Internal Market: German Personal Income Tax Law Infringes EU Rules
Philip Bentley QC
Once again, the European Court of Justice (ECJ) has declared illegal a national tax rule which infringes one of the fundamental freedoms of the EC Treaty. The taxpayers lived in France but worked as “non-residents” in Germany. Their German source income was taxable in Germany at a rate determined by taking into account their worldwide income. Since German residents were entitled to deduct notional “negative income” arising out of the use of their house as a dwelling, the taxpayers made the same claim in respect of their house in France for the purpose of determining their worldwide income. The German tax authorities refused. The ECJ ruled that this constituted less favourable treatment for non-residents than for residents, and so infringed the principle of the free movement of workers. Moreover, since “positive income” from the house would have been taken into account, there was no ground for not doing the same for “negative income”.
Trade: Possible WTO Action Over the EC-China Footwear Dispute
In the latest development in the EC-China footwear dispute, China has warned that if the European Union imposes anti-dumping duties on imports of Chinese footwear it will ask the World Trade Organisation (WTO) to resolve the issue. China suggests that the Commission’s decision to deny Market Economy Status (MES) to all Chinese exporting producers of footwear was arbitrary and against WTO rules. Due to the fact that none of the Chinese producers of footwear were granted MES, experts expect that the level of anti-dumping duties might be as high as 20 – 40 per cent. Pursuant to the EC Anti-dumping law, the European Commission may impose provisional anti-dumping duties on imports of footwear from China and Vietnam by 7 April 2006 at the latest.
Taxation: ECJ Issues Judgment Interpreting the Sixth VAT Directive
The European Court of Justice (ECJ) has ruled on three cases involving the Sixth VAT Directive (77/388/EEC), finding that complex transactions designed to avoid VAT may be illegal. The cases, which were referred by English courts, all involved schemes to recover VAT through complex transactions. The ECJ first explained that, because the terms of the Directive are clear, the fact that a transaction is intended solely to obtain a tax advantage is not relevant to the question of whether it qualifies as a supply of goods or services or an “economic activity” within the meaning of the Directive. The ECJ, however, also held that the Directive precludes a taxable person’s right to deduct input VAT where the transaction on which the right is based constitutes an abusive practice. Moreover, the Court held that where payments are made on account, VAT may be chargeable without the supply having actually been made, provided the goods or services have been precisely defined.
Agriculture: EU Sugar Reform
EU agriculture ministers have adopted a reform of the EU sugar regime that will come into force in July 2006. They have also agreed the methodology for calculation of the reduction of current production quotas. The planned reduction of the overall EU-wide quota is in the region of 2.5 million tonnes for 2006/07. The Council will vote on the exact production quota for each Member State on 2 March 2006. Aid will be available to compensate businesses for losses caused by the reform and to encourage exit from the market by less competitive players. Compensation will also be available to African, Caribbean and Pacific countries affected by the EU sugar reform. These countries currently object to the adequacy of the compensation offered. For more details on the EU sugar reform see Brussels Brief of 24 June and 2 December 2005.
Competition: Commission to Continue Efforts to Eliminate Market Access Barriers
The European Commission has published its preliminary report on the ongoing energy sector enquiry which confirms the initial findings of November 2005 (see Brussels Brief of 18 November 2005). The enquiry will continue by focusing on eliminating (i) the foreclosure of the electricity and gas markets through long-term downstream contracts and (ii) barriers preventing access to capacity of gas pipelines, gas storage and on gas and electricity interconnectors between Member States. The Commission’s objective is to address the roots of the problem, but it does not exclude action against (i) practices of setting prices on electricity wholesale markets, (ii) the gas/oil price linkage and (iii) practices which deter customers from switching suppliers. A number of issues will still have to be addressed at a regulatory and merger control level.
Internal Market: European Parliament Votes on Proposed Services Directive
The European Parliament has proposed a revised text of the much-debated directive on services in the internal market following a compromise reached between the Socialist (PES) and Democrat (EPP-ED) groups which was then backed in the first-reading vote. The text omits specific references to the country of origin principle in the key article, although the fundamental objective of the proposed directive remains the same. A Member State will be required to guarantee providers from other Member States the freedom to exercise service activities within its territory. National measures which present obstacles to providers offering services, such as by requiring that an office be set up in the country where services are temporarily being offered, will therefore be banned. The Commission has already announced that it will quickly modify its original proposal on the basis of the Parliament’s revision. The EU Council will then have to decide its position on the proposed directive.
Competition: De Beers Commitments Not to Purchase from ALROSA made Legally Binding
The European Commission has closed its case alleging that De Beers abused its dominant position by entering into an agreement with ALROSA to purchase the equivalent of roughly half of its annual diamond output. De Beers is the largest diamond mining company in the world and ALROSA, a Russian company, the second largest. The Commission concluded, in a preliminary assessment, that their supply arrangement would eliminate ALROSA as a source of supply outside Russia and would enhance De Beer’s market power. Initial commitments were altered following comments from interested parties. De Beers has now committed to cease purchasing rough diamonds from ALROSA from 2009 following a phasing out period between 2006 and 2008. The Commission hopes that these commitments will create a viable alternative source of supply for rough diamonds outside of De Beer’s channels. The Commission will now assess De Beer’s “Supplier of Choice” distribution system, the subject of further complaints, in light of these commitments.
Competition: Transitional Removal of IATA Tariff Conferences Exemption
The European Commission has published its proposal for a review of block exemption Regulation (EEC) 1617/93. The Commission proposes to discontinue the competition rules exemption given to certain arrangements between the airlines that are made under the auspices of the International Air Transport Association (IATA). Those arrangements concern tariff conferences between airlines in the context of interlining agreements and have been granted immunity since 1993. Last November, the Commission had already announced that it was envisaging immediate termination of the block exemption (see Brussels Brief of 18 November 2005), but following consultation with EU Member States, the Commission now proposes a transitional period that would expire at the end of 2006. Interested parties may submit their comments on the draft regulation before 18 March 2006.
Competition: Telefónica Faces Margin Squeeze Charges from European Commission
The European Commission has sent the Spanish incumbent telecom operator Telefónica a statement of objections alleging abuse by the company of its dominant position in the market for broadband internet services. The Commission alleges that the Spanish company, which owns related infrastructure for the provision of internet services, charges competitors wholesale prices that are so close to its retail prices that rivals are forced out of the market. According to the Commission this is one of the reasons why retail broadband internet prices in Spain are above the Community average. In the past, the Commission fined Deutsche Telecom and the French provider Wanadoo for similar practices in the internet market.
NEXT WEEK’S EVENTS
Monday 27 February – Friday 3 March 2006
General Affairs and External Relations Council (27 – 28 February 2006)
COURT OF JUSTICE
There will be no sitting of the Court of Justice during the week from 27 February 2006 to 5 March 2006 inclusive
COURT OF FIRST INSTANCE
There will be no sitting of the Court of First Instance during the week from 27 February 2006 to 5 March 2006 inclusive