Economic Mobility and Fiscal Federalism: Taxation and European Responses in a Changing Constitutional Context

• Author: Jussi Jaakkola,Jukka Snell
• Published date: 01 November 2016
• DOI: http://doi.org/10.1111/eulj.12212
• Date: 01 November 2016

Economic Mobility and Fiscal Federalism:

Taxation and European Responses in a

Changing Constitutional Context

Jukka Snell* and Jussi Jaakkola

Abstract: In this article we explore the claim that the four freedoms of the EU lead to the

inevitable erosion of the capacity of Membe r States to collect tax, undermining nation al

systems of welfare and solidarity. We argue that European tax integration has undergone

asignificant change during the last ten years or so, with a judicial,regulatory and legislative

response by Union institutions. First,the Court of Justice has recalibrated someof the basic

concepts it applies when reviewing the European constitutionality of nati onal tax norms.

Second, the Commission has utilised state aid rules to attack targeted tax competition.

Third, importantlegislative initiatives have beenadopted or proposed to safeguard Member

State taxing capacities. The new phase is influencedby the changed constitutionalcontext of

the recent enlargement s and the Eurozone crises, w hich may increase the supp ly of and

demand for tax integration.

1

I Introduction

In this article we explore the claim that the fourfreedoms of the EU, in particular the free

movementof capital but also the right of establishment,lead to an inevitable erosion of the

capacityof Member States to collecttaxes. It has been argued that corporationsare able to

rely on the four freedoms against nationaltax authorities and arrange their affairs so that

profits are allocated to low tax jurisdictions and lo sses to high tax ones, or where they

enjoy double deductions or double non-taxation.

1

2

Further, it is sometimes claimed that

the single market necessari ly results in a race to the bottom on tax , as Member States

engage in a destructive spiral of competition to attract mobile capital through ever lower

taxes. This wouldlead either to pressure to cut welfare benefitsand public services, or shift

the tax burdenelsewhere—for example by meansof raising consumptiontaxes or personal

income tax—thus possibly resulting in unfair patterns of allocation of taxes.

2

3

In a nut-

shell, the chargeis that the EU is undermining national systemsof welfare and solidarity,

3

4

without replacing them with a European one.

* Jukka Snell is Professorof European Law at Universityof Turku and Swansea University. Jussi Jaakkolais a

PhD Candidateat Universityof Turku. Earlier draftsof this paper were presentedin seminars at EUI and VUB

in 2015 and 2016. The authors would like to thank all participants, and in particular Philipp Genschel and

Agustín JoséMenéndez, for insightful comments.

1

Thesekinds of concerns wereexpressed by severalMember States and acceptedby the Court in CaseC-446/03,

Marks & Spencer, ECLI:EU:C:2005:763,paras 42–51. They have since been raised also at the international

level; see OECD,Addressing Base Erosion andProfit Shifting (OECD Publishing,2013).

2

See, e.g.,the list of concerns outlinedin Commission StaffWorking Document,‘Corpor ate Income Taxation in

the EuropeanUnion’SWD(2015) 121 final,1–14, at 11–12.

3

See also the article by M. Ferrera, ‘The Contentious Politics of Hospitality: Intra-EU Mobility and Social

Rights’,2016(2016)22European Law Journal,791–805 [in this issue].

European La w Journal, Vol. 22, No. 6 , November 2016, pp. 7 72–790.

© 2017 John Wiley & SonsLtd. 9600 Garsington Road, Oxford,OX4 2DQ, UK

and 350 Main Street, Malden, MA02148, USA

The article proceeds as follows: we first outline the EU tax framework and the interde-

pendence it createsamong the Member States, as well as the effects of this framework on

national taxation.We will suggest on the basis of empirical evidence that whilethe capac-

ity to tax has not beeneroded as a whole, some of the tax burden might have been shifted

from mobile taxpayers to immobile ones.We then proceed to consider the actionsthat the

EU institutions have taken, or are in the process of taking, to ad dress these issues. We

identify a judicial response, a regulatory response, and a legislative response. Our claim

is that the legalsituation is far more nuanced todaythan 15 or even 10 years ago, and that

the various EU institutio ns are engaged in a set of actions that, taken toge ther, may

amount to a broad-basedand reasonably coherent attemptto address the challenges. Fur-

ther, we point out the changing constitutional context that is both increasing the ‘supply’

of and the ‘demand’for EU action on tax. We conclude that the fundamental variable is

not the law of the EU, but rather political will.

II European Integration and Constraints on National Taxation

A The European Union as a Legal Framework for Fiscal Interdependence

The creation of a single marketamong states with different national tax systems (and tax

law traditions) was bound t o result in enduring tensio ns between the European Uni on

and its MemberStates. On the one hand, national taxnorms have been regarded as obsta-

cles to theeffective establishmentof a single market. On the otherhand, market integration

has been said to constrain the fiscal and redistributive capacitiesof national tax systems by

fostering fiscalinterdependence and, as a consequence, tax competition

4

between Member

States. The Europeanisation of national tax systems has beenmarked by two dynamics.

5

First is the establishment of the internal market. The 19 57 Treaty establishing the

European Economic Communi ty set as objectives the reali sation of free movement of

goods, the right of establishment, free movement of workers, free provision of services,

and—to a lesser extent—free movement of capital.

6

Realisation of economic freedoms

required removing national norms and practices which hindered cross-border economic

activities. The removal of restrictions was to take place through adoption of Community

legislation.

7

From the 1970s onwards, the role of the freedoms in b uilding the internal

market became more salient .

8

A preliminary step in this pr ocess was their

4

We emphasisethe differencebetween tax competitionand fiscal interdependence,of which the latterserves as a

preconditionfor the former; see P. Dietsch, CatchingCapital: The Ethics of Tax Competition(Oxford Univer-

sity Press, 2015),at 36 and 77–80.

5

For further reasons, see P. Genschel,A.KemmerlingandE.Seils,‘AcceleratingDownhill: How the EU Shapes Cor-

porate Tax Competition in the Single Market’(2011) 49 Journal of Common Market Studies, 585–606,at 587–589.

6

On theinitially supplementaryrole of the freemovement of capital,see e.g. J. Snell, ‘FreeMovement of Capital:

Evolutionas a Non-Linear Process’,in P. Craig and G. de Búrca(eds.), The Evolution of EU Law (Oxford Uni-

versity Press, 2nd edn , 2011), 547–574, at 548–551and J. A. Usher, ‘The Evolution of theFree Movement of

Capital’(2007) 31 Fordham International Law Journal,1533–1570.

4

We emphasisethe differencebetween tax competitionand fiscal interdependence,of which the latterserves as a

preconditionfor the former; see P. Dietsch, CatchingCapital: The Ethics of Tax Competition(Oxford Univer-

sity Press, 2015),at 36 and 77–80.

5

For further reasons, see P. Genschel,A.KemmerlingandE.Seils,‘AcceleratingDownhill: How the EU Shapes Cor-

porate Tax Competition in the Single Market’(2011) 49 Journal of Common Market Studies, 585–606,at 587–589.

6

On theinitially supplementaryrole of the freemovement of capital,see e.g. J. Snell, ‘FreeMovement of Capital:

Evolutionas a Non-Linear Process’,in P. Craig and G. de Búrca(eds.), The Evolution of EU Law (Oxford Uni-

versity Press, 2nd edn , 2011), 547–574, at 548–551and J. A. Usher, ‘The Evolution of theFree Movement of

Capital’(2007) 31 Fordham International Law Journal,1533–1570.

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