Emigration and immigration of a business: impact of taxation on European and global mobility

Transcription

1 Emigration and immigration of a business: impact of taxation on European and global mobility Name: Loes Brilman ANR: Study: Fiscal economics Study year: 2012/2013 Submission Date: 24 June 2013 Supervisor: Mr. dr. D.S. Smit Exam Committee: Prof. dr. P.H.J. Essers Prof. dr. E.C.C.M. Kemmeren

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3 PREFACE This master thesis is written in the context of my study Fiscal Economics at Tilburg University. Against the background of the EUCOTAX Wintercourse, the central theme of this thesis is the impact of taxation with respect to the emigration and immigration of a business on European and global mobility. Being the internationally oriented person that I am, I felt honored of having the chance to participate in this international project. Witnessing my enthusiasm, I proudly present this thesis. In the course of writing this thesis, I received guidance, input, and advice from inspirational people, and I wish to take the occasion to briefly pay my gratitude. Firstly, I want to thank my supervisor, Daniël Smit. His advice and criticisms inspired me to continue and improve my work every single time. Additionally, I want to thank mr. Dusarduijn, professor dr. Essers, professor dr. Kemmeren, drs. Peters, professor dr. Stevens, and last, but not least, Mark Vitullo for their feedback, advice, and support provided during the Wintercourse meetings. Moreover, for their enthusiasm and support during the Wintercourse-week in Osnabruck, I express my gratitude to prof. dr. Essers, prof. dr. Kemmeren, and Femke Poort. Similarly, I want to thank my group mates of the other participating Universities for the cooperation and fun during the Wintercourse-week. I also especially want to thank my Wintercourse colleagues, Minne Bosma, Celeste Krens, Alexandra van der Kruk, and Yvette Timmermans. You were not only of support throughout this project but throughout this entire year. We had a lot of fun and an unforgettable time, not only in Osnabruck. Finally, I want to thank my parents and sisters, boyfriend and friends. Even when confronted with my thesis stress, their support has been unconditional. Most importantly, I want to thank my grandfather who has always been my counselor, equipped with good advice and support. Even though he passed away recently, the idea of him and what he would have said or done helped me throughout the process of writing this thesis. Loes Brilman Tilburg, June

4 CONTENTS PREFACE... 2 CONTENTS... 3 LIST OF ABBREVIATIONS...11 INTRODUCTION Background Research question Normative framework EUCOTAX comparative law Research design NORMATIVE FRAMEWORK Introduction European and global mobility Fiscal sovereignty The benchmark: international tax neutrality Theories on international tax neutrality Capital export neutrality (CEN) Capital import neutrality (CIN) Inter-nations neutrality Critical analysis Synthesis: international tax neutrality serving as a benchmark International tax neutrality and the internal European market International tax neutrality and fiscal sovereignty Conclusion: CIN as a benchmark EMIGRATION OF A BUSINESS Introduction The purpose and justification of exit taxes Why are exit taxes problematic? Distinction between types of businesses A. Dutch tax system B. EUCOTAX comparative law The concept of residency

5 A. Dutch tax system Natural persons Legal entities B. EUCOTAX comparative law Natural persons Legal entities The concept of residency under tax treaties Incorporation versus real seat jurisdictions A. Dutch tax system B. EUCOTAX comparative law How does a business lose its status as a resident? A. Dutch tax system Natural persons Legal entities The influence of tax treaties on the status as a resident Transfer of the place of effective management Revised DTCs B. EUCOTAX comparative law Business-emigration (for tax purposes) A. Dutch tax system Dutch meaning of business emigration How to emigrate from the Netherlands Natural persons Legal entities B. EUCOTAX comparative law Specific tax provisions on business-emigration A. Dutch tax system Some preliminary remarks Purpose and scope; the Dutch total profit concept Subject of Dutch exit provisions Object of Dutch exit provisions Exit provisions for businesses in the personal sphere Partial settlement Final settlement Exit provisions for businesses in the corporate sphere Partial settlement

6 Final settlement B. EUCOTAX comparative law Recovery of exit taxes A. Dutch tax system Recovery provisions and Law on deferral of exit taxation Background: why the amendment of the Recovery Ac? Current state of affairs The amendments of the Recovery Act B. EUCOTAX Comparative law Treatment of assets upon departure A. Dutch tax system B. EUCOTAX comparative law Procedural obligations Upon emigration Notification of movement Moment of emigration, tax declaration, and tax assessment The period after emigration The influence of the incorporation system Opting-in for deferred payment Tax treatment of business emigration benchmarked against the normative framework The Dutch tax treatment upon business emigration: synopsis Dutch exit taxes and European and global mobility Dutch exit taxes and fiscal sovereignty Dutch exit taxes and capital import neutrality Can the Netherlands impose an exit tax? Immediate or deferred payment? Conditions of deferral Conclusion Summary and conclusion IMMIGRATION OF A BUSINESS Introduction How does a business become a tax-resident A. Dutch tax system Natural persons Legal entities B. EUCOTAX comparative law

7 3.3 Business-immigration: meaning and how to A. Dutch tax system Natural persons Legal entities B. EUCOTAX comparative law Specific tax provisions and treatment of assets upon arrival A. Dutch tax system Tax base step-up Immigration versus foundation of a business in the Netherlands Cost base used for depreciable property Deemed acquisition of assets Evaluation of assets by the tax administration B. EUCOTAX comparative law Procedural obligations Tax treatment of business immigration benchmarked against the normative framework Immigration and European and global mobility Fiscal sovereignty and capital import neutrality Conclusion Summary and conclusion CROSS-BORDER TRANSFERS OF ASSETS TO AND FROM A PERMANENT ESTABLISHMENT Introduction Permanent establishment under national law A. Dutch tax system Definition Starting up a PE in the Netherlands B. EUCOTAX comparative law Permanent establishment in DTCs PE-profit allocation Article 7 OECD model tax convention Avoidance of double taxation OECD model tax convention and Dutch Standard Treaty Dutch method of exempting profits from a foreign PE Method of profit allocation to a PE

8 4.4.4 Profit of the PE and profit of the general enterprise Transfer of assets from a national head office to a PE abroad A. Dutch tax system Asset transfer from the Dutch head office to a PE abroad Temporary transfer of assets Permanent transfer of assets B. EUCOTAX comparative law Transfer of assets from a national PE to a head office or PE abroad A. Dutch tax system Asset transfer from a Dutch PE to the head office of a limited resident taxpayer Partial settlement under the final settlement provision? Consequences for the interim transfer of asset components Alternative: compartmentalization Asset transfer from a Dutch PE to the head office of a non-resident abroad Temporary transfer of assets Permanent transfer of assets Asset transfer from a Dutch PE to a PE abroad Where the company is a resident taxpayer Where the company is a limited resident taxpayer Where the company is a non-resident taxpayer B. EUCOTAX comparative law Tax treatment of transfers of assets to and from a PE benchmarked against the normative framework Asset transfers to and from a PE in the light of European and global mobility Fiscal sovereignty and capital import neutrality Conclusion Summary and conclusion ALTERNATIVE METHODS OF BUSINESS MIGRATION (OTHER THAN SEAT TRANSFERS) Introduction Cross-border mergers and divisions Introduction Tax merger directive Mergers and divisions in the Netherlands Company law aspects Tax law aspects Cross-border conversions

9 5.3.1 Introduction Cross-border conversions in the Netherlands Company law aspects Tax law aspects Summary and conclusion THE RELATIONSHIP BETWEEN EXIT TAXATION AND TAX CONVENTIONS: FROM A DUTCH PERSPECTIVE Introduction Allocation of taxing rights National law, tax treaties and taxing rights Tax treaties and Dutch policy Allocation of taxing rights under art. 7 of the OECD model tax convention Allocation of taxing rights under art. 13 of the OECD model tax convention Treaty override Case law Literary review Summary and conclusion EUROPEAN UNION LAW Introduction Article 49 TFEU: freedom of establishment Court of Justice of the European Union cases on business migration Case law on individuals (natural persons) Hughes de Lasteyrie du Saillant N. v. Inspecteur Commission v. Spain Case law on companies (legal entities) Daily Mail Überseering SEVIC System Cartesio National Grid Indus VALE Commission v. Portugal EFTA Court Arcade Drilling AS Commission v. Kingdom of the Netherlands Commission v. Spain Is there a general line in CJEU rulings on business migration cases? The broad general line

10 The accessibility of the freedom of establishment Taxation upon the emigration of a business Dutch tax treatment of emigrating businesses in the light of EU law The Dutch business-emigration provisions in the light of case law on emigrating individuals Can substantial shareholders be compared to entrepreneurs? Court s rulings on individuals applied to individual businesses Should individual businesses be treated as individuals or as businesses? The Dutch business-emigration provisions in the light of case law on emigrating companies Comments on the amended Recovery Act Provision of sufficient securities Administrative requirements Calculation of recovery interest Scope of the Law on deferral of exit taxation Termination of the deferral of payment Payment in ten annual installments Conclusion: compatibility of Dutch exit tax regime with EU law EUCOTAX Comparative law Option between immediate and deferred payment Option between immediate payment and payment in 5 annual installments No option Recovery of tax is irrelevant Summary Dutch tax treatment of immigrating businesses in the light of EU law Not providing a step-up incompatible with EU law? Tax base step-down Summary and conclusion THE DUTCH EXIT TAX SYSTEM Synopsis: current Netherlands tax system European and global mobility and capital import neutrality DTCs EU law Alternatives and possible solutions for exit taxes Compartmentalization systems Residence-based compartmentalization Succeeding-residency compartmentalization Compartmentalization system Bundesfinanzhof A trade system for exit claims

11 8.2.3 Matching tax payment to tax advantage (step up and depreciation) Coordinated solutions proposed by the European Commission The Dutch exit tax system Improving the current system Deferral of payment? Conditions of deferral Settlement provisions Conclusion Introducing a new system Summary and conclusion SUMMARY AND CONCLUSIONS BIBLIOGRAPHY Books and articles Parliamentary documents and legislation Case law European Commission documents and web pages Other secondary sources EUCOTAX papers

12 LIST OF ABBREVIATIONS A-G Advocate General AOA Authorized OECD Approach BFH Bundesfinanzhof (German Federal Finance Court) BNB Beslissing Nederlandse Belastingrechtspraak B.V. Besloten Vennootschap (private limited company) CCCTB Common Consolidated Corporate Tax Base CEN Capital export neutrality CFE Confederation Fiscale Europeenne CIN Capital import neutrality CJEU Court of Justice of the European Union DTC Double tax convention DTCs Double tax conventions EC European commission EEA European Economic Area EU European Union EUCOTAX European University Cooperating on Taxation IB / PITA Wet Inkomstenbelasting 2001 (Personal Income Tax Act 2001) IW / RA Invorderingswet 1990 (Recovery Act 1990) LB / WTA Wet Loonbelasting 1964 (Wage Tax Act 1964) LJN Landelijk Jurisprudentienummer (national case law number) MBB Maandblad Belasting Beschouwingen MN Market neutrality MS Member state MSs Member states NGI National Grid Indus NL Netherlands NN National neutrality NOB Nederlandse Orde van Belastingadviseurs (Netherlands Order of Tax advisors) NON National ownership neutrality NTFR Nederlands Tijdschrift voor Fiscaal Recht N.V. Naamloze Vennootschap (public company) PE Permanent establishment PEs Permanent establishments TFEU Treaty of Functioning of the European Union TFO Tijdschrift Fiscaal Ondernemingsrecht Vpb / CITA Wet Vennootschapsbelasting 1969 (Corporate Income Tax Act 1969) UK United Kingdom WFR Weekblad Fiscaal Recht 11

13 INTRODUCTION Although we now take it for granted, the single market (sometimes also called the internal market ) is one of the EU s greatest achievements. Instead of being obstructed by national borders and barriers, people, goods, services and money move around the EU as freely as they do within a single country. 1 This citation does not seem to hold for the area of taxation. Ultimately, the dream of the European Union is the achievement of a genuinely border-free internal market. When it comes to taxation, however, Member States are largely free to design their direct tax systems in a way that meets their domestic policy objectives and requirements. 2 The outcome is contradictory: multiple tax systems within one internal market. Interaction of these multiple tax systems only results in obstacles and restrictions to cross-border movement of people, goods, services and money. This is no different on the global market. It follows that taxation has a certain (distorting) impact on European and global mobility, both of persons and of capital. Background This thesis has been written in the context of the EUCOTAX Wintercourse The theme of this year s Wintercourse was the impact of taxation on European and global mobility of persons and capital. The current thesis deals with the subject area of the influence of taxation of business migration on European and global mobility. In the world we live in nowadays, characterized by globalization, Europeanization, a well-developed international infrastructure and extensive information and communication technology, taxation is no longer a national affair. Differences in treatment of residents and non-residents in addition to mismatches and disparities in national tax policies can have a serious dissuasive effect on taxpayers wishing to move their tax residence cross-borders. Therefore, international coordination and harmonization of tax is a prerequisite for enabling growth of the economy, not only regarding the internal European market but also the global market. When it comes to European and global mobility, one very important issue is the emigration and immigration of a business. Many Member States of the European Union still impose what are called exit taxes. These exit taxes can cause restrictions or obstructions to the ideal of the single European market with unhindered mobility. Merely due to the fact that a taxpayer transfers its tax residence to another country, the taxpayer is confronted with a tax on a form of income that has not yet been realized. Thus, departing residents are taxed on an accruals basis whereas in a purely domestic situation transferring residents are taxed on a realization basis. This poses a difference in treatment constituting an obstacle to free movement. 4 The Court of Justice of the European Union has already given its verdict in several cases on the extent to which specific exit tax provisions of different Member States are (in)compatible with the Treaty freedoms 5. 6 In this respect, the Netherlands is probably best known for the CJEU s recent ruling in National Grid Indus 7. In this case, the Dutch exit tax rules concerning the transfer of a Dutch incorporated company s place of effective management to another Member State were scrutinized. The Court s ruling in this case is also highly relevant for other Member States 8, since it unveiled possible restrictive provisions of other national tax systems as well. In my opinion this highlights the importance of analyzing and 1 European Union, Border-free Europe (single market). 2 See also: COM(2006) 823 final, para 1. 3 The EUCOTAX Wintercourse is an intensive collaboration program between seventeen international Universities. The subject area of the Wintercourse has always been "The European Harmonization of Tax Law". Every single year however, the program has a different theme. 4 See also COM(2006) 825 final, par More specifically: article 49 of the Treaty of Functioning of the European Union (TFEU); freedom of establishment. 6 For business-emigration of individuals or natural persons see amongst others: CJEU N. (Case C-407/04) and CJEU Hughes de Lasteyrie du Saillant (Case C-9/02), and for business-emigration of companies or legal entities see amongst others CJEU Daily mail (Case-81/87), CJEU Überseering (Case C-208/00), CJEU Cartesio (Case C-210/06) and CJEU National Grid Indus (Case C-371/10). 7 CJEU National Grid Indus (Case C-371/10). 8 See also Kemmeren 2012, p

14 evaluating national law systems. For this reason this thesis includes an analysis of different national tax law systems with respect to the emigration and immigration of a business. 9 Research question It is clear that exit taxes can be problematic in the context of mobility or free movement. In the light of the overall theme of the EUCOTAX Wintercourse I strive for the enhancement of European and global mobility. The following research question will be guiding throughout this thesis: How does the Netherlands tax system with respect to business migration impact on European and global mobility, and what should be the impact in the light of tax conventions, EU law, and international tax neutrality? This question contains a descriptive and a normative element, a what is and a what should be. Regarding the descriptive element, the current Netherlands tax system with respect to the emigration and immigration of a business and immigration of a business will be analyzed in detail. Moreover, the transfer of assets in permanent establishment (PE) situations 10 as well as mergers and divisions of corporations are included in the discussion. Attention will also be paid to how this Netherlands system with regard to business migration relates to tax conventions and EU law, and whether it can pass the benchmark of international tax neutrality. Having completed the descriptive part, the question then is: how can the system be improved. Taking into account the implications and problematic issues found during the analysis, a new system will be proposed which is capable of enhancing European and global mobility. Normative framework If European and global mobility would be the only parameter of the search for a better system, the outcome would be easy; abolishment of exit taxation. There would then be no obstruction to mobility as businesses can move as freely cross-borders as within a single country. However, in my opinion, this is realistic nor desirable. Attention has to be paid to the counterbalance, which is the fiscal sovereignty of States. Every Member State has the right to set its own tax policy and to levy and collect these taxes. Member States have to take care of themselves, and see to an adequate level of revenue to finance public expenditure. Within the internal European market mobility should be unobstructed, while at the same time respecting the fact that Member States have the right to set and collect their own taxes. It is clear that fiscal sovereignty conflicts with the ideal of unobstructed European and global mobility. Somewhere along the way, an improvement in the mobility will go at the cost of the sovereignty of Member States, and the other way round. By conjoining the two in a model, I will try to reach a compromise aimed at serving the best of both worlds. This is my normative framework, where the benchmark of international tax neutrality, or more specifically capital import neutrality, will be used to find the optimal outcome regarding the interaction between the two pillars. EUCOTAX comparative law In this thesis a comparative law will be made. The basis for this comparative law are both papers describing other national tax law systems and the EUCOTAX Wintercourse intensive workweek, where these different national systems were further discussed and analyzed. The participating countries include the following (in alphabetical order): Austria, Belgium, France, Germany, Hungary, Italy, the Netherlands, Poland, Sweden, and the US. As a preliminary remark, it 9 By business, any business is meant, including an individual, a company or a deemed company. 10 Transfer of assets from head office to a PE in another state, transfer of assets from a PE to head office in another state, or transfer of assets from a PE to a PE in another state. 13

15 should be noted that the input from some countries was insufficient for further analysis and comparison. As a consequence, not all national systems will be discussed in detail on some aspects. Nonetheless, the goal is to make the comparative law as complete as possible. Research design The design of this research is as follows. In the next chapter, I will start with describing the normative framework, which is equipped to achieve the goal of enhancing European and global mobility while at the same time respecting States fiscal sovereignty. The concept of capital import neutrality will be introduced as a benchmark. In the second chapter, the current Netherlands tax system with regard to the emigration of a business will be discussed and analyzed. Attention will also be paid to the tax systems of the other EUCOTAX countries, although the focus lies on the Netherlands tax treatment. Topics which will be discussed include the distinction between individual businesses and companies, the incorporation system vs. the real seat system, the concept of residency in the Netherlands and the influence of double tax conventions, emigration and the relating tax provisions, the recovery of taxation, and procedural issues. Finally, the Netherlands tax treatment of emigrating businesses will be assessed in the light of the normative framework. In the third chapter, the Netherlands tax treatment of immigrating businesses will be discussed, where most of the aforementioned topics will be analyzed from an inbound perspective. Similarly, the chapter will end with an assessment of the Netherlands tax system regarding business immigration in the light of the normative framework. In the fourth chapter, the focus is on the Netherlands tax treatment of cross-border asset transfers to and from a permanent establishment (PE). The chapter will start with the definition or meaning of the PE, where this will be discussed with regard to both the Netherlands and the other EUCOTAX countries, and in the light DTCs. Also, the method of PE profit allocation will be assessed. After this, the Netherlands tax treatment of cross-border asset transfers will be discussed with respect to several PE situations. The chapter will again end by placing this tax treatment against the background of the normative framework. Chapter five will pivot around alternative methods of business migration, where attention will be paid to both the civil and tax law issues regarding the cross-border merger and the cross-border conversion. In the sixth chapter, the current Netherlands exit tax system will be assessed in the light of double tax conventions. Both case law and literature will be employed to ascertain whether or not the imposition of an exit tax amounts to treaty override. In the seventh chapter, the current Netherlands tax system regarding business migration will be assessed in the light of EU law. Starting with a discussion of the freedom of establishment and important case law of the CJEU on the topic of business migration, a broad framework will be set up in order to establish the compatibility of restrictions to business migration in general. After this, the Netherlands exit tax system will be analyzed in the light of this framework, followed by a brief analysis of the other EUCOTAX countries systems. Finally, the Netherlands tax treatment upon the immigration of a business will be assessed in the light of EU law. Having completed the entire analysis regarding the what is element of the research question, the eighth chapter will focus on what improvements can be made or the what should be. After briefly summarizing the findings, two alternatives will be proposed. Under the first alternative, the current system of exit taxation will be taken as the starting point, building on this by proposing several improvements aimed at enhancing European and global mobility. Under the second alternative, a new system will be proposed which is less restrictive to European and global mobility than a system of exit taxation. This thesis will be closed with a final summary and conclusion, in which an answer will be formulated to the main research question. 14

16 1. NORMATIVE FRAMEWORK 1.1 Introduction In the modern world mobility is essential. Mobility, however, also increases the need for cooperation, coordination, and harmonization. In the area of direct taxation Member States of the European Union enjoy a high level of fiscal sovereignty in the area of direct taxation, which has resulted in the co-existence of 27 different tax systems. The resulting distortions, which can take the form of differences in treatment of residents and non-residents or mismatches and disparities in national tax policies, can have a serious dissuasive effect on taxpayers wishing to move their tax residence cross-borders. In particular, tax obstacles in the form of exit taxation on businesses can impel taxpayers to stay in their home State. The fact that decisions and behavior are influenced by taxation is rather problematic, as it can lead to a suboptimal allocation of production factors, resulting in welfare losses or excess burdens. And especially in the context of the ideal internal European market, where the level of mobility within the single market should be equivalent to the level of mobility within one single nation, a distorted allocation of production factors is highly undesirable. This is where the notion of tax neutrality comes in. In a single market, taxes should not affect decisions in terms of trade, investment and localization of firms. 11 It is clear that nowadays there are still a number of tax distortions and obstructions in the international playing field which have not been eliminated. One of them can be found in the form of exit taxation on businesses. Therefore, only a limited degree of tax neutrality has been achieved. Ideally, taxation should not influence the efficient allocation of production factors. 12 The normative framework is thus delimited by two important concepts, namely European and global mobility on the one hand, and fiscal sovereignty on the other. In practice, these two concepts are somewhat discordant. The aim is to achieve the highest possible level of European and global mobility, without harming the fiscal sovereignty of Member States. Figure 1 The two concepts, European and global mobility and fiscal sovereignty, will be discussed in paragraph 1.2, respectively, paragraph 1.3. In paragraph 1.4 the concept of international tax neutrality will be analyzed and operationalized for the purpose of serving as a benchmark. 11 Radaelli 2002, p Ruding Committee report,

17 1.2 European and global mobility Ultimately, the European Union aspires to achieve the following: Instead of being obstructed by national borders and barriers, people, goods, services and money move around the EU as freely as they do within a single country. 13 This is reflected in the concept of the internal European market. The internal European market should, ideally, have the exact same characteristics as a national market. These ideal characteristics have been laid down in the Treaty of Functioning of the European Union (TFEU). Article 26(2) TFEU states the following: the internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties. Put briefly, this means free movement irrespective of national borders. According to Title VII, chapter 1, the conditions of competition should be undistorted, implying, amongst others, that state aid or artificial constructions aimed at tax avoidance are unacceptable. Finally, according to article 114, the TFEU aims at harmonization of national laws; visualizing the European internal market as a national market also implies that there should be no disparities between national law systems. Reflecting on the current state of the European Union, it is safe to say that these ideal characteristics for the internal European market are rather, perhaps too ambitious. European mobility is still not at the same level as mobility within one single Member State. This is partially caused by national taxation. When leaving the sphere of the European market, it could be argued that, ideally, global mobility should be unlimited as well. However, due to the fact that the level of coordination within the European Union is higher than within the rest of the world, a discrimination between the two situations might be justified. For example, information exchange on a global level may be more problematic than within the European Union. Such a lack of coordination on the worldwide market can justify a relatively lower level of global mobility (i.e. more obstructions in third-country contexts), when compared to mobility on the European internal market. 1.3 Fiscal sovereignty Fiscal sovereignty cannot simply be put aside in order to achieve a higher level of mobility. Fiscal sovereignty has to be respected, at least to the extent that States have not intentionally given up their taxing rights. 14 Traditionally, tax systems were viewed largely in the context of single and sovereign jurisdictions, unaffected by the tax systems outside their borders. 15 Sovereignty can be defined as a State s inviolable right of self-determination within a specific territory and political community. 16 The expansion of the European Union has eroded the sovereignty of States to some degree. Nonetheless, Member States still enjoy a high level of fiscal sovereignty in the area of direct taxation, meaning that states are largely free to design their direct tax systems in a way that meets their domestic policy objectives and requirements. 17 Member States have to take care of themselves, and see to an adequate level of revenue to finance public expenditure. This does not mean that Member States are completely autonomous. The CJEU requires that MSs exercise their sovereignty consistently with higher Community law. 18 Nonetheless, Member States reluctance to give up their autonomy in the area of taxation is reflected in the requirement of unanimity in articles 114 and 115 TFEU European Union, Border-free Europe (single market). 14 An example of the importance of fiscal sovereignty can be seen in the current developments of the Common Consolidated Corporate Tax Base (CCCTB), which aims at harmonizing the tax base of the corporation taxes of the different EU Member States. It goes beyond the scope of this thesis to discuss all the details, but shortly put: due to the fact that the proposed CCCTB has a large impact on the fiscal sovereignty of Member States and on their tax revenues (through the consolidation element and the formulary apportionment), it will probably not come to the actual introduction of the CCCTB (maybe a CCTB, without consolidation). Thus, in aspiring to enhance the internal European market, fiscal sovereignty has to be respected! 15 See Musgrave 2006, p See Jansen 2011, p For a detailed discussion of the concept of fiscal sovereignty I refer to Isenbaert 2010 and Douma See also: COM(2006) 823 final, para See also Jansen 2011, p See also Jansen 2011, p

18 1.4 The benchmark: international tax neutrality Exit taxes obstruct European and global mobility. Merely due to the fact that a taxpayer transfers its tax residence to another country, the taxpayer is confronted with a tax on a form of income that has not yet been realized. Thus, departing residents are taxed on an accruals basis whereas in a purely domestic situation, transferring residents are taxed on a realization basis. This difference in treatment poses an obstacle to free movement, as it can impel taxpayers to stay in their home State. The question then is: how can the obstructing effect of exit taxation be reduced? Taking this as a starting point, achieving the highest level of European and global mobility is the aim. In order for mobility to flourish on a European and global level, economic considerations, rather than fiscal considerations, should be decisive with respect to the economic behavior of taxpayers. Efficiency and productivity are best served when there are no distortions or disturbances to the market mechanism. 20 An efficient allocation implies that production factors should be located there where they can earn the highest return. Unlimited mobility is a prerequisite for this. When mobility is obstructed through the imposition of an exit tax, this could result in an inefficient allocation of production factors, harming the European single market. And therefore the criterion of international tax neutrality is needed; taxation should not influence the efficient allocation of production factors. This being said, it is again emphasized that fiscal sovereignty has to be respected, where great value is attached to the principle of territoriality. I will therefore look for a theory on international tax neutrality which respects the fiscal sovereignty of Member States Theories on international tax neutrality Several theories or views on international tax neutrality can be found in academic literature. The concept dates back to the late sixties and early seventies, 21 and initially focused on capital import neutrality (CIN) and capital export neutrality (CEN). Later on, the discussion expanded to other forms of international tax neutrality, such as capital ownership neutrality 22, market neutrality 23, national neutrality and national ownership neutrality 24, and inter-nations neutrality 25. All these different theories on international tax neutrality take a comparative approach: investment and business decisions should be unaffected and undistorted, compared to a world in which there would be no taxation. The non-tax world 26 is thus the starting point of analysis in all tax neutrality theories. As for the purpose of this research, I will not discuss national neutrality and national ownership neutrality, as these theories only seek to maximize national efficiency. 27 Taking into account the overall normative framework set out above, the focus should be on efficiency of the European internal market in the first place, and sequentially the global market. Discussing a theory aimed at maximizing national efficiency is therefore irrelevant. I will also leave the concepts of market neutrality and capital ownership neutrality out of the discussion, as I wish to narrow my focus on the two classical theories on international tax neutrality, CIN and CEN, which specifically focus on direct investments. When CEN is achieved, there is no tax incentive to locate investment in one country rather than another; CIN instead ensures that in a given country there is no tax-induced competitive advantage of a domestic company over a foreign company. 28 CEN and CIN are two important principles which states use to justify their right to tax residence and source, 29 and these principles can be employed as a benchmark for assessing the efficiency of taxes affecting crossborder company activity (and thus mobility) in the single market. 30 I will also discuss the theory on inter-nations neutrality (INN), as this theory has a slightly different focus. It looks at the combined effect of different national tax systems and consequently at the conditions which must exist in each country in order to prevent that investments are 20 See also Kemmeren 2001, p See also Musgrave 1959 and Richman As introduced by Desai and Hines Jr As discussed by Devereux and Lorentz As discussed by Shaheen As discussed by Vogel See also Shaheen 2007, p See Shaheen 2007, p See also Radaelli 1999, p See Ajinkya 2010, par See also Radaelli 1999, p

19 favored in one country over the other. 31 In the context of European and global mobility, a theory which considers the effects resulting from the interaction of MSs might be useful Capital export neutrality (CEN) Starting from a point of no taxation, the theory of capital export neutrality seeks a tax system that does not distort the locational allocation of investment capital. Capital export neutrality has therefore also been called locational neutrality 32 or home neutrality 33 since it takes the perspective of the country of residency. The notion of capital export neutrality holds that an investor should pay the same total tax, 34 irrespective of whether he receives a given investment income from foreign or from domestic sources. 35 It is often argued that when satisfied, capital export neutrality is efficiency enhancing, because it produces a more efficient allocation of capital on a global level. 36 As a result, global welfare will be enhanced as well. 37 Capital should be invested in the same locations where such capital would have been invested had there been no taxes. The investment decision is then tax neutral. 38 In the context of investments in a business, the concept of capital export neutrality can be displayed the following: 39 Figure 2 Figure 3 The following example illustrates the notion of capital export neutrality from a Dutch perspective: 31 See Vogel, 1988, p See Knoll 2009, p See A.C.G.A.C. de Graaf 2004, p Total tax, meaning domestic plus foreign tax. 35 See amongst others: Musgrave 1959; Vogel 1988, p. 311; and Kemmeren 2001, p See amongst others: Knoll 2009, p. 3; Bond et al. 2000, par. 4.2; Radaelli 1999, p. 667; and Desai and Hines Jr. 2003, par However, some authors have a different opinion. See for example Weber and Kemmeren, who believe that taxation based on the universality principle creates a non-neutral and therefore inefficient tax system (Weber 2005, p. 116 and Kemmeren 2001, p. 75). 37 See Desai and Hines Jr. 2003, par See also Musgrave 1959 and Shaheen 2007, p Note that there are many more options imaginable. 18

20 Example: Assume that the Dutch business in figure 2 is a computer manufacturer. The company wants to expand, and has two options: 1) expand to a low-tax country where production costs are high (e.g. the home country), or 2) expand to a higher-tax country where production costs are low. Companies are likely to locate in the country with the highest after-tax return on their investment. If the lower tax payment of the first option offsets the higher costs of producing each computer, ultimately resulting in a higher after-tax return on the investment than option 2, differences in the amount of tax payable change a company s decision about where to locate. This means that CEN does not hold. CEN is only satisfied when it makes no difference whether a taxpayer (either natural person or a legal entity) invests in a business in the home country or in a foreign country. More specifically, the total tax burden should be equal in both option 1 and 2. Only then, tax considerations do not influence whether the Dutch entrepreneur invests its capital at home or abroad, satisfying the normative goal behind CEN. Under the theory of capital export neutrality, source-based taxation is considered inefficient. 40 Think about the aforementioned example of the Dutch computer company. If the countries, represented by option 1 and 2, both use a source-based system for the taxation of business profits, and we assume that companies base their investment decisions on the after-tax rate of return, this would lead to an allocation of business investments which is inefficient from a global perspective. Indeed, starting from the point of a non-tax world, the pre-tax rate of return should be decisive in where to invest, not the after-tax rate of return since under source-based tax systems this will lead to a notably different allocation of capital. 41 From a classical point of view on tax neutrality, only a pure residence-based tax system would satisfy CEN. 42 Such a system is based on the universality principle, as it concerns taxation on the worldwide income of the resident. 43 However, we do not live in a world where all countries employ a residence-based system of taxation. Many countries also use source-based tax systems leading to distorted outcomes. CEN then requires that these distortions are neutralized, which means that residence-based taxes should be designed to offset any source-based taxes exactly. 44 This might be achieved when residence countries tax the worldwide income of their residents under the provision of unlimited foreign tax credits. 45 Such a tax system would satisfy CEN. 46 However, even when CEN is satisfied from a national perspective, investors who reside in different countries will still obtain a different after-tax return when compared to one another. 47 This is caused by the fact that each country has a different tax system (with respect to for example tax base, rates, and implementation) Capital import neutrality (CIN) Starting from a point of no taxation, the theory of capital import neutrality seeks a tax system that does not distort the location of the investors (i.e. where capital comes from). Whereas CEN takes the perspective of the country where the 40 See Shaheen 2007, p See also Horst 1980, p See amongst others: Musgrave 1959 and Green 1993, p See Weber 2004, par See Bond et al. 2000, par See also Desai and Hines Jr. 2003, par. 3.1; Bond et al. 2000, par. 3.2; Knoll 2009, p. 4; Horst 1980, p. 796; Ajinkya 2010, par ; and Graetz and Warren Jr. 2006, p Assume that the computer company, who resides in the Netherlands, has decided to set up a production facility in Spain. Reason for this is that, due to the current economic crisis, many people are facing unemployment in Spain. Following the normal rules of supply-anddemand, labor has become relatively cheap in Spain. Since this particular Dutch computer company is labor intensive, production is consequently cheapest to pursue in Spain. Further assume that the Netherlands impose a 25 percent income tax and that Spain imposes a 15 percent income tax. For the Netherlands to satisfy CEN, Dutch investors must pay the same 25 percent tax on income earned in Spain as they pay on income earned in the Netherlands. This requires that the Netherlands tax its residents on their worldwide income and provide a foreign tax credit for the full amount of tax paid in Spain. Under this tax system, the computer company based in the Netherlands and investing in Spain will pay tax in Spain on the income derived from that country at a rate of 15 percent. The company will also be taxed at a 25 percent rate in the Netherlands on that particular income, since residence-based taxation involves, by means of the universality principle, the worldwide income. However, in the Netherlands, the computer company will receive a credit for the 15 percent paid in Spain. It will, thus, have to pay 10 percent of its Spain earning to the Netherlands in taxes, which leaves the company with a total fixed tax payment equal to 25 percent of its income. Hence, for the Dutch taxpayer, CEN is satisfied. 47 See also Smit 2011, par

21 investor resides, CIN takes the perspective of the location of the investment, i.e. the taxing jurisdiction. 48 Tax considerations should not influence whether a particular investment is made by domestic investors or foreign investors. 49 CIN is thus satisfied by a tax system in which business considerations, and not tax considerations, determine who makes which investments. The notion of capital import neutrality holds that investments originating in various states should compete on equal terms in the capital market of any state, irrespective of where the investor resides. 50 Thus, investors who invest in one particular country are subject to the same treatment, namely that of the country of the source of the income generated by the investment. 51 This enables a level playing field for investors and their foreign competitors, 52 since CIN ensures that in a given country there is no tax-induced competitive advantage of a domestic company over a foreign company. 53 Whereas CEN is believed to promote efficient production, it is argued that CIN fosters competitiveness 54 and efficient saving 55. The condition for the absence of any distortion in the market and thus for there to be no tax-induced advantage is that all firms in a given jurisdiction should face the same effective tax rate. 56 In the context of investments in a business, the concept of capital import neutrality can be displayed as follows: 57 Figure 5 Figure 6 The following example illustrates the notion of capital import neutrality from a Dutch perspective: Example: Assume that within the Dutch market, there are two competing firms; one owned by a Dutch investor and one owned by a French (EU) investor. In this situation, CIN is only satisfied when both investors are taxed at the same rate. If they are taxed differently, CIN will not hold as this would mean that they are competing on unequal terms, resulting in a distortion of international tax neutrality as it is to be understood under CIN. Assume that the company, residing in France, invests in a PE in the Netherlands. CIN requires that the French investor pays tax at the same rate as Dutch investors in the Dutch market. Assume that the Dutch investors in the Netherlands pay tax at 25 percent. On the merits of non-discrimination, all investors in the Netherlands, whether Dutch residents or not, pay 25 percent tax to the Dutch treasury. Hence, if France does not tax the Dutch income of the French investor, then both groups of investors (Dutch and French) will pay tax at the same rate, satisfying CIN. 48 See also Shaheen 2007, p See Knoll 2009, p See also: Musgrave 1959 and Kemmeren 2001, p Richman (Musgrave) 1963 and Vogel 1988, p See also Kemmeren 2001, p See C.M. Radaeilli 1999, note See amongst others: Kemmeren 2001, p. 75; Richman 1963, p. 8; and Knoll 2009, p. 18; 55 See Desai and Hines Jr. 2003, par See amongst others: Richman 1963; Horst 1980, p. 794; Bond et al. 2000, p. 32; Graetz and Warren Jr. 2006, p. 1197; and Desai and Hines Jr. 2003, par Note that there are many more options imaginable. 20