Abstract
Last January, the European Commission launched a major effort to speed up the adoption of EU legislation in the area of taxation, as announced in Commission President Juncker’s State of the Union. Its 2019 Communication was entitled: ‘Towards a to more efficient and democratic decision making in EU tax policy’. 1
Words like ‘more efficient and democratic’ make it hard for any EU supporter to put on the brakes. But from a tax policy perspective one needs to keep in mind that taxation and expenditure should go hand in hand. As long as budgets for social security, education, transportation, defense and more are still set at national levels, the prerogative to design a proper tax system suiting a Member State’s needs should also be there. Taxation is no aim in itself: it serves primarily to facilitate government expenditure (even though it might be used for redistributive purposes and for nudging taxpayer’s behavior as well).
That being said, in order to guarantee proper taxation as envisaged by Member States, international cooperation is a necessity to make sure taxation works out as intended. In order to address tax avoidance, tax evasion and double taxation, some degree of coordination at the EU level is a luxury we cannot do without in an internal market. The question remains, however, how we can draw a line between coordination to make sure national tax systems serve their intended purpose – as determined by each Member State – without harming the internal market and preferably improve it, and coordination with the purpose of getting national tax systems more in line with ‘best practices’ or standards acceptable to the EU’s largest economies.
1. The passerelle clause
In the Commission’s view, ‘unanimity is neither a practical nor an effective way of decision-making’. 2 The concept of ‘pooled sovereignty’ seems to be the Commission’s answer to the loss of national tax sovereignty, indicating that coordination at EU level may actually be beneficial to Member States and, indeed, it can be. In essence, the Commission is proposing to invoke the passerelle clause (Article 48(7) TEU) to remove the need for unanimity in large parts of the taxation domain through the adoption of qualified majority voting (QMV). It also proposed to adopt the ordinary legislative procedure instead of the special legislative procedure which currently reduces the role of the European Parliament to merely an advisory one.
What makes the Communication most intriguing is that the Commission is not trying to hide that its proposal entails a slippery slope. To the contrary: it is very much the centerpiece of the proposal. It takes some political guts to do this, but then again there were upcoming elections at the time. The Commission sketches the way forward by invoking the passerelle clause in four steps. 3
First, QMV should be used for measures that have ‘no direct impact’ on the taxing rights of Member States, nor their tax bases or rates. Think of measures aimed at dealing with the predictable trio of ‘tax fraud, evasion and avoidance’ and those facilitating tax compliance by businesses. These include evergreens like improved administrative cooperation between Member States, but also harmonized reporting by businesses and the introduction of mandatory rules to close tax loopholes. (It is hard to think of a better way to trivialize the major impact which anti-avoidance rules may have on the complexity and structure of national tax systems, but who cares?)
The second step is to use QMV for tax measures supporting other goals, such as ‘climate change, protecting the environment or improving public health or transport policy’. This second step, when put in motion, would probably mention pre-defined taxes that will be striven for (a carbon tax, a tax on non-recyclable waste, a road use tax or an EU fat tax maybe?), as an upfront carte blanche would hardly be acceptable to national parliaments. As for environmental tax measures, to which a specific passerelle clause applies (Article 192(2) TFEU), one would at least need to have some clear idea of where one would want to go, as their variations are numerous and their impact on both businesses and private individuals can be substantial.
The third step would be to employ QMV in areas that have been harmonized for the most part already, such as VAT and excises. This would facilitate much needed modernization of the existing EU legal framework, thus the Commission. Despite of the difficulties ahead, this might be the least problematic of the four, as long as rate harmonization is not subject to QMV.
The fourth is the introduction of other major initiatives such as a common consolidated corporate tax base (the CCCTB). Here we enter into an area where much is to be gained by multinational businesses with respect to reducing administrative burdens, by introducing uniform rules to calculate taxable profits across the EU and possibly allowing for consolidate tax filing at one Member State instead of up to 28 (a one-stop shop). Yet, this may come at the cost of uncertainty for businesses in the medium term and increased tension between national tax authorities who would become more interdependent.
Another major initiative as part of the fourth step would be adopting a comprehensive solution for the taxation of the digital economy, a fiercely-debated topic at the moment both at the level of the EU and the G20/OECD. 4 Here coordination is inevitable for the internal market to prosper, but it is likely that any such solution would also affect brick-and-mortar businesses and the traditional services industry. So, I look forward to the actual phrasing of the proposal to use QMV in this domain, as a limited focus on the digital economy might be easier to sell politically but hard to maintain in the end. For the time being, a Commission proposal for an interim solution like a digital services tax has been shelved awaiting progress at the G20/OECD.
2. €290 billion a year plus change
Unanimity has hampered progress according to the Commission, which in support of its proposal lists four of its tax initiatives that would have brought in over €290 billion a year EU-wide in the long run, if adopted. 5 One of these initiatives concerns the aforementioned CCCTB that aims to harmonize corporate taxation across the EU. This might well benefit the EU as a whole but it may also harm some Member States because of how taxable profits will be split amongst them. Other initiatives aimed at reducing VAT fraud, taxing financial transactions and taxing digital services are mentioned as near self-evident measures that are long overdue, despite continued disagreement about the latter amongst Member States whose interest may not be fully aligned.
The Commission provides several other arguments in order to make its case for QMV. For instance, if one Member State uses its tax system in an attempt to attract mobile capital, this may result in a beggar thy neighbor policy, where other Member States loose more in revenue than is gained by the receiving state, often forcing the latter to tax less mobile income, such as labour. Moreover, unanimity carries the risk of Member States playing politics, as it can be misused as a bargaining chip to serve ‘purely national interests’ (other than valid reservations from a legislative perspective, I assume). 6 The Commission also ensures us that ‘moving to QMV would not affect the current competences of Member States in the field of taxation’. 7 This might be true from a legalistic point of view, but from a political perspective it is quite hard to sell once Member States get overruled.
In the event the Commission’s case for QMV is not convincing enough, it reminds us of Article 116 TFEU to allow for QMV to deal with quite specific tax matters, which ‘the Commission is ready to employ (…) should the specific necessity arise’. 8 This is playing with fire, as Article 116 TFEU could easily be abused to let tax doctrines from one (large) Member State dominate that of others in the pursuit of addressing disparities.
So, how bad are things really? We should recognize that, despite the foregoing, the EU has made a lot of progress in the field of taxation in recent times. It established a database to facilitate the exchange of information on tax rulings between tax authorities, 9 increased transparency in business reporting and reporting of aggressive tax structures to these authorities, 10 and there was the adoption of mandatory anti-abuse rules in domestic corporate tax regimes - a milestone in EU tax legislation. 11 The European Parliament took an active role in this in the latest legislative period; it established a number of special parliamentary committees (TAXE, TAX2, PANA and TAX3). Admittedly, things could have gone further and more expediently, but from an historical perspective, the last five years (2014-2019) were quite successful for the EU. Still, there is a lot of follow-up work to be done, especially when it comes to facilitating the internal market (as in step four above).
3. Taking QMV step-by-step needs carve-outs
QMV is not a done deal by far given the sensitive nature of taxation. Taxation is key to public policy and essential to the functioning of society, as the Commission reminds us in the opening sentence of its Communication. The passerelle clause has its own safeguards that would hinder adoption of QMV in case any national parliament objects. Moreover, some Member States have core constitutional safeguards with regard to the levying of taxation which would make it virtually impossible to hand over decisive decision making in this respect, even if current governments would be sympathetic to it.
Hypothetically speaking, what if initial consensus could be reached with regard to the Commission’s proposal? It is clear that invoking the passerelle clause to authorize the use of QMV and the ordinary legislative procedure for all (corporate) tax matters would be a bridge too far, which is why the Commission proposed to resort to more limited requests for authorization one at a time. Yet, curtailing the use of the passerelle clause in a way that would mold the EU into actually sticking to what the Commission proposed, would already mean that we are half way down the path of actual decision making. In order to get the necessary unanimity to invoke the passerelle clause, we may already need a proposal containing a substantial number of carve-outs and restrictions in advance.
The Commission explicitly ensures us that fears of the EU going beyond its competences and interfering with corporate tax rates and personal income taxes in case unanimity is done away with, are unjustified. 12 But at the same time, these fears are not totally unfounded.
Upon invoking the passerelle clause for each step of the Commission’s path, the setting of minimum tax rates may be carved-out explicitly. But how would one prevent QMV decisions that could lead to the same, by requiring (other) Member States to sanction foreign tax rates that are substantially lower than theirs? Member States might be obliged to levy additional taxes if dividends have been received from a foreign subsidiary with a tax burden only half that of its parent company. Within the EU, enforcing such a switch-over in the presence of substantial genuine economic activities abroad might, in the end, threaten the internal market.
And who will determine what the scope of a corporation tax is when it comes to introducing mandatory anti-tax-avoidance measures or a comprehensive CCCTB? Will it still be up to Member States to draw the line between corporate taxation and personal income taxation depending on a business’s legal form? Or should the proposal for authorizing the use of the passerelle clause already specify upfront how partnerships and cooperatives are to be handled, as to actually still allow them (that is, their partners and participants) to be governed by personal income taxes? This required level of detail was probably not envisaged when the passerelle clause was introduced ten years ago.
A QMV directive in the field of corporate tax may also have repercussions for bilateral tax treaties. When such treaties are being negotiated with other countries, much-needed personal income tax concessions may be set off against, for instance, lower withholding taxes for businesses (and individuals) to reach an agreement. Here a Member State might see its bargaining power reduced, affecting tailor-made solutions for its own residents and tax system.
4. Conclusion
Moving to QMV in matters of taxation is not self-evident, as the prerogative to tax and spend is with the EU Member States. Yet, the internal market needs their continued commitment and willingness to compromise for it to reach its full potential. Strengthening the European Parliament’s role in drafting tax legislation by switching to the ordinary legislative procedure would technically be possible without QMV, but with unanimity still in place this will not expedite actual decision making to say the least.
If there would be consensus to switch to QMV, one should not be so naive as to think that the proposed use of the passerelle clause will make the decision-making process far less burdensome. Agreeing upon the level of restrictions and carve-outs needed upfront for each and every step, to make the Commission’s proposal work out the way it is presented, would be a troublesome and time-consuming path in itself. The latter is necessary though, as QMV is designed to stay once agreed upon. This should not discourage Member States and the Commission from trying to find common ground, however, but let us ensure that we indeed take one step at a time and do not slip.