Can the European Union or the European Court of Human Rights End Double Taxation?

Author: Ossi Haapaniemi

Directive on Double Taxation Dispute Resolution Mechanisms

The proposed new EU Council Directive on Double Taxation Dispute Resolution Mechanisms (COM(2016) 686 final) lays out rules to resolve disputes between Member States on eliminating double taxation of income from business and the rights of taxpayers in this context. The European Commission concluded that the imposition of comparable taxes by two (or more) tax jurisdictions in respect of the same taxable income or capital has a negative impact on cross-border investment and leads to economic distortions and inefficiencies.

The proposed Directive is aimed at increasing legal certainty and improving the conditions for cross-border activities within the Internal Market. It is effective and it provides for mandatory resolution of double taxation disputes, if necessary, by way of arbitration within strict and enforceable timelines. Unfortunately the proposed directive covers only businesses, thus, double taxation may remain applicable to individuals.

UK Fessal Case: Double Charge to Tax on Profits Infringed upon Taxpayer’s Human Rights

In the recent case I Fessal v HMRC [2016] UKFTT 0285 (TC) (reported in Tax Journal, 13 May 2016), a UK court held that a double charge to tax on the same profits infringed upon the taxpayer’s human rights under Article 1 of Protocol No. 1 of the European Convention on Human Rights (A1P1) (peaceful enjoyment of possessions). The court stated that, “Subjecting the same profits to tax twice cannot reasonably be said to be pursuing a legitimate aim in the public interest or to be striking a fair balance between the demands of the general interest of the community and the protection of the individual’s rights”. The Fessal case makes the point that it is not in the public interest to tax the same profits twice.

ECHR Jokela Case: Combined Effect of Expropriation and Inheritance Tax Violated Peaceful Enjoyment of Property

On 21 May 2002 the European Court of Human Rights stated in the Jokela case (Application No.  28856/95) that the Convention’s intention is to safeguard those rights, which are “practical and effective” as opposed to “theoretical” or “illusory”. It followed that, even though the Court did not find a violation of Article 1 of Protocol No. 1 as a result of either of the two distinct forms of interference, which it had examined separately (the expropriation and the inheritance tax), it must also satisfy that their combined effect is not such as to violate applicants’ general right to the peaceful enjoyment of their possessions as guaranteed by the first sentence of the first paragraph of that provision. In the Court's view, this right includes the expectation of a reasonable consistency between interrelated, albeit separate, decisions concerning the same property.

The Court stated that the taxpayers could legitimately expect a reasonably consistent approach from the authorities and courts, which were required to determine the market value of the land in the different sets of proceedings and, in the absence of such consistency, a sufficient explanation for the different valuation of the property in question. For the reasons indicated in the decision, there was neither consistency nor any such explanation for the lack of consistency with the applicants' legally protected expectations as property owners. In these circumstances, the outcome of those proceedings was incompatible with the applicants' general right to the peaceful enjoyment of their possessions as guaranteed in the first sentence of the first paragraph of Article 1 of Protocol No. 1. Accordingly, this provision had been violated.

Can the European Court of Human Rights End Double Taxation on Individuals?

Mutual agreement procedures in tax treaties are meant to be effective remedies at solving double taxation in both countries of a treaty; however, this is not always the case. Last summer the Ministry of Finance sent a resolution to a taxpayer stating that they have ended negotiations with Spain without an agreement to solve double taxation on capital gains. The taxpayer has now appealed to the European Court of Human Rights arguing that at least the combined effect of subjecting the same capital gains to tax twice (in Finland and in Spain without any tax credit) cannot be considered in the public interest and, thus, it violates the peaceful enjoyment of property. According to Jokela (and UK Fessal case), the taxpayer’s rights should prevail.

The governments are fighting against aggressive tax planning, but the problem of double taxation is at least as important as the problem of double non-taxation. Now, the European Court of Human Rights can solve this for every taxpayer in Europe. We cannot reveal the name of the taxpayer, but after a positive decision, every tax lawyer will remember it!