The start of a new European Commission also means setting new political priorities in the EU tax field. As the European Commission is solely responsible for proposing EU legislation, the Commission’s tax agenda will have a significant impact on EU tax developments in the years to come.
The outgoing Juncker Commission focussed heavily on tax measures tackling aggressive tax planning by multinationals. During its 2014-2019 tenure, significant parts of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Action Plan were adopted within the EU, such as the introduction of various EU-wide anti-tax avoidance measures (interest limitation rule, CFC rule, general anti-abuse rule, anti-hybrid rule) the extension of the system of automatic exchange of tax information (CbC reports, cross-border tax rulings) and a system of mandatory disclosure of cross-border tax arrangements by intermediaries. Certain high-profile State aid investigations into tax ruling practices should also be seen within this frame.
The mission statement that commissioner-designate for Economy, the Italian Paolo Gentiloni, received from President-elect Ursula von der Leyen, sheds light on the tax agenda of the new European Commission. In addition to further work on achieving a simpler and fairer tax system, the key tax priorities of the next Commission will be on measures addressing climate change and digitalisation, the two pivotal legs of the next Commission’s priorities.
Taxing an increasingly digitalised economy
One key priority of the next Commission will be to agree on an approach on digital taxation at OECD/G20 level. This is a priority area for both Gentiloni and Margrethe Vestager, Executive Vice-President-designate for “a Europe fit for the Digital Age”.
If no such consensus can be reached by the end of 2020, the Commission plans moving forward with a European digital tax. Specifically, speaking to Members of the European Parliament at his confirmatory hearing, Paolo Gentiloni said that “if there is no consensus emerging next year […] we will work on the European proposal in the third quarter of next year. We will not jump the gun on the European proposal during the international debate, but I am very serious in committing myself and the Commission to have our proposal next year if international consensus is not there”.
It will be interesting to see which direction it will go. The current OECD tax work seeks to address the digitalised economy by (fundamentally) reshaping existing tax systems (with complex techniques to re-allocate taxing rights to the jurisdiction of customers and/or users). By contrast, the digital services tax (DST) proposed by the European Commission in March 2018 – later turned into a digital advertising tax by France and Germany in the (unsuccessful) hope to reach a compromise in the Council – is a revenue-based tax specifically targeted to “internet giants”. Such DST raises numerous questions on interaction and compatibility with the existing tax rules, not to mention potential (geo)political tensions, notably with the U.S. as shown by the recent transatlantic fight over France’s new unilateral DST. It is therefore not a surprise that the EU proposal for a DST did not yet receive the required unanimous support among Member States, although several Member States have in the meantime unilaterally introduced a DST or are taking steps in this respect.
European Green Deal
Taxation will play a central role in the European Green Deal, a comprehensive plan to be presented in early 2020 with a view to have a climate-neutral economy by 2050. Ensuring that tax policy enables Europe to deliver on its climate ambitions will be a priority for both Gentiloni and Frans Timmermans, Executive Vice-President-designate for the European Green Deal.
A first focus in this area is bringing an end to fossil-fuel tax subsidies through a review of the European Energy Tax Directive (ETD), a Directive that sets out minimum tax rates for energy products used as motor or heating fuel and for electricity. A recent evaluation report published by the Commission services concludes that the ETD is no longer fit-for-purpose. It however remains to be seen whether the Commission will propose targeted changes to the ETD or alternatively a more comprehensive reform of the energy tax system, but no doubt the proposals will ensure that energy taxation moves towards promoting environmentally sustainable technologies and energy products as well as convergence of tax rates within the EU. It can also be expected that the transport sector will be central in the debate, including a reassessment of the current mandatory exemption of fuels used in air navigation and maritime transport.
The next Commission intends to present its European Green Deal in the first 100 days of its tenure. That work in this area will be kick-started is evidenced by the EU Finance Ministers’ high-level discussions on energy taxation at an ECOFIN Council meeting in Helsinki on 14 September. The exchange of views took place behind closed doors, but we understand that three Member States (Estonia, Malta and Cyprus) significantly pushed back on the proposal made by the Swedish Government to establish an EU aviation tax on kerosene. If the Swedish Finance Minister appeared opposed to using qualified majority voting (see also below) to overcome the veto of some Member States, she seems determined to create a “coalition of the willing” within the Council, so that Member States willing to move forward with an aviation tax could still do so.
With carbon prices rising within the EU, in particular under the Emission Trading Scheme (ETS), the European industry will increasingly face a competitive disadvantage compared to goods and services produced in countries that do not take similar action on climate change. To restore a level playing field and avoid carbon leakage (businesses moving production to countries with lower carbon cost) the next European Commission sees the introduction of a Carbon Border Tax as a key priority. Such Carbon Border Tax would be levied on imported goods and services in order to address the difference in carbon cost between the EU and the country of production. Apart from its complexity, one can expect that the introduction of a Carbon Border Tax will face (geo)political sensitivities. As suggested in the mission letter to Gentiloni, it will be a challenge to ensure that such tax is compliant with WTO rules.
At his confirmatory hearing, Gentiloni did not really unveil more detail on these new proposals but he said that there are potentially more own-resources for the EU coming from taxation, notably from the Carbon Border Tax. He also stated the Commission “will try to be very quick and effective on the carbon border tax, but the legal and technical elements are not easy to define”.
Simpler and fairer tax systems
The next European Commission plans continuing the work on making tax systems simpler, clearer and easier to use. Indeed, a few Commission’s proposals are still pending adoption by the Council.
The best illustration is the common consolidated corporate tax base (CCCTB), initially proposed by the Commission in 2011 and re-launched in 2016, which will be on the Commission’s tax agenda again. Under the most recent proposals, CCCTB would be mandatory for large multinationals and would be introduced in two phases: a single corporate tax base in an initial phase and adding consolidation features in a second phase.
It can be expected that some elements of the Commission’s CCCTB proposal will be impacted by the ongoing discussions on taxation of the digital economy, e.g. as regards the apportionment of corporate tax bases between Member States, where use of data is expected to come into play. It is furthermore apparent that during Margrethe Vestager’s confirmatory hearing in front of the European Parliament on October 8, she emphasised the importance of combining CCCTB with a minimum tax level, thereby clearly hinting to the recent OECD Global anti-base erosion proposal (GloBE). The GloBE proposal is intended to ensure that all internationally operating businesses pay a minimum level of tax.
The fight against tax fraud, tax evasion and tax avoidance will be stepped up, including by making a fraud-proof VAT regime and improving cooperation between national authorities.
Gentiloni’s mission also includes developing stronger measures to combat harmful tax regimes around the world. Interestingly, it is suggested that the European “blacklist” of non-cooperative jurisdictions for tax purposes, which to date is largely a political instrument, will be given teeth in the fight against harmful tax regimes. No details are available on possible EU-wide defence measures. In addition to non-tax sanctions, one can imagine tax measures penalising persons doing business in or with blacklisted regimes, such as non-deductibility of payments, source taxation, increased disclosure, etc.
Finally, Margrethe Vestager’s confirmatory hearing revealed that the next Commission will also try to make progress on an earlier proposal regarding “public Country-by-Country” reporting. Public CbC reporting would require large companies to draw up and publish a report with certain tax information, including the number of employees, turnover, profits, taxes paid, etc. With respect to EU Member States and non-cooperative jurisdictions, the information would have to be broken down by country. This file has been proposed by outgoing Taxation Commissioner Pierre Moscovici but is blocked in Council due to remaining disagreement among the EU28 Finance Ministers. However, Vestager urged Ministers “to do what they can to achieve [public CbC reporting]”, meaning that we should expect a new impulse to be given to this proposal. Furthermore, what makes it special is that this proposal has a different legal basis than traditional tax initiatives meaning that the European Parliament, which already agreed its position in the last mandate, has a full co-decision role on public CbC reporting and that the proposal is adopted by the Council using qualified majority voting instead of unanimity. Thus, the European Parliament should also be expected to put political pressure on the Member States to move forward.
Breaking the political impasse: towards qualified majority voting
In a recent Communication, the European Commission proposed to use “passerelle clauses” in the EU Treaties to allow proposals on taxation to be adopted by qualified majority voting (QMV), as opposed to unanimity voting which is normally required in tax matters. It is apparent that the Communication expressly identified almost all of the above mentioned tax policy priorities as areas where there is need to move away from unanimity in taxation: improved cooperation between tax administrations, fighting tax abuse, energy taxation (for which the Treaties contain a specific “passerelle clause”), creating a fraud-proof VAT system, solution for taxation of the digital economy, CCCTB.
Although hard to adopt in practice because it requires the unanimous support of the Member States, it is interesting to note that it is one of Gentiloni’s missions to “make full use of the clauses in the Treaties that allow proposals on taxation to be adopted by co-decision and qualified majority voting”.
At Gentiloni’s confirmatory hearing, a Belgian MEP, Belgium’s former Finance Minister, submitted that for him QMV on taxation measures meant that the Commission would be more in favour of the larger Member States to the detriment of the smaller ones.
Gentiloni tried to ease these concerns, broadly shared by smaller Member States, by saying that he “will try to run for consensus”. He however also made it clear that “the role of Member States, big or small, on taxation is very relevant, but we have public opinion, we have Parliament, we have the passerelle clause, we have Article 116. We cannot accept the idea to avoid any decision on taxation”.
As hypothetical as it is, if successful, this shift in decision-making might change the course of future negotiations on key tax initiatives.
Politically, Gentiloni belongs to the same centre-left group as his predecessor, the Frenchman Pierre Moscovici. Overall, we should therefore expect him to take a similar approach to that of Moscovici, who was very proactive in pushing tax reform forward and obtained political agreement in record time on a number of initiatives, as outlined above.
Paolo Gentilonis nomination as Economy Commissioner was approved by Members of European Parliament (MEPs) on 3 October. His hearing was smooth and uneventful. Gentiloni did not reveal much more detail on his legislative plans but he appeared committed and on top of his dossiers. There is still uncertainty as regards the fate of other Commissioner-designates, which can delay the whole process, but if things go as currently planned, the full college of Commissioners should be officially endorsed during the plenary vote in the European Parliament on 23 October. The new Commission will then take office on 1 November.