January 16, 2019

Europe needs to go beyond the unanimity rule in tax

Yesterday, the European Commission proposed a plan to allow tax legislation to be approved by qualified majority voting instead of unanimous voting. Is this a politically feasible strategy to overcome the tax legislation gridlock that continually hinders key proposals such as the temporary Digital Advertising Tax (DAT)?  

For those insistent that tax reform in the EU is vital to ensure multinational companies do not shift profits and erode the tax base the change to QMV is seen as essential. The efforts to get the temporary digital levy imposed on large companies such as Google and Facebook was just the latest example that has pent up their frustration.

And indeed there are numerous other EU tax proposals that have been waylaid by the failure to get unanimous consent of all EU member states in the Council of Ministers. The Common Consolidated Corporate Tax Base (CCCTB), originally proposed nearly 10 years ago, and the Financial Transaction Tax are arguably the most of important of these. The European Commission, EU member states led by Germany and France and, most important, large European companies insist the CCCTB is vital for EU corporate tax reform. CCCTB proponents insist the urgency has become all the more acute in the face of the U.S. corporate tax reform, which was adopted at the end of 2017 but will really kick in 2019.

And there is recognition that overall tax corporate tax reform – beyond just the temporary DAT – tailored to transform the digital economy by adopting new virtual permanent establishment rules must be agreed in the coming years.

But it is no secret that the legion of small EU member states led by not only Ireland and the Baltic nations but also those in central and Eastern Europe are as adamant as ever that national tax policy is strictly the domain of national governments and any attempt to undermine that sacred right will be rejected. 

Just one example of that determination was revealed after the European Commission proposed in April of 2016 legislation requiring companies to publicly report taxes paid and profits earned on a country by country basis (CBCR). Hailed by tax advocacy groups as the transparency cure-all for combating corporate tax evasion and aggressive tax planning, the CBCR has been blocked for nearly three years in the Council of Ministers. Four successive EU rotating presidencies, including the latest under Austria, made little or no attempt to progress on the legislation.

Why? Because key EU member states led by the small nations as well as a few large ones oppose it because the European Commission proposed the CBCR law as single market legislation. As a result it could be approved by qualified majority voting instead of unanimous consent. Therefore not only could opposing countries be overruled in the Council of Ministers but single market legislation gives the European Parliament co-decision powers instead of only consultation powers as is the case with tax legislation.

But many countries insist the public CBCR proposal is tax legislation and therefore must only be approved by unanimous voting. And the European Council of Ministers legal service has backed them by insisting the European Commission got it wrong by proposing the CBCR legislation with single market law as its legal base instead of as tax law.

Of course the recalcitrant attitude towards the pending CBCR by some EU member states can be explained a bit by the old adage: fool me once, shame on you, fool me twice shame on me. This is in reference to revisions to the EU Capital Requirements Directive approved in the wake of the 2008 financial crisis. That legislation contained CBCR public tax and profit reporting requirements for banks and other financial institutions that were approved and are now in force.  

Whereas the European Commission, pro-EUEuropean parliamentarians and those member states in favor of the “ever closer” political integration saw the EU Capital Requirements public CBCR requirements has an important step towards eliminating unanimity rule on tax related legislation, others countries saw their consent as a lapse of judgment at a time of political and economic upheaval. Thus they have refused to give a millimeter on the broader public CBCR proposal that would apply to all companies with a 750 million annual turnover operating in the EU.

So when the European Commission makes its proposal to impose QMV on all tax legislation does it mean the EU executive body believes countries insistent on tax legislation unanimity in the past have seen new light through old windows and have been converted on a road to a United States of Europe. Or at least on a road to that keeps the EU up with global corporate tax reform trends?

The proposal will play well in some pro-EU political parlors. But it has low chances of getting approved. And when it comes to dealing with the growing legions of anti-EU forces, especially those mobilizing for upcoming European Parliament elections in May, the proposal will likely backfire. Moreover it will certainly be used by some as Exhibit A in their anti-EU campaign that is always looking for a way to portray “Brussels” as a big bad beast determined to usurp national sovereignty from EU member state capitals.

Still, Europe needs to go beyond the unanimity rule.