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Tax Law and the Internal Market: A Critique of the Principle of Mutual Recognition

Published online by Cambridge University Press:  27 October 2017

Julian Ghosh
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Abstract

The principle of mutual recognition tests a potential breach of internal market treaty provisions and restricts the scope for a Member State to justify a breach by reference to what happens, or has happened, in a different Member State. The principle of mutual recognition is a distinct principle to that of non-discrimination and does not apply by reference to the functional equivalence of Member States’ regulatory regimes. Mutual recognition has been developed by the Court of Justice of the European Union (CJEU) as a distinct principle (perhaps a general principle) of EU Law, quite separate to the settled principles of non-discrimination and prohibition of obstacles to market access. The principle of mutual recognition entrenches a neo-functionalist model of the Union project and acts as an accelerant to the harmonisation of the domestic regimes of Member States which are subject to its application, in areas where harmonisation is realistically possible. In areas where harmonisation is not realistically possible, the application of the internal market by reference to the principle of mutual recognition sets aside non-internal-market-compliant Member States’ regulatory provisions, leaving an unsatisfactory space in these regulatory regimes. However, the principle of mutual recognition is, in the light of the application of the principles of non-discrimination and the prohibition of obstacles to market access, quite unnecessary and operates to frustrate legal certainty and the legitimate expectations of the Member States.

Type
Research Article
Information
Cambridge Yearbook of European Legal Studies , Volume 16 , 2014 , pp. 189 - 221
Copyright
Copyright © Centre for European Legal Studies, Faculty of Law, University of Cambridge 2014

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References

1 I am grateful to Professor Catherine Barnard, Trinity College, Cambridge, Professor Kenneth Armstrong, Sidney Sussex College, Cambridge and to Professor Derrick Wyatt QC, St Edmund Hall, Oxford for their comments on a draft of this chapter. I am also immensely grateful to Professor Stephen Weatherill, Somerville College, Oxford, for an early sight of his article which is a coruscating (and entertaining) attack on the principle of mutual recognition: ‘Why there is no “principle of mutual recognition” in EU law (and why that matters to consumer lawyers)’ (now published as chapter 19 of Varieties of European Economic Law and Regulation (Springer International Publishing, 2014) 401). Any errors are mine.

2 Case 120/78 Rewe-Zentrale AG v Bundesmonopolverwaltung für Branntwein [1979] ECR 649 (‘Cassis de Dijon’).

3 Craig, P and De Búrca, G, EU Law: Text Cases and Materials, 5th edn (Oxford, Oxford University Press, 2011) 595 CrossRefGoogle Scholar.

4 See Commission Communication 3 October 1980 [1980] OJ C256/2 (‘the 1980 Communication’): ‘Any product imported from another Member State must in principle be admitted to the territory of the importing Member State if it has been lawfully produced, that is, conforms to the rules and processes of manufacture that are customarily and traditionally accepted in the exporting country, and marketed in the territory of the latter … Only under very strict conditions does the Court accept exceptions to this principle’; ‘Completing the Internal Market’ COM(85) 310, 14 June 1985: ‘The general principle should be approved that, if a product is lawfully manufactured and marketed in one Member State, there is no reason why it should not be sold freely throughout the [Union]’ (para 58); see also Commission Communication ‘Mutual Recognition in the Context of the Follow-up to the Action Plan for the Single Market’, June 1999.

5 This chapter describes the provisions within TFEU, Articles 28–33 (Free Movement of Goods, Common Customs Union), Articles 34–37 (Free Movement of Goods—Prohibition of Quantitative Restrictions), Articles 45–48 (Free Movement of Workers), Articles 49–55 (Freedom of Establishment), Articles 56–62 (Freedom to Provide Services) and Articles 63–66 (Free Movement of Capital and Payments) collectively as the ‘internal market provisions’.

6 Armstrong, KA, ‘Mutual Recognition’ in Barnard, C (ed), The Law of the Single European Market—Unpacking the Premises (Oxford, Hart Publishing, 2002) 225 Google Scholar; Maduro, MP, ‘So Close and Yet So Far: The Paradoxes of Mutual Recognition’ (2007) 14 Journal of European Public Policy 814 CrossRefGoogle Scholar; Nicolaïdis, K, ‘Trusting the Poles? Constructing Europe Through Mutual Recognition’ (2007) 14 Journal of European Public Policy 682 CrossRefGoogle Scholar; Pelkmans, J, ‘Mutual Recognition in Goods. On Promises and Disillusions’ (2007) 14 Journal of European Public Policy 699 CrossRefGoogle Scholar; Schmidt, SK, ‘Mutual Recognition as a New Mode of Governance’ (2007) 14 Journal of European Public Policy 667 CrossRefGoogle Scholar; see also Schioppa, FKP (ed), The Principle of Mutual Recognition in the European Integration Process (Basingstoke, MacMillan, 2005)CrossRefGoogle Scholar. For a recent treatment of the notion, see Janssens, C, The Principle of Mutual Recognition in EU Law (Oxford, Oxford University Press, 2013)CrossRefGoogle Scholar.

7 Craig and de Búrca, EU Law, n 3 above, 596.

8 As opposed to legislative obligations imposed on Member States to recognise, say, qualifications of other Member States, which might (but need not) have the same policy rationale as the notion of ‘mutual recognition’ developed by the CJEU but bear quite a different analysis as regards its application and legitimacy, which is outside the scope of this chapter.

9 Some of which may be controversial but which in the writer’s view, ought not to be; debate on these propositions shall have to take place elsewhere.

10 Haas, EB, The Uniting of Europe, 2nd edn (Stanford CA, Stanford University Press, 1968) 16 Google Scholar; and see Wessels, W, Maurer, A and Mittag, J (eds), Fifteen into One? The European Union and its Member States (Manchester, Manchester University Press, 2003) 10 CrossRefGoogle Scholar.

11 Albeit, in the context of fiscal provisions, that qualified majority voting does not apply.

12 The Union has legislated in three contexts in the field of direct taxation: see Council Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States [2011] OJ L345/8 (‘the Parent-Subsidiary Directive’) concerning distributions paid by subsidiary companies to their parent companies; Council Directive 90/435/EEC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States [1990] OJ L225/6 (‘the Mergers Directive’) concerning intra-Union cross-border mergers; and Council Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States [2003] OJ L157/49 (‘the Interest Directive’) on interest and loyalty payments made between associated companies, cross-border within the Union. And see the observations of the CJEU in Case C-250/95 Futura Participations SA v Administration des Contributions [1997] ECR I-2471 (‘Futura’) at para 33, where the CJEU clearly contemplates the harmonisation of Member States’ domestic tax rules: ‘As yet, no provision has been made for harmonising domestic rules relating to the termination of the basis of assessment to direct taxes’ (emphasis added). See also Case C-374/04 Test Claimants in Class IV of ACT Group Litigation v Inland Revenue Commissioners [2006] ECR I-11673 (‘Class IV ACT’), para 52. Put another way, the objective of the internal market is ‘to unite national markets in a single market having the characteristics of a domestic market’ (Case 207/83 Commission of the European Communities v United Kingdom [1985] ECR 1201, para 17 of the judgment of the Court) with an absence of ‘disparities between the laws of the Member States … liable to create or maintain distorted conditions of competition’ (Case C-300/89 Commission of the European Communities v Council of the European Communities [1991] ECR I-2867 (‘Titanium Dioxide’), para 15 of the judgment of the Court).

13 TFEU Articles 34 (imports) and 35 (exports). Article 49.1 (establishment), 56.1 (services), 63 (capital and payments).

14 TFEU Article 45 (workers).

15 This terminology appears in a number of works; see, for example, Heller, T and Pelkmans, J, ‘The Federal Economy: Law and Economic Integration and the Positive State: The USA and Europe Compared in an Economic Perspective’ in Cappelletti, M, Seccombe, M and Weiler, J (eds), Integration through Law: Europe and the American Federal Experience (New York, Walter de Gruyter, 1986) 90 Google Scholar, 324 et seq, discussed in Jimenez, AJM, Towards Corporate Tax Harmonisation in the European Community: An Institutional and Procedural Analysis (London, Kluwer Law International, 1999) 2–3 Google Scholar.

16 This should be an uncontroversial proposition, given their common treaty and policy archaeology, was expressly recognised by the CJEU: see Case C-19/92 Kraus v Land BadenWurttemberg [1993] ECR I-1663, para 29 of the judgment of the Court (citing previous case law); Case C-107/94 PH Asscher v Staatssecretaris van Financiën [1996] ECR I-3089, para 29 of the judgment of the Court and Case C-311/97 Royal Bank of Scotland Plc v Greece ECR I-2651, para 20 of the judgment of the Court. For academic acknowledgment that the internal markets should have a common test for breach justification and proportionality, see Cruz, JB, Between Competition and Free Movement: The Economic Constitutional Law of the European Community (Oxford, Hart Publishing, 2002) 91–98 Google Scholar. However, as is made clear below, the application of the principle of mutual recognition has led to a fundamental inconsistency in the CJEU’s application of the internal market provisions, certainly as between Arts 34 and 35 (goods) on the one hand and Art 56 (services) on the other.

17 The distinction between there being no breach and a breach which might be justified is critical, since only in the latter case is proportionality engaged: see, for example, the discussion of Futura below.

18 Whether by reference to an express proviso in the internal market provisions themselves or by reference to the ‘mandatory requirements’, whereby the domestic Member State provision which seeks the protection of the mandatory requirements must pursue an objective which is compatible with the Treaties, since it is only then that the provision (and the objective which it pursues) may take precedence over the internal market objective of the free movement of the factors of production throughout the Union: Cases C-60/84 and C-61/84 Cinetheque SA v Federation Nationale des Cinémas Francais [1985] ECR 2065, paragraph 23 of the judgment of the Court; Case C-362/88 GB-INNO-BM NV v Confederation du Commerce Luxembourgeoise [1990] ECR I-667, paras 15 and 19; Futura, para 26. Put another way, the breach of the internal market provisions was to have as its explanation the pursuit of another legitimate Treaty objective, for example, to help large families to create employment (Case C-209/01 Schilling v Finanzamt Nurnberg Süd [2003] ECR I-13389, paragraph 40), or to purport research and development (Case C-39/04 Laboratoires Fournier SA v Direction des Verifications Nationales et Internationales [2005] ECR I-2057).

19 Case C-204/90 Bachmann v Belgium [1992] ECR I-249, para 27. ‘Necessary’ means ‘indispensable’: Case C-118/96 Safir v Skattemyndigheten i Dalarnas Lan [1998] ECR I-1897, para 33. It is worthwhile noting that the notion of ‘proportionality’, in this context, is very different to that expressed in Art 5 of TEU. In Art 5 of TEU, the notion of ‘proportionality’ provides that legislation (whether at Union level or at Member State level) should not go beyond what is necessary to achieve a Union-compliant objective. ‘Proportionality’ in the context of a ‘justified’ Member State domestic provision which prima facie breaches the internal market provisions, plays a very different role indeed. Here, proportionality effectively gives precedence to the internal market objective, in any competition with the other Unioncompliant objective pursued by a Member State, whose pursuit of that latter objective causes breach of the internal market provisions. The notion that a provision must be ‘necessary’ or ‘indispensable’ to achieve that latter objective (be it helping large families, research and development, or other objectives specified in the TEU/TFEU) means that it is the internal market which takes precedence in any such competition.

20 Opinion of the Advocate-General in Cases 117/76 and 16/77 Albert Ruckdeschel & Co v Hauptzollamt Hamburg-St Annen [1977] ECR 1753 at 1778. Prohibited discrimination extends to such treatment on grounds of nationality, age etc.

21 Case C-264/96 ICI Plc v Colmer [1998] ECR I-4695, para 28 of the Advocate-General’s Opinion.

22 The question of the appropriate comparator for cases of alleged discrimination, that is, whether the comparison is also to be made between the nationals of the Member State under scrutiny (‘the host Member State’) and the non-host Member State-national, or whether comparisons may legitimately be made between two host Member State-nationals, or two non-host Member State-nationals are outside the scope of this chapter. For an assessment of this question, see Ghosh, J, Principles of the Internal Market and Direct Taxation (Oxford, Key Haven, 2007) 69–73 Google Scholar.

23 Case 81/87 R v HM Treasury and IRC, ex parte Daily Mail and General Trust Plc [1988] ECR 5483 (‘Daily Mail’), para 16 of the judgment of the Court.

24 Case C-415/93 Union Royale Belge des Sociétés de Football Association (ASBL) v Bosman [1995] ECR I-4921.

25 Case C-9/02 De Lasteyrie du Saillant v Ministère de l’Économie, des Finances et de l’Industrie [2004] ECR I-2409.

26 Case C-470/04 N v Inspecteur van de Belastingdienst Oost/Kantoor Almelo [2006] ECR I-7409.

27 Case C-190/98 Graf v Filzmoser Maschinenbau GmbH [2000] ECR I-493, at paragraph 23 of the judgment (see also para 32 of the Opinion of the Advocate-General). In Graf, the absence of a right to be paid compensation, for leaving an employment without cause, in circumstances where host Member State-nationals did not receive such compensation either (so that the relevant host Member State provision was not discriminatory, directly, or indirectly) did not constitute such an obstacle.

28 This market access is clearly particularly pertinent in relation to the freedom to provide services under Article 56: see Case C-384/93 Alpine Investments BV v Minister van Financien [1995] ECR I-1141; Safir, n 19 above, paragraph 23 of the judgment of the Court.

29 Although this view may be controversial: see Barnard, C and Deakin, S, ’Market Access and Regulatory Competition’ in Barnard, C and Scott, J (eds), The Law of the Single European Market—Unpacking the Premises (Oxford, Hart Publishing, 2002) 204–13Google Scholar.

30 See, for example, Art 49 (freedom of establishment) which prohibits ‘restrictions on the freedom of establishment’ in Art 49, first paragraph and (separately) specifically ‘includes’ ‘the right to take up and pursue activities … under the conditions laid down [by a host Member State] for its own nationals’ (Art 49, second paragraph); Art 56 (freedom to provide services) prohibits ‘restrictions on the freedom to provide services’ whereas Art 57 expressly confers the right, on a person providing a service, to ‘temporarily pursue its activity in [another] Member State with the services provided, under the same conditions as are imposed by that State on its own nationals’. And Art 63 (free movement of capital) prohibits restrictions on the movement of capital, whereas Art 65(3) (certain express derogations to Member States, permitting restrictions on the free movement of capital and payments) expressly distinguishes between discrimination and restrictions by providing that ‘the measures and procedures [constituting permitted derogations to Article 63] shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments’ (emphasis added).

31 Case 8/74 Procureur du Roi v Dassonville [1974] ECR 837, para 5 (‘Dassonville’).

32 See Ghosh, Principles of the Internal Market, ch 4 for an analysis of the CJEU’s approach in both its tax and non-tax case law which, for a while, at least until Case C-98/01 Commission of the European Communities v United Kingdom [2003] ECR I-4641 (‘Special Share’), did successfully distinguish between discrimination and obstacles to market access as separate grounds for breach but then reverted to the Dassonville formulation in the ‘Special Share’ action.

33 Para 8 of the judgment of the Court.

34 Case 112/84 Humblot v Directeur des Services Fiscaux [1987] ECR 1367.

35 See paras 13–17 of the judgment of the Court.

36 That Cassis de Dijon concerned TFEU Art 34 and Humblot concerned TFEU Art 110(1) is irrelevant; both analyses are predicated on the application of a standard notion of indirect discrimination on the part of a host Member State.

37 KA Armstrong, ‘Mutual Recognition’, n 6 above, 234–35.

38 See the Commission Communications referred to above. Certainly the 1980 Commission Communication’s observation that ‘the principles derived by [the CJEU in Cassis de Dijon] imply that a Member State may not in principle prohibit the sale in its territory of a product lawfully produced and marketed in another Member State … [because] [w]here a product “suitably and satisfactorily” fulfills the legitimate objective of a Member State’s own rules (public safety, protection of the consumer or the environment etc), the importing country cannot justify prohibiting its sale by claiming that the way it fulfils the objective is different from that imposed on domestic products … [and] in such a case, an absolute prohibition could not be considered “necessary” to satisfy a mandatory requirement’ cannot be taken legitimately from para 14 of the CJEU’s judgment in Cassis de Dijon.

39 Commission v Italy (Italian Trailers) was a direct action case raised under Art 258 TFEU. Thus there was no actual home Member State of manufacture of trailers whose sale within Italy was impeded, which the CJEU could consider in its judgment. It follows that an appeal by the CJEU to mutual recognition can only be intelligibly made if the notion is indeed a general principle.

40 Case C-110/05 Commission of the European Communities v Italy [2009] ECR I-519.

41 At para 33.

42 As it happens, the prohibition on motorcycles towing trailers was held to be justified on public safety grounds and also to be proportionate: see paras 59 et seq.

43 Case C-142/05 Aklagaren v Mickelsson [2009] ECR I-4273.

44 Again, the prima facie breach was justified (see paras 31–43), although the matter was remitted to the National Court for a conclusive finding on such justifications (see para 41).

45 Case C-456/10 Asociacion Nacional de Expendedores de Tabaco y Timbre (ANETT) v Administracion del Estado [2012] 2 CMLR 45.

46 In ANETT, the quantitative restrictions were not justified: see paras 50–56.

47 And if the principle is indeed a general principle of Union Law, it presumably constitutes a sufficient ground for breach of TFEU Arts 34 and 35.

48 This is a better description of the principle of mutual recognition than any sort of description of a ‘conflict resolution’ rule which settles a fight between the respective regulatory regimes of host Member States and home Member States. It is not a question of the settlement of any conflict but rather the answer to the question of which factors are relevant to ascertain breach, justification and proportionality in relation to the internal market provisions. This in turn depends on the correct analysis of the nature and perspective of these provisions.

49 For example, the United Kingdom’s ‘transfer pricing’ regime, which adjusts artificial pricing amongst connected persons, was, in the light of Case C-168/01 Bosal Holding BV v Staatssecretaris van Financien [2003] ECR I-9409, extended from its application to only cross-border transactions to intra-United Kingdom transactions, resulting in additional taxcompliance costs (to ensure that the transactions’ consideration process was properly valued) for the relevant parties, in circumstances in which the tax take for the United Kingdom remained exactly the same (since any under or over-pricing by one party within the United Kingdom would result in a greater taxable profit for either the purchaser (in the case of under-pricing by the seller) or the seller (in the case of the over-pricing by the purchaser). The United Kingdom imposed these additional compliance cost by means of a primitive extension of a regime designed to counter cross-border tax avoidance as the simplest means of securing compliance with the internal market provisions, rather than engaging in a commitment to a common consolidated tax base within the Union, which was designed (on a Union-wide basis) to counter tax-driven manipulation of the pricing-connected party transactions (which would be less effective within a common consolidated tax base in any event, for the reasons given above), without attracting unnecessary compliance costs.

50 cfMaduro, MP, We the Court, the European Court of Justice and the European Economic Constitution (Oxford, Hart Publishing, 1998) 132 Google Scholar. See also C Barnard and S Deakin, ‘Market Access and Regulatory Competition’ 202–4.

51 MP Maduro, ‘So Close and Yet So Far: The Paradoxes of Mutual Recognition’, n 6 above.

52 Or that of a home Member State, where the application of mutual recognition cannot be viewed as any sort of conflict between a host Member State and a home Member State at all (see below in relation to the discussion of Case C-446/03 Marks & Spencer Plc v Halsey (Inspector of Taxes) [2005] ECR I-1083 (‘Marks & Spencer’)).

53 It should be remembered that the CJEU’s observations in Cassis de Dijon related to justifications, not to breach.

54 Council Directive 74/577/EEC on stunning of animals before slaughter [1974] OJ L316/10.

55 Case 5/94 R v Minister of Agriculture, Food & Fisheries ex parte Hedley Lomas (Ireland) Ltd [1996] ECR I-2553, paras 20–21 of the judgment of the Court.

56 Case 270/83 Commission of the European Communities v France [1986] ECR 273 (‘Avoir Fiscal’), para 20; see also Case C-175/88 Biehl v Administration des Contributions du Grand-Duché de Luxembourg [1990] ECR I-1779, para 16; Case C-330/91 R v Inland Revenue Commissioners, ex parte Commerzbank [1993] ECR I-4017, para 18.

57 Case C-565/08 Commission of the European Communities v Italy [2011] 3 CMLR 1 (‘Italian Lawyers’ Fees’), para 49 of the judgment of the Court; see also Case C-518/06 Commission of the European Communities v Italy [2009] ECR I-3491, para 63.

58 Indeed it is difficult to reconcile the CJEU’s application of mutual recognition to its decision in Cases C-267/91 and C-268/91 Criminal Proceedings against Keck and Mithouard [1993] ECR I-6097, where the CJEU narrowed the test for breach of Art 34 by holding that non-discriminatory selling restrictions (in relation to pricing of goods) did not impede access to the host Member State’s market place (see paras 15–17) if goods were lawfully marketed in the home Member State free from such pricing restrictions. In Italian Trailers, Member States made submissions that the CJEU’s approach in Keck meant that the non-discriminatory prohibition on the sale of trailers in Italy was protected from an accusation of breach of Art 34 by Keck (see para 22). The CJEU simply did not meet this point at all, merely citing paras 16–17 of its judgment in Keck as an instance of the CJEU’s acknowledgment of the principle of mutual recognition (which is wrong: paras 15–17 in Keck merely acknowledge that the relevant goods were marketed lawfully in Member States other than France, without any formulation of a principle of mutual recognition): see paras 33–37. Italian Trailers is only reconcilable with Keck if the CJEU’s approach in Keck is restricted in its application to ‘selling arrangements’ which do not fix on the nature of the goods under scrutiny, as opposed to the market participation conditions which frame the regime in which such goods are sold (permitted pricing arrangements, permitted hours of trading etc), none of which was addressed by the CJEU in Italian Trailers.

59 It is fair to say that the CJEU did not at all try to reconcile its approach in Italian Lawyers’ Fees to Italian Trailers/Mickelsson/ANNETT.

60 Meaning the taxation of persons, on their income and capital profits, as opposed to ‘indirect taxation’ imposed on transactions, such as Value Added Tax.

61 Unfortunately, this case law has received relatively little attention. Neither Futura— discussed below as an important example of the application of the principle to establish breach in the context of Art 49 in relation to a host Member State non-discriminatory, non-market-access-impeding provision—nor the cross-border dividend case law mentioned below, are mentioned at all in C Janssen’s, The Principle of Mutual Recognition in EU Law, while Marks & Spencer, which raises severe conceptual problems in its application of mutual recognition, is relegated to a footnote (at p 39, fn 163) as an example of a home Member State regime being set aside (although as observed below, it is not apt to discuss Marks & Spencer in terms of a ‘home Member State’ and a ‘host Member State’ analysis.

62 Futura Participations SA v Administration des Contributions [1997] ECR I-2471.

63 Paras 25–26.

64 Para 26.

65 Thus making the obligation to keep accounts a fortiori Graf in its compliance with the internal market provisions.

66 The CJEU recognised that Luxembourg was entitled to police its tax regime to cross check losses claimed for Luxembourg tax purposes with accounting losses (paras 31–35: ‘effective fiscal supervision’ is a legitimate justification) but held that the rights of the Luxembourg tax authorities to make enquiries under the Mutual Assistance Directive (Council Directive 77/799 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation [1977] OJ L336/15) meant that the requirement to keep Luxembourg accounts in respect of the Luxembourg branch was not proportionate (paras 36–42).

67 Case C-35/98 Staatssecretaris van Financien v Verkooijen [2000] ECR I-4071 (‘Verkooijen’).

68 Para 36.

69 Para 34.

70 Para 35.

71 Case C-315/02 Anneliese Lenz v Finanzlandestirektion für Tirol [2004] ECR I-7063 (‘Lenz’).

72 Case C-319/02 Proceedings Brought by Manninen [2004] ECR I-7477 (‘Manninen’).

73 Lenz, n 71 above, paras 20–21.

74 Since Art 65(1)(a) disapplies Art 63, the question is one of breach, rather than one of justification to cure prima facie breach.

75 See Lenz, n 71 above, paras 31 and 32.

76 By removing the dis-application of Art 63.

77 The mandatory common construction of all of the internal market provisions demand that the same approach to breach, justification and proportionality apply to all of the freedoms (see above) which means, in turn, that the terms of Art 65(1) must be seen as a mere quantification of the case law which relates to justification and proportionality in relation to the free movement of goods, the free movement of workers, the freedom of establishment and the freedom to provide services (hence the terms of Art 65(3)). This approach does not make Art 65(1)(a) redundant. Rather it recognises the need for common construction of the freedoms and allows the CJEU’s case-law on the other freedoms to inform the application of Art 65(1)(a).

78 Lenz, n 71 above, para 32.

79 Para 33.

80 Manninen, n 72 above, para 33.

81 Although Art 65(1)(a) was not mentioned in the CJEU’s judgment in Manninen, it is clear that the CJEU had Article 65(1)(a) in mind, since the CJEU addressed the investors’ comparability of circumstances where the investors ‘might differ according to the place where they invested their capital’: para 34.

82 Paras 35–36.

83 Para 37.

84 The CJEU’s approach to mutual recognition in this direct taxation case law is exactly the same as that applied in relation to the free movement of goods in Italian Trailers, Mickelsson and ANNETT (effect of the regulatory regime in one Member State must be recognised in any application of the internal market provisions to another Member State).

85 Incidentally, there is no criticism made by the writer (at all) based on the observation that, of course, there is no ‘economic double taxation’ as regards the home Member State in which the recipient shareholder resides. Of course, it is true to say that, so far as Austria was concerned, there is not economic double taxation of the company (which was established outside Austria) and therefore no double (Austrian) taxation of the amount distributed to the Austrian tax resident shareholder. The same is true in Manninen. Finland had not taxed the Swedish-established company and therefore there was no Finnish double taxation of the dividend, once received in the hands of the Finnish resident shareholder. Although the relevant home Member State (respectively, Austria in Lenz and Finland in Manninen ) would have a perfectly sensible complaint as a matter of orthodoxy international tax law, these cases are simple examples of orthodox fiscal considerations yielding to the objectives of the internal market (discriminatory market participation conditions and obstacles to the free movement of the factors of production must be set aside and in the case of any conflict the direct effect and supremacy of European Union law trumps all competing considerations).

86 Whereas some combination of connecting factors, both physical, such as location and legal, such as, for companies, the place of incorporation.

87 The location of profits.

88 Orthodoxy is that a tax resident person is taxed on his worldwide profits, whereas a non-resident person is only taxed on those profits located (‘sourced’) in the taxing State: see Ghosh, Principles of the Internal Market and Direct Taxation Chapter 1.

89 It is no answer to say that, of course, even two home Member State companies may have different tax profiles depending on the availability of reliefs under the home State’s own tax regime. That is, of course, true. And two home State tax resident companies may be in very different circumstances as regards their subsidiaries (one may have no subsidiaries, the other may have many subsidiaries, some of which are foreign, some of which are not, which may, in turn, effect the actual tax charge on those companies). But the network of Double Tax Treaties concluded by both jurisdictions, and their terms, which are dependent on negotiations, on any view, may be very different indeed. And the home Member State in which the recipient of any dividend is resident may or may not have its own Double Tax Treaty with the state in which the dividend-paying company is tax resident, adding yet another layer of complexity and driving a further wedge between the ‘comparability’ of the situations between the recipient of a dividend who is resident in the same Member State as the paying company and his counterpart, where the paying company is tax resident in another Member State jurisdiction.

90 Broadly, at the material times, defined as companies which had a direct or indirect 75% shareholder relationship either as parent and subsidiary companies or as ‘sister’ companies: Income and Corporation Taxes Act 1988, ss 402 and 413(3).

91 Case C-446/03 Marks & Spencer Plc v Halsey (Inspector of Taxes) [2005] ECR I-1083, para 40.

92 Para 51.

93 Paras 45–46.

94 Para 48.

95 Para 49.

96 A recognition that Art 49 was simply not engaged by reason of prohibiting loss-relief in respect of companies wholly outside the United Kingdom’s tax net (since there was no exercise of jurisdiction over these companies by the United Kingdom at all) should have led to the conclusion that the negative integrationist internal market provisions were not engaged, as negative integration is predicated on an illegitimate exercise of jurisdiction. By requiring the United Kingdom to, at least potentially, allow cross-border group relief, the CJEU effectively turned the internal market profits into tools of positive integration, which is conceptually wrong in principle. This aspect of the CJEU’s decision in Marks & Spencer and why it was wrong is discussed in Ghosh, Principles of the Internal Market and Direct Taxation, ch 3.

97 Case C-196/04 Cadbury Schweppes Plc v Inland Revenue Commissioners [2006] ECR I-7995 (‘Cadbury Schweppes’).

98 The ‘Controlled Foreign Companies’ regime, which penalised the establishment of subsidiaries in low-tax jurisdictions.

99 And thus require justification, subject to the application of the principle of proportionality.

100 Or indeed any other ‘group’ company.

101 It is inapt to analyse Marks & Spencer as any sort of conflict between a ‘home Member State’ (the United Kingdom) and a host Member State (the jurisdictions of the loss-making subsidiaries), since the tax regimes of the subsidiaries’ respective jurisdictions (France, Belgium, Germany) were not the subject of scrutiny at all. There was no conflict of tax regimes analogous to the free movement of goods case law in Cassis de Dijon and Italian Trailers/ Mickelsson/ANNETT, where the less restrictive regime of the home Member State of export could indeed be seen to be in conflict with the host Member State which prohibited their sale.

102 Marks & Spencer, n 91 above, paragraph 55.

103 Para 53.

104 Para 55.

105 There can be no objection to Member States incurring obligations under a legislatively recognised mutual recognition principle, as in the context of qualifications etc. That is a wholly separate and different conversation.