Tax Treaties and EC Law : Development, Problems and Solutions

Double taxation treaties play a vital part in the international relations between states regarding taxation matters. Since double taxation can occur as soon as a person has income in more than one state, it is very important that there can be effective remedies to the problems that can occur in these situations. Double taxation treaties are necessary in most situations created by international trade and they are even more important in such a free flowing economic co-operation such as the EU, where the trade between the Member States is not only free but also very frequent. Most double taxation treaties are based on the Model Treaty created by the OECD. Even states not members of the organization use it as a model for their treaties. This means that treaties between Member States of the EC are often rather similar, but many times have been drafted without consideration taken to EC law. This can create problems since the European Court of Justice (ECJ) has stated in its case law that even though the Member States are solely competent when it comes to direct taxation, that competence must be used in accordance with EC law. Since double taxation treaties are directed at flows of income and capital between states, it is most probable that they can run afoul of EC law. After some judgments of the ECJ the situation is clearer now, but there are still some possible future problems. Examples of such problems are trailing taxes, limitations of benefits and the most favoured nation (MFN) principle. The latter has been before the Court, but there are many questions surrounding the MFN principle that has not been answered satisfactorily. Even if more cases are brought before the Court and it gives more guidance on how the Member States shall conclude treaties with each other, it is still preferable with proper EC legislation on the subject. It must also be mentioned that the ECJ has shown reluctance to disrupting the tax treaty networks in place and has been reluctant to dismiss rules based on the OECD Model Treaty. Several different solutions to these problems have been put forward, ranging from doing almost nothing and just letting the development in the case law have its way to a complete regulation of these issues through legislation by the EC. The two most interesting solutions presented are a Multilateral EU Tax Treaty or an EU Model Tax Treaty. Both of these two different methods would mean that the problems would have a proper solution in that it would implement common rules that would be applicable over the whole of the EU