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EU law out of the question?

Peter Kavelaars

EU law regularly leads to surprising and far-reaching decision-making and case law. An example of recent decision-making is the introduction of the minimum tax of 15% as of January 1 of this year. This minimum tax is not limited to the Member States of the EU but also extends to the BES and in any case Curaçao also intends to introduce such a complex tax. An example of important recent case law is the state aid proceedings regarding so-called transfer pricing cases. The European Commission thus aimed to create an independent commercial criterion for transfer pricing in addition to the globally accepted transfer pricing guidelines of the OECD. Highly unfortunate and it is therefore pleasant that the Court of Justice has ruled in a number of judgments that this option does not hold true. This includes cases involving FIAT/Chrysler, Amazon and Starbucks. There is another such case pending, namely from Apple. That is a major case considering the financial importance: no less than €13 billion. However, it is expected that the European Commission will also draw the short straw in that case. However, the EU seems to be a bad loser because a draft directive with transfer pricing rules was published last year. That seems rather redundant, because, as mentioned, the OECD guidelines are followed worldwide. New guidelines therefore do not seem very useful, especially because they are very similar to those of the OECD. It is conceivable that the EU would like to introduce its own commercial criteria in this way. The question is whether this will actually happen, because it is expected that not all Member States will be eager to introduce such new rules. Implementation still requires unanimity from all member states and it is highly doubtful whether this will succeed. This year there will certainly be more clarity about this.

A completely different issue that the Court of Justice considered last autumn concerns a so-called infringement procedure. This concerns a case brought by the European Commission against the Netherlands, because Dutch tax legislation does not comply with European law. The European Commission monitors the legislation of the Member States and if it contains rules that, in the opinion of the European Commission, are not in accordance with EU law, it request the Member State to amend its legislation. If the Member State does not do so, the Commission will take the Member State before the European Court. This happened to the Netherlands, which recently led to a judgment in which the Commission prevailed. In my opinion, this is partly wrong.

What is it about? An interesting issue about pension value transfer. If an employee changes jobs, he can usually take his pension with him to the new position and contribute it to the pension scheme applicable there. The main reason for this is that this prevents a possible pension breach. That argument is becoming less and less valid, because pensions are increasingly built up on the basis of a so-called defined contribution scheme. A pension breach cannot occur. Another reason is that it is impractical to receive various (small) pensions from more pension providers in due course. The Netherlands has arranged that such value transfers must be possible. An important fiscal point is that this must also be possible without taxation. That has also been arranged. But suppose the employee switches to a job in another country: can he also take his pension with him and is that also tax-free? This is the case as far as the Netherlands is concerned. This has to be the case in the EU, otherwise cross-border value transfers would be treated worse than domestic value transfers. So in that respect there is nothing wrong. But it is of course true that the pension accrued up to that point has been accrued in a tax-facilitated way - this is no different in Curacao - and that the Netherlands therefore has a tax claim on the benefits. Of course, he doesn't want to just give it away. However, it should be borne in mind that under tax treaties, pension benefits are usually allocated to the state of residence for taxation. The Netherlands can therefore no longer levy taxes if the employee has also emigrated, which is usually the case in these cases. Nevertheless, there are cases in which the Netherlands is still entitled to levy taxes and situations in which there is no treaty and the Netherlands is also allowed to levy taxes on pension accrued in the Netherlands. For these reasons, certain conditions are imposed on a cross-border transfer of pension capital. One of the conditions is that the redemption option in the immigration country may not be wider than the redemption option in the Netherlands. The latter is very limited. The European Commission believed that the Netherlands should not impose this condition on the new foreign pension scheme. The Court of Justice agrees. That is strange: EU law does require that cross-border cases should not be treated worse than domestic situations, but it does not require that cross-border cases should be treated more flexibly and that the Netherlands should respect foreign law. Member states simply apply different rules, also known as disparities, and this must be respected. The Court therefore sees things differently in this case, which, in my opinion, is not correct. A second issue in which the Netherlands was also wrong concerned the condition that it imposed certain conditions on the foreign pension provider, such as accepting liability for the Dutch tax claim. The Court of Justice also considered this incorrect, even though domestic acquiring pension providers must comply with more or less the same rule.

In any case, the Netherlands must adapt its legislation. The cases once again illustrate that EU law can be far reaching and that member states have really lost part of their autonomy. Not everyone is equally enthusiastic about that.

Peter Kavelaars is professor of Fiscal Economics at Erasmus University Rotterdam and of counsel at Deloitte Dutch Caribbean.

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