Hard law and soft law interactions in EU corporate tax regulation: exploration and lessons for the future

Abstract

The EU regulatory framework for direct taxation is composed of three interconnected elements. First, having satisfied the requirement of a unanimous vote, the EU adopted a range of directives on the basis of the general harmonisation provision (Article 115 TFEU). Therefore, a traditional hard law framework harmonising some aspects of direct taxation exists in the EU. Second, case law is an indirect method of exerting influence on the direct tax field. As long as no positive integration has been brought about, the Member States are free to regulate this sphere as they see fit. The boundaries of their regulatory freedom are imposed, however, by negative integration i.e. by the ECJ applying the Treaty rules on non-discrimination. Jurisprudence has been an influential and dominant regulatory tool. Third, corporate taxation has also been regulated through soft law. The key example of a non-legally binding instrument in the direct tax field is the Code of Conduct for Business Taxation. This thesis investigates interactions between these hard and soft law measures and draws conclusions about the future of EU direct tax regulation. To achieve these aims, two research strands are explored. First, the thesis discusses the nature of the Code. In particular, it is investigated whether the Code can be regarded as an example of a ‘pure’ soft law measure. It is argued that the nature of the Code is not as clear-cut as is officially presented. Behind soft law terminology, the Code operates as a hard law measure. Supported by an examination of the OECD anti-harmful tax competition initiative, the thesis concludes that the use of soft law in tax regulation has not been wholly successful. The introduction of legally binding solutions is restricted by the requirement of unanimity, which is difficult to attain in the expanding EU. Thus, hard law has instead been introduced through the back door, raising valid questions about regulatory legitimacy. Second, this thesis explores the relationships between hard and soft law in the wider context of EU direct tax regulation. The extent to which the Code is embedded in the broader environment of tax regulation is analysed. The Code tends to be characterised as a soft law measure situated within the regulatory environment of taxation that, for years, has been dominated by hard law instruments. At this level, interactions between ECJ jurisprudence and soft law instruments are also explored. Consequently, the thesis demonstrates that hard law and soft law are not necessarily alternative choices; both approaches can be applied simultaneously to influence one regulatory field, and both offer different strengths and values. In a field as politically sensitive as direct taxation, soft law may prove to be insufficient to bring about real change. The addition of a hard law (or legally binding) element might be necessary to secure effectiveness of regulation. This thesis proposes that the current, disingenuous hybrid regulation of direct taxes in the EU should be replaced with a more transparent hybrid, where hard law measures are openly applied and soft law is given the opportunity to regulate in parallel and to its own distinct potential.