The EU ‘no taxation’ thesis, no more?

It’s the end of the world as we know it, and I feel fine“. Pedants will argue these are lyrics from a song by American rock band R.E.M, but I swear I heard the words blowing across the Baltic Sea, all the way from Magdalena Andersson’s offices in the Swedish Riksdag in Stockholm. No doubt Andersson and her Swedish colleagues were feeling ambivalent as the Czech European Union Presidency announced on Friday an EU-wide agreement on a new “solidarity contribution” from fossil fuels producers. That’s EU-speak for a special tax on the excess or windfall profits of oil and gas companies reaping unprecedented rewards from the ongoing energy crisis.

On the one hand, the Swedish government supports the EU measures. “I have wonderful news”, Andersson told the press after initial agreement was reached earlier in September.

On the other hand, representatives from Sweden – alongside at least Poland and Hungary – had raised concerns over the legal basis of the regulations proposed by the European Commission, decrying its classification as a non-tax measure, which enables EU-wide adoption by qualified majority vote, instead of unanimity as required for tax measures. Just ahead of the final political agreement, the Swedes were careful to have a statement published noting that, “emergency levies should not set a precedent as to how tax issues are adopted at the EU level”. A certain dril tweet comes to mind.

This may seem like a trivial point, but squabbles over the legal basis of tax and tax-related policies have become a crucial battleground for European integration.

For decades, the conventional wisdom was, simply, that the EU had no taxing power. From its foundation, member states specifically exempted taxation from the competences of the European Union institutions, with any harmonisation or integration subject to full agreement by all members, each holding veto power, and thus constraining EU taxing authority. The preeminent prerogative of sovereign states, power to tax could certainly not be handed over to some supra-national authority.

“The EU is not a major player in the attempt to govern the globalisation of taxation, forced to play the role of passive spectator”, wrote Claudio Radaelli – EU tax scholar par excellence – in 1997. “Who has taxing power in the European Union? Almost all EU scholars give the same answer: Only Member States!”, was the assessment of Philipp Genschel and Markus Jachtenfuchs in 2011.

Slowly but steadily, that conventional wisdom has eroded. By reform and by stealth, EU institutions have gained a significant say in tax policy matters across the continent. Genschel and Jachtenfuchs set out the components of what they call the “no taxation thesis” – the idea that the EU does not have taxing power – and then they tear it down, parts of it at least:

The ‘no taxation thesis’ rests on two claims. First, the EU lacks a genuine European tax resource that would enable it to govern through its own financial means independently of Member States. Second, the EU has very little control over national taxation and, consequently, Member States retain substantial tax autonomy. We do not dispute the first claim, but challenge the second.

In short, they argue that through both formal legislation – agreed by all member states – and jurisprudence from the EU court system, the Union exercises authority over member states’ tax policies.

Tax policy in the European Union has changed radically in the last decade, but the trend has remained: EU institutions have been empowered, through structural changes and institutional action, to steer European fiscal arrangements. As I describe in a recent piece, the sources of these changes are multiple, including the wider politicization of international tax politics in the wake of the global financial crisis, the increasing formal powers of the European Parliament, and the activism of the European Commission. As Aanor Roland and Indra Römgens argue, assessing contemporary tax policy-making dynamics in the EU: “[N]ew institutional and discursive opportunities were exploited by the European Commission, Parliament and NGOs to induce policy change.”

These changes have allowed, within the constraints imposed by the EU’s founding treaties, substantial policy change in the area of taxation, to the extent that the two pillars of the ‘no taxation’ thesis no longer hold. First, recent policy advances have paved the way for the EU to collect resources for its budget, and the Commission in particular has pitched a palette of ideas to do so. Second, as Genschel and Jachtenfuchs argued, EU policy-making processes do influence national taxation. Today much more so than 10 years ago, when their analysis was published. The Commission’s state aid investigations into national tax policies might be the hallmark example from recent years of EU institutions using every tool at their disposal to advance its powers over taxation in Europe.

Alongside and underlying these trends, however, is perhaps the most significant change for the ‘no taxation’ thesis: EU members are losing their veto power over tax policy. And its happening through legal basis classifications. Simply, if the Commission can push through a tax- or tax-related proposal as a non-tax measure, no individual member state can block its adoption; a qualified majority will do.

It can’t always work. EU implementation of a global minimum tax has famously stalled due to Poland then Hungary exercising their tax veto rights. But broadly speaking, the Commission are increasingly succesful in overriding such veto power using legal basis classifications.

Fights over the legal basis of EU legislation are not a new thing; they trace back to the founding treaties. Because different policy areas provide different procedures and different competences to different parties – an artefact of what member states have been willing to cooperate on (and how), and of EU inter-institutional bargaining – legal basis choices can have significant implications. Joseph Jupille set out the simple dilemma:

[A] proposal might represent a legislative proposal to create a road toll, [which] inhabits the jurisdictionally ambiguous space falling within both taxation and transport jurisdictions.

Contesting the legal basis of a particular legislation – initially the prerogative of the Commission to define – is thus an opportunity for other parties, namely the European Parliament or (groups of) member states, to communicate their dissatisfaction as a kind of “diplomacy by other means“. Which brings us back to Magdalena Andersson.

In the last decade, but since 2016 in particular, the Commission – often with support from the Parliament – has ramped up its attempt to overcome that great barrier, the unanimity requirement in tax matters. With a handful of attempts (some succesful), proposals to implement tax(-related) policies have been made under non-tax legal basis, variously under rules governing right of establishment, emergency measures, or via so-called “passerelle clauses“. The Commission and its allies have also tried to generate momentum to scrap the unanimity requirement for tax policy altogether.

EU member states losing their tax veto, formally, is hugely unlikely because, well, that would require unanimity. But effectively the veto is depreciating in value, and has been depreciating for a while now. The innovative activism of the European Union institutions is contributing to that, shifting power away from national parliaments and towards Brussels. So you can understand why Magdalena Andersson and her colleagues might be a bit upset. While legal basis classification might sound like an obscure battleground, its strategic deployment now seems a likely route to overcoming the greatest impediment to advancing European tax integration. The upshot, in practical terms, might be more progressive tax policy on the horizon in Europe. Despite some setbacks, a comprehensive agenda is possible, perhaps starting with more aggressive regulation on tax transparency, wealth taxation, and expanded cooperation on environmental and personal income taxation. Stay tuned.