Earlier this year, the European Commission published a non-binding communication which proposes a step-by-step removal of unanimity on the EU’s tax decision making. Is this realistic, and are there any alternatives?
Currently, most EU legislation is passed through so-called ordinary legislative procedure (OLP). Under it, the European Commission proposes legislation which then must be approved by both the European Parliament and the Council of EU Member States.
Under OLP, the Council’s decision on a Commission proposal is taken by qualified majority voting (QMV). That means it must be approved by 55% of member states (currently 16 out of 28), representing at least 65% of EU population.
But, as is usual in the world of tax, things are a little more complicated for the Commission’s tax proposals. They must be adopted by the Council unanimously, whilst the European Parliament only provides a non-binding opinion.
There are now plans for this to change.
On 15 January, the Commission published a communication proposing a step-by-step move to QMV for tax proposals. The first batch that would go to QMV would be tax proposals that improve administrative cooperation and counter tax fraud and avoidance. Next, tax proposals that have other policy goals, such as environment or climate. Thirdly, VAT and excise duty proposals. Fourth and finally, measures that affect single market coherence, such as the common consolidated tax base (CCCTB).
Is this legally feasible?
In theory, yes. The Lisbon Treaty introduced a ‘passerelle clause’ which allows EU member states to transfer policy proposals that are currently decided by unanimity to the QMV procedure. The catch, though, is that this change would itself require the unanimity of all member states.
Why change?
The Commission’s communication was motivated by its frustrations with many tax files that have been blocked by a minority of member states (for example, the digital services tax, the CCCTB and a proposal allowing reduced VAT rates for e-publications).
Some of these files were blocked for purely national concerns, some held as bargaining chips in other negotiations. And sometimes even when an agreement was reached, the outcome would only be a watered-down version of the Commission proposal.
Conversely, smaller member states have perfectly legitimate reasons not to hand over their tax sovereignty to larger market jurisdictions. Moreover, some worry that OLP in tax files would lead to the involvement of the politicised European Parliament. Of course, depending on who you ask, this can also be a positive outcome.
What are the next steps? Many expect that QMV for tax will not go anywhere, as a number of member states are reluctant. But the Commission’s administration is already thinking about the next steps. For example, a general reform of the Energy Tax Directive (ETD) is planned ‘by end 2020’ using the passerelle clause. A more targeted reform of ETD to remove tax exemptions for kerosene could come even before, in ‘early 2020’ – also using the passerelle clause.
For member states which are concerned in general about tax sovereignty, it might make strategic sense to show political goodwill by agreeing on a limited use of OLP and QMV in relatively less controversial files.
Any alternatives?
For more controversial files, such as the CCCTB, an alternative to both the unanimity status quo and the passerelle clause is to adopt enhanced cooperation.
Under enhanced cooperation, a minimum of nine EU member states can move ahead with a Commission proposal on their own. In tax, enhanced cooperation has only been used for the financial transaction tax (FTT) proposal since 2013. For a long time, nothing happened on the FTT, but new momentum has emerged. Just a month ago, the German finance minister Olaf Scholz said that an agreement in autumn is feasible. If the FTT succeeds, it might encourage the Commission and member states to make greater use of this tool in many more tax files in the future.
Another option is simply to maintain the status quo. Many point out that despite requiring unanimity on tax matters, the current Commission has successfully finalised a record number of tax proposals. Perhaps there is no point in tinkering with the tax decision making process, as everything seems to depend on simply having the appropriate political momentum and capitalising it in a smart way.
Earlier this year, the European Commission published a non-binding communication which proposes a step-by-step removal of unanimity on the EU’s tax decision making. Is this realistic, and are there any alternatives?
Currently, most EU legislation is passed through so-called ordinary legislative procedure (OLP). Under it, the European Commission proposes legislation which then must be approved by both the European Parliament and the Council of EU Member States.
Under OLP, the Council’s decision on a Commission proposal is taken by qualified majority voting (QMV). That means it must be approved by 55% of member states (currently 16 out of 28), representing at least 65% of EU population.
But, as is usual in the world of tax, things are a little more complicated for the Commission’s tax proposals. They must be adopted by the Council unanimously, whilst the European Parliament only provides a non-binding opinion.
There are now plans for this to change.
On 15 January, the Commission published a communication proposing a step-by-step move to QMV for tax proposals. The first batch that would go to QMV would be tax proposals that improve administrative cooperation and counter tax fraud and avoidance. Next, tax proposals that have other policy goals, such as environment or climate. Thirdly, VAT and excise duty proposals. Fourth and finally, measures that affect single market coherence, such as the common consolidated tax base (CCCTB).
Is this legally feasible?
In theory, yes. The Lisbon Treaty introduced a ‘passerelle clause’ which allows EU member states to transfer policy proposals that are currently decided by unanimity to the QMV procedure. The catch, though, is that this change would itself require the unanimity of all member states.
Why change?
The Commission’s communication was motivated by its frustrations with many tax files that have been blocked by a minority of member states (for example, the digital services tax, the CCCTB and a proposal allowing reduced VAT rates for e-publications).
Some of these files were blocked for purely national concerns, some held as bargaining chips in other negotiations. And sometimes even when an agreement was reached, the outcome would only be a watered-down version of the Commission proposal.
Conversely, smaller member states have perfectly legitimate reasons not to hand over their tax sovereignty to larger market jurisdictions. Moreover, some worry that OLP in tax files would lead to the involvement of the politicised European Parliament. Of course, depending on who you ask, this can also be a positive outcome.
What are the next steps? Many expect that QMV for tax will not go anywhere, as a number of member states are reluctant. But the Commission’s administration is already thinking about the next steps. For example, a general reform of the Energy Tax Directive (ETD) is planned ‘by end 2020’ using the passerelle clause. A more targeted reform of ETD to remove tax exemptions for kerosene could come even before, in ‘early 2020’ – also using the passerelle clause.
For member states which are concerned in general about tax sovereignty, it might make strategic sense to show political goodwill by agreeing on a limited use of OLP and QMV in relatively less controversial files.
Any alternatives?
For more controversial files, such as the CCCTB, an alternative to both the unanimity status quo and the passerelle clause is to adopt enhanced cooperation.
Under enhanced cooperation, a minimum of nine EU member states can move ahead with a Commission proposal on their own. In tax, enhanced cooperation has only been used for the financial transaction tax (FTT) proposal since 2013. For a long time, nothing happened on the FTT, but new momentum has emerged. Just a month ago, the German finance minister Olaf Scholz said that an agreement in autumn is feasible. If the FTT succeeds, it might encourage the Commission and member states to make greater use of this tool in many more tax files in the future.
Another option is simply to maintain the status quo. Many point out that despite requiring unanimity on tax matters, the current Commission has successfully finalised a record number of tax proposals. Perhaps there is no point in tinkering with the tax decision making process, as everything seems to depend on simply having the appropriate political momentum and capitalising it in a smart way.
