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Taxation

The European Union has no competence over taxation (Photo: European Central Bank)

Tax policy is a symbol and an important element of national sovereignty, and forms part of a country’s overall economic policy. The EU had no power (competence) over direct taxation, only over indirect taxation - and then only if approved unanimously.

The Lisbon Treaty add the avoidance of  "distortion of competition" as an aim of the tax paragraph in Art. 113 TFEU and thus opens the way for more Court cases outlawing distorting tax rules, whether in relation to indirect or some direct taxes, such as low corporation taxes, different taxation rules for foreign-owned assets etc.

The Lisbon Treaty also defines the Internal Market as an area without distortions of competition under Protocol No. 27 (On the Internal Market and Competition). This should strengthen the hand of the Court  in applying the internal market rules, which are decided by qualified majority vote, to get rid of such distortions.  

The Commission has proposed to harmonise the tax base for corporate taxation based on the article dealing with indirect taxes. It is in the annual work programme for 2008, but has been postponed until after the second Irish referendum on the Lisbon Treaty.

In an Irish Declaration it is stated that the EU will have no new competences on taxes.

Discriminatory taxation is already forbidden. This rule is used by the EU Court to put pressure on member states, for example, in judgments by the EU Court or in court verdicts on the taxation of pensions.

Making taxation consistent across the EU (harmonisation) requires unanimity among the EU states.

The EU can invent new joint EU taxes according to Art. 311 TFEU - it requires unanimity.

Links

http://europa.eu/scadplus/leg/en/s10000.htm

Factsheet on taxes

CORPORATE TAXES IN IRELAND

The Lisbon Treaty directly invites the Court to outlaw the low Irish corporate rate of 12.5 % by  making important changes in the concept of the Internal Market which were never discussed in the Constitutional Convention.

1. Art. 113 TFEU in the Lisbon Treaty is the legal base for the EU  harmonising rates of indirect taxes. For direct taxes Art. 115 TFEU may be used, or the flexibility clause in Art. 352.

There is no clear definition of indirect taxes. Corporate tax was normally seen as a direct tax. But the Commission has planned to harmonise the tax base for corporate taxes on the basis of exactly Art. 113 TFEU. This is now Art. 93 in the Nice Treaty. The articles require unanimity in the Council when taxes are harmonised.

2. There is no specific articles for the harmonisation of direct taxes. The EU Court has included direct taxation in Case C-35/98 stating “although direct taxation falls within their competence, the Member States must nonetheless exercise that competence consistently with Community law”.

Member States must also respect the Convention of 23 July 1990 (revised 25.5.1999) on double taxation and the directive of 19 December 1977 on mutual assistance in the area of direct taxes.

3. What really matters is the broadening of the concept of the Internal Market under the Lisbon Treaty. The tax clause in Art. 113 TFEU has been changed. Taxes must not only be harmonised when this is necessary for the functioning of the Internal Market.

Now, the Lisbon Treaty has widened the scope of harmonisation enormously by adding “and to avoid distortion of competition”. This concept is much broader. What difference does not distort competition?

4. This broader concept can also be found in the new Protocol No 27 widening the definition of the Internal Market which now includes “a system ensuring that competition is not distorted”. The Protocol even explicitly invites the Council to use the flexibility clause in this new area if there is no other legal base for legislating. But this still require unanimity when it comes to the EU seeking to harmonise rates.

5. There is a much easier legal base for fighting distorted competition. This is Art. 116 TFEU allowing the Council to decide by a majority vote. The Commission starts the process by sending a letter about the distortion of competition to the member state concerned.

If the member state does not change the distorting element, the Commission can go to the EU Court or propose a law to be adopted by qualified majority. Here there is no national veto. This article has not been used for taxes, yet. But there is no guarantee that it cannot be used.

6. On 17 January 2008 the EU Court overruled a Danish law on the taxation of Danes possessing secondary housing in Denmark or/and abroad. This had no connection to the common market at all.

7. Finland was forced to change its taxation of pensions in the Danner case. Denmark lost a tax case on pensions as well.

8. The Union may be able to affect the low Irish corporate tax by means other than direct harmonisation of tax rates.

9. The Commission has started the work for harmonisation of the corporate tax base. It was included in the annual programme for 2008. The draft has been prepared and may make it impossible for the Irish state to gain revenue from  the turnover of Irish companies in other Member States - if rumours are right. The proposal has been archived until after the Irish referendum.

10. Ireland haw received a strong political guarantee against the harmonisation of their low corporate tax. There is only one legal way to safeguard the low Irish tax, a clear Treaty Protocol stating: “Nothing in the European treaties shall hinder Ireland from maintaining its lower taxes on companies in relation to their turnover anywhere in the world.”

Jens-Peter Bonde, former MEP and member of the two conventions: jp@bonde.dk

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