Is the tax calculation method for exemptions with progression contrary to EU law? Quantitative and formal–analytical analysis

Abstract

This study analyzes whether the tax progression proviso’s calculation method for foreign income exemptions under a tax treaty breaches EU law. This research question has not yet been examined in the literature. In such a case, a violation of the EU fundamental freedoms may result in taxpayers partially losing the tax-reducing effect of the basic allowance deduction due to the tax progression proviso’s calculation method in their EU or EEA state of residence. Theoretical, quantitative, and formal–analytical research methods were used to examine this issue. Moreover, the analysis uses Germany and Austria as examples. However, the findings can be replicated in all EU and EEA countries applying the same type of taxation. The study’s main contribution is demonstrating that the current progression proviso’s calculation method in Germany and Austria for income from other EU Member States and EEA states, exempt under DTAs, breaches EU law and is, therefore, prohibited. The fiscal policy implications of such unlawful taxation are highlighted. EU and EEA Member States must amend their tax laws if they violate EU law. Therefore, a new calculation method for taxation with a progression proviso is developed to bring the EU Member States’ tax legislation in line with EU law. The study expands the literature on taxation and public finance, since it has not yet dealt with this issue. Moreover, the economic policy implications of the research findings are outlined. This study belongs to the field of taxation and fiscal policy and is of fundamental relevance.