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Double taxation - an obstacle to the Single Market?

EcovisSingle Market (also known as Internal Market or Common Market) is one of the European Union task and it was the original goal of the European Economic Community established in 1957 by the Treaty of Rome. Single Market is guaranteed by the free movement of goods, service, people and capital. It was launched on 1 January 1993 but even in 2009 when the Treaty of Lisbon came into force these four freedoms were not completely working. And double taxation might be one of the obstacles for a perfect operation of the Single Market.

What does the double taxation mean? It is the taxation system when a physical or legal person has to pay two or more taxes on the same income, capital or financial transaction. These taxes are fixed by the different countries. For example a person is a resident of one country but works in a another one and he might be potentially obliged to pay income tax in both countries.

European Commission describes double taxation as the imposition of comparable taxes by two (or more) tax jurisdictions in respect of the same taxable income or capital (http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0712:FIN:EN:PDF). And it underlines that almost 20 years after the creation of the Single Market, business and individuals operating in the EU market risk being taxed by more than one member state on the same revenue as soon as they cross an internal border while, in some cases, they could escape all taxation (http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0712:FIN:EN:PDF). Which means that double taxation might discourage persons or companies to start cross-border activities and thus interfere a good operation of the Single Market.

So far European Union member states are trying to resolve this problem by unilateral, bilateral or multilateral treaties because European Union law does not oblige them to eliminate double taxation. Lithuania has treaties on double taxation with 51 countries (obviously not only with European Union member states) (http://www.vmi.lt/lt/index.aspx?itemId=1003083). The main goals of these treaties are:

  • To distribute the taxation rights between contracting countries. The treaty itself doesn't impose rules how the income should be taxed. The contracting country which gets the right to tax the income does it on its own internal laws.
  • To eliminate the double taxation, i.e. the situation when both countries according to their national law can tax the same person on the same income/capital/ financial transaction.
  • To fight against financial crimes or avoid of paying taxes what could be achieved by an effective exchange of information between competent authorities of contracting countries.
  • To avoid tax discrimination, i.e. to make sure that a country applies the same taxation system to all tax payers regardless of their nationality.

These treaties are applied to income and capital taxes imposed by a contracting country despite if they are imposed by the state or local authorities and despite the way they have to be paid. In Lithuania these taxes are: corporate income tax, personal income tax and immovable property tax.

However these initiatives from European Union member states are not enough to guarantee an effective Single Market. That's why European Commission is trying to solve double taxation problems. In the EUROPE 2020 A strategy for smart, sustainable and inclusive growth European Commission determine Single Market as on of the strengths of Europe and it predicts a Single Market for the 21 st century: stronger, deeper, extended single market is vital for growth and job creation. But it also states that however, current trends show signs of integration fatigue and disenchantment regarding the single market. European Commission propose several actions for the improving of the Single Market and one of these actions is removing tax obstacles (http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52010DC2020:EN:HTML).

On 11 November 2011 it adopted a Communication on Double Taxation in the Single Market (hereafter – Communication) (http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0712:FIN:EN:PDF). The goal of this Communication is to identify cross-border taxation problems and their impact on the internal market as well as to propose possible solutions and further steps.

As it is stated in the Communication in an international context double taxation may arise as a consequence of dual residence or of taxation in both State of residence and the State of source. So clearly this situation is an obstacle for a free movement of services, capital and even people who might be discourage to work in a different country than their State of residence. And without the guarantee of these freedoms (free movement of goods, service, people and capital) we can not even talk about Single Market.

At the actual stage European Union member states are not obliged to prevent double taxation but according to the research done by European Commission taxpayers are really concerned about this problem and identify it as one of the main obstacles encountered by citizens in cross-border situations. There were already several directives and recommendations on tax relief procedures but these instruments are not sufficient. So in its Communication European Commission propose several possible solutions:

  • Strengthening of existing instruments. European Commission presented amendments to already existing text (the Interest and Royalties Directive) with a view to reduces the number of cases where double taxation can occur.
  • Extension of the coverage and the scope of double tax conventions. European Commission is encouraging the member states to work in a framework of double tax conventions.
  • Steps intended to come to a more consistent interpretation and application of double tax convention provisions between the European Union member states. Commission is considering the elaboration of a Code of Conduct on double taxation.
  • Ease and accelerate dispute resolution within the European Union. The Commission sees a need to analyse the improvement that can be made to the procedures for the resolution of double taxation disputes within the European Union (http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0712:FIN:EN:PDF).

The European Commission not only presents possible solutions, it also invites other European institutions to discuss these ideas. Hopefully these initiatives will help to achieve goals determined in the EUROPE 2020 strategy and Single Market will become stronger, deeper and extended.

Giedre Uleviciute
Assistant to the Attorney at Law

ECOVIS Miškinis, Kvainauskas ir partneriai advokatų kontora
Mesiniu str. 5, LT-01133 Vilnius, Lithuania
Phone: +370 (5) 212-40-84 - Fax: +370 (5) 212-27-41
E-Mail: giedre.uleviciute@ecovis.lt - Internet: www.ecovis.lt