Income Tax Discrimination and the Political and Economic Integration of Europe

By Graetz, Michael J.; Warren, Alvin C., Jr. | The Yale Law Journal, April 2006 | Go to article overview
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Income Tax Discrimination and the Political and Economic Integration of Europe

Graetz, Michael J., Warren, Alvin C., Jr., The Yale Law Journal



   A. Discrimination Against International Commerce Under International
       Trade and Tax Treaties
   B. The Corporate Income Tax Decisions of the ECJ

   A. Legal Implications
      1. The Demise of Imputation
      2. The Future of Tax Incentives and International Double Taxation
   B. Fiscal Policy Implications

   A. The Path of Greater Harmonization
   B. The Path of Greater Autonomy

   A. Comparable Decisions of the U.S. Supreme Court
   B. Implications of the ECJ Decisions for the United States



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.

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