Assuring Real Freedom of Movement in EU Direct Taxation

Date01 November 2000
AuthorIan Roxan
Published date01 November 2000
Assuring Real Freedom of Movement in EU Direct
Ian Roxan*
The decisions of the European Court of Justice in applying the Treaty principles of
freedom of movement to the direct taxation of individuals have been strongly
criticised as taking an overly simplistic view of the interactions between national tax
systems. The interactions often make non-discrimination an inappropriate criterion.
This article proposes a framework, grounded in economic analysis, for
understanding the implications of the interactions for freedom of movement. First,
I establish a precise definition of obstacles to freedom of movement of individuals as
costs of migration, as distinguished from incentives to migration (such as mere
differences in national tax levels). Incentives can encourage economic distortions in
migration, but they are not obstacles to migration (or free movement). Secondly, I
develop the cross-migration test to distinguish costs of migration from incentives. I
apply the test to show that two commonly used schemes of double tax relief,
including exemption with progression, create unjustified obstacles to free movement.
The European Court of Justice has taken an increasingly active role over the years
in giving direct effect to the provisions of the EC Treaty on the freedom of
movement of persons in the field of direct taxation (income tax, corporation tax,
capital gains tax and their equivalents). While the cases in this field follow, at least
formally, the approach taken by the Court in other fields, they have been strongly
criticised by tax experts. It is argued that the cases do not recognise the reality of
taxation, of the international tax system or of the double tax conventions that lie at
the heart of that system.1In more recent cases the Court has tried to show more
awareness of the features of the tax system, but it is not clear that this awareness
has resulted in more satisfactory judgements.2On the other hand, it has also been
argued that the tax experts have failed to appreciate the requirements of the Treaty
and the adjustments to the national tax systems that it demands.3
Both of these arguments have a certain degree of merit. The interaction of
taxation and freedom of movement can only be properly analysed if we start from a
good understanding of the nature of both taxation and freedom of movement. In
particular, the freedom of movement principles address a different issue from the
issue of double taxation that is the focus of the international tax system.
ßThe Modern Law Review Limited 2000 (MLR 63:6, November). Published by Blackwell Publishers,
108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA. 831
* Law Department, London School of Economics. I am very grateful for the helpful comments of J.
Freedman, H. G. Collins, and two anonymous referees. Any errors that remain are my sole responsibility.
1 J. F. Avery Jones, ‘Carry on Discriminating’ [1995] British Tax Review 525, D. W. Williams,
Asscher: the European Court and the Power to Destroy’ [1997] EC Tax Review 4.
2 J. F. Avery Jones, ‘Further Thoughts on Non-discrimination in Europe Following Asscher’ [1997]
British Tax Review 75.
3 P. J. Wattel, ‘Home Neutrality in an Internal Market’ (1996) 36 European Taxation 159. There is a
further argument that the real problem is that the Court’s decisions have not been tempered by
appropriate harmonisation measures from the Council (eg Williams, n 1 above), but this is a direct
consequence of the requirement of unanimity in the Council on tax matters. This argument is,
therefore, not very productive.
This article seeks to develop a framework in which the interaction can be
properly understood, by showing how freedom of movement can be applied to
direct taxation from first principles. To do so I turn to the analysis of the economics
of taxation. This analysis is an integral part of the analysis of the economics of the
public sector, so it is directly applicable to the issues that the freedom of movement
principles attempt to deal with.
Since most of the cases before the Court on direct taxation have, until very
recently, concerned the position of individuals, my analysis focuses on the taxation
of the labour income of individuals, and on their freedom of movement as workers
or as self-employed individuals. (For convenience I shall generally just speak of
‘workers’ in reference to both groups. The direct tax cases apply to both with little
distinction,4and the distinguishing features of self-employment are not germane to
the present discussion.) Moreover, the economic position of companies (and even
of investors generally) is significantly different, so it is preferable to deal with
them separately.
The next Part of this article briefly outlines the problems that international
taxation creates for the application of the Community law principles on freedom of
movement, and identifies the legal bases available for the characterisation of
obstacles to free movement. The third Part starts from the opposite end by
considering from an economic perspective the nature of an obstacle to free
movement and the ways in which a tax system can hinder free movement of
individuals. The fourth Part proposes a test for such economic obstacles based on
concepts of Community law. The fifth Part looks at how this ‘cross-migration’ test
applies to the various regimes for double tax relief that countries might use to tax
individuals exercising their Community rights to free movement. The sixth Part
considers some of the implications of these results for taxation within the
The problem
Legal setting
The EC Treaty provides for the freedom of movement of persons, goods, services
and capital.5In this article I am concerned with the freedom of movement of
persons, either as workers (under article 48, now art 39 EC),6or as self-employed
persons establishing themselves in another member state (under article 52, now art
43 EC).7These freedoms entail the prohibition of the discrimination on the basis of
nationality for those exercising the freedoms.
Until the last few years tax measures impugned before the European Court under
the freedom of movement provisions were usually attacked as creating
discrimination or covert discrimination on the basis of nationality. In contrast,
the usual criterion that is used to determine the extent to which a person is within
the jurisdiction of the tax system is residence. A country will normally only tax
4 See Asscher vStaatssecretaris van Financie
¨nCase C-107/94 [1996] ECR I-3089, [1996] STC 1025.
5 Article 3.
6 Virtually all the cases on direct taxation were decided by the Court before the advent of the Treaty of
Amsterdam, and therefore use the old numbering of the EC Treaty. Nevertheless, in the interests of
currency, I shall generally use the new numbers, after the initial reference.
7 The two are now largely treated together in the case law of the Court. See the comment of Fennelly
AG in Graf vFilzmoser Maschinenbau GmbH Case C-190/98, 16 September 1999 (not yet reported),
para 21, note 20.
The Modern Law Review [Vol. 63
832 ßThe Modern Law Review Limited 2000
non-residents on income that has its source within the country. In addition, various
features of the tax system, such as personal allowances, often do not apply to non-
residents, or apply on a different basis. The international tax system, based on the
vast network of bilateral double tax treaties, nearly all of which follow the outline
of the Model Convention prepared by the OECD,8also uses residence as the
principal criterion for assigning tax jurisdiction.
The Court has accepted that residence is in principle an objective criterion, and
thus a legitimate one. But it has also been quite ready to hold that, since non-
residents naturally also tend to be non-nationals, the use of the criterion of
residence can constitute covert discrimination on the basis of nationality.9The tax
cases before the Court have thus generally concerned an individual resident in one
member state who works and earns income in another member state.
The peculiarities of taxation
The central element that creates the difficulties in the direct tax cases arises from
the fact that the freedom of movement provisions are applied by the Court to
measures, in this case tax measures, of one particular member state. However, an
individual living in one member state and working, at least in part, in another will
be subject to the tax jurisdiction of both countries.
This dual jurisdiction problem is not wholly unfamiliar. Similar issues arise
when goods are subject to standards both in the country of manufacture and
import, or where workers seek to have qualifications obtained in one country
recognised in another country. In most of these cases the detriment caused by
dual regulation is either that access to the market in the second country is
prohibited or that compliance with a second set of regulations imposes
(unnecessary) additional costs. What is unusual about being subject to two tax
systems is that they operate not merely concurrently, as in these other cases, but
additively. Being subject to a second tax system means being subject to more of
exactly the same thing, ie more tax. (Of course, it may well also entail additional
compliance costs.)
The amount of the additional burden may be reduced by double tax relief in
recognition that the other jurisdiction also charges tax, but any residual tax
imposed by the second jurisdiction is always an addition. In many cases the relief
will mean that only one of the countries actually charges tax on the income earned
in the second country, but this may well depend upon the particular circumstances
of the taxpayer. In other words, the tax rules of both countries still have to be
applied, even if one of them ends up not charging tax after having considered the
taxpayer’s position in the other country. Moreover, where only one of the countries
imposes tax, it is entirely possible that the taxpayer will pay more tax than he or
she would have paid if tax had only been imposed by the other country. In effect,
the high level of tax imposed in the first country would conceal the operation of the
other tax system.
The total tax burden on the taxpayer will thus typically reflect the interaction of
the two tax systems, even if only one country is actually charging any tax. In part
8 The current version is published with the Commentary thereon in OECD Committee on Fiscal Affairs,
IModel Tax Convention on Income and on Capital (Paris: OECD, 1997) (hereinafter ‘OECD Model
9 See eg Finanzamt Ko
¨ln-Altstadt vSchumacker Case C-279/93 [1995] ECR I-225, [1995] STC 306,
324-325 STC, paras 28–31.
November 2000] Freedom of Movement in EU Direct Taxation
ßThe Modern Law Review Limited 2000 833

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