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Florida Tax Review

Abstract

This article focuses on these two “federalist” systems (U.S. Constitution and EEC Treaty) and their respective approaches to thwarting tax discrimination. Like Congress, the Council of Ministers (comprised of representatives of the Member States at the ministerial level) has the power to regulate commerce between the Member States. Nevertheless, despite several studies outlining the distortions to the internal market caused by tax differences, the scope of EC direct tax legislation is currently very limited when compared to progress made in the value added tax area. Many commentators blame the “continuous legislative vacuum in the income tax area” on the continued unanimity requirement for tax legislation.

In this article, I examine whether the ECJ has been able to handle tax discrimination more effectively than the U.S. Supreme Court. I thought this research might prove fertile because the time span of consideration of these issues was so compressed in the European Union. It has only been approximately 20 years since the first EU tax case as compared to over 200 years of U.S. jurisprudence.

For all these reasons, I was hopeful that a more coherent theory might have developed in the European Union. Unfortunately, as described in Part IV, the jurisprudence is confused on both sides of the Atlantic. In Part II, I provide background for the reader unfamiliar with the European Union and outline the EU’s distinctive institutional arrangements. In Part III, I set forth the principles of international and interstate taxation that underlie the tax legislation that has been promulgated by the respective Member States and the U.S. states.

In Part IV, I outline how the Supreme Court and the European Court of Justice have struggled with the conflict between these generally accepted tax principles and the effective prevention of discriminatory treatment of foreign source income. For example, it has been accepted under international tax law that nonresident taxpayers are in a different situation than resident taxpayers and the taxation of nonresidents can be different than that of resident taxpayers. This creates a conflict between these generally accepted tax principles and the effective prevention of discriminatory treatment of foreign source income.

In Part V, I choose the most recent Supreme Court case that deals with individual tax discrimination and then examine the ECJ jurisprudence to determine how the European Court of Justice would decide the issue. Although the ECJ approach yields much certainty (the national tax provision is generally found to violate the Treaty), it does not appear to solve the discrimination problem. Because great strides have been made towards an internal market, I believe that the EU would be better served by harmonization at the legislative level. At a minimum, the ECJ should, at this point, give more deference to Member State tax systems. On the other hand, given the recent U.S. experience with federal intervention in state tax legislation and the current anti-tax rhetoric, the United States is better served by judicial oversight instead of the congressional interference that has restricted the ability of the states to levy necessary axes. I conclude with a recommendation that the Supreme Court should give more priority to state tax conflicts and additional restraints should be placed on the ability of Congress to tamper with state tax laws.

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