Individual citizens dislike paying taxes as much as international corporations. The latter try to avoid taxes using entirely legal means, for example by availing of double taxation conventions. These bilateral agreements are concluded between states to avoid the multiple taxation of income. Although this objective is achieved for the most part, such agreements also give rise to situations that lead to double non-taxation. A project funded by the Austrian Science Fund FWF deals with this phenomenon and analyses ways of optimising tax laws in order to avoid such situations.
To tax or not to tax?
A current publication arising from the aforementioned project was the recent recipient of an award from the International Fiscal Association (IFA) – a globally active association for the promotion of international tax law. The insights contained in the publication are summarised by Michael Lang, Principle Investigator of the FWF project and head of the Institute for Austrian and International Tax Law at WU (Vienna University of Economics and Business), as follows: "Christoph Marchgraber has successfully demonstrated that the implementation of a current recommendation by the EU Commission for the avoidance of double non-taxation could do more harm than good." At first glance, the Commission's recommendation, which proposes the implementation of a so-called "subject-to-tax" clause, seems convincing: double taxation conventions should ensure that income is not subject to multiple taxation, but also that it is taxed in at least one of the contracting states.
Philosopher's stone or sword of Damocles?
On closer examination, what sounds like the philosopher's stone for the avoidance of double- and non-taxation emerges as something more akin to a sword of Damocles. As Marchgraber demonstrates in his publication, the devil is in the details here. The Commission's recommendation does not, as intended, exclusively apply to tax avoidance strategies of international groups of companies, but could also affect citizens who find themselves the unexpected beneficiaries of a tax advantage. According to Marchgraber it is hardly possible to predict which cases will be affected by the proposed rule: "Although it may not be the intention of the European Commission, the implementation of the recommendation could impose huge restrictions on the tax policy options available to the EU Member States."
Tax exemption or carte blanche?
According to Marchgraber, it is, inter alia, unclear how to solve situations in which two contracting states believe that they should apply the "subject-to-tax" clause. In this case, both states could conclude that the limits otherwise imposed by the double taxation convention are lifted, which would lead to double taxation. Double non-taxation, however, is equally possible if both contracting states take the position that only the other contracting state may tax. "Of course, this conflict of interests could be resolved through a mutual agreement based on bilateral negotiations," says Marchgraber. "However, very few states have been successful in the attempts to apply this option up to now."
Solid basis for good laws
Marchgraber's expertise on this topic is no accident. He has been analysing the phenomenon of double non-taxation in the context of the FWF project since 2013. The Principle Investigator Michael Lang describes the content of the project as follows: "A basic question which we are investigating concerns the extent to which the aim of avoiding double non-taxation is legally relevant at all." To this end, the project is examining the rules and recommendations of the OECD and EU aimed at preventing double non-taxation. Based on this, legal principles are being developed which should help with the avoidance of double non-taxation. The questions on which Lang, Marchgraber and the collaborating team of international researchers are working are highly topical. Global corporations are under increasing pressure to adapt their tax behaviour. Still, suitable legislative provisions to deal with this phenomenon are currently lacking. The results of this FWF project should contribute to the resolution of this problem.
Michael Lang is Professor of Tax Law with a special focus on International Tax Law at Vienna University of Economics and Business (WU). He is a renowned international expert in double taxation agreements and is sought after as a consultant for international auditing organisations. Lang heads the FWF project “Double Non Taxation” (2013-2016) and is is Speaker of the FWF Doctoral Program in International Business Taxation. Christoph Marchgraber is research associate (Post-Doc) and lecturer at the Institute for Austrian and International Tax Law at WU Vienna. An expert for business law, he has specialised in Tax Law and Tax Politics.