CCTB

Are EU Institutions becoming the new supra-national tax authorities? PART II – Who’s got the powers?

 

As we saw in Part I of this series, we have to ask ourselves the right questions. Namely, “are EU institutions overstepping the legal bounds?” In this Part II, we explore the increasing tax powers of the EU institutions and possible implications of the CCTB Proposal on Member States who actually don’t have much in common.    

A coordinated delegation of tax powers  

The European treaties do not give the EU Institutions a general tax regulatory power, but rather enable them to adopt measures to facilitate the establishment and functioning of the internal market. However, some elements, such as the delegated powers granted to the EU Commission under the supervision of the EU Council under the article 290 of the TFEU, witness the increasingly supra-national tax authority of EU Institutions. This provision states that the EU Commission may be conferred the power to adopt non-legislative acts of general application to supplement or amend certain non-essential elements of a legislative act. On this basis, the CCTB Proposal establishes powers for the EU Commission to act in a broad range of areas (notably to lay down definitions of more concepts, more detailed rules against tax avoidance).  On the same ground, the EC tax intermediaries proposal dated 21 June 2017 empowers the EU Commission to update the list of hallmarks used to define the “potentially aggressive cross-border tax planning arrangements”.

These delegated powers are so broad that they give the EU Commission the ability to amend the scope of the relevant Directives and to close legislative gaps for an indeterminate period of time. De facto, the EU Commission is becoming a brand new EU tax authority. The only control over such delegate acts is a 2 month “stay of execution” within which the EU council would have to react (which is very difficult to imagine in practice).

These 2 Directive proposals are not the only area where the EU institution would act as supra-national tax authority. When it comes to State aid in tax matters, the EU Commission can choose, with the discretion of a tax authority, which cases to prosecute.  This has been demonstrated again this 26 October 2017, when the EU Commission announced that, despite the fact that the Brexit negotiations are pending, it has opened an in-depth investigation into the UK Controlled Foreign Companies (“CFC”) rules. According to the EU Commission, the exclusion from the application of UK CFC rules for certain transactions by multinational groups, introduced as from 2013, allows these multinationals to pay less UK tax, and as a consequence be in breach of EU State aid rules. This is surprising when we know that, on one hand, such UK CFC exclusion is nevertheless denied where a main purpose of the funding structuring is to achieve a reduction in taxable UK loan relationships, and that, on the other hand, all EU MS are expected to introduce (or amend) CFC rules in their legislation as of 1 January 2019, following the adoption of Anti-Tax Avoidance Directive. While the CFC mechanism is complex, it is fairly apparent that what the commission is challenging (as often recently) is tax competition among MS, rather than any distortion of competition among businesses which is the proper purpose of the State aid rules. 

The legitimacy issue

By proposing the CCTB Proposal, and by putting pressure on MS to accept, the EU institutions (pushed by “big” MS with a rather high tax pressure) seem to be trying to remove fiscal autonomy from the MS even further and assume a role of supra-national tax authority. A recent statement from the French Ministry of the Economy and Finances and the Minister of Public Accounts and Action, dated 7 August 2017, illustrates this. According to this statement, priority will be given to tax harmonization at the level of the European Union in order to eliminate variations of national legislations which allow tax evasion, and to end tax competition between MS. This declaration also states that France and Germany launched an initiative on 13 July 2017 to establish a common position aimed at the adoption of a first Directive by 2018.

This would have serious implications from a democratic legitimacy perspective. We are witness to a breakdown in the ability of MS to exercise their fiscal powers autonomously and, as a result, an erosion of the power of the citizens to control, through national parliaments, the management of these powers. In this scenario, it is ultimately the citizens who are losing their power to determine and control the orientation of their States’ fiscal policies. Ultimately, why should “big” MS, as France and Germany, impose their views and tax policies on smaller MS?  A more serious question is whether seeking to do this under the cover of completion of the internal market amounts to an abuse of process.

In this context, it is interesting to note that EU MS with low corporate tax rates (i.e. Cyprus with 12,5%, Ireland with 12.5%, Bulgaria with 10%, Hungary with 9%; Latvia with 15%) meet the EU budgetary deficit requirement (deficit below the 3% of GDP Treaty reference value) while some EU MS with a higher tax rate (i.e France with 33%, Greece with 29%) struggle to meet the EU requirements in this area and are subject to Excessive Deficit Procedures (EDP). Similarly, Sweden and Estonia, with corporate tax rates of 22% and 20 % respectively, have never breached their obligation in terms of EU budgetary limits. These facts, added to the tendency of many MS to engage in a move to a lower rate close to 20% are difficult to reconcile with the political proposal made in the EU parliament to impose a common corporate tax rate of 25%.

One size fits no one

Is the CCTB proposal the first step of a new EU fiscal capacity, notably through the powers delegated by the Proposal to the EU Commission, under the supervision of the EU Parliament, linking monetary and fiscal policy? If this is the case, the road to full EU tax integration will not be an easy one… The fact that, in the recent Apple case, the Irish government is contesting the Commission’s decision concerning the recovery of €13 billion of illegal State aid granted by Ireland, unwilling to recover such amount for fear of losing its tax favorable status in the eyes of multinational corporations, clearly demonstrates that MS are not yet ready to waive their fiscal sovereignty rights and hand over control of their taxation powers to EU institutions. The MS' toolbox is shrinking. As monetary policy instruments are no longer available to help achieve macroeconomic objectives for Eurozone members, MS depend on fiscal policy to attract investments. To deny use of these remaining tools would be to deny the right of States and citizens to build their own, sovereign future. From a macroeconomic perspective, MS with low tax pressure on business have no reason to be envious of MS, like France, with higher tax pressure.

There is no “one size fits all” approach when it comes to tax law. Every EU MS has a different economy with different needs. A tax system responds to these needs, setting incentives or disincentives where appropriate. It is evident that a small open economy like Luxembourg has different requirements than a large economy like France and Germany. Similarly, they may have a different focus, depending on whether they are production based (like Germany) or service based (like Luxembourg). In this respect, legislators will generally choose a tax framework, including in calculation of the tax base, that encourage their countries’ economic growth.  The CCTB also sets new incentives for optimisation, meaning that the status quo will not continue. Taxpayers will respond to these new incentives, out of the realm of control for the MS.

Last but not least, it might be worth pointing out that tax competition is not necessarily a bad thing.  When tax competition is removed or greatly diminished, politicians are less inclined to foster a competitive environment..., are we thus risking the emergence of an tax cartel where larger less efficient MS seek to squeeze out smaller more efficient competitors? 

Part III – Are we witnessing the emergence of an EU tax cartel? - coming soon. 

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Are EU Institutions becoming the new supra-national tax authorities? Part I – What are the right powers?

 

Let’s start by taking a look at this statement from the official EU website:

“…the EU does not have a direct role in raising taxes or setting tax rates. The amount of tax you pay is decided by your government, not the EU

Here’s another one:

“…the EU's role is to oversee national tax rules – to ensure they are consistent with certain EU policies, such as: promoting economic growth and job creation; ensuring the free flow of goods, services and capital around the EU (in the single market); making sure businesses in one country don't have an unfair advantage over competitors in another; ensuring taxes don't discriminate against consumers, workers or businesses from other EU countries”

And one more:

“…the EU's main role is to ensure that principles such as non-discrimination and free movement in the single market are followed”

These statements seem somewhat baffling in light of the fact that the EU is increasingly taking on a role of regulator, proposing Directives which have direct and significant consequences on tax law in Member States (“MS”) and which include significant delegated powers for the Commission. One of the more eyebrow-raising proposals of the EU Commission aims to enforce a mandatory common corporate tax base (“CCTB”). CCTB is a single set of rules used to calculate companies' taxable profits in the EU. Having gained considerable steam from the resurgence of public interest in fighting tax avoidance, the CCTB Proposal, initially introduced in 2011 and then shelved, is back at the center of political and societal debates on whether a common tax base is competitive, good for business, simple, or even necessary.

The CCTB Proposal raises fundamental questions on both the fiscal role of EU institutions and the impact of such a proposal on the fiscal sovereignty of MS. Even though the power to levy taxes remains exclusively in the hands of MS and the European Union (“EU”) has no fiscal capacity of its own, there is no doubt that EU law does, to some extent, interfere with this sphere of state responsibility. But what kind of fiscal Europe is being created via fiscal Directives? And how far can the EU institutions take tax measures?

The “approximate” limits

The EU treaty is rather mute on the subject of legislating direct taxation, with one article in particular frequently cited as the basis for these actions. Article 115 of the Treaty on the Functioning of the EU (“TFEU”) authorises the EU Council, acting unanimously on a proposal from the EU Commission, to issue Directives for the approximation of laws that "directly affect the establishment or functioning of the common market”. According to the wording of the article, the introduction of direct taxation Directives by the Council is limited by two important factors:

  • Unanimity – It’s explicitly required for the adoption of tax measures at the EU level. It is way for each State to have their say, thus maintaining sovereignty safeguard.
  • Scope - The EU treaty only provides for legislation for situations with an EU dimension. Tax measures are thus only necessary when tax discrepancies across EU countries have a direct impact to fundamental freedoms. This approach incorporates the principle of subsidiarity which, for tax purposes, means that MS should determine their own tax arrangements, except to the extent that major distortions would arise.

Much more subtly, the use of the word “approximation” in the article 115 of the TFEU, also limits the scope of the measures taken. In comparison, the TFEU provides for the “harmonisation” of turnover taxes, excise duties and other forms of indirect taxation. There is no definition for either “harmonisation” or “approximation” in the EU treaties. Some authors seem to consider them synonyms. A literal interpretation, however, will reveal that each word has its own distinct meaning. Both terms do not require the same degree of “integration” of domestic laws of MS. On one hand, the aim of approximation of laws is to reduce disparities between legal systems (without necessarily abolishing them) by allowing MS to choose from a range of possibilities. On the other hand, the aim of harmonisation is to align national regulations with Community standards agreed upon in Council Directives (which nevertheless leave room for MS legislation). The use of the term tax harmonization is confusing, insofar as it is often used for the establishment of identical tax bases, rates, and systems throughout the EU. But, although harmonisation aims at implementing positive integration, it does not fully correspond. It implies neither unifying, nor making uniform tax provisions (e.g. VAT regimes across the EU). 

An imperfect harmony

The term “harmonisation” appears in the preamble to the CCTB proposal, where it is mentioned that the proposed measures “do not go further than harmonising the corporate tax base, which is a prerequisite for curbing identified obstacles that distort the internal market”. This is an indication that the CCTB proposal goes further than the simple “approximation” of the corporate tax base allowed by the TFEU. And there is no doubt that CCTB is a step on path to unify the corporate tax rules within the EU and ultimately allow loss offset and formulaic apportionment of profits among MS. Further, even if it was not the initial intention to harmonise national corporate tax rates, EU parliamentarians have already proposed to amend the CCTB proposal to include a common corporate tax rate of 25%.

The question we should really be asking is whether the EU institutions are overstepping bounds by submitting the CCTB Proposal in the first place. In this respect, it is also interesting to note that, since the Treaty of Rome in 1957, the coexistence of different tax systems within the EU has never been seen as creating major distortions which “directly affect the establishment or functioning of the common market”. So why would it be different today? Could it be a consequence of the current international crusade against tax avoidance? Maybe, but this crusade has been going on, with various intensities, since the dawn of time, so why has it become an EU problem now? In addition, there are existing measures built on the OECD BEPS plan that deal with tax avoidance so why do we need to add CCTB?  And, in any case, nothing, not even the fight against tax avoidance (as important as it may be), should allow EU institutions to flout the rules inscribed in the EU treaties to protect the rights of MS and their citizens. 

Continue reading with Part II of our series - "Who's got the powers?" 

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