The Federal Constitutional Court [Bundesverfassungsgericht, BVerfG] must decide whether or not the legislator is allowed to breach tax treaties with other countries. The Federal Fiscal Court [Bundesfinanzhof, BFH] is of the conviction that a tax norm is unconstitutional if it changes a double taxation agreement (DTA), and has passed on corresponding proceedings to Federal Constitutional Court by referral order (docket no.: I R 66/09). This could now overturn numerous similar tax laws which likewise alter DTAs to the detriment of the taxpayer (so-called "treaty overrides").
In the current proceedings, a taxpayer resident in Germany was unable to prove that his employee activities rendered in Turkey had been duly and properly taxed there. The tax office and the fiscal court of first instance therefore treated the income as taxable in Germany. The DTA with Turkey, however, stipulates that this income is tax-exempt in Germany. According to the old DTA, which was still applicable to this matter, this is the case irrespective of whether or not the income was duly and properly declared in Turkey. A norm of income tax law, in contrast, stipulates that the taxpayer is not exempt from German taxation in the event of a failure to prove the due and proper declaration of the income abroad.
The Federal Fiscal Court considers this norm to be unconstitutional for two reasons. To begin with, it only applies to income of an employee. Since there is no material reason for such limitation, the provision is unconstitutional as it violates the principle of equal treatment of Article 3 German Constitution [Grundgesetz, GG]. Secondly, and this is of fundamental importance, the German legislator is also obliged to observe the general principle of international law that contracts must be observed (pacta sunt servanda). The decree of a norm which unilaterally alters a DTA constitutes a violation of the constitutional regime, which unjustly impairs the taxpayer in its general freedom of action (Article 2 I GG in conjunction with Art. 20 III GG).
An exception can only exist if the legislator can plead a sufficient justification basis. In these proceedings no such justification basis lies in the lacking proof of taxation in Turkey. According to the DTA, the exemption from taxes in Germany was agreed specifically irrespective of any due and proper taxation in Turkey. Germany could have terminated the DTA and have made the tax exemption dependent upon the due and proper declaration of the income in the foreign state in which the activity was conducted – as has also now happened with the current DTA with Turkey.
The Federal Fiscal Court is therewith amending its established jurisprudence of many years. Should the Federal Constitutional Court rightly share its opinion, then countless similar treaty overrides will doubtlessly come under the scrutiny of constitutional law; in the draft of the Annual Tax Act [Jahressteuergesetz] 2013 another treaty override is envisaged. The legislator can then reckon with considerable cleanup operations. Irrespective of this, the judgement could help to increase the acceptance of tax norms and the taxpayers' trust in jurisprudence.
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