Double Tax Treaties and Community Law
Author:
Gerald Murphy
COMMUNITY LAW HAS PRIORITY
Section 826 of TCA 1997 is the enabling provision by which Irish tax treaties become part of domestic law. Similarly, throughout the Community, the main source of international taxation law is derived from rules set out in tax treaties and brought within the system of domestic law of the member States. However, community law takes precedence over all national tax provisions including tax conventions although Community law acknowledges their importance.
The difficulty is that in the enlarged treaty with its 25 and shortly to be 27 Member States, there is currently a network of some 300 bi-lateral treaties. The Commission sees these treaties as causing difficulties particularly for taxpayers wishing to benefit from their freedoms under the Treaty of Rome.
AREAS OF CONFLICT
This is perhaps not surprising since the focus of tax treaty law is to regulate cross-border relationships by allocating taxation rights between two contracting States. Community law on the other hand has the major objective of establishing a single market without internal borders.
Significantly, the European Court of Justice has highlighted cases of discrimination in the treatment of Community citizens and businesses because of the way treaties are formulated or applied.
The Court has remarked that, while direct taxation does not fall within the purview of the Community, powers retained by Member States must be exercised consistently with Community law.
Member States are showing some restlessness that ECJ decisions particularly in the area of cross-border taxation have affected the way that national direct taxation is applied. Not surprisingly then, the Commission itself is beginning to take a look at this area.
The priority which has therefore emerged has been stated as follows:
the prevention or remedy of incompatibilities between Community law and the provisions of tax treaties, particularly in cases of double taxation, and the creation ... of greater legal certainty.
[EC Law and tax treaties working document; TAXUD E1/FR DOC(05) 2306]
One difficulty is that the ECJ can only rule on specific cases and the problem of reconciling decisions of the Court based on different facts leaves considerable areas of doubt.
The difficulties are not confined just to treaties between member States. A treaty concluded with a third country must be reviewed on a different basis when reconciling its provisions with Community law. Since the ‘third countries’ include the USA with its world wide major economic interests and strengths, reconstructing EU tax treaties with "third countries" is no easy task.
There is also a distinction to be made between treaties signed before the entry into force of the EC treaty, or the accession treaty where appropriate, and those included after those dates.
COMMUNITY LAW AND CONFLICT
Where there is a conflict with Community law, the EC treaty expressly provides that Member States should take all appropriate steps to limit the incompatibilities.
Since Member States must also abstain from any measure which could jeopardise the attainment of the objects of the EC treaty, the making of a tax agreement with a third country which contains provisions contrary to community law clearly involves a failure by the Member State concerned to meet its obligations.
Commentaries also suggest that limitation on benefits clauses in treaties with third countries may represent a material breach of EC law.
It may be useful in this context to look more closely at selected articles from the OECD model treaty to see what kind of problem may arise in relation to community law and of course bearing in mind that treaties will often vary from the suggestions in the OECD model
ARTICLE 3
This article defines amongst other terms the word "national" and does so generally in the context of the two contracting States only. Later in the treaty, Article 24 requires that persons possessing the nationality of one of the contracting States may not be treated by the other State any less favourably than its own nationals.
But since the EC treaty requires that there should be no discrimination between nationals of the EC, it would seem that the definition of "national" should be extended.
Article 3 also provides that any term not expressly defined in the tax agreement shall be interpreted according to the meaning it has in the tax law of the contracting States. This, however, ignores the fact that Community law is the primary interpretative source for any contracting State which is also a member of the Community.
ARTICLE 5
Article 5 deals with the concept of permanent establishment. Difficulties of interpretation here are not helped by the fact that in many member States there is no definition within national law so that tax conventions often serve as the sole legal point of reference.
In addition, the definition in the OECD model is not consistent and many States depart from the model in their definitions.
Furthermore, the internal market requires that a community enterprise should be able to set up a branch (however that is defined) in any member State.
Quite apart from needing a definition which will apply in each member State as well as in any contracting third party State, the expected common consolidated corporate tax base (CCCTB) may be expected to create other difficulties in this area
ARTICLE 18
The OECD model suggests that pensions paid in respect of private employment should be taxable only in the state of residence. In practice however there are alternative methods of allocating tax rights.
But, one major problem is the lack of clarity relating to tax deductions for contributions to pension schemes not just at tax treaty level but at times within national jurisdictions.
SOLUTIONS
Possible approaches to the difficulties presently existing could include the following:
-Drafting an EU version of the OECD model treaty recognising the requirements Community law;
-Conclusion of a multi-lateral tax treaty between all Member States, or;
-A Commission Directive on the subject.
A single Community model treaty would be valuable for taxpayers in terms of legal certainty, simplification, and reduction of compliance costs.
A multi-lateral treaty is not a new concept. In 1983, the Nordic countries within the EU (i.e. Finland, Sweden and Denmark) signed a multi-lateral tax treaty with other members of the Nordic Council and thus substituted that multi-lateral treaty for the previous bi-laterals existing between the five countries. Undoubtedly, that treaty was helped by the convergence of the tax systems of the various Nordic countries involved.
An EU Directive on the subject may be expected to look at issues of convergence but in any event the process would involve consideration throughout the Community of all problem areas.
But what happens in the meantime? It may well be the case that administrations may be approached locally to relax the application of provisions of ‘intra-Community’ treaties so that they may be in accordance with Community law.
But how does one get major third party countries to join up to such a process?
Gerald Murphy is Taxation Executive with the Institute of Chartered Accountants in Ireland.