Tax Analysts Blog

Two Steps Forward, Three Steps Back for Europe?

Posted on Mar 18, 2016

Every so often these days, it looks like the member states of the European Union might unite on tax administration and policy issues. Building upon a fairly successful coordinated VAT regime, the EU is considering coordinating other tax policies. These include a financial transactions tax and the European fiscal Holy Grail, the common consolidated corporate tax base.

Unfortunately, every time it looks like Europe will unify behind certain tax policies, the member states start circling the wagons and shooting inward. It appears that this classic defensive reaction may have begun when former PwC trainee Antoine Deltour leaked to the press hundreds of tax rulings Luxembourg had issued to large multinationals. Instead of defending the rights of sovereign states to administer their own tax laws in accordance with well-established international laws – e.g., the OECD’s published transfer pricing guidelines – the European Commission started crying foul. After all, the commission’s competition bureau asked, doesn’t it violate the Treaty on the Functioning of the European Union (TFEU) for some members to give multinationals a better tax break than they give domestic corporations? Well, of course it does. But what if only the multinationals asked for them? (That’s a subject for another day.)

Which brings us to Europe’s latest attempt to coordinate its diverse income tax regimes. The commission recently released a directive proposing a comprehensive set of tax antiavoidance measures. The reactions of some member states could have been predicted. Reflecting an orderly approach to managing a lot of change all at once, German Finance Minister Wolfgang Schäuble wants the EU to finish implementing the OECD’s base erosion and profit-shifting recommendations before undertaking any new projects. Consistent with his message that his country is “open for business,” U.K. Chancellor of the Exchequer George Osborne wants to at least see the other member states’ tax rulings before deciding that BEPS has enabled Europe to reach tax avoidance equilibrium, or concluding that more should be done to level the continental tax playing field – at least for business in the U.K.

What about the member states that have facilitated multinational tax avoidance, like Luxembourg and the Netherlands? Not only do they continue to defend past ruling practices that have enabled multinational giants like Starbucks to shift income out of some EU member states into others offering a better tax deal, they also appear to have little interest in changing the status quo. In fact, the Netherlands, which holds the current rotating chair of the Council of the European Union, refused to even send a representative to a meeting called to discuss the latest antiavoidance measures.

Apparently, whether a member state’s preferential tax rulings violate the TFEU is in the eye of the beholder – the member state. If, as Samuel Johnson reportedly said, patriotism is the last refuge of a scoundrel, sovereignty claims may be the last refuge of member states that foster tax avoidance, or thwart European tax coordination.

 

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