Competence Conflicts and Solutions: National Tax Exemptions and Transnational Controls

9 Colum. J. Eur. L. 79 (2002)

Hanno E. Kube. Dr. iur. (Heidelberg), LL.M. (Cornell), Assistant Professor of Law (Habilitationsassistent) at the Institute for Finance and Tax Law of the University of Heidelberg.


Tax sovereignty is still considered to be a particularly sensitive area of authority retained by the nation-states, and the foundation of a “sound fiscal federalism.” Accordingly, the regimes based on transnational law have hardly any powers to impose taxes themselves and also largely abstain from regulating national taxation directly. However, tax law only appears to be one of the enclaves in which the national legislators still dominate. The transnational regimes impose significant indirect restrictions on national tax sovereignty. This is generally apparent in two situations. First, national taxing power is curtailed by transnational law, whenever states attempt to tax domestic and foreign persons, goods, services and capital differently. In this case, the principle of non-discrimination as a central element of transnational law becomes relevant. While it is potentially applicable to all kinds of taxation, the principle of non-discrimination has until now mainly been invoked in the field of indirect taxation. Secondly, national tax sovereignty is also curtailed, whenever states seek to support persons, goods, services or capital by privileging tax exemptions, which are more appropriately termed tax subsidies in view of their financial effects. Here, the transnational state aid and subsidy-controlling regimes set the limits of permissible support. As tax subsidies are not restricted to certain areas of taxation, particularly not to such areas in which discrimination against foreign entities takes place, the curtailments of state power by transnational state aid and subsidy-controlling regimes can potentially be far-reaching, even more so, when considering that the definition of a tax subsidy can be highly controversial in the first place. This is because a legislator may subsidize, but he may also design a just tax system by exempting certain cases from taxation. The pivotal question is how to distinguish between substantively “advantageous”, “normal” and “disadvantageous” tax treatments. Despite this potentially wide field of application, the transnational law on state aid control until now primarily has made an impact in the field of direct taxation.

The following paper confronts the national law on tax exemptions with the transnational regimes of state aid control in the field of direct taxation. The aim of this study is to shed light on the fundamental differences in the values, scopes and motives of the respective legal frameworks, and to suggest ways to improve national and transnational law on tax subsidies and its understanding. More generally, this study also intends to show that national tax law and transnational competition law are intricately intertwined. Any further progress in the development of a multi-layered legal system will require an awareness of these connections, and a will to enhance the exchanges between the different layers of the system.

The analysis begins with a sketch of German law on tax subsidies. The German tax system is founded on the principle of Leistungsfahigkeit (“ability to pay”), which sets the boundary between a just arrangement of the tax system and an individual privilege within this system. Having identified a tax subsidy in this way, the constitutional issues it raises shall be outlined. The transnational regulations on state aid control will be presented against this background. Due to their predominance, this examination will confine itself to the EC and the WTO regulations, which generally make incomplete distinctions between national tax arrangements and tax subsidies, resulting in a rather one-sided focus on economic equality. The last section offers some guidance as to how the national and transnational frameworks on tax subsidies can be better coordinated in the long run. The most important prerequisite for such coordination is a shared understanding of legal terms, such as the notion of a tax subsidy. This shared understanding is to be attained mainly by transferring the tax concept of Leistungsfdhigkeit to the transnational level, which implies a further reconciliation of economic and social policy concerns. Such reconciliation appears to be key to any further harmonization within the multi-layered legal system, in tax subsidy control and beyond.