Closer to an internal market? The economic effects of EU tax jurisprudence

This paper proposes a new framework to assess the impact of Court of Justice of the European Union (CJEU) jurisprudence on Internal Market-related areas, by considering whether the jurisprudence of the Court on corporate taxation fulfils the constitutional mandate, as set-out in the European Treaties, of establishing such a market. It is shown that the Court’s focus upon removing discriminatory obstacles to the fundamental freedoms does not necessarily lead to a more level playing field and increased tax neutrality, an instrumental objective towards attaining a European Internal Market. In order to assess whether the jurisprudence of the Court does indeed attain increased neutrality or level playing field, two rulings are used as case studies. The first ruling in Lankhorst-Hohorst regards the compatibility of thin capitalisation with free movement provisions; the second in Marks & Spencer concerns the compatibility of rules on group consolidation with those same provisions. An economic analysis demonstrates that, depending on the reaction of Member States to the ruling, tax induced differences in capital costs faced by firms operating within the European Internal Market may increase, whilst GDP and welfare may decrease. Consideration of actual legislative amendments introduced to thin capitalisation rules by Member States following Lankhorst-Hohorst, and to group consolidation rules following Marks & Spencer, appear to indicate that it is this negative scenario which has prevailed. Results demonstrate that it is not always or necessarily the case that decisions of the CJEU will led to an increased level playing field and tax neutrality, thus contributing to the establishing of the EU Internal Market. The paper considers the constitutional implications of this conclusion, and the consequent breaking of the constitutional instrumental chain. In particular, it reflects on whether the Court’s actions can be regarded as ultra vires, and whether they may constitute a violation of the rule of law and the principle of separation of powers. It concludes that the Court’s lack of consideration of the constitutional instrumental chain might mean that we are heading in the wrong direction.