Some short clarifications on EU taxation

5 November 2022  – Jorge Núñez Ferrer

Recently I participated in a panel on EU taxation to give a small overview on the subject. The Panel event was “Principled Tax Policy: The Future of Pillar Two and Fiscal Federalism in the EU” done in collaboration with the US based Tax Foundation. I thought that I could publish the presentation note I prepared for the event.

The supranational role of the EU in taxation is rather confusing. Many cringe at the mention of ‘Fiscal Federalism’ when EU tax issues are addressed, but that is the theoretical framework on the distribution of competencies between levels of government, e.g. for federal states like the USA.

When fiscal federalism and taxation are mentioned, quite a few link this with the EU powers to raise funds for its budget. It is true that choosing those resources have made a lot of ink flow for decades in order to determine which would be more suited at “federal level”.

However, member states have resisted such a move and the only real EU level resources directly owned by it are the customs revenues, followed by a virtual calculation “if an EU VAT resource were to exist”. 70% for the EU expenditure is financed by direct contributions based on GNI.

Some new resources are emerging, as well as the use of the European Emissions Trading System used mainly for having a unified approach to carbon taxation as a resource for the EU.

EU taxes to finance the EU are only a minor issue in the subject of EU taxation, because the EU budget is small. The main issue is the coordination of taxation practices within the EU.

Taxation is mostly a national competence, fully for setting rates and with close to zero EU influence in direct taxation. Member states resisted EU interference for decades and decisions have to be taken unanimously… until recently.

The EU has indeed a considerable amount of power if the Member States decide to move ahead. The Treaties indicate that the EU can act to address the actions in national taxation if:

a) Have a detrimental indirect effect on the Single Market – free movement of goods, people and capital

b) Have a detrimental effect on the environment

c) Have a negative effect on competition

Until now the European Commission would thereat carefully and proceed by bringing a MS to the ECJ with infringement procedures, but often only if triggered by a legal case launched by those affected. Taxes are also subjected by state aid rules and those are increasingly under scrutiny.

So, the effect of the EU can be considerable in some instances. On indirect taxation the EU has from very early own been essential in harmonization to facilitate trade in the internal market, this is the harmonized base for VAT. On direct taxation there has not been as much success, for example in the harmonization of the corporate tax base, which still causes headaches for companies operating in different countries and causes hidden tax competition. Here advances are being seen but still slow and difficult.

Other areas for a functioning single market have been more successful, driven by a number of highly mediatized cases. The Commission has been active in the areas of tax evasion and tax competition and cooperation between tax authorities.

Anti tax avoidance Directive 2016/2017 is such a case. Another is the Directive on administrative cooperation (DAC 2011 and many amendments… the next oncomming being No.8), particularly important areas of incoming cooperation focusing are those on modern tech (crypto and emoney are latest) and business taxation, with a push further for the harmonisation of tax base. This latter is important if we want to have a clear picture of the effective tax rates in countries, which often deviate from the official rate due to exemptions.

A new tax initiative which also may become a potential new resource for the EU and affects international aspects, is the proposal to tax profits from foreign multinationals (read in particular “digital tax”), and the possibility to introduce tax retentions from profits made in other tax jurisdictions internally in the EU.

As already mentioned the introduction of a Carbon Border Adjustment Mechanism (CBAM) is expected, i.e. carbon tariffs for imports. But hold your breath as considerable teething problems should be expected.