need it); for example
public health coverage or study costs.
➢ You pay fees to enter university, but the state covers a large part of the study
costs. People who don’t study don’t get that service in return because they
don’t need that specific service.
When do we pay taxes? The triggers are the following:
→ When we earn money (income taxes, labour tax, tax on business profit, etc)
→ When we inherit (inheritance tax)
→ When you buy products and services (VAT =value added tax, excise tax)
→ When you own an immovable property (property taxes)
Principle of territoriality: In order to levy a tax on you, the state must establish a link with you. The
government may only impose taxes on citizens residing or having ownership interests within the
boundaries of their territory. They can only tax people who have a link with the territory.
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, → The link can be residence in the country, but also a situation which is linked to the country for
example an income earned in Belgium -> Belgium can tax.
See later: residence v. source approaches
→ The link with the person or ownership interest is the ground for taxing right. There are many
ways a state can say they have a taxing right over you.
1.2 Main purpose and roles of taxation
1. Financing public expenditure = main objective
→ Taxes are the main revenue source for the states. A state can’t function without taxes.
→ Examples: education, health, justice, defence, public infrastructures, research,,
economic development, development cooperation
→ Without taxes the research for example would only be done for private actors which
pay for it and invest in it because that is profitable. There would then be no public
roads or infrastructures (=compensate market failure).
→ Sometimes private finance is just not enough!
→ Sufficient tax revenue is essential for a democratic state because it allows that
everyone, and not only the riches, have access to education, justice, health care, etc.
Taxes also finance all sorts of non profit organisations or associations that protect
minorities (=concept of redistribution).
→ In most EU countries there are billions of euros collected by the government every
year. Graphics show that 40.3% of the GDP (Gross domestic product= BBP) are from
taxes. But how is this tax income spend?
Most of the spending is to cover social protection and health needs.
Environmental protection (still really small: only 0,8% of the tax income).
General public services,
Education
Economic affairs
Safety
…
2. To encourage or discourage certain activities or behaviours = secondary objective
→ Disincentive: influencing the consumers to not act a certain way, to consume less of a
certain product by levying high taxes. For example: environmental taxes, excise tax.
→ Incentive: influencing someone to act a certain way.
Micro-economic instrument: encouraging someone to do something. For
example: incentives on hiring workers, merit goods, theatre, sport clubs,
school meals.
Macro-economic instrument: encouraging the economy as a whole to do
something. For example: Tax scheme for specific regions, stimulating demand
in times of deflation until full productive capacity is employed.
90% of state revenue is tax income, but what with the other 10% ? What are alternatives for states to
generate income?
→ Borrowing? Yes, states can borrow money on the international market from other states, but
this only works for wealthy countries with a properly working tax system because someone
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, has to be willing to lend at a decent and interesting interest rate, mostly guaranteed by future
taxes or cutbacks in government spending.
If an unwealthy state wants to borrow money the potential loaning states will see a
risk that the borrowing state will not be able to reimburse the money so they won’t as
easily accept to loan the money.
→ Donations (=vacant successions)
→ Selling or renting public properties/assets. For example selling or renting buildings.
→ Interests from shares into public/private companies: sometimes the state is a shareholder in
companies and from that they get dividends.
→ Income from services and supplied to citizens in competition with private sector (e.g.
electricity)
→ Fines and penalties are a relatively stable source of income, but they are still not enough
compared to what taxes bring to the state.
Now, what the government gives, it must first take away… this means that a balance must be found
between the need to raise money from citizens and the need to not harm citizens and economic
growth. Therefore there are a couple of principles developed by economists such as Adam smith.
→ You have to make sure to have an appropriate tax system.
You have to make sure to have a good tax which means that the tax would score
relatively high if you asses it against a couple of bench marks. These bench marks
would be general tax principles. Some of these general tax principles have been
generalised by the EOCD (=European Organisation of cooperation and development).
Besides the general tax principles you also have legal and constitutional principles in
each states which are also important in many fields. The basic legal principles apply
even if the general tax principles apply.
The first and most important legal principle is the principle of legality, meaning that if
the tax is not foreseen by the law, there is no tax. This is very important regarding tax
planning strategies, tax avoidance and tax fraud. As long as something is not illegal you
can’t punish it, you can change the law for the future and make it illegal, but not
retroactively.
→ You need strict procedures to adopt new taxes and increase existing taxes (legal principles:
rule of law: burden of proof, rights of defence)
1.3 Internationally recognised tax principles (OECD)
The following principles are important to considerate when you want to create a new tax. View the
potential new tax through these principles to see if the tax is good and appropriate. These principles
are also important to assess an existent tax.
E.g. if you want to analyse the VAT system: The VAT is complex and is only getting more complex
because the economic activities and businesses are also getting more complex. In this case if you want
to reform the VAT system you will first have to prove that the system as it is now is not optimal based
on the tax principles (ability to pay, certainty, etc). Based on the following principle you will be able to
find the weak spots of the system and find where to improve it.
1. Ability to pay/equity
→ This is an essential trait of a good tax system. It means to have a tax system that takes
into consideration the ability to pay of the tax payer. If you have tax payers that pay in
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, accordance to their ability to pay we can speak of equity and we have an equitable
tax. We can distinguish horizontal equity and vertical equity.
Horizontal equity: the tax burden should not vary among people having similar
standard of living = someone who is in the same situation as me has the same
tax burden.
Vertical equity: how should the tax vary across people with different living
standards? The taxpayer contributes in proportion of his resources. If you
have more you are able to pay more.
→ This is the opposite of the “benefit principle”: some economists raised the question if
we shouldn’t be able to determine the taxation based on how much we get from the
state?
E.g. if you are often sick, you use health coverage more, so you pay more. If
you go to court more often, you pay more. If you go to the museum often, you
pay more.
This would be possible to a certain extent, but is very difficult. This is at odds
with basic characteristics of tax which is that you pay without specific
counterparty.
This was never applied. You should not pay in proportion to what you get, you
should get in proportion of what you need.
What does the “ability to pay principle” mean in practice? In income taxes for example it can
be implemented by imposing:
→ A tax burden that is strictly proportionate to the revenue (=imposing a flat rate)
If you have a flat rate of 40% and you earn 2000 you pay 40% of 2000 as a tax.
If you earn 5000 then you pay 40% of 5000; You pay in proportion of the
revenue, but the percentage stays the same.
With this technic the vertical equity is being preserved.
→ A tax progression, meaning you diversify the tax rate between taxpayers. Taxpayers
that have bigger income should ay bigger percentage of that income to the state
budget.
A lot of states agree with this and think that your ability to pay grows more
than just proportionately. Therefore a lot of states use progressive income tax
systems (e.g. Belgium) where the tax is applied to income brackets expressed
in monetary values. For each slice of income you have different rates that
apply.
➢ Progressive systems produce higher rates of taxation for the highest
incomes. which is the desirable result based on equity since it makes
taxation more consistent with the principle of ability to pay and
favours redistribution of incomes, and therefore increases vertical
equity
➢ The assumption is that the ability to pay increases more than strictly
proportionally.
➢ There’s no need to have a lot of brackets to be progressive. You can
also have for example 2 brackets with 2 different tax rates to be
progressive. A system in which there is no tax under a certain level of
income and then low level of tax above a certain threshold and then a
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, much higher level of tax above a higher threshold is also enough to be
considered a progressive system.
BUT are progressive systems always more equitable? How do you make a fair
progression? From what moment do you determine that someone’s ability to
pay increases? Is it indisputably fair to rax more those who earn (and work?)
more? This is a matter of political and ethical judgement.
→ Are progressive income tax systems more equitable than flat rate consumption tax
systems? Two questions can be asked here: how do you determine the ability to pay
and are progressive fairer than tax rate?
How to determine “ability to pay”?
➢ Is income the right indicator of ability to pay? And is only income an
indicator? What about patrimony, shares, money on bank accounts,
real estate, money you earn out of rents?
E.g. an individual having family money and not working has no
income so he isn’t progressively taxed, but he lives out of
untaxed or very low taxed interests. Is this fair?
➢ The advantage of the progressive income tax system is that you are
able to take into consideration the personal situation of the person by
personal deductions. This is only possible with the income tax, not
with the VAT for example (see a few lines further)
E.g. it’s fair that a single mother with 3 kids pays less income
tax than a couple with 1 child.
But if you go to a restaurant you will not pay less because
you’re a single mother with 3 kids.
➢ Are other tax bases more equitable? Lately there has been a lot of
political discussion about taking other things as a base do determine
the ability to pay. For example:
expenditures (necessity goods taxed less than leisure)
savings, real estates, etc.
→ Back to the question: Are progressive fairer than flat rate?
Concerning the VAT you’ll often hear that it is a regressive tax because you can
not take into consideration the personal situation of the tax payer. Because of
this, most VAT systems include reduced VAT rates.
Flat VAT rate proportional in themselves because the burden of tax will
depend on what the customer chooses to buy (and the assumption is that rich
people buy more and more expensive).
➢ E.g. everyone needs electricity, including the poorest, therefore you
need a reduced VAT rate because this is a commodity.
➢ We also have reduced rates on food, water, medicines etc.
➢ In the UK even kids shoes are taxed at a reduced VAT rate.
This is considered as a way to mitigate unfairness and to make sure that also
poor people can afford these necessity goods.
BUT who benefits from reduced rates? It has been proved that reduced rates
are not always a good idea. Why is that?
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, ➢ Because if you are able to identify goods that will mostly be used by
poor households, than yes, the reduced rates have a progressive effect
and positive effect.
➢ But because richer households consume more in aggregate terms than
poorer households, rich households can still be expected to gain more
in aggregate terms from a reduced VAT rate (though still less in
relative terms).
E.g. poor and rich people consume bread, because it’s a
necessity good. It’s not because you’re rich that you are going
to consume less necessity goods. The amount consumed by
rich and poor people here is roughly equal.
➢ If a reduced rate is provided for goods or services that the rich
consume proportionately more of than the poor then that reduced
VAT rate will actually have a regressive effect.
➢ In practice, the size of the tax reduction from a reduced VAT rate will
depend on the actual consumption patterns of households.
➢ Another problem: sometimes reduced rates are targeted at services
or goods that are mostly used by rich people (restaurants, theatre,
opera, etc): in this case those with more ability to pay will actually have
a kind of “tax saving” because they will be able to benefit from the
reduced rate even if they would be able to pay the full tariff.
The positive/progressive or negative effect depends on the product. Who benefits
more from reduced rate on:
➢ Food?
➢ Pharmaceuticals? Poorest households are also those who have the most
health conditions associated to the fact that they are poor, so they tend to
use more pharmaceuticals. This means that here, the reduced rate on
pharmaceuticals may have a progressive effect.
➢ Restaurant food?
➢ Theatre and museum?
➢ Clothing? If you buy a pair of shoes that cost €500 you have a huge tax
saving if the VAT rate is only 6% ad not 21%. If you are able to pay a pair
of shoes €500 then this huge reduction was not really necessary, because
you have the ability to pay.
CONCLUSION: There’s an usual assumption that reduced rates are good for poor
households because they are a correction to the VAT systems which are in principle
not progressive, but this has to be nuanced. A case by case critical analyse is
needed if you want to know when it has a positive effect.
2. Certainty
→ Often combined with simplicity, meaning: tax rules should be clear and simple to
understand so that taxpayers know what and when they have to pay→ guarantees
certainty.
→ Why is this important?
Certainty is an important factor for companies to decide to invest. Too many
changes in legislation is a disincentive to invest. Certainty is an incentive for
business to come and invest in your country.
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, A simple tax systems makes it easier for individuals and businesses to
understand their obligations and entitlements. As a result, businesses are
more likely to make optimal decisions and respond to intended policy choices.
If the system is complex you need a specialist to survive in the tax legislation
which leads people to think about tax planning strategy and how to have the
lowest taxes and eventually go abroad. complexity favours aggressive tax
planning, which may trigger deadweight losses for the economy.
3. Efficiency
→ This refers to the cost that is related to the functioning of the tax systems on 2 sides:
The side of the taxpayer: compliance cost
➢ Includes all the costs incurred by suppliers in relation to fulfilling their
tax obligations, i.e.: money costs related to time cost (filling returns,
collect the data, acquire the knowledge, travel to tax office),
counselling costs (professional advice from accountants, lawyers),
litigation costs.
➢ Should be proportionate.
➢ Compliance costs borne by “unpaid tax collectors”. Basics of good
governance to reduce them. Otherwise, risks of evasion (public policy
concern). Also good governance: make system clear and not change
too often, because any change incurs compliance costs to get used to
it – certainty.
➢ Compliance costs much greater than admin costs. Compliance costs
not smaller for small operators because large operators can make
economies of scale. Regressiveness of compliance costs.
The side of the administration: administration cost
➢ E.g. If you create a tax that can bring 1 million of income but the cost
of organizing and implementing it would cost half a million, then it’s
not worth it.
➢ The purpose of tax is to create revenue, not loss! It should not cost
too much to administer the tax otherwise it’s costing money to
citizens without a valid purpose. The costs should be proportionate to
the expected revenue.
➢ High administration costs increases the amount of tax that needs to
be levied.
= both costs should be as low as possible!
→ Often there has to be a trade-off between different principle because it’s not always
possible to create a tax that scores high on all the principles. Progressive systems for
example might score high in terms of vertical equity, which is positive, but they
increase complexities and therefore compliance and administration costs.
Compliance: progressive taxes implies keeping account of be able to give a
clear account of income generated in order to make it possible to the tax
administration to verify compliance. This requires advanced accountancy
rules.
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, Administration: more difficult to monitor and operate in less developed
economies or in economies largely rural (less skilled taxpayers, makes controls
more difficult if faraway from cities where admins are).
➢ E.g. in the progressive income tax system you take a lot of personal
information into consideration to determine the most equitable tax
rate (number of children, single or not, etc). From the “ability to pay”
perspective this is very positive, but this also requires way more work
and therefore more costs to administrate the tax. So from the
“efficiency” perspective it will score bad. This is why we will decide to
not take into consideration ALL the personal information so that we
can find a balance between the principle of the ability to pay and the
principle of efficiency.
4. Neutrality
→ = the key principle
→ This raises the question of the incidence/ impact of the tax.
Who is the tax going to impact? This has to be the person you want/ plan to
impact.
Is the conduct of the taxpayer likely to be modified on accounts of the tax?
→ E.g.: neutrality and consumption taxes:
the point of a consumption tax is to hit the consumer, but will the supplier be
able to actually fully shift the tax burden forward to the consumer?
If you buy a desk in Belgium for example, you pay 21% VAT on that desk. That
21% will be added to the price the consumer pays. The seller of the desk
decides about the price of the desk and then adds the worth of the tax to shift
the tax burden on the consumer. This is what the legislator had in mind and
who he planned to hit with the tax.
This is the assumption that the supplier is able to fully shift the tax burden on
the consumer, but in reality this will not always be the case. It is generally
accepted that the ability of the supplier to shift the tax burden forwards to
consumers in the form of higher prices actually depends on his market
position and on the price elasticity of demand.
➢ If the demand Is very price elastic (=responsive and sensitive to price
changes) then even if the price doesn’t increase a lot when the tax is
imposed, the demand will fall significantly. In this case the supplier
will not be able to pass the entire tax burden to the consumer. The
consumer will have to reduce the margin of his price to fit the worth
of the tax in the price without it increasing. The burden of the tax will
also lie on the supplier in this case, and this is not the person that the
legislator wanted to impact with the tax.
For example: a new excise duty on pineapples will probably
decrease demand because consumers are likely to turn to
other fruits. In order to avoid that, the supplier might rather
absorb the increase and reduce its margin.
➢ If the price demand is inelastic the supplier will be in a position where
he can pass the burden of the tax to the consumer, because
consumers are less sensitive to price changes. In this case he quantity
demanded will only fall very slightly or not at all even if the price
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, increases due to the incorporation of the amount of the tax. This is
the case for products that can’t easily be substituted.
For example: car fuel. People need it and cannot tank with
anything else (some rare alternatives, would require to
change car). Cost will be passed to consumer.
Same with addictive products such as cigarettes. There’s no
alternative here other than to quit.
→ Neutrality and direct income taxes: does an increased tax burden automatically result
in increased tax revenue?
If you apply and income tax, the person you want to hit is the earner, not the
person/company employing the earner. There can be different results of this
increased tax burden:
➢ The income effect: Taxes reduce my purchasing power, so I should
work more to pay for the things I want, therefore taxes should make
me work harder. = positive impact!
➢ The substitution effect: since I’m getting less money for each hour I
work, I should work fewer hours because your work reward is less so
you substitute away from work towards other things. =negative
impact where the state ended up not having more tax revenue!
It’s also possible that the tax increase cannot be forwarded to the worker and
that the employer must absorb it. This might happen if the employer doesn’t
want to lose a good skilled worker by paying him less. In this case the legislator
doesn’t hit who he planned to with his tax. This might result as follow:
➢ Redundancies of less skilled employees in order to keep the same
salaries for fewer well skilled workers.
➢ increased end price of final products.
5. effectiveness and fairness
→ Taxation should produce the right amount of tax at the right time, while avoiding both
double taxation and unintentional non-taxation.
→ The potential for evasion and avoidance should be minimized. Otherwise it’s always
the same who pay: those who can’t afford to avoid taxes by moving to another country
or tax planning, etc.
→ The goal here is to have a fraudproof system.
→ You will also see a trade off here: you want the legislation to be robust against fraud,
but again it can not be too complex otherwise the costs will get too high.
→ Level playing field between competing businesses.
2. Direct and indirect taxes
The traditional distinction between direct and indirect taxes is based on who actually suffers a
corresponding reduction of his/her income:
→ Direct taxes : taxes are borne by those who actually pay it to the government.
E.g.: income taxes by individuals and companies, property taxes, wealth taxes.
Personal situation usually has impact on the tax
→ Indirect taxes: borne economically by final consumers but paid by suppliers.
E.g.: excise tax, VAT, inheritance tax
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, Personal situation has no impact on the tax
In this case the taxpayer, the person responsible towards the treasury, will be
the third party that collects the tax (for example the notary in case of
inheritance tax)
E.g. VAT: the consumer pays the tax because the tax is incorporated in the
price paid to the supplier, but it’s the supplier that has to collect that tax and
pay it to the state. If the supplier doesn’t do that (or doesn’t do it right), the
state will come for the supplier, not for the consumer.
It’s important to realize the importance of indirect taxes! For a long time tax
on income was the biggest part of the total tax revenue, but this is no longer
the case. The indirect taxes, and most specifically the VAT, are now an
increasing share of the tax revenue.
➢ Illustration the tax structure:
➢ Illustration 2: the tax revenue of the OECD member states:
➢ Illustration 3: the tax revenue in the US: In the US there’s a
consumption tax system, but there’s no VAT system, and the graphic
show that consumption taxes only produce 17,6% of the tax revenue.
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