The Economic Effects of EU Tax Jurisprudence

Abstract

The aim of this paper is to propose a new framework to assess the impact of Court of Justice of the European Union (CJEU) jurisprudence on the construction of a European Internal Market, by considering whether the jurisprudence of the Court on corporate taxation fulfils the mandate set-out in the European Treaties for 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 the impact of the jurisprudence of the Court upon neutrality and level playing field, the decision in Lankhorst-Hohorst, regarding the compatibility of thin capitalisation rules with free movement provisions, will be used as case study. 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, 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 a genuine EU Internal Market. The paper considers the constitutional implications of this conclusion, and the consequent breaking of the constitutional instrumental chain.