Advanced

Financing Costs and Overhead Deduction in Cross-Border Transaction - A Requirement of EU Law?

Gärtner, Inken LU (2016) HARN60 20161
Department of Business Law
Abstract
This Master thesis explores the EU law requirements for the taxation of the provision of cross-border services by the source state. As often the field of direct taxation, this is a delicate area where tension exists between the tax sovereignty of the Member States and the EU’s aim of the realization of an internal market. The CJEU has ruled several times on different tax legislation of different Member States in connection to the freedom to provide services. Now it is confronted with another pending case – C-18/15 Brisal – in which, on the one hand, the technique of charging the tax and, on the other hand, the computation of the tax payable by non-resident service providers is questioned. By comparing precedent case law to the first issue... (More)
This Master thesis explores the EU law requirements for the taxation of the provision of cross-border services by the source state. As often the field of direct taxation, this is a delicate area where tension exists between the tax sovereignty of the Member States and the EU’s aim of the realization of an internal market. The CJEU has ruled several times on different tax legislation of different Member States in connection to the freedom to provide services. Now it is confronted with another pending case – C-18/15 Brisal – in which, on the one hand, the technique of charging the tax and, on the other hand, the computation of the tax payable by non-resident service providers is questioned. By comparing precedent case law to the first issue the analysis reveales that the CJEU has always accepted the taxation in form of withholding tax for the cross-border taxation of services, even though it did not allow the same in other direct tax areas such as dividend taxation and exit taxation. In addition, the analysis demonstrates that the EU has improved the mutual assistance for the recovery of tax claims by implementing new Directives, which were not subject of discussion in the precedent case law yet. However, the newest Directive is not applicable in the case Brisal, which is why it can be concluded, that the CJEU will not change its line of reasoning in that case, although withholding taxes hinder the realization of the internal market.
The second problematic feature of the Portuguese legislation at issue is the calculation of the taxable amount. Residents pay taxes on interest income on the net amount at a rate of 25%, whereas the tax of non-residents is levied on the gross amount at a rate of 20% or less, depending on the applicable double tax agreement. Gross taxation leads to a higher taxation when the costs for providing the services are higher than the compensation by the lower flat rate and it always induces taxation even when losses occur. The CJEU has ruled several times in this area, that the non-deduction of directly linked costs infringes EU law. However, the facts of the pending case are more complicated as one of the plaintiffs is a bank which demands the deduction of financing-overhead costs. The analysis in this Master thesis reveals that no distinct ruling exists for the deduction of financing costs and none is existent for the deduction of a proportional part of overheads. Consequently a deductive approach is applied, which analysed the issue in the light of two principles underlying EU law in the area of direct taxation – the fiscal principle of territoriality and the principle of neutrality. This approach demonstrates that the principle of neutrality requires the deductibility of costs at issue and that a deviation from that is not justified by the principle of territoriality.
In a final step, several justification grounds are analysed and it is concluded, that the technique of taxation may be justified by the need for an efficient tax collection, but no justification ground is found adequate to legitimate the infringement of EU law by the computation system. Therefore, it is concluded that the CJEU should make the deduction of a proportion of financing-overhead costs a requirement of EU law in order to promote the realization of the internal market. (Less)
Please use this url to cite or link to this publication:
author
Gärtner, Inken LU
supervisor
organization
course
HARN60 20161
year
type
H1 - Master's Degree (One Year)
subject
keywords
Source Taxation, Withholding Tax, Interest Taxation, Cost Deduction, Overhead Deduction
language
English
id
8880201
date added to LUP
2016-06-14 12:24:16
date last changed
2016-06-15 12:16:04
@misc{8880201,
  abstract     = {This Master thesis explores the EU law requirements for the taxation of the provision of cross-border services by the source state. As often the field of direct taxation, this is a delicate area where tension exists between the tax sovereignty of the Member States and the EU’s aim of the realization of an internal market. The CJEU has ruled several times on different tax legislation of different Member States in connection to the freedom to provide services. Now it is confronted with another pending case – C-18/15 Brisal – in which, on the one hand, the technique of charging the tax and, on the other hand, the computation of the tax payable by non-resident service providers is questioned. By comparing precedent case law to the first issue the analysis reveales that the CJEU has always accepted the taxation in form of withholding tax for the cross-border taxation of services, even though it did not allow the same in other direct tax areas such as dividend taxation and exit taxation. In addition, the analysis demonstrates that the EU has improved the mutual assistance for the recovery of tax claims by implementing new Directives, which were not subject of discussion in the precedent case law yet. However, the newest Directive is not applicable in the case Brisal, which is why it can be concluded, that the CJEU will not change its line of reasoning in that case, although withholding taxes hinder the realization of the internal market.
The second problematic feature of the Portuguese legislation at issue is the calculation of the taxable amount. Residents pay taxes on interest income on the net amount at a rate of 25%, whereas the tax of non-residents is levied on the gross amount at a rate of 20% or less, depending on the applicable double tax agreement. Gross taxation leads to a higher taxation when the costs for providing the services are higher than the compensation by the lower flat rate and it always induces taxation even when losses occur. The CJEU has ruled several times in this area, that the non-deduction of directly linked costs infringes EU law. However, the facts of the pending case are more complicated as one of the plaintiffs is a bank which demands the deduction of financing-overhead costs. The analysis in this Master thesis reveals that no distinct ruling exists for the deduction of financing costs and none is existent for the deduction of a proportional part of overheads. Consequently a deductive approach is applied, which analysed the issue in the light of two principles underlying EU law in the area of direct taxation – the fiscal principle of territoriality and the principle of neutrality. This approach demonstrates that the principle of neutrality requires the deductibility of costs at issue and that a deviation from that is not justified by the principle of territoriality.
In a final step, several justification grounds are analysed and it is concluded, that the technique of taxation may be justified by the need for an efficient tax collection, but no justification ground is found adequate to legitimate the infringement of EU law by the computation system. Therefore, it is concluded that the CJEU should make the deduction of a proportion of financing-overhead costs a requirement of EU law in order to promote the realization of the internal market.},
  author       = {Gärtner, Inken},
  keyword      = {Source Taxation,Withholding Tax,Interest Taxation,Cost Deduction,Overhead Deduction},
  language     = {eng},
  note         = {Student Paper},
  title        = {Financing Costs and Overhead Deduction in Cross-Border Transaction - A Requirement of EU Law?},
  year         = {2016},
}