Thursday, March 02, 2006

Circumventing the tax veto through enhanced cooperation – is it time to use it?

The mismatch between the powers of the ECJ, to strike down tax legislation of the EU Members States, that is in contravention of the EU fundamental freedoms and secondary legislation, and the lack of a harmonized EU income tax rules is often seen by many commentators as a road to abyss!

It leads somewhere but that somewhere is in the end only fine-tuning, repairing, and adjusting domestic law provisions taking into account the ECJ rulings without, in the end, eliminating all the asymmetries derived from having 25 different tax systems (see for example the responses of member states to the recent ruling on the Marks & Spencer case).

As the EU Tax Commissioner recently described, most of the barriers to the functioning of the Internal Market are now related to the 25 different tax systems and such differences result in high compliance costs, huge administrative burdens, and have some negative impact on competitiveness, growth and employment. So that means that something needs to be done. But that “ultimate quest” would require over passing the unanimity limitation and convincing member states to partially do away with one of their last national powers: Fiscal Policy.

The project that is sparkling some attention is the Common Consolidated Corporate Tax Base (CCBT), which would mean the EU companies would be able to compute their aggregate profits in the EU internal market according to a single set of EU tax rules.

As you can imagine, although the debate around this project is still in its infancy, several Member States already expressed their preliminary reservations and uncertainties. In a recent speech held recently in Ireland (coincidence or not one of the notorious Reservationists) the EU Tax Commissioner (EU tax policy and its implications for Ireland) reinstated that its plans do not intend to propose a harmonised corporate income tax rate but only harmonise the method of calculating the tax base. The Commissioner added in the last line that if necessary (sic if the Reservationists persist with their opposition) the Commission is ready to propose the “atomic bomb”, i.e. the adoption of the common tax base only by those Member States who are interested. According to Mr. Kovacs, “we cannot allow some States to hold others back”!

In summary, the enhanced cooperation mechanism, adopted by the Treaty of Nice (2000) allows a group of Member States to establish closer cooperations in certain areas, while still remaining in the framework of EU institutions, independently from Member States not participating in this process. At least 8 Member States are required to form closer cooperation, which in any case should respect the acquis communautaire (The entire body of EU legislation). In the end, if used in the field of corporate taxation it represents abolishing the national veto on closer EU tax integration and opens the way to a “Europe at two speeds”.

What I am afraid is that although CCBT would eliminate asymmetries between different tax systems, enacting a CCBT under the “enhanced cooperation mechanism” would in itself create asymmetries between the members states “IN” and “OUT”. In the end, I doubt what is more prejudicial!

With all this discussion, no wonder that the degree of tax harmonization/coherence achieved within Europe, with so little “voting power”, is grabbing the attention of scholars from outside Europe. I recall that during last summers visit to Brazil, I came across a very comprehensive and inciting book on EU Law written by a Brazilian Scholar. This time, Michael J. Graetz (Yale Law School) and Alvin C. Warren, Jr. (Harvard Law School) provide their very useful insights on the European Court of Justice (ECJ) jurisprudence on tax matters, comparing the ECJ jurisprudence with the resolution of related issues in the US taxation of interstate commerce and international taxation.

Income Tax Discrimination and the Political and Economic Integration of Europe (still a draft to be published in Yale Law Journal, April 2006), is a very interesting reading, both from a US and European perspective, on the importance of the growing bulk of ECJ jurisprudence on direct taxation and its potential impacts.


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