Revisiting “Schumacker”: Source, Residence and Citizenship in the ECJ Case Law on Direct Taxation

Abstract

ECJ case law on direct taxation has been very important in the development of the international dimension of direct tax systems of EU Member States. Through the application of the non-discrimination principle and the requirements of the fundamental freedoms, some of the basic structures of the implementation of income tax systems have been revised to accommodate to the needs of the single market. However, the requirements of the EU single market are fundamentally incompatible with the assumptions that have served to build the criteria under which modern income tax systems have been developed (worldwide income taxation, residence vs source, unlimited vs limited tax liability, credit vs exemption, tax treaties).

The Court tried to reconcile the requirements of both systems (EU Law and income taxation) in the Schumacker case, which can be considered a landmark modern case, despite the fact that it simply implicitly introduced some of the latest developments of ECJ case law on direct taxation. Since then, the Court has been moving to a broader consideration of the fundamental freedoms and then reconsidered them under the need of a certain reequilibrium between the rights derived from EU Law and the recognition of the financial interest of EU Member States.

By doing so, the ECJ used the interpretation of EU Law to refine some of the basic trends of cross border income taxation, both referred to limited and unlimited tax liability requirements and to the measures devoted to alleviate the negative aspects derived from the interaction of the exercise of the tax jurisdiction by two or more EU Member States simultaneously.

EU Law was then seen as a mechanism to improve the deficiencies raised by the corresponding and subsequent rules and mechanisms formulated by international tax law to deal with problems generated to and by cross-border income situations. But more recently the EU law seems to be more in favour of other criteria that serve to balance the position between EU Law rights granted to citizens and companies and financial interests of Member States, mainly with the recognition of the ‘balanced allocation of taxing rights’ and ‘avoidance of double tax advantages’, or the need to prevent ‘risks of tax avoidance’ as justification criteria à la Schumacker. This landmark case reaffirms then its prominence again in the verification of which evolution has suffered the ECJ case law on direct taxation and whether this evolution may determine the predictability of new case law based on sound and consistent principles or on allocation criteria of taxing rights. The present article analyzes to what extent the ECJ has tried to evolved such a line of reasoning through the formulation of the symmetry criteria.

Based on the findings and considering the relevance of the outcome of the case in the Schumacker decision, the article proposes to analyze to which extent EU Law has to stick to traditional objectives and outcomes of international tax law – alleviation of international double taxation, allocation of taxing rights, prevention of cross-border tax evasion – when dealing with fundamental freedom’s requirements or, on the contrary, has to look for criteria more consistent with the integration required by a single market and a further budgetary and fiscal consolidated situation. In that sense, the consideration of the requirements of the ability to pay principle will be analyzed to see whether they can serve to promote it as an EU Law principle that guides the formulation of consistent and coherent ECJ case law on direct tax matters.

The author can be reached at alfredo.garcia@uv.es. The present article is part of the Research Project MICINN DER 2009-13199, VI Plan nacional de Investigación Científica, Desarrollo e Innovación Tecnológica, granted by the Spanish Ministry of Education under the title ‘El control del ordenamiento tributario español desde la óptica constitucional y comunitaria: análisis y propuestas’.