New Deal for Europe - Commerce Clause and the Potential Internal Consistency Test of the European Union

1. Kerckhaert-Morres
Presentation by Charles Edward Andrew Lincoln, IV
Based off the the ECJ case and in regards to broader policy implications:
Case C-513/04, Kerckhaert & Morres v. Belgium, 2006 E.C.R. I-10967
For Professor Dennis Weber’s Advanced EU Tax Law class (January 25, 2017)

2. Facts of Kerckhaert-Morres
• Couple lived in Belgium
• In ’95 and ’96 they received dividends
from French company.
• French WHT of 15% on dividends
• Belgium did not apply the credit system
for any taxes paid on the French WHT
• Belgium taxed dividends at 25% on the
corporate level without any double tax
relief
• Thus, they paid more taxes than dividends
coming from a Belgian company

3. Difference in taxation between domestic and
cross-border dividends

4. Procedural Posture
• Belgian Court requested a
preliminary hearing for the
ECJ to determine whether or
not the imposition of double
taxation violated Article 53
TFEU stating that the rule
“interpreted as prohibiting a
restriction resulting from a
provision in the income tax
legislation of a Member
State”

5. Commission’s view
•Commission stated
that the ECJ should
not force Belgium
to give a tax credit,
because it would
be a violation of EU
fundamental
freedoms

6. Advocate General Geelhold’s Opinion
• Geelhold’s view was that
“juridical double taxation was
thus a ‘quasi-restriction,’ and
as such it ‘may only be
eliminated through the
intervention of the
Community legislator.’”

7. ECJ Opinion
• The ECJ stated that EU Treaty
Freedoms do not preclude
Member States from
“parallel exercise of taxing
jurisdiction,” even if it leads
to double taxation, as long as
neither State treats the cross-
border situation less
favorably than the
comparable purely domestic
situation.
• This is not a restriction of the
free movement of capital

8. Terra/Wattel
• “comparability standard is needed to decide
whether the two positions are comparable from the
point of view of the object and purpose of the
impugned national tax measure… assumption of
taxing jurisdiction is national sovereignty, but the
exercise of the jurisdiction so assumed is subject to
Court scrutiny”
• Terra/Wattel appreciate the ECJ balancing the
interests of the internal market with the legitimate
interests of Member States rather than:
• Montesquieu’s bouche qui pronnce les paroles de
la loi
• Ruling from the court

9. Comptroller of Treasury of Maryland v.
Wynne, 135 S. Ct. 1787 (2015).
• Maryland’s personal income tax
scheme, which taxes income
that its residents earn both
within and outside the state but
does not provide residents with
a full credit against the income
taxes that they pay to other
states, violates the dormant
Commerce Clause.

10. Commerce Clause in the United States
Constitution
•[The Congress shall have Power] To
regulate Commerce with foreign Nations,
and among the several States, and with the
Indian Tribes
•— Article I, §8, clause 3

11. Maryland tax system
• Maryland’s state-level personal
income tax comprises two distinct
components: a state component
(retained entirely by the state) and
a county component, which
ultimately flows to the taxpayer’s
county of residence.
• Maryland grants its residents a
credit for taxes paid to other states,
but it offers no such credit against
the county component
Maryland Comptroller: Peter Franchot

12. Facts of Comptroller of Treasury of Maryland
v. Wynne (2015).
• The Wynnes are Maryland
residents who had earned much
of their income in other states.
They argued that, by subjecting
their income to duplicative state-
level taxation, the county
component of Maryland’s
income tax scheme ran afoul of
the dormant Commerce Clause.

13. Justice Alito’s Test for DCC Violation
• (1) [T]o survive dormant
Commerce Clause scrutiny,
Maryland’s tax needed to be
“internally consistent,” and
• (2) in addressing the tax’s
internal consistency, the Court
needed to examine Maryland’s
personal income tax scheme “as
a whole.”

14. “Internal Consistency” Test
• Test found in at least seven
previous US Supreme Court
cases.
• It asks whether interstate and
intrastate commerce would be
taxed equally if every state were
to adopt the precise tax scheme
at issue
• Maryland’s tax failed the test.

15. Failure of the ”Internal Consistency” Test
• The Court reasoned the unfavorable treatment of interstate
commerce was “not simply the result of [the Maryland tax scheme’s]
interaction with the taxing schemes of other states” but inherent in
the tax system.
• As such, Maryland’s scheme effectively “operate[d] as a tariff.”
• And “[t]his identity between Maryland’s tax and a tariff is fatal
because tariffs are ‘the paradigmatic example of a law discriminating
against interstate commerce.’” i.e., the internal market of the US.

16. Open questions after Wynne case
• The Court did not state how Maryland should solve the problem.
• They could use a credit for the Wynnes.
• Maryland could change it’s scheme by stopping the taxation of non-
residents.
• Would this work in the EU? A strictly territorial system.

17. Other question for Maryland
• Maryland could eliminate all of the credits it affords to residents for
income taxes paid elsewhere and completely repeal any income tax it
imposes on non-residents.
• Meaning only tax residents’ world-wide income, and abstain from taxing any
non-resident’s income.
• The Court has stated this would be internally consistent,
• But in the past the Supreme Court has also held tax systems to “fairly
apportion taxation” to Corporate income tax.

18. Final thoughts on Wynne:
• But the Court does not
solve questions that are
not before it
• Just like when Terra/Wattel
stated:
• “Montesquieu’s bouche
qui pronnce les paroles de
la loi ”
• “The Court does not
legislate from the bench.”

19. Should Europe adopt a type of “Internal
consistency test”?
• Perhaps possible through
legislative amendment and
providing for a type of
“Commerce Clause”?

20. Solutions
• Commission’s idea: use treaties to determine which state has to
relieve double taxation
• EC legislator creates a European framework for the division of taxing
rights
• ECJ could try to place the “blame” on a state to relieve double
taxation (without the former two solutions)
• Perhaps in reference to OECD principles

21. OECD has become a European standard
• OECD has already become a European standard and is frequently
relied upon the ECJ
• Moris Lehner, The Influence of EU Law on Tax Treaties from a German
Perspective, 54 BULL. INT'L FISC. Doc:. 461, 465 (2000)

22. New Deal for Europe?

23. CCCTB
• CCCTB solves double taxation for corporations
• So, seemingly X-Holding will be overruled by the Commission’s Mandate
• Commission found that non-uniform taxation is harmful for the
economy.
• If it was expanded to other states.

24. Image Sources
• Wikipedia.org
• Creative Common License
• Attribution-ShareAlike{{cc-by-sa-4.0|details}}
• I claim no ownership of any of the images. They were all found on
Wikipedia.org
• All images from Wikipedia unless otherwise state.
• Construction of the Dam (study for mural, the Department ofthe
Interior, Washington, D.C.), detail, 1938, William Gropper”
http://americanart.si.edu/images/1965/1965.18.11A-C_1a.jpg

25. Bibliography
• See Addendum