Commentary

Commentary

Description

Professor Seer has provided in his chapter a thorough examination of the question of deductibility of gifts to charitable bodies in third countries under the proposed Council directive regarding a common consolidated corporate tax base. There are two features of the proposed directive’s treatment of this issue which are particularly worthy of note. First, donations to charitable bodies in third countries are deductible essentially on the same terms as donations to charitable bodies in Member States, at least where certain informational requirements are met. This commentary will refer to this feature as the “parity” provision. Second, donations to charitable bodies (in both Member States and third countries) are deductible only up to 0.5 per cent of revenues for a taxable year. This commentary will refer to this feature as the “cap” provision. Interestingly, this cap appears to be substantially lower than analogous caps under the national laws of various Member States. For example, some countries, such as the United Kingdom, apply no cap at all. German law likewise presents a notable contrast to the proposed directive. Specifically, Germany applies a cap under a sort of split-rule, according to which the cap on deductibility is set at the higher of 20 per cent of net income or 0.4 per cent of gross revenues plus payroll. Presumably the German reference to a gross base, in addition to a net base, is meant to allow space for deductibility of fixed contributions in years where a company has low net income, or even a loss. Germany also allows a carry-forward of any disallowed deductions under the cap.42 By contrast, the cap under the proposed directive refers only to a revenue base and has no carry-forward provision. The likely consequence of this is that in medium to high profit years the proposed directive could very likely set the cap at a rate well below that under the national law of Member States such as Germany that permit calculation of a cap on a net basis at relatively higher rates. In light of the basic parity approach under the proposed directive, it would be unwise to analyse the issue of donations to third-country charitable bodies in isolation. Rather, a full understanding of the proposed directive’s treatment of the third-country case is best developed within the scope of an analysis that considers the broader issue of donations to charitable bodies formed in any state outside that of the transferor, whether a Member State or a third country. This is precisely the tack that Professor Seer has followed in his chapter, which places the analysis of donations to charitable bodies in third countries within the context of a general discussion of the following issues: the overall character of charitable donations as business expenses or not; the justification for deductibility of charitable donations to the extent they are not business expenses; and the ECJ jurisprudence on the deductibility of charitable donations to organizations in other countries. Professor Seer reaches the following conclusions on these three matters. First, he finds that charitable donations are generally not to be considered business expenses. Second, he takes the deduction of charitable donations to be justified in certain cases, notwithstanding the fact that they are not business expenses, on the grounds of a tax surrogate theory. That is, to the extent that the charitable body performs functions which relieve the sovereign of its obligations, then such donations function as tax surrogates and ought to be removed from the tax base. To the extent the body does not relieve the sovereign of its obligations, then the above-stated justification fails and the donation should not be deduct- ible. Given the rationale underlying the tax surrogate theory, it is not surprising that national legislation has tended to afford deductions only in the case of donations to bodies internal to the state. In other words, although sovereigns sometimes undertake obligations that are to be fulfilled in third countries, this is the exception rather than the rule. At the very least, it is to be expected that a donation to a third-country charitable body will relieve the sovereign of fewer obligations than a donation to a like organization in the home country. Third, the ECJ jurisprudence on these matters, chiefly the Hein Persche case, has required that to the extent a Member State allows deductibility of charitable donations at all, it must do so in a non-discriminatory way that does not impede the free movement of capital under Article 63 TFEU.46 Thus, Member States must allow deductibility for transfers to internal bodies and bodies organized in another Member State on equal terms. The basis for this decision is that limiting deductibility to internal bodies serves only a revenue preservation function and as such cannot justify an incursion on the fundamental freedoms. Professor Seer finds an inevitable tension here. The tax surrogate theory survives as the best justification for charitable donation deductions, notwithstanding the ECJ’s jurisprudence. Thus, the theory that undergirds the national legislation in the first place is at odds with the result under ECJ decisions that such national legislation be applied in a non-discriminatory fashion.

Source Publication

Corporate Income Taxation in Europe: The Common Consolidated Corporate Tax Base (CCCTB) and Third Countries

Source Editors/Authors

Michael Lang, Pasquale Pistone, Josef Schuch, Claus Staringer, Alfred Storck

Publication Date

2013

Commentary

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