Taxes 101: what is the purpose of EU tax policy?

Eurosceptics are often heard saying ‘why is Europe meddling in this?’, whereas europhiles often say about precisely the same issues, ‘why isn’t Europe doing more?’. Please fill in monetary policy, COVID-19, double taxation and so on. What can the European Union do as far as taxation is concerned?

The first objective of taxation is to raise revenue for public expenses. In addition, each national tax system shows certain social policy considerations where it concerns exemptions, progressive rates, deductions, exceptions and so forth.

EU tax law and policy has not as its first objective the raising of revenue. The EU itself does not raise taxes to fund its expenses. EU tax law and policy are connected to the central policy objective of the EU, which is the internal market, and EU taxation policy is merely a tool to achieve, enhance and further develop the internal market. In addition, certain taxes constitute revenues for the EU budget. Indeed, VAT, customs and excise duties make up the bulk of the so-called ‘own resources’ for the EU budget. These are collected by member states and passed on to the EU as part of their contribution to the EU budget.

The reader may ask why it is that taxation has such a limited importance in the EU construction. Very simply because the treaties governing the EU scarcely mention taxation. Only indirect taxes are mentioned in Article 113 of the Treaty on the Functioning of the European Union (TFEU) and direct taxation is not mentioned at all. Both Article 113 and Article 115, which are used for legislating in the field of direct taxation, explicitly require any legislation to have as its objective the establishment and the functioning of the internal market.

This does not mean that future new EU tax legislation cannot serve to fund the EU budget. It simply means that in addition to an EU tax legislation based on either Article 113 or Article 115, the EU needs to legislate to have the proceeds of the tax passed on to the EU budget.

However, the main point to be made here is that taxation in the EU has very largely remained a national competence. That does not mean that the EU has nothing to say about national taxation law of the member states. Even though direct taxation does not as such fall within the purview of the Union, the powers retained by the member states must nevertheless be exercised consistently with Union law, namely with the fundamental freedoms of the internal market such as the free movement of persons, workers and capital, the freedom of establishment and the freedom to provide services. It falls therefore to the Court of Justice of the European Union (CJEU) to declare national tax legislation compatible or incompatible with the freedoms conferred by the TFEU.

The Union can also legislate in the interest of the internal market, which is a more positive approach than bringing actions before the CJEU. However, in taxation, it needs to do so with unanimity of all member states, which explains why legislative successes are relatively few in taxation compared to other areas.

As far as tax policy is concerned, one can distinguish three phases in the 70-year history of Union law where it concerns taxation.

A first phase is the early phase where the focus was essentially on indirect taxation with the establishment of the customs union and the value-added tax system. Direct taxation was considered as being an exclusively national competence untouched by Union law.

A second phase starts with an infringement case brought by the Commission against France on the avoir fiscal regime, a particularly complicated tax credit mechanism, which for the first time applied the treaty freedoms to direct taxes. This second phase is then a phase in which the realisation and completion of the internal market is really central and in which the focus clearly lies on the elimination of any discrimination in national tax legislation between tax residents and non-tax residents. This is also noticeable in legislative work. The parent-subsidiary directive therefore exempts dividends and other profit distributions paid by subsidiary companies to their parent companies from withholding taxes and eliminates double taxation of such income at the level of the parent company. The interest and royalties directive ensures that cross-border interest and royalty payments are subject to tax only once in a member state. Finally, the merger directive ensures tax neutrality and removes tax disadvantages for mergers and similar operations between companies of different member states compared to when such operations are carried out within one member state.

Since the financial crisis of 2008 and the many international tax scandals received widespread public attention, we are in a third phase, which is clearly focusing on the preservation of the tax base of member states through, firstly, the fighting of tax fraud, tax avoidance and tax evasion, but also ensuring the inclusion of sources of income that currently remain untaxed due to the changing economic models shifting from a brick-and-mortar economy to a digital economy.

In legislation, this new focus is clearly visible in the proposals in the Anti-Tax Avoidance Directive, the – unsuccessful – proposal for the Digital Transaction Tax, but also the willingness to participate in international fora such as the OECD/G20-led initiative on minimum effective taxation and the partial reallocation of taxing rights of certain multinational companies.

The conclusion is therefore that within the European Union taxation is not an aim in itself but an instrument to enhance and complete the internal market and ensure that EU citizens can enjoy without tax discrimination its freedoms to live, work, invest and retire in another member state than their member state of origin. The European Union being in constant evolution, it is not excluded that, in the future, its tax policy will not only limit itself to the protection of member states’ tax bases but pursue a more active revenue-raising approach, whether for the member states’ budgets or as own resources for the Union budget.

The information and views set out in this article are those of the author and do not necessarily reflect the official opinion of the European Commission.The views expressed in this #CriticalThinking article reflect those of the author(s) and not of Friends of Europe.