A Theory of Tax Discrimination

The fundamental freedoms of the EC Treaty prohibit tax discrimination—harsher tax treatment of cross-border economic activities than purely internal activities. Critics of the ECJ argue that the Court’s broad interpretation of the EC freedoms causes it to find tax discrimination where there is none. This tendency encroaches upon the sovereignty of EU member states and hampers their ability to pursue economic policy goals. This Article shows that, contrary to the claims of the Court’s critics, the ECJ’s errors in tax discrimination cases go in both directions: in addition to finding discrimination where there is none, the Court also sometimes fails to recognize discrimination. The Court’s failure to recognize tax discrimination undermines the economic integration of Europe and abridges EU nationals’ personal rights. This Article is the first to identify the Court’s standard of review in tax discrimination cases, the comparable internal situation test (CIST), as a source of the Court’s error. Instead of CIST, the Article proposes that the ECJ borrow a standard developed by the U.S. Supreme Court for tax cases arising under the Commerce Clause: the internal consistency test (ICT). By adopting this more reliable and predictable standard, the ECJ can better fulfill the policy goals behind the nondiscrimination principle, including promotion of economic efficiency and integration of the European common market.