Taxation I - Block 1.pdf

Taxation I - Block 1 (4 definitions) Tax 1. (economic terms) an imposition of costs on individuals or firms by the government; a required payment to a government but not ALL required payments to the government are taxes 2. A required payment to the gover...

Taxation I - Block 1 (4 definitions) Tax 1. (economic terms) an imposition of costs on individuals or firms by the government; a required payment to a government but not ALL required payments to the government are taxes 2. A required payment to the government →under and over-incusive definition as some legally required payments may be made not to the government itself, but to a government-controlled entity; also not all payments to the government are taxes a. Taxes should not include a civil or criminal fine or payments to the government for which taxpayers receive something in return (when does a tax become a fee?) 3. Taxes as a subsection of compulsory contributions → a monetary contribution unilaterally imposed under public law which serves to raise revenues and it is payable to a public authority a. Fees → compulsory contributions paid by the beneficiary of public services; doesn’t need to correspond to the exact cost of the benefit but also not entirely disproportionate b. Contributions → compulsory contributions tied to the contributor’s recipt of a benefit as a result of the carrying out of public works or the establishment or expansion of public services (e.g. sidewalk improvement) c. 4. Taxes → residual category where nothing is received in return (what about their purpose lmao) Direct v indirect taxes Legally, inflation is not a tax Europe and Latin America → well-elaborated statutory definitions of tax and other compulsory contributions. Under those, taxes are seen as a subset of compulsory contributions. Common law countries → may not even attempt to define tax and the meaning may differ according to context. [US Shoe case broad sense of tax] Canada → frequently upheld levies such as license fees, registration fees and regulatory fees EU Law → no single concept of tax, similar to US Shoe it strikes down ad valorem charges as they were not proportionate to the service rendered Brazil → Clash of EU and common law definition with enactment of “contribution for intervention in the economy” Tax v. fee arises in foreign tax credit. Social security payments are legally required to be considered taxes, but they are not treated as such in many countries depending on legislation 18th-19th indirect were the ones whose incidence is shifted Pollock v. farmers; loan & trust Co ruled income tax as direct and hence unconstitutional Canada → both provincial and federal governments are allowed to impose direct taxes, stemming from JSM definition. Income tax → quintessential direct tax Taxes on consumption are considered direct e.g. VAT and excises JS Mill - a direct tax is one which is demanded from the very person who it is intended or desired shoupld pay it. Indirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another (e.g. customs) Acc. 18th-19th ⇒ direct taxes are the ones whose indices are shifted; but modern econ theory sees income taxes changing depending on the circumstances Courts refrain from using economic theory to determine direct or indirect taxes. They have established a typology based on the general tendencies of those taxes and their understanding of them; they have distinguished taxes likely to be recouped as part of the cost of doing business from those likely to be passed on as an element of the price of the transaction subject to tax Estate taxes are indirect while probate fees are direct In Switzerland, Article 129 of the Constitution allows the Federation to harmonize only dlrect taxes. These are understood as including taxes on income and capital, but not on inheritances and gifts. Most important tax worldwide is income tax In some countries it covers individuals and corporations, in others there is corporate/profit tax. It’s a progressive tax when individual hence many pay more in social security than income. Social security tax → usually referred to as a contribution (national insurance contributions), collected like taxes even though not classified as one VAT → most important in many countries, substantial revenue source. Equivalent economically to a retail sales tax, some countries have one or the other and some have both, although VAT is preferred Excise → a sales tax imposed on a limited category of goods, usually at manufacturing stage or of import but might be at retail as well (e.g. gas in the US) Property tax → on land and buildings - personal property tax for specific possessions (e.g. cars, planes, yachts) - In europe net wealth tax on the value of the taxpayer’s total assets net of liabilities - Wealth transfer/estate/inheritance tax Customs duty → the principle revenue before VAT, now crucial for trade not revenue. Procedural significance for tax law, collected from different authority than internal revenue. Involve import duties and export taxes Stamp duties → imposed on transactions like immovables or securities, mortgages or contract execution, taxes % of transaction value. Financial transaction tax that taxes a small % of bank transaction value. “nuisance tax" is applied to taxes which raise little revenue Session 1 - Fundamentals Taxable events No tax life - hypercapitalistic, sovereign tax system - Communism/nationalising industries Tax havens Taxation and tax law despite their technical reputation are relevant to ideology, politics and how does one think a society should function The concept of tax and its mechanics are the reflection of the worldview o an ideology or a group of ideologies. The fact that most western countries adopt a specific system does not mean that it should be shared and adopted by every jurisdiction. Problems with the above definition of taxes - Jurisdtictions → double taxation treaties/bilateral treaties; they exist because countries have different definitions of taxes and in international situation e.g. companies operating in A but residing in B and you need to decide which country levies the taxes to avoid double taxation or double-non taxation - those treaties are a cornerstone of tax law - OECD - A club of free market somewhat wealthy countries that have managed to impose their tax treaty as the most used - After 2008 countries needed revenue and to close the loopholes be mending their tax treaty through the OECD Sources of Tax law - Tax treaties - Tax rulings/confirmations/agreements - decisions made by specific courts and agencies (e.g. IRS). when a taxpayer is unsure of the interpretation of a tax and they go to such a public body that confirms the interpretation of the law in such instances. It affects third parties and is binding. It is seen as a way to get special government treatment and seen in a boad light as frequently favourable interpretation of the law have been adopted in order to reach lower tax rates. Direct taxes - the person receiving the money is the one responsible for paying the tax Indirect - the person paying the tax is not the on receiving the money; easier to collect e.g. VAT The three goals of taxation (reading) Grounds for evaluating tax policy: efficiancy, equity and administrability Consumption v. income tax (bankman & weisbach) 1. CT is mor efficient/ does not discriminate between current and future consumption 2. Equally good at redistribution and hence equity 3. CT easier to administer as it doesn’t tax capital Why do most developed countries employ both income and consumption taxes, and more specifically, the value-added tax (VAT)? Why did the United States switch to taxing primarily income for most of the past century? - superiority of CT was not clearly understood when the United States switched from taxing consumption to income in 1913. What are taxes for?? - To raise revenue for necessary governmental function e.g. provision of public goods - Redistribution, making up for the resulting inequality of a normally functioning market based economy - Regulatory; to steer private sector activity in the directions desired by the government to achieve these goals, a pure consumption tax is not sufficient. Instead, an income or wealth tax is needed, but because of the well-known problems of taxing income or wealth, a consumption tax is needed as well. Thus, the ideal tax system will include both income and consumption taxes, and it is thus not surprising that every single OECD member country except the United States, and most developing countries, rely on both types of tax. Revenue The VAT is second only to the individual income tax in raising revenue in most OECD member countries, it has also been successful in developing countries Walfare state → A principal reason why most OECD economies adopted both income and con- sumption taxes is their fundamental commitment to the principle of ensuring a social safety net for all their citizens. Experience in Europe has shown that very high VAT rates can have similar negative consequences to very high income tax rates. both income and consumption taxes are needed to fund the social safety net. The main reason for that is administrability. Experience from all the other OECD countries has shown that more revenue can be raised from a combination of an income tax and a consumption tax than either alone, even though there is some overlap in the base of the tax. Democratic argument → If the United States replaces the income tax with a consumption tax, this would make it politically much more difficult to readopt the income tax in the future. And both an income tax and a consumption tax will be needed to fund the existing social safety net in the United States, which has near uni- versal support among Democrats. Hence, the revenue argument is a strong reason for Democrats to reject proposals to replace the income tax with a consumption tax. Redistribution a primary goal of the income tax historically was seen as re- distributing wealth from the rich to everyone else. This explains why it was first adopted in the United States (16th amendment), and it also explains why the income tax is persistently maintained today in developing countries that could satisfy their entire revenue needs by the VAT. Non-welfarist v. welfarist views on redistribution can be measured by the Gini coefficient (level of inequality in a society) Why reduce inequality? In a democratic society the majority can legitimately decide on redistribution even if their only reason is that inequality is unfair or aesthetically offensive Arguments on why a democratic society should curb excessive concentration of power  1. Democracy - all power is ultimately accountable to the people hence private accumulation of power is unaccountable 2. Liberal conception of equality - Waltzer’s “complex equality”; every social "sphere" should have its own appropriate distributive principles and that possession of goods relevant to one sphere should not automatically translate into dominance in other spheres as well. Watzer hence advocates taxation as a means of restricting the market to its proper sphere while recognising the limitations of all redistribution in order to avoid diminishing the market 3. J-curve theory/negative effect of extreme inequalities - revolutions are most likely to occur in societies that have experienced a period of economic growth that lifts the standard of living and expectations of all members of a given society, followed by an external or internal shock that reduces the standard of living of the majority while leaving the rich unaffected. Rising inequality, even when accompanied by improved standards of living for an entire society, poses significant hazards should we only use consumption taxes to fund government activities, and rely entirely on the spending side to reduce inequality? NO 1. Politically dangerous to rely entirely on spending decisions for redistribution 2. Experience in other countries apart from the US shows that income tax can have a significantly redistributive effect 3. The use of income and wealth tax has symbolic value Wealth tax is not a viable candidate to use on the side of the income tax as it is problematic politically, constitutionally and administratively - hence possibly federal level consumption tax Regulation Income tax has been seen as a regulatory tool from the beginning. Through it government can achieve “supervisory control of corporations which may prevent a further abuse of power” The hayday of using income tax as a regulatory tool came post WW2, as part of a general tendency to entrust regulatory powers to the state. Regulatory provisions (taz expenditures) clashed with other taxation goals e.g. they made the income tax less effective in both raising revenue and redistribution since most of the expenditures overcomplicated the code. Third goal of taxation → regulation of private sector activity by rewarding activities that are considered desirable and deterring activities that are considered undesirable Implications for tax reform: - Some private activities can best be regulated by consumption taxes (e.g. deterring consumption of tobacco or alcohol) - Relation to investment and saving behaviour; the biggest tax expenditures tend to be those that encourage individuals to invest for certai goals (e.g. retirement, housing or education) or corporate investments. Conclusions Revenue Redistribution Regulation Explains why for most redistributive unconsummed Explains the political resilience countries both income and wealth of the income tax since only by  consumption taxes are needed Explais why the US adopted taxing savings can polticians to support the social safety net the income tax and why regulate savings and developing countries insist on investment behaviour retaining the income tax Consumption tax neede for all three; To raise revenue when the public sectors require more of it, to achieve redistribution by taxing consumption and consumptions is more easily regulated by CT than income taxes. Session 2: the three goals of taxation Welfare state is the mainstream in the west, meaning that the state is in need of revenue to finance its activities. There could be alternatives for raising revenue like nationalising industries which could be the case for select institution within the state. If you think there a link between poverty and inequality you will require some sort of redistribution in order to counter poverty, the other side might argue that redistribution is not needed. The erosion of democracy is the strongest argument for redistribution The problem with using the regulatory function for things you want to prevent is that the stae becomes dependent on activities it deems wrong e.g. tobacco use Pigouvian tax - how to use taxes to influence behaviour, what products can be taxed depending on their elasticity Tax Administration (Reading) Commonwealth countries → separate tax administration provisions in separate substantive tax laws. Each tax law is standalone containing both the substantive rules and the rules of tax procedure. Not optimal - leads to divergence of procedural rules and duplication of legal norms. Preferable to bring together procedural rules for all taxes; peculiar provisions to specific taxes are dealt with in separate chapters or grouped together with the substantive rules for the tax - UK → Taxes Management Act 1970 - New Zealand → consolidated Tax Administration Act 1994 - S. Africa → Tax Administration Act 2011 - Scotland → Revenue Scotland and Tax Powers Act 2014 Countries with all tax laws in one code do not face such issues. European and Latín American countries → tax codes whlch contain the general rules for taxation, including procedural and administrative provisions. For them tax codes are codes of the general taxation rules with specific guidelines contained in a seperate law for each tax. Most tax codes are descendants of the 1919 german tax code. Internal organisaiton of tax administration  1. Return filing US → almost universal filing while it is significantly lower in most OECD countries Developing countries → the goal is to limit return filing (through e.g. high tax threshold) as to not occupy the tax administration from more important tasks e.g. collecting taxes from businesses 2. Withholding and information reporting Most countries have shifted collection burden for most of the taxes to the private sector through witholding obligations (individual income tax, social security, sales and excise taxes) France & Switzerland don’t withhold taxes on wages. Only a few countries make extensive use of witholdings ondomestic payments other than wages, interest and dividence. Required information reporting relates to the capacity of the administration to process information and its ability to compel third-party information reporting in the legal framework. Canada → courts allowed disclosure of information stored in US servers. US → most comprehensive requirements and best system of matching individual income tax returns with information returns Austria, Belgium, Luxembourg, and Switzerland → under pressure írom other OECD countries to reduce bank secrecy Japan → lack of a TIN iníluenced the design oí its VAT Internarional information returns → automatic info reporting especially on interest income presupposes that the bank secrecy laws don’t apply, most OECD countries accept automatic info reporting. All OECD countries have Taxpayer Identification Numbers (TNIs) used ot trace taxpayer income across tax types. 3. Advance rulings The tax administration can be approached for advice that will however not be binding. Advanced rulings offer to taxpayers a way to obtain legally binding advice on specific transactions. Many systems still have no provision for ARs but most OECD countries now issue ARs. Sweden & India → ARs issues by independent quasi-judicial body Advanced Pricing Agreement (APA) → type of AR, US and imitated in OECDs; tax administration agrees to respect prices for the transfer of goods and services amazon members of a corporate group. Possible involvement of more than one Tax Administration to avoid inconsistent determinations US → rulings sought to obtain assurance of the tax treatment of large transactions Brazil → rulings are risky, common for ARs to adverse to the taxpayer France → a ruling can be obtained against application of the abuse of law rule of article L64 but taxpayers rarly apply for such rulings Germany → system of binding commitments following a tax audit, similar effect to ARs in that the treatment of an issue drtermined in the audit might be extended to future years. A binding commitment may be revoked but only prospectively. 4. Audits Germany & Japan most intense field audits followed by the US and last the UK Key difference of audit procedure; Common law countries follow a more informal procedures for tax audits in comparison to civil law countries that allow the administration to do only what is allowed by law, particularly in France and Germany. 5. Dispute resolution Right of appeal to the tax administration is available to all countries. There are usually two stages 1. Quasi-independent appeal that settles cases on the basis of the hazards of litigation; solves most cases before they reach the court = Administrative review 2. If it’s not resolved it is referred to the court system; specialised tax courts might exist in some countries while civil tax cases are usually heard in civil courts. a. France → tax cases are heard in two different court systems i. Conseil d’etat - income and turnover taxes ii. Cour de Cassation - registration duties , wealth tax and excise tax b. Germany → all appeals go to a specialised tax court system, no appeal in the decisions of the Federal Tax Court but for appeals on constitutional grounds filed witht he Constitutional court c. UK → general and Special Commissioner d. US → system of possible appeals to 3 different sets of courts; minimal societal benefits i. Tax Court → taxation experts; rulings withold the tax system integrity, sympethetic to the government’s economic substance attacks but also will reject the government’s arguments shall they be inconsistent with the law ii. Federal districts courts → not tax experts; favour taxpayers more than the tax court. Taxpayers must have paid the tax in dispute beforehand, which is not needed for the Tax court. iii. Court of Appeal → No tax experts; many appeal court judges = no uniform apprach. Disputed tax does not need to be paid in many OECD countries. Some countries do not require payment until the review process is completed on the grounds that until that process is complete the tax liability has not been confirmed by the Tax Administration. Most countries allow collection of undisputed tax owings. Burdens of proof - Proving that an assessment is incorrect is placed on the taxpayer in civil law countries but shifts to the authority when e.g. a penalty has been imposed - In some countries the authority shall prove taxable income and the taxpayer expenses - France → tax administration has the burden of proof in certain cases when invoking the doctrine of abuse of law. - Countries of ten require taxpayer to prove bona fides of transactions with tax havens France → taxpayer’s representation to the tax administration that a certain factual situation existed binds the taxpayer. Decrees, regulations, instructions and circulars can be challenged on the grounds of being ultra vires including conflict with EU law 6. Collection General lack of convergence; some countries grant extensive powers to tax authorities and other require them to go to court US → IRS has the power to impose liens and collect taxes without going to court, but has to be seen in the context of rules for tax payment: the taxpayer can always go to Tax Court and stay any collection util the tax is determined Question of seizure of assets by tax administration - constitutional (e.g. argentinian Supreme court prohibits tax admin from seizing assets without court order on the grounds of taking property without due process) Where the tax laws themselves contain no special rules íor collection, the general procedures íor collecting civil judgments will apply. These procedures may also apply as an alternative to the specialized tax procedures, at the option oí the tax administra­tion. Tax collection rules to be considered in the context of the bankruptcy rules - bankruptcy laws typically set a priority for tax claims, hence the law concerning collection proedure is complex/sui generis for each country 7. Civil penalties Penalties are seen by administration as enhancing the compliance package (from audits to collection) and they focus on the compliance incentive created by the threat of it. US → Penalties are complex with many possible penalties to sort through and difficult issues to whether specific transactions are to be exonerated from application of penalties. Transfer pricing penalties have gained importance, penalties for lack or inadequacy of documentation And more. (most are non-deductable and no relief to be sought) Often there is little attempt to tailor the degree oí the penalty to the fault of the taxpayer. For countries with weaker tax administrations, penalties can be problematic because their imposition almost inevitably involves administrative discretion and hence the possibility for corruption or heavy handedness on the part oí the tax administration. Importance of rate of penalty as well as standard of culpability and available excuses (related to discretionary question of administration) Among the OECD countries, the tax administrations in all the common law countries and some civil law countries have the authority to offer reduced penalties in exchange for voluntary disc\osure. Tailoring penalties - US imposes penalties where the taxpayer’s position relating to specifically defined tax shelters is found to be unjustified upon audit and litigation or when the taxpayer fails to disclose a listed/reportable transaction on its return. ✨ 8. Tax crimes In most countries tax evasion is a crime Germany exception on recent tax prosecution increase (been there done that for years ig) Generally most countries have broad rules on what constitutes tax evasion or tax fraud - difficult task; US → broad tax fraud definition; a conviction for it requires wilful commission, false return filing is such a commission and hence even the failure to declare a small amount is prosecutable as fraud. AUS, US, UK → some tax fraud prosecutions against tax advisors for behaviour bordering tax avoidance and tax fraud - vivid illustration of drawing the line between the two, still controversial 2012 UK → procedure whereby a letter is sent to a taxpayer suspected of fraud giving the opportunity to confess and hence avoid prosecution = Contractual Disclosure Facility 2012 Belgium → revised coordination system for civil and criminal proceedings; if a criminal route is taken no civil penalties can be imposed unless the criminal case is dismissed Switzerland → general tax evasion concept (considered criminal offense punishable by fine) and a subset of tax evasion called tax fraud (punishable by imprisonement). Fine line between conduct that merits: (1) a reassessment oftax, without penalty, (2) a reassessment plus a penalty, and (3) a criminal sanction, and the line can shift as the íacts oí a particular case become known, hence investingation conducted with the same procedure as audits. Practical question of when a civil case turns criminal and what happens next US → courts have found no difficulties with the concept that the tax authorities can conduct an investigation that might result in either prosecution or the imposition of a civil penalty. IF IRS determines that a criminal prosecution should be brought, it turns the case over to the Justlce Department (no requirement that the case be turned over immediately). Limitations on how civil investigation can proceed as civil summonses cannot be used in aid of the criminal investigation. CA → SC ruled constitutional protections for criminal investingations apply once the predominant purpose of an investigation becomes the determination of criminal liability. GER → greater room for investigation by authorities; where no other crime apart from evasion is involved, the admin carries it out. Case presented to court by admin only when a fine is involved otherwise public prosecutor’s office. AUS → tax authorities responsible for penalties, more severe offenses penalties imposed by court. ECHR → broad right against self-incrimination compared to US law as it extend to documentation and legal persons not just testimony. Session 3 Sources of tax law 1. Constitution 2. Treaties a. Double tax treaties (DTT)→ allocate taxing rights 3. EU law a. Directives i. VAT ii. Mergers  4. Specific laws (including non-tax laws with tax provisions) 5. Other regulations (specifically local taxes) 6. General Law principles 7. Interpretation of the law a. Tax rulings b. Case law Tax rulings/Agreements/Confirmations - typically binding not only to the person making the request but if they are made public they can be binding to further cases in certain jurisdictions Common law countries have standalone rules for each kind of taxes while continental europe and latin america have more general tax law or general tax code applicable to all kinds of taxes and then specify the particularity of each tax Tax returns - In case of corporate tax you need to file for returns even if you don’t reach the taxable amount/profit which is not necessarily the case for individual income tax Loss carryforward Audits - when you file tax returns they are reviewed and they might have questions and initiate investigations called audits to make sure that especially in times of self-asessed tax filing everything is being done correctly Elements of a tax case/ assessing if it’s worth the hassle 1. Rate of success - how often do taxpayers win in similar cases? Depends on jurisdiction and topic 2. Do you have to make the payment before the resolution? 3. Burden of proof - depends on the topic 4. Process length - not worth a long time process if we are dealing with a minor incident Tax avoidance v. tax evasion The former is when you use loopholes or unclear parts of the law, ambiguous interpretations in order to avoid some taxation while the latter is straightforwardly having to pay something and not doing so Carbon tax (Reading s5) Market based cap and trade system not optimal due to several practical considerations 1. Too long before it becomes operational due to inherent rulemaking delays 2. Its effectiveness could be undermined by the challengesof setting baselines for emission reduction targets, freed distribution of allowances and the use of offsets instead of meaningful emission reduction measures 3. Even though it promises fixed reductions, there is tradeoff uncertainty; if the price of carbon rises too high there will be political pressur eto relax the cap and remove the primary benefit of the system More effective → Carbon tax on all coal, natural gas and oil produced domestically or imported in the US. Easier to implement, enforce and simpler to adjust if the market-based changes are too weak or too strong.  Would produce revenue that could be used to fund research and development of alternative energy and tax credits to offset any aggressive effects of the tax Much quicker in reducing greenhouse gas emissions; implemented and effective immediately Could be effective in advance of any international treaty = credibility in internatinal CO2 limit negationations The tax could later supplement a cap and trade system Cap and trade could be more politically viable as it is not labelled as a tax or is as transparent about energy price effects. Kyoto protocol 1997 was the first international agreement with mandatory limits on greenhouse gas emissions where developed nations gareed to decrease their emissions by at least 5% below the 1990 levels by 2012 → US and Kazakhstan are the only countries to have signed but not ratified it EU most significant efforts to control CO2 emissions Clean Air Act (CAA)(2008) ⇒ National Ambient Air Quality Standard (NAAQS) 1. Doesn’t require new legislation 2. Title 1 has been used only for 6 pollutants so far but it is a well-established method of addressing US air pollution 3. All sources of CO2 emissions could be addressed including activities such as deforestation 4. Implementation left to the states hence tailoring the standard to their unique features and the availability of alternative energy per state Market-based limits → Reliance on them would allow development of the most innovative snf cost-effective form of CO2 reductions which might not occur if the government mandates specific types of emission controls under the CAA Cap and trade has been successful in numerous countries including the EU and have been adopted as the principal method of reducing CO2 emissions Both the cap and trade system and the carbon tax are market-based limits and have a theoretical advantage over traditional regulatory controls. Cap and trade Carbon tax Cost certainty Due to the fixed cap without Provides cost certainty as the regard of the cost to the amount of tax is set in advance economy at large or to the individual it suffers from lack of cost certainty Benefit certainty Imposes an overall cap on the Does not offer benefit certainty level of permitted emissions in as the effect of its imposition the economy it provides benefit on CO2 is unknown in advance certainty BC > CC - puts the emphasis on the environment and not economics BUT it seems short sighted and misleading to focus on the benefits only as any policy imposes important costs CC > BC - since benefits of co2 policies are worldwide and long-term while the costs of any adopted policy will be confined and immediate it is important to focus on the costs Carbon tax Pros Cons 1. Simplicity 1. Political resistence A carbon tax is inherently simple: a tax is Most of the oppositon derives from organised imposed at X dollars per ton of carbon groups that stand to benefit from a cap and trade content on the main sources of carbon system like industry groups and wall street. dioxide emissions in the economy, namely 2. Benefit uncertainty coal, oil, and natural gas. In contrast, the cap No assurance that any given tax level will result and trade system is complicated and relatively in the desired reduction in CO2 emissions. If the untried. level is not achieved the tax might rise resulting in further political opposition. 2. Revenue A carbon tax by default generates revenue BUT: (1) cap and trade might suffer from similar benefit uncertainty, (2) the tax rate can 3. Cost Certainty be adjusted The cost is the amount of the tax and whatever its incidence is the cost cannot rise above the tax 3. Tax exemptions rate. Enables businesses to plan ahead. Cap and Will become subject to pressures for permanent trade suffers from cost uncertainty exemptions for affected industries which will permanently weaken its effect and exacerbate 4. Signaling benefit Uncertainty The tax sends a signal that pollution poses a negative externality on others that should be 4. Coordination internalised by paying the tax. The cap and trade Cap and trade is easier to coordinate due to system’s message is more ambiguous as it ether envisioned direct transfer of allowances allows the purchase of the right to pollute or to between the US and the EU ETS receive pollution permits; hence you are allowed to pollute as long as you are willing to pay Session 4 Derouin case Social contributions v. Tax EU tax regulation v. Tax treaty Whether the treaty could influence the right and obligation included int her regulation Whether the inclusion in the tax base for contributions such as the CSG and the CRDS… MS are free to determine the income on which social security coontributins were due and that the treaty could also be taken into account n determine the base as the regulation did not exclude its application (prevents double taxation but does not give a way to calculate the tax in question) EU court refused a specific ruling on tax law Arguments 1. Derouin’s status  2. Application of french social security regulation 3. Scope of CGS and CRDS 4. Coordinations v. harmonisation → The regulation is a means of coordination not harmonisation and hence the MS have to determine the bese for social contributions *Hybrid in international taxation Has been frequently used for tax planning - means that it has two different definition in two different jurisdictions Hybrid - Entities - Instruments (types of payment) [may be dividend, interest, or royalties, might be taxed or not] A hybrid entity might be considered taxable for one jurisdiction but not for another Everything is taxable, it just depends on when and how Constitutional constraints (Reading ss6) Tax law does not exist in a vacuum, there are rules and principles from other disciples and jurisdictions, above or below Tax law has to comply with principles, legislative and executive competencies as well as procedural rights. It interacts with EU law Testing tax legislative comapred to constitutional courts varies greatly due to different 1. Constitutional texts a. In some countries the courts lack the ability to overturn acts of legislature on the baiss of uncostitutionality e.g. UK, NZ 2. Philosophy of court and allocation of cases in the judicial system 3. Political systems which can impact the way tax law is tested against constitutional principles Constitution - Can impose limits on tax lawmaking - Restricts types of taxes that may be levied or principles with which taxes must comply - Delimits the competence of legislature to the executive branch - Guarantees to citizens substantive and procedural rights hence providing protection frm legislation in tax and other areas EU countries → EU law requirements are of constitutional nature Federal states → constitution makes arrangements for the division of tax lawmaking power between government and states Constitutional courts and approach in testing tax legislation against constitutional norms - UK, NZ → no written constitution; courts don’t have the power to overturn acts of lergislature on the basis of unconstitutionality - EU → courts can invalidate statutes on the basis of EU law violation; EHRC contains principles similar to those found in constitutions e.g. discrimination prohibitions Procedure - GER → procedural rules for access to constitutional courts are generous - FR → narrow access to courts on constitutional matters When a tax is found unconstitutional some taxpayers might not be able to recover it e.g. when that finding is applied prospectively Indirect challenging of a tax by asking the court to interpret it in the context of the constitution. France → Constitutional council determines constitutionality of laws, Administrative courts can strike down regulations as unconstitutional Unitary state, federalism non-applicable Constitutional court struck down tax laws when - Irregulairity of competence - Violation of procedural protection of citizens - Found to be violating substantive rights e.g. equal treatment balance of competencies between legislative and executive is the greatest irregularity. Germany → Constitutional court tests laws against general pricniples of due process, equality and protection of marriage and property. Generally shied away for applying elastic principles to tax law US → SCOTUS unwilling to strike down tax laws for equal protection violations as “in taxation [...] legislature possesses the greatest freedom in classification” 16th amendment ratification - possible justification on not striking income tax unsonstitutional. US courts regard tax as intensely political and are hence reluctant to impose a common denominator on tax equality 7 principles in the tax//constitution relationship 1. Legality → whether the constitution allows that regulation or law, cannot be imposed by administration. Related to principle of annuality as tax laws have to be renewed annually. In some countries legality means one of these: a. Tax authorities don’t have the power to enter agreements with individual taxpayers because it implies application of tax outside general rules b. Limits to Administrative discretion to determine whether to grant a tax priviledge (e.g. France) c. Tax law to be constructed strictly since otherwise the judge would be making the law and not the legislator (e.g. Mexico, Japan, Belgium) 2. General Limits to taxing power → limited legislative power v. broad legislative power in federal countries, constitutionally imposed procedural rules on taxation a. US → tax laws originate in House of Representatives. Congress not to disguise a regulatory measure as a tax hence extending its regulatory reach beyond what is constitutionally approved b. France → organic budget law imposes procedures to be followed during tax legislation 3. Explicit Limits to types of taxes → often in federal states (e.g. US hasd to dermine whether various levels on exports constituted taxes since the constitution prohibits such taxes, whether specific taxes were considered direct since there is a constitutional limit on how many direct taxes can be imposed) 4. Federalisation/Federalism → allocation of tax power between state and regional authorities a. Legislative authority (can be subdivided) b. Administrative authority (who collects)  c. Right to receive revenues In Germany these different elemets are split with respect to particular taxes. In a few OECD countries do different VAT rates and corporate income tax apply in different subnational jurisdictions (US, Canada, Switzerland). Autonomous tax authority 1. US → constitution Commerce Clause; permits state taxation only where it (a) applies to an activity having nexus with the taxing state (b) is fairly apportioned (c) doesn’t discriminate against interstate commerce (d) is fairly related to services provided by the state. 2. Canada → tax rates vary across provinces both for income and VAT. A corporation's taxable income earned in a province is determined as: ½ of the taxable income allocated to the province on the basis of the permanent establishment revenue of the corporation in the province and ½ allocated to the province on the basis of wages paid to permanent establishment employees. (special rules for insurance companies) 3. Switzerland → independence of provinces. intercantona l double taxation avoided by federal court rulings with constitutional Art. 127, federal tax harminisation law and intercantonal concordats. 4. Sweden → municipalities have some tax raising authority 5. Nonretroactivty → true retroactivity and de facto retroactivity (no tax consequences). Technical mistakes in tax legislation passed to be fixed retroactively, or when reversing a judicial decision with which the legislature disagrees. No constitutional protection against retroactivity. A law passed befare the conclusion of a taxable year could apply as of the beginning of that year, because the taxable event (determination of taxable income) does not legally occur until the books are closed at the end oí the year. a. France → Con.C. ruled laws are allowed to be retroactive as long as they don’t disturb specific cases b. EU → ECHR compatible with retroactive legislation as long as it serves a legitimate purpose and is not disproportionate (Huitson?) c. US → discretion to Congress as retroactivity is not a violation of substantive due process if it is rationally related to a legitimate legislative purpose d. Germany → extensive jurisprudence to protect taxpayer’s ability to rely onexisting tax legislation, retroactive tax legislation allowed only under specific circumstances where there is compelling public interest. Prohibition of retroactivity based on rule of law and it is only justified where: i. De minimis retroactive consequences ii. Unclear or contradictory law befor enactment iii. Required retroactive application in order to correct a constitutionally defective legal rule (e.g. violation of equality principle) iv. Required retroactive application due to public interest e. Spanish & Italian → intermediate position 6. Equality → US (low level scrutiny), France (Mid), Germany (High) a. Germany i. Interest income - unconstitutional tax scheme (equality violation). Too much tax evasion on nondeclaration that the decorators were taxed unfairly. However the scheme was not invalid and remained for transitional period and the defect could be remedied by legislation (Effective provision of info by banks to tax authorities or flat-rate) ii. Net wealth tax - unconstitutional as its valuation rules resulted in value disparities for different properties compared to market value  iii. Constitutional protection of liberty prohibits confiscatory taxation (no more than 50% of a property when combined with other taxes) iv. Protection of family relevant to wealth tax, requirement of respect for continuity of property of the marriage and family v. Stricter scrutiny → cases of constitutionally protected rights, not reserved for fundamental rights only. Discrimination of tax treatment of political parties to be justified under “special, urgent reason” vi. Statutory interpretation → narrow interpretation of the law by lower courts violates equality principle when it calls for broader interpretation. The principle influences interpretation under the theory that a statute should be interpreted so as to be constitutional when possible b. France → struck down tax laws especially when they were found to violate equality as in procedural equality before the law/procedural due process. Occasionally CC struck down legislation on the right to equality when found arbitrary. In general CC is reluctant to find tax distinctions to violate equality. Nevertheless, the legislation is free to provide concessions which are in the public interest. Support for the family to be provided through means other than the tax system c. US → reluctant to find discrimination in tax law to violate equality. Nordinger v. Hahn involves equal protection clause challenge to the manner in which real property is assessed under the California constitution. 7. Marriage → different tax standards and types applied based on the jurisdiction, some countries protect marriage and family constitutionally. Courts in these countries have generally found that special protection is violated by joint taxation of married couples that results in a higher tax than the combined tax for single persons. Sorne courts see such joint taxation as a violation of equality. a. Joint taxation unconstitutional in Germany as the aggregation oí a married couple could not be justified on the basis that the couple formed a household unit, because unmarried couples could also form such a unit, and the law did not reach such units (also Cyprus, Ireland, Italy, Korea and Spain). Austria → retroactivity permitted only under special circumstances; scrutiny of laws for violation of equality as good reason must be adduced to justify legislative classification (also Belgium) Italy → constitution has struck down few tax provisions on equality Spain → constitutional clause guaranteeingequality in taxation matters. Applies generality, equality, progressivity, nonconfiscation and economic capacity to taxation through constitution. European Tax law “The validity of a community instrument cannot be affected by allegations that it runs counter to fundamental rights as formunated by the constitution of an MS” except insofar as these fundamental rights are recognised at an EU level based on common constitutional traditions of the member countries. EU doesn’t really resemble a federal state as it has no power to tax on its own it has its own source of revenue → customs duties, industry based levies on coal, steel, sugar and insoglucose, income tax on it staff and revenue sharing linked to VAT Debate on the extent of EU tax harmonisation; interpretation of domestic legislation often relies on directives and EU law to be minded for domestic tax law understanding. Positive & negative integration to be used for minimising common market distortions. Positive being harmonisation of actions taken by the Council in the form of directives and regulations, negative being policeing of distortive tax measures by MS carried out by the Commission and CJEU. when the Council adopts tax harmonisation provisions it must act unanimously which slows down tax harmonisation in the EU EU achieved unification of customs duties through Customs Code that applies to all MS replacing internal customs duties. VAT harmonised as internal VAT laws apply but in conformity with EU directive. Limited excise tax harmonisation. Little harmonisation in income tax - key harmonisation measures with direct effect (taxpayers can rely onthem when domestic law is inconsistent) - Parent-Subsidiary Directive → relieves from taxes dividends paid by subsidiaries of EU companies to parent companies - Merger Directive → harmonised tax rules for cross-border reorganisaitons - Arbitration Directive → binding arbitration in the event that competent authorities cannot agree European Finance Ministers signed Code of Conduct pledging to address harmful tax comeptition - not binding it is instrumental against tax erosion Social security → coordinated on the bsis that employees pay S.S. contributions in the state they are employed in. SS and income tax differs within the EU = coordination issues Limitations on taxation by MSs → absence of internal custom duties and prohibition of MS to tax as in to impede free movement of goods, services, workers, establishment and capital. Prohibition of discrimination on nationality. Prohibition against tate aid although tax rulings are not illegal state aid but need to be examined whether it departs from general taxation rules and confers to selective advantage. EU law shows common development of statutory construction 1. Due to many possible interpretations of a law in different languages CJEU favors teleological interpretation 2. EU law affects domestic legislation interpretation in areas harmonised by directives. Possible to use directive as evidence of legislative intent 3. Interpetation of EU law raises issues on tax law-civil law relationship as they share concepts 4. Purposive approach of EU statutory interpretation may inference jurisdictions whin the EU which had not been so enthusiastic about the purposive approach before. Bilateral tax treaties usually have a dispute resolution clause that helps the tax authorities to agree on the solution EU HR Convention Protection of property, prohibition of discrimination, requirement of due process. CJEU and National courts can apply it; fair trial provisions do not apply in tax matters but criminal trial procedural protections do. Significant for countries e.g. UK (Human Rights Act 1998) & Netherlands that lack constitutional review courts Lisbon treaty innovations in HR recognition 1. Recognition of Fundamental Rights charter thus giving the charter binding legal force 2. Requires EU to become a formal party to the Convention rather than treating it as substantive rules/source of rights Transfer pricing - the setting of the market prices for intercompany transactions. When entities from one company group transact with eachother they must do so at a market price, comparable to a similar transaction taking place between unrelated entities (arms length principle). Advance Price Arrangements - refer to the calculation of the fair price setting of these transactions Usually based on compliance, transfer price report stating the methodology for setting the market prices