EATLP 2010 Retroactivity in Tax Legislation “Legislating by Press Release”

1. EATLP 2010 Retroactivity in Tax Legislation “Legislating by Press Release” PROF. DR. JUR. JOHANNA HEY Institute for Tax Law, University of Cologne

2. Contra Retroactive effect until the moment of earlier announcement of a tax bill, is a problem and needs special justification, because in principle the taxpayer is allowed to trust in the prevailing legal situation until promulgation of a new law.

3. Contra 1: Role of promulgation Promulgation of a new law in the official law gazette is an indispensable element of a state under the rule of law. For good reasons most legal systems know only one way of promulgation, usually constitutionally guaranteed.

4. Contra 2: Justification always necessary The taxpayer’s expectations in the application of the prevailing legal situation are – generally speaking – always legitimate until a new law is officially promulgated. Any retroactivity/retrospectivity (application/effect before promulgation) results in a potential violation of the taxpayer‘s confidence in the prevailing legal situation. Therefore it has to be justified no matter whether it was announced before. • Allowing retroactivity until an earlier press release without further justification might not be legislation by press release, if the parliament adopts the bill afterwards. However, it has the effect of legislation by press release.

5. Contra 3: German Case Law Justification depends on distinction between retroactivity and retrospectivity 1. Retroactivity: Permanent case law German Constitutional Court: Retroactivity until the date of adoption of a bill in parliament is always justified, no other reasons necessary (rationale: “adoption of the bill in parliament destroys the legitimate expectations”) Other (earlier) announcements can only reduce the legitimacy of the taxpayers expectations not to be burdened by a retroactive tax law; further justification needed, e.g. overriding compelling public interest. Questioned by Federal Fiscal Court request for constitutional review of 8/2/2006: Any retroactive application before promulgation needs special justification. • 2. Retrospectivity: Also earlier announcements (e.g. first media reports) reduce the legitimacy of taxpayer’s expectations; together with mere budget considerations justification of an earlier date for grand fathering.

6. Contra 4: Two-tier justification For the justification one has to distinguish between • The way and legal quality of the announcement • and • The reasons why the tax legislator cannot wait with the application until promulgation.

7. Contra 5: Quality of Announcement • Quality of the announcement: • Neither media coverage nor official press releases provide a sufficiently reliable base for the taxpayer to anticipate the possible change of the legal situation. He just knows that the law might change, neither if nor how it will change. • Announcements of the government or executive bodies like the Ministry of Finance cannot be considered to destroy the legitimate expectations because of the separation of power/democratic principle. • Even if the new law is finally adopted in parliament and will not be subject to any further alterations the legislator still needs a special justification if the law shall be applied before promulgation.

8. Contra 6: Reasons of Justification Possible reasons of justification are: • Harmful announcement effects • (in general not only budgetary effects but e.g. economic distortions) • Correction of evident technical errors • The quality of the change in the law (e.g. closing loopholes) as such does not justify retroactivity until announcement.

9. Conclusion A restrictive approach to retroactivity until announcement is imperative - to guarantee the certainty and reliability of a legal system and - to discipline the tax legislator to avoid loopholes and unintended benefits right from the beginning when enacting a new bill.