Oxford University Centre for Business Taxation
Business tax and the EU
The balance of competences in taxation
In July 2012, the UK government initiated its Balance of Competence Review, aiming to examine the impact of the UK’s membership of the EU on its national interests. Anzhela Yevgenyeva prepared a response to HM Treasury’s Call for Evidence on taxation, which was frequently cited in the Treasury’s subsequent report published in July 2013.
The Centre for Business Taxation's research drew six main conclusions. First, the basic balance of competences between the UK and the EU is secured by the unanimous voting requirement. The Treaty of Lisbon strengthened political control over EU legislative competence: any national parliament can raise objections if it alleges that the principle of subsidiarity is infringed by a draft legislative act. Second, the use of non-binding instruments in the process of tax policy making at EU level has become wider, although this cannot directly threaten the balance of competences between the EU and its Member States. Third, the enhanced cooperation procedure carries more serious challenges to the balance of powers between the EU and its Member States. For example, in January 2012, authorisation to proceed with the enhanced cooperation in relation to the financial transaction tax (FTT) proposal was granted by the ECOFIN Council. Concerns arise over the wide ‘extraterritorial’ impact of the tax in the Commission’s proposal, particularly when the ‘non-participating states’ have a limited ability to influence its substance at the stage of adoption.
Fourth, the far-reaching and pro-integration approach of the Court of Justice of the European Union to direct tax cases has been widely criticised in the academic literature as invading the fiscal sovereignty of Member States. Fifth, the research draws attention to the ambiguity of the procedural framework of the infringement procedure which has been used proactively by the Commission in taxation, which is especially important for the UK since UK provisions are amongst the most frequently challenged. Sixth, the EU state aid rules shape the way in which Member States can exercise their sovereign taxing rights, in particular when they intend to grant tax advantages of a ‘selective’ nature.
The FTT proposal under the enhanced cooperation procedure
This research examines the controversial proposal in February 2014 by the European Commission for a Council Directive to implement a financial transaction tax (FTT) through the enhanced co-operation procedure. This procedure allows a sub-group of Member States, subject to the fulfillment of some conditions, to introduce measures that only bind the participating Member States and has been pursued following the Commission’s inability to garner the necessary support of all Member States for its original proposal for an FTT of September 2011.
The research analyses the proposal and the accompanying impact assessment, focusing on the newly-added features of the proposed tax and its potential impact on both participating and non-participating Member States. It concludes, amongst other things, that there will be both positive and negative impacts on non-participating Member States, such as the UK, but that the evidence provided in support of the proposal is unsatisfactory in a number of respects.
The research also examines the proposal from the perspective of public international law. It discusses the controversial extraterritorial reach of the proposed tax as a result of the “contagion effect” (following which an entity established outside participating Member States is subject to the tax if its counterparty is established in a participating Member State) and the “issuance principle” (following which transactions between entities established outside participating Member States are subject to the tax if they involve instruments issued in participating Member States). It argues that doubts exist with respect to the compatibility of the “contagion effect” and the “issuance principle” with internationally-recognised legal principles.
The research also considers the legal requirements imposed by the EU Treaties on the use of the enhanced co-operation procedure. Whilst raising some concerns in relation to the proposal’s compliance with these requirements, the research concludes that the outcomes of any potential political or judicial challenge are uncertain.
Joachim Englisch, John Vella, and Anzhela Yevgenyeva, 2013, The Financial Transaction Tax proposal under the enhanced cooperation procedure: legal and practical considerations. British Tax Review, 2, pp.223-259
Redistributive and stabilising effects of a European tax-benefit system
The current debt crisis has given rise to a debate about deeper fiscal integration in Europe. There is a widespread view that moving towards a ‘fiscal union’ would increase the ability of the currency union to maintain economic stability in situations where some member states are affected by economic shocks. At the same time, the idea of deepening fiscal integration raises a number of concerns. In particular, residents of high-income countries fear that more fiscal integration may lead to massive redistribution in favour of low-income countries. Higher taxes in high-income countries and higher transfers in low-income countries could both increase and undermine incentives to work and invest.
This research addresses these issues by analysing the economic effects of two key elements of fiscal integration, i) the introduction of an EU-wide integrated tax and transfer system which partly or fully replaces the existing national systems and ii) the introduction of a system of fiscal equalisation. These reforms would be far-reaching, but they reflect the widespread view that radical steps towards more fiscal integration are necessary. The research draws on representative household micro data from 11 Eurozone countries to simulate these policy reforms and to study their effects on the distribution of income as well as their impact on automatic fiscal stabilisers.
Replacing one-third of the national tax and transfer systems by a European system would lead to significant redistributive effects both within and across countries. Labour supply incentives may be undermined in both low and high-income countries. But the reform would improve fiscal stabilisation especially in countries which cannot rely on national automatic fiscal stabilisers because they face borrowing constraints. A horizontal fiscal equalisation system based on taxing capacity would redistribute revenues from high- to low-income countries, but the stabilisation properties of this system are ambiguous.
Olivier Bargain, Mathias Dolls, Clemens Fuest, Dirk Neumann, Andreas Peichl, Nico Pestel, Sebastian Siegloch: Fiscal union in Europe? Redistributive and stabilising effects of a European tax-benefit system and fiscal equalisation mechanism, CBT working paper, 12/22
Closer to an internal market? The economic effects of EU tax jurisprudence
This research assesses the impact of Court of Justice of the European Union (CJEU) jurisprudence on the Internal Market, by considering whether the jurisprudence of the Court on corporate taxation fulfills the constitutional mandate of establishing such a market, as set out in the European Treaties. The Court’s focus upon removing discriminatory obstacles to the fundamental freedoms does not necessarily lead to a more level playing field and increased tax neutrality. Economic analysis shows that tax-induced differences in capital costs faced by firms operating within the European Internal Market may increase, whilst GDP and welfare may decrease. Consideration of actual legislative amendments introduced to thin capitalisation rules by Member States following Lankhorst-Hohorst, and to group consolidation rules following Marks & Spencer, suggests that this negative effect has actually happened. The research considers the constitutional implications of this conclusion. It concludes that the Court’s lack of consideration of the constitutional instrumental chain may mean that we are heading in the wrong direction.
The development of an EU principle of prohibition of abuse of law
In February 2006 the Court of Justice of the European Union (CJEU) delivered its ruling in Halifax, a case concerning the interpretation of EU secondary legislation on VAT. The judgment represented the culmination of a long process, with the Court referring for the first time to the 'principle of prohibiting abusive practices'. Yet, Halifax also represented the beginning of a new process: the discussion over the significance of the newly designated 'principle of prohibition of abuse of law'. Fundamental questions immediately arose and were the subject of intensive debate such as the scope of application of the principle; how would the abuse test be applied; and, the nature and implications of this 'principle' - interpretative, general, or neither. This research reviews and considers the ongoing debate over the development of an EU principle of prohibition of abuse of law. It reflects on the role of the principle within the field of free movement of persons, in the context of the literature on convergences and divergences between the fundamental freedoms. It then proposes the notion of reverberation as a new conceptual framework for the analysis of the development of general principles of EU law.