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Austrian Advance Rulings Measures and their Compatibility with EU and OECD Provisions against Harmful Tax Competition

Diplomarbeit 2002 111 Seiten

BWL - Rechnungswesen, Bilanzierung, Steuern

Leseprobe

Table of contents

Table of contents

Dedication

1. Preface

2. Eu and OECD PRovisions against harmful tax competition
2.1. are measures to curb harmful tax competition necessary?
2.1.1. Definition of harmful tax competition
2.1.2. arguments in favor of the adoption of measures against harmful tax competition
2.1.3. arguments against the adoption of measures against (harmful) tax competition
2.1.4. Conclusion
2.2. EC State Aid Provisions (Arts 87 to 89 of the EC Treaty)
2.2.1. General concept of state aid within the EU
2.2.2. EC legal rules on state aid
2.2.3. Categorization of state aid by objective
2.2.4. Fiscal state aid
2.3. Code of Conduct of business taxation
2.3.1. BAckground and Legal nature
2.3.2. Scope
2.3.3. Criteria to identify harmful tax practices
2.4. OECD Report on Harmful Tax Competition
2.4.1. Background and Legal nature
2.4.2. Scope
2.4.3. Criteria to identify harmful tax practices

3. international rulings practice
3.1. introduction
3.1.1. Definition of aDvance ruling
3.1.2. Why rulings are important but still controversial
3.2. Classifications
3.2.1. legal basis
3.2.2. Right to obtain a ruling and time limits for the issue of a ruling
3.2.3. binding force and term of validity
3.2.4. possibility of appeal
3.2.5. the applicant
3.2.6. the ruling authority
3.2.7. publication
3.3. national and international topics

4. Austrian rulings practice and its compatibility with provisions against harmful tax competition
4.1. introduction
4.1.1. Definitions
4.1.2. Good faith ("Treu und Glauben")
4.2. Administrative decisions ("Bescheide")
4.2.1. General aspects
4.2.2. Declaratory decisions legally not expressly provided for
4.2.3. Special provisions in austrian tax law providing for the issue of administrative decisions -- national topics
4.2.4. Special provisions in austrian tax law providing for the issue of administrative decisions -- International topics
4.2.4.1 Section 48 Federal Fiscal Code
4.2.4.2 Section 103 income tax code
4.3. Agreements
4.3.1. AGreements between a taxpayer and the tax authorities
4.3.2. Agreements between countries
4.4. obligations to provide information and rulings ("Auskunftspflichten")
4.4.1. general aspects
4.4.2. national topics
4.4.3. international topics
4.4.3.1 section 6 of regulation 1995/57
4.4.3.2 section 5 of regulation 1995/56
4.5. General rulings
4.6. express-answer-service of the ministry of finance
4.7. Compatibility with provisions against harmful tax competition
4.7.1. Sec 48 Federal Fiscal Code
4.7.1.1 Forbidden state Aid
4.7.1.2 Code of conduct
4.7.1.3 OECD Report on harmful tax competition
4.7.2. Sec 103 income tax code
4.7.2.1 Forbidden state Aid
4.7.2.2 Code of conduct
4.7.2.3 OECD Report on harmful tax competition
4.7.3. declaratory decisions legally not expressly provided for
4.7.4. ADvance Pricing Agreements
4.7.5. obligations to provide information and rulings ("auskunftspflichten”)
4.7.6. General rulings
4.7.7. Express-answer-Service of the ministry of finance

5. Conclusion

Bibliography

Dedication

I would like to dedicate this paper
to my grandmother, to my parents, and to my boyfriend Wolfgang.

Ich möchte diese Arbeit meiner Großmutter, meinen Eltern und meinem Freund Wolfgang widmen.

Preface

This paper is intended to give an overview over Austrian advance rulings in an international context. In order to be able to outline the Austrian rulings practice and provisions that constitute a legal basis for advance rulings -- since in Austria rulings are not based upon one single law or provision but on many -- I also would like to define in the following chapters the term "advance ruling" and describe what is understood by it in international tax practice.

Moreover, this paper is intended to examine Austrian rulings measures in the light of the EU and OECD provisions against harmful tax competition, as well as under the state aid provisions of the EC Treaty.

To achieve consistency in my argumentation, I have structured this paper as follows:

In the first part, the provisions of the EU (Code of Conduct of Business Taxation) and OECD (report on harmful tax competition) against harmful tax competition as well as the state aid provisions are described and the discussion, as to whether provisions against harmful tax competition are necessary at all, is outlined briefly. Then, international rulings practice is explained. Finally and essentially, Austrian rulings provisions are described in detail and assessed according to the criteria to identify harmful tax practices described in the provisions against harmful tax competition.

This diploma thesis was written in the course of the EUCOTAX-program 2001/2002. EUCOTAX is a scientific cooperation between several European universities (i.e. European Universities Cooperating on Taxes). The intention of this program is to provide students and young academics with the experience of participating in an international tax conference. During their time of preparation, they are supported by senior experts. This year's general topic was "Tax Competition". This topic was split up into six sub-topics which were to be discussed in groups during this year's conference. These sub-topics were "State aid", "OECD report on harmful tax competition", "Code of conduct of business taxation", "Holding companies/exempt entities", "CFC legislation", and "Advance rulings". The conference this year was held from 4 April to 12 April 2002 in Tilburg, Netherlands.

I would like to thank everybody who supported me in writing this paper, especially Univ.-Prof. Dr. Michael Lang and Mag. Walter Loukota, who gave me the opportunity to write it in the course of the EUCOTAX-program, which was an extraordinary challenge and a precious experience. I would also like to give thanks to my parents -- Mag. Herbert Gruber and Mag. Ingeborg Gruber-Kopp -- who have always helped me in every way in achieving my goals. Thank you very much.

2. Eu and OECD PRovisions against harmful tax competition

2.1. are measures to curb harmful tax competition necessary?

2.1.1. Definition of harmful tax competition

The term "unfair tax competition" appeared for the first time in a discussion paper submitted by the EU Single Market Commissioner, Mario MONTI, to a meeting of European Finance Ministers in 1996. The main topic of this paper was competition within the EU from Member States with relatively low-tax regimes.[1]

In 1997, MONTI submitted the EC document "Towards Tax-Coordination in the European Union: A Package to Tackle Harmful Tax Competition", which contained a draft Code of Conduct for Business Taxation, to the European Finance Ministers. In this document, low or zero taxes were considered to be "harmful".[2]

The OECD sees harmful tax practices in practices "which can have a detrimental effect on world economic growth" and gives the examples of preferential tax regimes specifically targeted at attracting mobile activities and examples of tax havens.[3]

PINTO defines tax competition as "the improvement of a country's national economy as compared to foreign jurisdictions by lowering the internal tax burden in order to increase the competitiveness of domestic business or to attract foreign direct investments". This concept presupposes that there may be two different goals behind the lowering of the tax burden: "good" tax competition is driven by internal policy goals and decisions meant to achieve greater fairness and neutrality in the countries' tax systems, whereas the goal behind "bad" tax competition is exclusively or primarily to attract foreign direct investment. This goal may be achieved by way of several different mechanisms operating through the direct tax system. For example, a country may grant a reduction of the corporate tax rate applicable to income earned by foreign investors, a tax holiday for a limited or an unlimited period in favor of foreign investors, a reduction of withholding tax rates on outbound income distributions, special investment allowances, formation of tax-free reserves, accelerated depreciation deductions for foreign investors, or the creation of special tax-free zones.[4]

These are examples of what may be considered harmful tax competition in practice. The theoretical concept, however, needs to be discussed further. The question that arises at this stage of the analysis is: What are the criteria to make a delineation, i.e. where is the borderline between "acceptable" and "harmful" tax competition?

This question will be dealt with in the following chapters.

2.1.2. arguments in favor of the adoption of measures against harmful tax competition

The most dangerous economic implication of harmful tax competition is said to be "fiscal degradation", i.e. the loss of revenue by the countries engaged in the lowering of their taxes on income derived from capital investments and, eventually, the erosion of their tax base. This mechanism, where countries are bidding against each other to minimize the tax burden on foreign investors' income in order to attract their capital and business activities, is known as the "race to the bottom". The result of this process is that the countries to which investments shift due to the implementation of favorable tax regimes gain insignificant tax revenue, whereas the countries from which investments are lured away (by means of "beggar-thy-neighbor policies") lose large amounts of tax revenue, with everyone being poorer in the end except some internationally mobile taxpayers.[5]

Several negative consequences result. Firstly, the lack of tax revenue brings with it a decrease in the resources available to governments to finance their public spending. This, in turn, leads either to a decrease in the quality of public services and ultimately in a country's welfare system, or to the need to seek alternative sources of revenue. If a government decides to seek alternative sources of revenue, for instance by increasing taxes on labor, consumption and non-mobile activities, undesirable distortions will be brought about especially by the increase in the taxation on labor (i.e. on wage-earners), due to the potential impact on unemployment and to the replacement of labor with capital in the production process. Moreover, there may be tax equity concerns. In particular, both vertical and horizontal equity are likely to be affected negatively because the tax burden is proportionally much higher on wage-earners than on wealthy taxpayers and, from an international point of view, because domestic taxpayers are more heavily taxed than foreign taxpayers.[6]

In OWENS'[7] opinion, there is no reason why taxpayers that do not or cannot take advantage of harmful tax practices should have to pay the taxes which have been avoided by those who have easy access to tax havens and preferential tax regimes.

Secondly, even more remarkable are the economic inefficiencies that are acknowledged to be caused by harmful tax competition. A misallocation of resources is said to occur with respect to investment decisions purely driven by tax considerations. In other words, if an investment in a certain country had not been made in the absence of a certain tax incentive implemented in this country, this indicates that the resources are not in the best possible location and are not used in the most efficient way from an economic point of view.[8]

Another negative consequence of harmful tax competition is that it entails drawbacks from a political and democratic point of view. National jurisdictions outbidding each other surrender themselves to the market, although they are convinced that they are retaining their fiscal sovereignty. In fact, their tax policies are dictated by taxpayers rather than by the goal of imposing a reasonable part of the cost of public expenditure on every production factor, including mobile capital.[9]

2.1.3. arguments against the adoption of measures against (harmful) tax competition

According to BRACEWELL-MILNES[10], the motives and actions of public officials have to be assessed by the same criteria as are applied to those of private persons: both pursue private interests which may or may not overlap or coincide with the public good.

What forces traders and merchants to serve the common interest in serving their own is the force of competition at home and abroad. Where competition is weak or absent, the trader becomes to a greater or lesser degree a monopolist, and the economic theory of monopoly has identified and measured the divergences between the common interest and the interest of a monopolist. Both domestically and internationally, traders may seek monopoly profits through the establishment of a cartel, and domestic interest may seek protection from the competition of international free trade.

These economic theories are directly applicable to the relations of tax authorities with other tax authorities and with taxpayers: Tax authorities are an extreme form of a government trading monopoly, operating in the commercial market from a position privileged through legislation.[11] These privileges could be weakened by competition or strengthened through international co-operation in policing tax avoidance and co-ordinating tax rates.

While tax rates can be coordinated in two ways, namely by averaging or by competition, averaging is the method favored by the European Commission because it reduces or precludes international competition and tends to increase tax rates by introducing or increasing tax minima. However, free tax competition has the same consequences as international competition in goods and services: it exerts a downward pressure on tax rates just as free trade exerts a downward pressure on prices because business will tend to move from higher-tax to lower-tax regimes.

The wealth of nations is increased by international free trade and reduced by cartels and protection, and the same should be true for tax systems. The real reason why governments which favor competition and free trade in commercial contexts support tax cartels and other forms of co-operation between national tax authorities is that governments and tax authorities are unwilling to accept the devolution of power from themselves to taxpayers that tax competition brings.[12]

ELLIS[13] argues that the Code of Conduct, for instance, plays to the hands of the larger EU member states only, because they have a larger domestic market and therefore an inherent competitive advantage over the smaller EU member states. When a multinational company considers an investment of any size, it typically favors a location where it can get relief from depreciation and for the risk of losses that it may incur. This inherent access to a tax base gives large countries an advantage in competing for new investments. Thus, it would only be fair to allow smaller countries to compensate the economic disadvantages by creating niches to attract new businesses.

Another statement was put forth by the Business and Industry Advisory Committee to the OECD (BIAC)[14]. It states that tax competition tends to keep tax burdens lower, which creates pressure for a less wasteful and, therefore, more efficient use of public funds. In addition, tax competition fosters increased efficiency in the allocation of scarce resources. Lower tax burdens also translate into lower costs for multinationals operating within the territory and internationally. Moreover, taxation is not the only factor taken into account by multinational companies when deciding in what country to locate specific economic activities, but there are other, non-tax, factors which are of equal importance, e.g. an adequate supply of appropriately trained workers, relative labor costs, and infrastructure. Therefore, tax competition is not per se a bad thing, as long as governments are able to protect their revenues from erosion.

2.1.4. Conclusion

Of course, tax competition can have beneficial consequences in certain areas (e.g. for companies or individuals that have to pay lower taxes than they would if there were no tax competition), but there is always the question of financing public services. If one is of the opinion that a government is necessary -- and since the alternative would be a fight of every individual against every other (anarchy), there is no serious alternative -- there must be a means for the government to finance its activities. For this purpose, it has to retain a certain power to raise taxes, and therefore tax competition (in the form of a "race to the bottom", which may result in tax revenues of practically zero) can be harmful to the economy. In addition, equity considerations must also be taken into account. As OWENS mentions, taxpayers who are to some extent less mobile than others should not have to bear the tax burden avoided by more mobile taxpayers. What needs to be mentioned in this context as well, is that the mobile taxpayers will probably not decline the public services offered to them in a certain country, although they do not pay their share of taxes.

It is common opinion amongst representatives of the countries belonging to the EU and OECD as well as amongst many economists that harmful tax practices must be countered so as to reduce the economic distortions mentioned above. To be able to identify the different tax measures implemented by governments as either harmful or acceptable, several indicators, which are deemed to show clearly the harmful character of a certain tax measure, have been laid down in the EU Code of Conduct, the OECD Report on Harmful Tax Competition and in the State Aid Provisions of the EU.

This paper is intended to give an overview over these indicators.

2.2. EC State Aid Provisions (Arts 87 to 89 of the EC Treaty)

2.2.1. General concept of state aid within the EU

Art 3 (g) of the EC Treaty provides that a system of undistorted competition has to be realized. All State Aid Provisions are directly linked to this aim and must therefore be interpreted functionally in the light of this objective. Free competition and its stimuli are highly important for an efficient allocation of resources. If free competition is not realized, however, products will no longer be manufactured where conditions are most favorable but where the company is granted the biggest "gift" (e.g. subsidy). Nevertheless, interference with the free market forces may be warranted where they alone are only able to achieve the desired result very slowly or to an insufficient extent.[15] Examples of aids that may be considered acceptable are aids granted to firms which invest in a particularly depressed area of the country (because the development of the area concerned is a benefit which fully offsets the harm to the interplay of free competition), or aids granted to a big company in financial difficulty (because the need to preserve employment may be more important than the distortion of competition that harms the companies involved in the same trade).[16]

The meaning of the term "State Aid" in EC law encompasses any transfer of public resources from the government to a specific recipient or to several recipients. This definition implies a) a cost or loss of public funds to the government granting the aid, and b) a corresponding accrual of wealth to its recipient or recipients.[17]

2.2.2.

EC legal rules on state aid

The fundamental rules concerning the granting of state aid are contained in Arts 87 and 88 of the EC Treaty.

From the wording of Art 87 (1), it follows that four conditions must be met for a measure to be considered state aid:[18]

1) an advantage conferred to a firm or firms;
2) from state resources;
3) distortion of competition and impact on intra-Community trade; and
4) specificity or selectivity (i.e. concerning certain undertakings or certain goods).

The first criterion is an advantage (subsidy) for a specific undertaking or several undertakings, consisting not only of positive benefits but also of interventions which in various forms are a relief from the charges normally applied to the benefited undertakings without a counterbalancing charge proportional to the alleviation granted.[19] The advantage may be granted in any form whatsoever.

The second criterion is that the advantage has to be granted out of resources directly or indirectly provided by the state, i.e. the origin of the transfer may either be the central government or any local government or any other public or private agency controlled directly or indirectly by the state.[20]

The third test is split up in two subtests, i.e. (I) the distortion of competition and (II) the impact on trade between member states. Competition is said to be distorted if the recipient of the aid can improve his rate of return on his investment in comparison with his competitors who do not benefit from the aid.[21] It is not, however, necessary for competition to be actually distorted; a potential distortion is sufficient.[22] Trade between member states is considered to be affected not only where part of the production of the benefited companies is exported to other Member States[23], but already whenever there is competition between the national company and undertakings from other Member States of the EU on the company’s national market or on the market of non Member States of the EC.[24]

Finally, the last criterion is the most difficult to be scrutinized when assessing the nature of a certain aid measure. It states that the advantage conferred by the state must be in some way specific or selective, with respect to either the beneficiary (i.e. sectoral aid), or the activity encouraged (i.e. horizontal aid), or the territory assisted (i.e. regional aid). The reverse application of this criterion means that general measures meant to promote harmonization and development in the common market are outside the scope of Art 87 (1).[25] All the same, aid measures that do not meet the selectivity criterion are considered to be general but nevertheless cause a distortion in the internal market, may fall under Arts 96 or 97 EC Treaty and may have to be abolished or amended.[26]

Art 87 (1), however, does not imply that all aid measures are absolutely prohibited. In Art 87 (2), several automatic exemptions are provided for, which are always deemed to be compatible with the common market (e.g. social aid, emergency disaster relief).[27] In addition, Art 87 (3) contains a set of exemptions (e.g. regional aid measures) that require an analysis by the Commission and its approval, which will be granted or denied after a careful assessment by the Commission under Art 88 EC Treaty.[28]. The list of possible exemptions is exhaustive.[29]

2.2.3. Categorization of state aid by objective

The categorization by objective groups together the various forms of state aid based on their goals and is fundamental not only from a theoretical point of view, but because of several practical legal consequences that are analyzed below as well. There are three categories of state aid grouped by objective.[30]

1) Sectoral aid (e.g. favorable measures granted to the agricultural, coal, steel or textile sectors).

Sectoral aid includes all aid measures provided by the EU Member States for the purpose of stimulating investments or helping the restructuring of certain sectors of the economy. They are usually available for all the enterprises engaged in the aided sector. Consequently, this kind of aid does not distort free competition in the sector concerned, but between companies in the benefited sector and in other sectors of the economy.

2) Horizontal aid (e.g. R&D incentive schemes or employment incentives).

This kind of aid is available to all enterprises in respect of a certain function of their business activity. Its object is to stimulate certain activities regardless of the trade the aided companies are engaged in. The distortion of this type of aid lies in the fact that some enterprises can take better advantage of these measures than their competitors because their activity relies to a larger extent on the function of the business that received the aid.

3) Regional aid.

This aid is available for all enterprises doing business in certain particularly depressed areas of a country. Its aim is to spur the employment or development of particularly depressed areas. It brings about discrimination between enterprises operating in aided areas and those operating outside these areas. In this case, it is necessary to weigh the advantages of development in a poor area against the distortion of competition caused by the aid.

2.2.4. Fiscal state aid

Fiscal state aid is categorized according to the elements used to calculate the tax liability and to ensure the collection of the taxes due:[31]

1) tax base (e.g. special exemptions of certain items of income, deductions not normally available under the general tax system).
2) tax rate (e.g. special reduced or nil tax rates in favor of income derived from activities such as financial services, tax credits linked to e.g. investment in business assets).
3) enforcement of tax claims (e.g. systematic debt cancellation or deferment, lax enforcement of tax rules).

The first category contains measures that have an impact on the calculation of the tax base. In particular, measures having the effect of modifying the standard method of determination of the final taxable amount by affecting the calculation of any of the items taken into account for this purpose fall into this category. The main problem is that the measures taken to change the tax base are difficult to detect because they may be granted on the grounds of unpublished and/or discretionary administrative practices or may be hidden within the provisions of a country's general tax system.

The second category of aid contains measures which change the tax liability of taxpayers.

Finally, the third category concerns the actual collection of taxes due. A loss of tax expenditure is equivalent to consumption of state resources in the form of fiscal expenditure.[32] Especially any form of relinquishment by a state of its right to recover tax debts not yet remitted constitutes state aid. It is hard to discover this form of state aid because it takes place on a case-by-case basis and is not disclosed by the tax administration.[33]

The EC state aid rules apply to all favorable measures implemented by a Member State falling under Art 87 EC Treaty regardless of the form chosen; what counts is a measure's effective consequences on competition and intra-community trade. Consequently, the general provisions and principles analyzed so far also apply to aids granted by Member States via their tax system. In particular, fiscal measures are assessed on the basis of the four conditions explained in 1.2.3.. Therefore, any tax concession which represents a relief from the tax burden normally placed on firms and which is financed through state resources in the form of a reduction of corporate or individual tax revenue is caught by Art 87 EC Treaty. This is because these concessions have the effect of hindering fair competition within the internal market by favoring certain taxpayers and affecting the Community trade within the meaning of state aid defined in 1.2.3.. All the same, the selectivity criterion is difficult to apply with respect to tax measures as well. A specific tax measure must constitute a deviation from the general tax system of the member state concerned. An example of such a measure is setting special rates or larger bases with respect to certain taxpayers. However, even a selective measure can be justified in the "nature or general scheme of the tax system" (this is rather a vague criterion).[34]

In addition to these general rules, fiscal state aid is subject to the various Commission acts sui generis on sectoral, horizontal and regional aid.

Finally, I would like to give an example of a particular form of state aid: administrative practices. In Greece, in 1990, the Commission found out that public enterprises showed an abnormal leniency towards a certain company in collecting the claims.[35] "Such action is likely to constitute state aid", the Commission ruled. The corollary to this decision is that every practice of a Member State's authorities, including its tax administration, entailing laxity or leniency in the recovery of its own (tax) claims constitutes state aid incompatible with the EC Treaty.

2.3. Code of Conduct of business taxation

2.3.1. BAckground and Legal nature

The Code of Conduct of Business Taxation (hereinafter "Code of Conduct") constitutes one of a series of measures in the income tax field ("Package to Tackle Harmful Tax Competition in the European Union") that also includes a Proposed Directive on the taxation of interest from savings and a Proposed Directive on withholding taxes on royalty and interest with respect to cross-border payments between related enterprises. The ECOFIN Council, which is composed of the finance ministers of EU Member States, unanimously approved the Code of Conduct at its meeting held on 1 December 1997.[36] The adoption of these documents started upon the initiative of the European Commission at the informal ECOFIN Council held in Verona in September 1996, and continued with the subsequent proposals submitted by the Commission to the Council.[37]

The Proposed Directive on the taxation of interest from savings features the imposition of a minimum withholding tax to be levied on interest payments effected to non-resident EU citizens by the EU country in which such payments are made, or, alternatively, an exchange of information with the recipient's EU country of residence ("coexistence model"). By this measure, a minimum level of taxation on income from savings would be ensured, for which at the moment most countries are tempted to grant favorable tax regimes because of the high mobility of savings.[38]

The Proposed Directive on intercompany payments of interest and royalties aims at the abolition of the imposition of withholding taxes on intra-group payments of interest and royalties, so that distortions caused by international economic double taxation can be avoided.[39]

The background to this Package is the ever-increasing importance of direct taxation on the correct functioning of the internal market. Since the four freedoms contained in the EC Treaty have made it possible for goods, services, persons and capital to circulate freely within the EU, cross-border trade and investments and with them direct taxation have assumed a more and more important role. Especially after the successful implementation of the Economic and Monetary Union (EMU), which will shortly lead -- through the disappearance of exchange rates and different interest rates -- to price transparency and the disappearance of protectionist measures, the importance of the direct tax regimes of the member countries in affecting investment decisions will increase significantly. Consequently, a sharp increase in tax competition is inevitable. The Package's goal is to tackle harmful tax competition in order to reduce and eventually eliminate the economic distortions, the fiscal degradation and the increase of taxation on labor caused by fiscal degradation, which could lead to a growth of the already high unemployment rate.[40]

The main document in this Package is the Code of Conduct. It has been adopted by the Council as a resolution, which is a non-binding legal instrument. In effect, it is only a political commitment of the member states to comply with what is agreed upon therein. Its provisions may not be enforced through legal remedies by the European institutions or by the member states if its provisions are not adhered to.[41] The Code of Conduct is, moreover, an "acquis communautaire", which means that it is binding for new EU members.

2.3.2. Scope

The Code of Conduct covers business tax measures which affect, or may affect, business activity within the European Community in a significant way, including special tax regimes for employees.[42] Tax measures are defined as encompassing not only laws, but regulations and administrative practices as well. Consequently, all the special tax regimes implemented by the Member States fall under its rules regardless of their legal form. Accordingly, "harmful" in the context of the Code of Conduct refers to measures that play a fundamental role in the companies' decisions on their investment location, and a certain tax measure implemented by a Member State is considered harmful to the Community interest where the decision of a taxpayer on the country in which his business activity should be located has been affected exclusively or preponderantly by such a measure.[43]

In addition, the Code of Conduct expresses special concern for mobile forms of business, especially for international financial and service activities, and, moreover, asks the Member States to promote the adoption of its provisions in dependent or associated territories, which may be regarded as a tax haven clause.[44]

2.3.3. Criteria to identify harmful tax practices

The point of departure for identifying potentially harmful tax measures pertains to those which offer a significantly lower effective level of taxation, including zero taxation, than that which generally applies in the Member State in question.[45] All tax provisions leading to a total or significant reduction in the effective tax burden imposed on business taxation are covered, regardless of whether they have effect in respect of the nominal tax rates, of the tax base, or of other factors such as depreciation schedules, tax treatment of reserves and provisions, etc.. The following six principal factors, which are indicated to show the harmful character of specific tax measures, are mentioned in the Code of Conduct:[46]

1) significant effect on the location of business.

2) availability of a tax incentive (advantage) only to non-resident taxpayers or to transactions concluded with non-resident taxpayers (deviation of a fiscal measure from the benchmark tax system of the country concerned).

This factor is regarded as controversial because tax measures implemented generally through the standard tax system may nevertheless be seen as harmful, e.g. a very low rate of corporate tax, the absence of withholding taxes on outbound income distributions, favorable depreciation provisions, etc..

3) no repercussions from a tax incentive on the domestic tax base of the country concerned due to the fact that it is completely unlinked to the domestic economy ("ring-fencing"; for an explanation see chapter 2.4.3.).

4) availability of a tax incentive to investors regardless of their having actual economic presence or carrying on a real economic activity in the country concerned.

This factor is regarded by PINTO[47] as very useful in detecting harmful tax competition because it shows that, on the one hand, a company has only invested in that country due to the tax incentive, and, on the other hand, that the country is only trying to attract mobile business activities instead of pursuing a sound domestic fiscal policy.

5) availability of a tax incentive entailing the computation of taxable income according to principles other than the internationally accepted ones (especially the OECD transfer pricing rules) in favor of multinational companies.

6) lack of transparency of a tax incentive, because it is, for example, granted on the basis of an unpublished administrative practice departing from general statutory principles in effect in the country concerned.

The fifth test is also regarded as important because it targets all the "hidden" incentives aimed at attracting foreign direct investment. These "hidden" incentives are perhaps the most dangerous form of harmful tax competition since they are difficult to detect and rely on a high degree of discretion exercised by a country's tax administration. Therefore, they may give rise to inequalities of tax treatment between taxpayers aware or unaware of their existence, as well as manipulations of the general tax system by the tax administration in a manner escaping judicial, administrative and ultimately democratic control.

Exchange of information is not specifically mentioned in the Code of Conduct, since within the EU the Mutual Assistance Directive of 1977 provides for an effective exchange of information between the member states.

In addition to these five indicators, the Code of Conduct contains two other factors that need to be taken into account in the assessment of the harmful nature of a certain tax measure:[48]

1) the "spillover effect" (economic effects), i.e. the actual impact a measure has with respect to other (neighboring) Member States' economies, taking into account the latter's tax treatment of the same or similar taxpayers or activities.
2) the underlying policy pursued by the Member State in question with the introduction of the said measure, and, in particular, whether the measure was meant to favor the economic development of depressed or underdeveloped areas within the EU such as "outermost regions and small islands".

Some of the tax measures covered by the Code of Conduct may fall within the scope of the EU State Aid Provisions. Therefore, the second factor is meant to provide a "safety-valve" for tax measures characterized as fiscal state aid if the different sources of EU law overlap. However, the qualification of a tax measure as harmful under the Code of Conduct does not affect its possible qualification as a state aid.[49]

2.4. OECD Report on Harmful Tax Competition

2.4.1. Background and Legal nature

The OECD Report on Harmful Tax Competition (in short "Report") was the result of a request by the OECD Council of Ministers in May 1996 in Lyon to "develop measures for countering harmful tax competition on investment and financing decisions and the consequences for national tax bases". The OECD Committee on Fiscal Affairs created a task force to carry out the request. Finally, the Council of Ministers adopted the OECD Report and a series of recommendations to its members on a meeting held on 8 April 1998. During this meeting, the Committee was also instructed to develop a dialogue with non-member states.[50] Luxembourg -- although it had approved the EU Code of Conduct in 1997 -- and Switzerland refused to vote in favor of the Report.[51]

The Report consists of an introduction and three chapters concerning the concept of tax competition, the criteria to identify harmful tax competition and recommendations to counter harmful tax competition. The second chapter will be dealt with in detail in 2.4.3..

The OECD Report is a non-binding legal agreement. It is a political document that represents the political positions that member countries have taken. However, peer-pressure (i.e. if others comply with the Report's provisions, one is inclined to do the same) is already working as a means of harmonizing and neutralizing the various tax regimes.[52]

As OSTERWEIL puts it, "...the OECD's influence is derived from its ability to persuade linked to a powerful membership base."[53]

2.4.2. Scope

The OECD Report is intended to "develop a better understanding of how tax havens and harmful preferential tax regimes affect the location of financial and other service activities".[54] To put it differently: It targets only "geographically mobile activities, such as financial and other service activities, including the provision of intangibles". Consequently, special tax measures enacted with a view to favoring manufacturing activities or other non-financial or non-service activities are not covered. Moreover, it explicitly targets tax havens, i.e. "countries that are able to finance their public services with no or only nominal income taxes and that offer themselves as places to be used by non-residents to escape tax in their country of residence".[55]

Geographically, the Report is intended to cover not only the 29 OECD Member countries, but also to influence non-OECD countries.[56]

The Report describes two forms of tax competition: acceptable and harmful tax competition. Acceptable tax competition is declared to be the result of the differences in the tax systems of the various countries due to their different internal fiscal policies.[57] Additionally, measures implemented by a country to reach internationally accepted standards are acknowledged to be acceptable. Consequently, tax incentives are regarded as acceptable where they are adopted as a tool of domestic policy to attract new and genuine investments or to favor the development of depressed areas suffering from specific disadvantages, such as unemployment, lack of natural resources, etc.

In contrast, harmful tax competition is defined as a country's exploitation of the interaction of the tax systems by the "enactment of special tax provisions which principally erode the tax base of other countries". Moreover, "poaching" constitutes harmful tax competition: Where the spillover effect on other countries is not a mere side-effect, incidental to the implementation of a domestic tax policy, but the effect for one country to redirect capital and financial flows and the corresponding revenue from the other jurisdictions by bidding aggressively for the tax base of other countries, this activity is called "poaching".[58]

2.4.3. Criteria to identify harmful tax practices

There are two categories of harmful tax regimes, namely tax havens and high-tax jurisdictions whose tax systems have preferential features that "allow the relevant income to be subject to low or no taxation".[59] The main difference between these two categories is that tax havens are perceived as being actively engaged in the erosion of other countries' taxable base and as being unwilling to be involved in the process meant to combat harmful tax practices, whereas the high tax countries' revenues are endangered by the existence of tax havens and preferential tax regimes enacted by other countries. Therefore, there is more cooperation in the fight against harmful tax practices among the high tax countries, as long as their competitors agree to do the same.[60]

The key factors to identify tax havens are the following:[61]

1) No or only nominal taxes.
2) Lack of effective exchange of information.
3) Lack of transparency.
4) No substantial activities.
In addition to that, promotional activities for tax free investments are a factor to identify tax havens.

As these factors are relevant for tax havens only -- Austria, however, is not regarded as a tax haven -- I would like to concentrate on the harmful preferential tax regimes in otherwise high tax countries in the following paragraphs.

The four key factors to identify harmful preferential tax regimes in otherwise high-tax countries are the following:[62]

1) No or low effective tax rates.

A zero or low effective tax rate may arise because the schedule rate itself is low or because of the definition of the tax base to which the rate is applied. This factor is a necessary starting point of an analysis of a country's tax regime, but is not a determining factor.

2) "Ring-fencing" of regimes.

Where regimes are partially or fully isolated from the domestic economy, the country implementing the measure is protected against the harmful effects of its regime -- i.e. bears little or none of the financial burden of its regime --, whereas its regime has an adverse impact on foreign tax bases. Furthermore, taxpayers within the regime benefit from the infrastructure of the country providing the preferential tax legislation without bearing the cost incurred to provide that infrastructure. Several forms of ring-fencing can be distinguished:

(I) Regimes that restrict the benefits to non-residents (also companies with foreign shareholders) or to persons engaging in business with non-residents.

Pure resident companies are excluded explicitly or implicitly from taking advantage of the preferential tax regimes and hereby the revenue-reducing effect of that regime is shifted to other countries.

(II) Regimes where investors who benefit from the preferential tax legislation are explicitly or implicitly denied access to domestic markets.

This also serves the purpose of insulating the domestic economy from the adverse effects of a regime. Market access is denied explicitly or implicitly through tax privileges that do not apply or which are neutralized if the enterprises carry on business in the domestic market (off-shore businesses).

(III) Other regimes may prohibit transactions in the domestic currency, so that the domestic monetary system is not affected by the regime.

3) Lack of transparency.

Lack of transparency will make it harder for the home country to take defensive measures. If a tax administration does not state clearly the conditions of applicability of a regime in such a manner that the said conditions may be invoked against the authorities and, in addition, if details of this regime -- including any application thereof regarding a particular taxpayer -- are not available to the tax authorities of other countries concerned, harmful tax competition may be created since the regime's beneficiaries are able to negotiate with the tax authorities and inequality of treatment of taxpayers in similar circumstances may be provoked. The lack of transparency in the operation of a regime may have the following reasons:

[...]


[1] See Bracewell-Milnes, B.: Tax Competition: Harmful or beneficial?, Intertax 1999, 86.

[2] See Bracewell-Milnes, B.: Intertax 1999, 86.

[3] See Owens, J.: Curbing harmful tax competition -- Recommendations by the Committee on Fiscal Affairs, Intertax 1998, 230.

[4] See Pinto, C.: EU and OECD to fight harmful tax competition: Has the right path been undertaken?, Intertax 1998, 386-387.

[5] See Pinto, C.: Intertax 1998, 387.

[6] See Pinto, C.: Intertax 1998, 387.

[7] See Owens, J.: Intertax 1998, 231.

[8] See Pinto, C.: Intertax 1998, 387.

[9] See Pinto, C.: Intertax 1998, 387.

[10] See Bracewell-Milnes, B.: Tax avoidance and tax competition, Intertax 1991, 298.

[11] See Bracewell-Milnes, B.: Intertax 1991, 298.

[12] See Bracewell-Milnes, B.: Intertax 1991, 299.

[13] See Ellis, M.: Are measures to curb harmful tax competition necessary?, European Taxation 1999, 79.

[14] See BIAC: A business view on tax competition, European Taxation 2000, 421-422.

[15] See Baudenbacher, C.: A brief guide to European State Aid law, London 1997, 1.

[16] See Pinto, C.: EC State Aid rules and tax incentives: A u-turn in Commission policy?, European Taxation 1999, 295.

[17] See Pinto, C.: European Taxation 1999, 295.

[18] See Pinto, C.: European Taxation 1999, 298-299.

[19] E.g. Case 90/70 Franz Grad vs. Finanzamt Traunstein [1978] ECR 25; Case 61/79 Amministrazione delle Finanze dello Stato vs. Denkavit Italiano, [1980] ECR 1205, Case 30/59 [1961].

[20] E.g. Case 78/76, Steinike und Weinlig vs. Germany [1977] ECR 595; Cases 72 and 73/91 Sloman Neptun [1993] ECR I-887.

[21] E.g. Case C 44/93 Namur vs. Office national du Ducroire and Belgium [1994] ECR I-3829; Case 84/82 Germany vs. Commission [1984] ECR 1451.

[22] See Baudenbacher, C.: State Aid law, London 1997, 22.

[23] E.g. Case 40 /75 Produits Bertrand vs. Commission [1976] ECR 1; Case 52/76 Benedetti vs. Munari [1977] ECR 163.

[24] See v. Wallenberg, in Grabitz/Hilf, Das Recht der europäischen Union, Art 92 para. 28.

[25] See Pinto, C.: European Taxation 1999, 298-299.

[26] See Pinto, C.: European Taxation 1999, 298-299.

[27] See Luja, R.: Anti-tax-avoidance rules and fiscal trade incentives, Intertax 2000, 227.

[28] See Pinto, C.: European Taxation 1999, 300.

[29] See Baudenbacher, C.: State Aid law, London 1997, 26.

[30] See Pinto, C.: European Taxation 1999, 297.

[31] See Commission notice on the application of the State aid rules to measures relating to direct business taxation, 1998, 3, and Pinto, C.: European Taxation 1999, 303.

[32] See Commission notice, 3.

[33] See Pinto, C.: European Taxation 1999, 303.

[34] See Pinto, C.: European Taxation 1999, 304.

[35] Commission Decision 91/144/EEC of 2 May 1990, in OJ L 73 of 20 March 1991, 27.

[36] See Osterweil, E.: OECD Report on harmful tax competition and European Union Code of Conduct compared, European Taxation 1999, 198.

[37] See Pinto, C.: Intertax 1998, 388.

[38] See Pinto, C.: Intertax 1998, 388.

[39] See Pinto, C.: Intertax 1998, 388.

[40] See Pinto, C.: Intertax 1998, 388.

[41] See Pinto, C.: Intertax 1998, 389.

[42] See Osterweil, E.: European Taxation 1999, 198.

[43] See Pinto, C.: Intertax 1998, 389.

[44] See Osterweil, E.: European Taxation 1999, 198.

[45] See Osterweil, E.: European Taxation 1999, 199.

[46] See Pinto, C.: Intertax 1998, 389.

[47] See Pinto, C.: Intertax 1998, 389.

[48] See Pinto, C.: Intertax 1998, 389.

[49] See Commission notice, 8.

[50] See Owens, J.: Intertax 1998, 230.

[51] See Osterweil, E.: European Taxation 1999, 198.

[52] See Sommerhalder, R.: Harmful tax competition or harmful tax harmonization, EC Tax Review 1999, 245.

[53] Osterweil, E.: European Taxation 1999, 198.

[54] See Osterweil, E.: European Taxation 1999, 198.

[55] See Pinto, C.: Intertax 1998, 390.

[56] See Osterweil, E.: European Taxation 1999, 198.

[57] See Pinto, C.: Intertax 1998, 390.

[58] See Pinto, C.: Intertax 1998, 390.

[59] OECD Report on harmful tax competition, 19.

[60] See Pinto, C.: Intertax 1998, 391.

[61] See Osterweil, E.: European Taxation 1999, 199.

[62] See OECD Report on harmful tax competition, 26-29.

Details

Seiten
111
Erscheinungsform
Originalausgabe
Jahr
2002
ISBN (eBook)
9783832470555
ISBN (Buch)
9783838670553
Dateigröße
699 KB
Sprache
Englisch
Katalognummer
v222376
Institution / Hochschule
Wirtschaftsuniversität Wien – unbekannt, österreichisches und internationales Steuerrecht
Note
1,0
Schlagworte
internationales steuerrecht eu-recht subventionen estg

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Titel: Austrian Advance Rulings Measures and their Compatibility with EU and OECD Provisions against Harmful Tax Competition