Double Non-Taxation

The increasing importance of cross-border business activities is accompanied by a rising complexity of international tax planning. Inconsistencies in domestic rules are relentlessly being exploited by multinationals through sophisticated arrangements in order to reduce the global tax burden. The existing tools of tax authorities do not provide a comprehensive response to cases of double non-taxation resulting from such highly complex transactions. The OECD and the European Commission are anxious to provide concrete solutions to realign international tax standards. These initiatives are of paramount importance for the future of international tax law. However, there is a substantial lack of fundamental research. It is the aim of this research project to fill this gap and to offer a comprehensive analysis of the possibilities to avoid double non-taxation. First, as double non-taxation requires a cross-border situation, unilateral measures have to treat cross-border transactions differently from purely domestic situations to avoid double non-taxation. This raises a fundamental question which has not been dealt with so far: Do the non-discrimination concepts laid down in the TFEU and Art. 24 OECD Model constitute a limitation for tackling double non-taxation? Given the current political debate, it is of the highest importance to shed light on the influence of the non-discrimination concepts on the fight against double non-taxation. The aim of this research project is to provide a structured analysis of the impact of the existing concepts of non-discrimination on unilateral measures addressing double non-taxation and to offer innovative solutions in order to tackle aggressive tax planning. Second, special emphasis will be put on tax treaty law. It will be examined whether avoiding double non-taxation is a basic principle of the OECD Model and, therefore, whether it has to be considered when interpreting its provisions. Afterwards, a systematic analysis of the various provisions of the OECD Model that might serve as a basis for preventing double non-taxation will be provided. Furthermore, a detailed examination of subject-to-tax clauses, as suggested by the OECD and the European Commission, will be provided in order to determine whether these suggestions are capable of effectively preventing double non-taxation resulting from international tax planning. Against this background, alternative approaches to tackle double non-taxation will be developed. This research project will make it possible to intensively contribute to the on-going discussion on the issue of double non-taxation resulting from international tax planning and to influence the understanding of the phenomenon of double non-taxation. Without doubt, the future of double non-taxation in international tax law depends on research yet to be done. In this regard, this research project will be a substantial contribution to the current political debate as well as a scientific milestone in fighting aggressive tax planning.

Over the last few years, double non-taxation has become one of the most popular issues in international taxation. The main reason is that since the beginning of the economic crisis the media and non-governmental organizations have increasingly unmasked the tax planning schemes used by multinational corporations to reduce taxation on income. This has led to an enormous political and temporal pressure to rapidly reform the international tax regime. However, although virtually everyone talks about double non-taxation, there is in fact no satisfying internationally accepted circumscription of this phenomenon. It seems that no one really knows what double non-taxation actually is. But without having a thorough understanding of the problem, it seems hardly possible to develop a consistent and sustainable solution. We have come to the conclusion that double non-taxation should be perceived as a situational and relative phenomenon: Whether multinational enterprises benefit from double non-taxation should be determined by comparing them with a enterprise that only operates in a purely domestic context. If the tax burden of the former is lower, this might indicate that the multinational enterprise benefits from loopholes created by the interaction of uncoordinated tax regimes of different states.In a famous hearing by the UK House of Commons Committee of Public Accounts, the chairman Margaret Hodge made a popular statement: We are not accusing you of being illegal; we are accusing you of being immoral. Indeed, having a proper definition of double non-taxation does not yet answer the question whether it is legally problematic. But is it true that double non-taxation is legally unchallengeable? According to our opinion, there are good arguments supporting the view that EU law may serve as a tool to legally challenge tax rules that might be used by multinational enterprises to unduly reduce their effective tax burden through cross-border transactions. The OECD, for example, argues that double non-taxation harms competition, economic efficiency, transparency and fairness. From an EU law perspective, the first two aspects in particular are legally remarkable, because the EU is based on the economic policy perception of an open market economy with free competition, favouring an efficient allocation of resources. To this end, the European Treaties contain provisions aimed at avoiding distortions of competition induced by the market participants, by the Member States, or by differences between the Member States legal systems. From a tax perspective, the State aid rules of Articles 107-109 TFEU are the most relevant means in this respect. According to our findings in this research project, it is no surprise that the European Commission increasingly relies on these rules in order to tackle tax planning structures of multinational enterprises. However, it can be reasonably assumed that the EU State aid rules potential has not yet been tapped in its entirety. Double non-taxation may hence be legally challengeable under EU law.