How the EU determines tax policy
While many tax specialists are focusing on the impacts Brexit may have on their UK clients, Donald Drysdale studies proposals that might affect businesses operating across the EU.
Tax decisions in the EU
With Brexit looming, the immediate attention of most businesses and their advisers is on how we’ll be affected on this side of the Channel. However, for those trading in or with other EU member states, the tax laws of those countries are likely to continue to be matters of particular interest.
The European Union is a block of 28 separate countries – soon to be 27 – and those nations exercise a high degree of autonomy in their tax affairs. At present, the European Council must decide unanimously on proposals in the area of tax before they can be adopted at EU level.
This situation has generally proved satisfactory for member states, whose respective tax legislation is linked closely with their national sovereignty as a result of its role in national revenues, budgets and policy choices. They see decision-making based on unanimity, giving them an effective national veto, as a means of protecting this sovereignty.
However, the European Commission regards this insistence on unanimity as undemocratic. It believes that moving away from it is an essential step towards creating a fairer tax system throughout the EU.
Proposals for change
A recent communication from the European Commission sets out proposals for ending the requirement for unanimity among member states on EU tax policy decisions.
The Commission is concerned that an inability to secure unanimity hitherto has frustrated progress on a number of significant EU tax initiatives which would have helped governments and businesses. Projects which have stalled have included a VAT definitive regime, a common consolidated corporate tax base (CCCTB), and new taxes on financial transactions and digital services.
A move away from unanimity on tax policy decisions has been called for by the European Parliament on a number of occasions.
The Commission’s paper proposes that the requirement for unanimity on tax policy decisions should be phased out by the end of 2025, and replaced by qualified majority voting (QMV).
Qualified majority voting
QMV in its present form was introduced by the Treaty of Lisbon and is officially the EU’s normal decision-making process in most policy areas. In spite of this, a majority of EU legislation is adopted by consensus.
When a decision is required under QMV on a proposal from the Commission, the European Parliament and European Council act together as co-legislators on an equal footing and a minimum of 55% of member states, representing at least 65% of the EU population, must vote in favour of the legislation. This is known as the ‘double majority’ rule.
Until Brexit, 16 out of 28 member states are needed to make up the 55%. After Brexit this will be reduced to 15 out of 27.
To prevent smaller countries from being railroaded, a decision can be vetoed by a ‘blocking minority’ of at least 4 member states representing more than 35% of the EU population.
A phased approach
The Commission proposes a gradual 4-step approach for introducing QMV on tax.
First, QMV would be introduced for measures that have no direct impact on the taxing rights of member states but are critical for combating tax fraud and avoidance. These might include matters such as administrative cooperation, international agreement and harmonised reporting obligations.
Next it would be applied to tax rules designed to support other policy goals, e.g. climate change and environmental taxes.
Then it would be extended to tax measures already largely harmonised, such as excise duties and VAT.
Finally, QMV would be the decision-making process for all initiatives to complete the single market from a tax perspective; these might include (for example) CCCTB and digital services tax.
The EU treaties contain so-called ‘passerelle clauses’ which allow certain decision-making processes to be moved from unanimity to QMV without revising the treaties. This would require unanimous consent by the member states and agreement by their national parliaments.
Will it ever happen?
QMV for tax policy decisions has been proposed before but not yet adopted. Although it is being pursued by the present Commission under President Jean-Claude Juncker, it may not be favoured by the next Commission which will take office in November 2019.
Even now there are vocal opponents. The Netherlands, Ireland and Malta have all stated that they would not support any move towards QMV on tax.
At an event in January, apparently only France and one other member state expressed support for the idea. Coincidentally, within the Commission, France’s Commissioner Pierre Moscovici is responsible for economic and financial affairs, taxation and customs.
Reportedly, Lithuania has said that it and other smaller peripheral member states are also against the proposals because smaller taxes allow them to preserve their competitive edge against stronger Western European economies.
Preliminary reactions from parliamentarians, businesses and civil society have been mixed. While there is no doubt a measure of support for QMV for EU tax policy decisions, the unanimity required to achieve this through use of the ‘passerelle clauses’ might be difficult to attain.
Given the scale of opposition, it seems unlikely that QMV for tax will be introduced within the timescale now being suggested. Nevertheless, pan-European businesses and their advisers should note that the introduction of QMV could eventually have a material impact on the future development of EU tax policies.
Article supplied by Taxing Words Ltd