14.12.2018 11.40 Edilex Tax Blog - Jouni Weckström, Attorney-at-Law: Tax Sovereignty in EU – is there such, what’s its relevance in the first place?
In the aftermath of the 2007-09 global financial crises and the consequential debt crisis, the EU state aid regime has been brought very much to the forefront of the means in recovering the damages caused to the EU banking sector. Furthermore, this has taken place kind of hand-in-hand with the OECD BEPS Project, emerging in turn from the point of view claiming that there have been dramatic changes in the international tax landscape in recent years.
Consequently, both the financial crisis and the claimed aggressive tax planning by MNEs have placed BEPS very high on the political agenda. Apparently in connection with the above, European Commission has made an impressive seizure of territory, so to speak, in recent years under the umbrella of the EU state aid discipline in contesting the tax sovereignty of the EU Member States by way of questioning the legitimacy of certain actions taken by the national tax authorities.
The activity of the European Commission can of course be seen both as a logical and inevitable outcome of the underlying polity, for the emphasis of the EU has really been with developing a common market, free of barriers on trading, and this aim is still high on the political agenda. But, the specific policy sector now forcefully scrutinized by the European Commission i.e. direct taxation is still, as a rule, within the scope of exclusive competence of the Member States.
To further clarify: the EU was initially referred as a polity with a paradigm of modern politics whereby a nation state would be in command of its domestic politics. However, more recently this framework is rather defined as post-modern where de-nationalization and internatiolisation have considerably labeled the politics of the individual Member States, the things have kind of turned upside-down. This should then be reflected with the sovereignty on direct taxation, the underlying rationale of which may well be illustrated with a notion from the days of the American Revolution, namely “No taxation without representation”.
In further weighing the fiscal sovereignty of a nation state against some other political paradigm with origins in supranational legal order such as the EU, it is good to realize also that right to tax is a fundamental prerequisite for the sole existence of a political society, such as a democratically formed state. In simple terms: if there would be no taxes there would neither be a state. What is then the relative weight of tax sovereignty of a Member State in EU when confronted with for example the demands offered by the ideal of Single European Market and its competition policy related prerequisites?
To start off in conventional terms, state sovereignty is generally seen as the final and absolute power of the ruler as pertaining to a certain geographically identifiable and politically structured government. When it comes to tax sovereignty, however, it is often seen to assume the inseparable relation to a sovereign state on one hand, and that state’s unquestionable right to levy taxes in its jurisdiction on the other.
In emphasizing the sovereign powers to tax as referred, this reflects of course very much of a state internal perception upon the qualification, or rather a kind of an internal will to retain the taxing powers as a sovereign state. This is a fair statement for example when featured against the factual limitations to (tax) sovereignty as emerged alongside with the globalization in political and economic fields.
Further, the above referred philosophy may be further boosted with an external view, an international law perspective, implementing the ideal of exclusion of interventions in the constitutional prerogatives of a sovereign state by other states. There is another side to the coin, however, and that is the emergence of international organizations into the hands of which, for various reasons, the sovereign states entrust their exercise of public power in certain policy fields, such as protection of fundamental rights or economy.
Now, when looked at from a perspective of the political realm discussed above, the pure notion of tax sovereignty does not seem to carry decisive weigh to it to dominantly pursue the national tax policies of Member States in projects with significant EU relevance. In other words, the national tax laws and their implementation by the local authorities in the Member States may well be questioned on political basis when there is a notable EU policy dimension involved.
However, against this background it is interesting to note that in the European Council Presidency Conclusions of 18/19 June 2009, the following decision was taken: “Nothing in the Treaty of Lisbon makes any change of any kind, for any Member State, to the extent or operation of the competence of the European Union in relation to taxation.” This was essentially a political statement the aim of which was to reassure Ireland towards its second referendum in 2009 on the concerns of the Irish people regarding the Treaty of Lisbon. This is well in line with the fact that the Member States did originally not, nor intended to transfer their fiscal powers back in 1957 to the supranational organization of EEC by the Treaty of Rome.
The real dilemma with the post-modern politics is, however, the kind of triangular positioning of the idea of tax sovereignty with respect to the globalized economy and markets on one hand and the international organizations taking over some of the tasks of the participating states on the other. What comes to the globalized markets, the sovereign states must give up to a necessary extent on their policy decisions upon e.g. the tax systems to manage their competitive positions in the emerging markets and to also generate tax revenue as effectively as possible.
In terms of tax policies driven by the Member States as assumed based on their sovereignty, it is said that there is a lack of understanding of the fact that the EU as a polity is really based on an idea of exchange of interests of the parties engaged. In other words, in trying to preserve their tax sovereignty, the Member States’ tend to ignore their established consent in relinquishing their sovereign powers in exchange for exercising national influence in a broader communal context when joining the EU.
EU does, however, further embrace its General Tax Policy, laid down as follows:
“The power to tax is in the hands of the Member States, with the EU having only limited EU competences. As EU tax policy is geared towards the smooth running of the single market, the harmonisation of indirect taxation was addressed before direct taxation. The fight against harmful tax evasion and tax avoidance has become a recent policy priority. Tax measures must be adopted unanimously by the Member States. The European Parliament has the right to be consulted on tax matters, except on budgetary-related issues, for which it is co-legislator.”
As the main priorities for EU tax policy, the following are then listed: “the elimination of tax obstacles to cross-border economic activity, the fight against harmful tax competition and tax evasion, and the promotion of greater cooperation between tax administrations in ensuring control and combating fraud”. With this increased tax policy co-ordination, the aim is to ensure that the Member States’ tax policies would support wider EU policy objectives further defined in the “Europe 2020 strategy”.
In terms of law the question then remains, where is the power to deviate from the Member States tax sovereignty, and who has it? How should that power be used to fulfill the requirements inherent to the rule of law, what are the procedural limitations of the executive or the judiciary? And bridging this back to the question of economic effectivity, we need to ask, who (always) pays the bill when the legal boundaries are tested?
To conclude, either you are in or you are out, there is no room for interpretative pluralism within the EU, assuming the economic activity is taken as the driver of its survival. Rather than aiming at a “political community, which is the highest of all”, a thought of further consolidation in corporate taxation could, after all, be the key.
Kirjat | Digikirjat | Verotus ja kirjanpito | Koulutukset (myös webinaareina)
Toimittaja: Jani Surakka, Edilex-toimitus (email@example.com)