Earlier this month, U.S. Treasury Secretary Janet Yellen called for a global minimum corporate tax rate. The proposal was quickly backed by Germany and France, despite the fact that “this may ultimately benefit the United States”, according to a retired top Belgian tax official, as it would empower the U.S. to encourage multinational companies to no longer make use of attractive tax arrangements outside of its territory.
Ireland in particular is worried, as such a change could have “very meaningful and significant effects”, according to its Finance Minister, given the country’s relative low 12.5% corporate tax rate, which allowed it to attract international headquarters of multinationals.
Similar initiatives to harmonise tax rates have been undertaken at the EU level. With the United Kingdom having left, a powerful ally for the likes of Ireland has disappeared, and France and Germany are most certainly smelling an opportunity. Already in 2018, both countries agreed a joint proposal for corporate tax harmonization among EU member states and last year, German Finance Minister Olaf Scholz stated that large EU transfers will only be possible “if we go one step further in the direction of fiscal union”. He thereby added that “it will certainly be necessary to harmonise a few things,” that he had long spoken out for a minimum taxation level in the EU, while citing a financial transactions tax and taxes linked to emissions, for example on air transport, as potential options. Only yesterday, during a plea for EU Treaty change, German Chancellor Angela Merkel cited taxation as a policy area where national vetoes could be scrapped.
Until now, the likes of Ireland and Luxembourg have resisted such initiatives, but last Summer, the European Commission proposed using a hitherto unused Treaty provision, in a bid to circumvent national vetoes on taxation. According to the Commission, article 116 of the EU Treaty enables decisions to be taken with majority voting, if the absence of the measure would be causing a distortion in the single market.
The Commission did concede that it would not be possible however to use the Treaty provision to push through the so-called “common consolidated corporate tax base” or “CCCTB”, which involves EU harmonization of the tax base rather than tariffs. Given that companies tend to minimize their tax base, in order to minimize their tax bills, narrowing the legal possibilities to do this at the EU level would be an important development that would constrain the scope to minimize taxation pressure. According to simulations, the CCCTB would result in a transfer of taxing income from small open EU member state economies to large closed ones. Ireland in particular would lose 7.7% of its tax revenue, while companies across the EU would see their effective tax burden increase.
In any case, the proposal has failed to gain unanimity at EU level, despite being on the table for 10 years now and despite France and Germany singling it out in 2018 as a priority. Let’s hope this venture keeps on failing, as it would also add to the bureaucracy brought about by other, simultaneous initiatives, like the OECDs “BEPS” proposals adopted in the EU’s 2016 “Anti-Tax Avoidance Directive” (ATAD), which forces EU member states to implement measures designed to reduce the scope for tax optimisation.
Apart from “CCCTB”, other EU projects to cover taxation that haven’t gone anywhere so far are plans for an EU digital tax and for an EU financial transaction tax.
In June, the European Commission will table its proposal for a Carbon Border Adjustment Mechanism” (CBAM), which would put a “carbon price” on imported goods, but has a strong protectionist flavour to it. It has been endorsed by EU leaders last Summer in the context of the new 800 billion euro “recovery fund”, which will be financed with jointly issued EU debt. EU taxes, including income from the EU’s CO2 emissions trading scheme, are supposed to serve to pay back that debt, to a degree and EU leaders mentioned in their Summit conclusions an EU carbon tax as one option.
The price of CO2 allowances on the EU carbon market is expected to increase a lot as the EU sharpens up its CO2 emission reduction targets, so this is supposed to shield EU-based companies from importers that aren’t subject to the EU’s expensive CO2 emission reduction regime. EU politicians seem to have forgotten that even if such a tax may help EU-based companies, EU consumers will ultimately having to pay those tariffs, while it will further deprive them from certain goods, resulting in reduced competition and therefore higher prices. On top of this comes the likely trade tension this will unleash with the U.S. and China and the highly politicized nature of which sectors will be covered by the carbon tax. In sum, the consequences of this proposal may be big that some opposition can be expected.
All these EU tax proposals shouldn’t distract from the fact that already today, the European Union holds great sway over taxation.
First of all, there have been the lawsuits of EU competition Commissioner Vestager, dubbed the EU “tax lady” by former U.S. President Trump. She has been making the shaky case that the tax arrangements between Ireland and the Benelux on the one hand and big companies on the other amount to unfair state aid, as these would not be open to competitors. As a result, these member states would need to impose retroactive back-taxes on the likes of Apple. Vestager has lost a few of these battles at the EU’s top court in Luxembourg, but not all.
Secondly, there is of course VAT, as the EU is able to set minimum VAT rates. Lastly, there’s the abundance of jurisprudence by the EU Court of Justice that affects tax law, something which can justified more easily, as taxation has often been used to implement national protectionism, and after all, it is the EU’s core business to counter just that.
Full-on tax harmonization would however take EU influence over taxation to another level, far beyond anything related to scrapping barriers to trade within the EU.
In this regard, the European Commission has just launched a consultation on EU taxation rules for tobacco products, mentioning that EU “minimum tax rates for tobacco products have lost their effect”.
Already now, the EU is able to set minimum tax rates for excise duties, but the suggestion here is clearly to go further, which would involve effective harmonization of taxation rates. This is obvious, given the EU Commission’s complaints that “the misuse of cross-border shopping rules for private individuals is a source of concern for several EU countries due to lost revenues”. It is no coincidence that tobacco – and also alcohol – are being targeted, with the EU Commission hoping health concerns may enable it to acquire greater powers over taxation.
It’s questionable however that health concerns are served well by effective tax rate harmonization. This would in all likelihood force EU countries with relatively lower tax rates on tobacco to increase these. This would not only financially hit consumers. It would also provide a strong boost to the black market, with the resulting dire consequences for public health and product safety.
On top of this, also “e-cigarettes” are mentioned, which is concerning for public health in itself, given that vaping products actually act as a way for smokers to quit smoking and shouldn’t therefore lumped together with tobacco.
In the past, France and Belgium had to lobby Germany for years to be able to lower VAT rates for restaurants and bars beyond the minimum, with Germany ultimately conceding this in 2009. This reveals that there is also a profound democratic issue with harmonization of taxation: even if politicians elected in France’s or Belgium’s democracy enjoy a strong democratic mandate for something – in this case alleviating the hospitality sector – they need to be granted consent by other democracies in the EU.
Often, the argument is made that tax harmonization ought to prevent a “race to the bottom” when it comes to tax rates. However, in effect, there is little evidence of that. What is clear instead is that tax competition secures a “race to the top” when it comes to the quality of the services provided by governments. It enables companies – and citizens – to vote with their feet and relocate to jurisdictions where they get more value for money. Germany and France are perfectly able to do what Ireland has done: in 1987, it enacted large expenditure cuts to bring the budget back into line, which turned it into the Celtic Tiger. This because the spending cuts allowed the Irish government to use the savings to reduce the tax burden to attract international investment and stimulate domestic entrepreneurship and innovation. Whenever French or German politicians badmouth tax competition, they really are attempting to divert attention from the question why they aren’t copying what has been a success elsewhere.
