Limitations of tax sovereignty

Tax policy in Germany faces the challenge of responding to international tax competition without going beyond the limits of tax sovereignty. The most important restrictions on tax policy design in Germany are imposed by the basic rights guaranteed by the German Constitution and by the European fundamental freedoms.

As far as constitutional tax law is concerned, a major concern is the ongoing broadening of the income tax base. International tax competition focuses on tax rates. Low nominal tax rates are implemented in order to remain competitive. At the same time, the lowering of tax rates must not lead to a reduction in tax revenue in the context of tight public budgets. In order to satisfy both premises, the tax base is broadened. This results in a redistribution of the tax burden, as the beneficiaries of low tax rates are not necessarily identical to those who suffer from the broadening of the tax base. This is problematic with regard to the constitutional requirement that people should be taxed equally according to their ability to pay taxes. It is therefore not surprising that the Federal Constitutional Court has recently been paying more attention to the implications of constitutional tax law for the design of the income tax base.

In particular in a cross border context, tax sovereignty is further restricted by the European fundamental freedoms. Spectacular decisions of the European Court of Justice have questioned traditional rules of German, foreign and international tax law and have not only led to considerable budget risks, but equally justified doubts concerning the sustainability of national tax systems. How can tax sovereignty of Member States be exerted at all, against the backdrop of open markets? Will it lead to a stronger pressure for harmonisation or to a “race to the bottom” in European tax law?

The department of Business and Tax Law pursues these questions on different levels: it looks at recent decisions of the Federal Constitutional Court and the European Court of Justice in the area of tax law and analyses fundamental problems of constitutional tax law and European corporate tax law. Furthermore, tax harmonisation is being checked for its adequacy and factual persuasiveness. A particular focus is put on measures for and against (“harmful”?) tax competition in Europe.