(Bloomberg Opinion) -- The current European Commission could go out with a bang if it moves ahead with a plan to grab more tax-setting authority from EU member states. We could find out next week whether multinational companies using various tax-avoidance strategies in Europe will have more to fear than they do with the current periodic harassment disguised as enforcement of the EU’s state-aid rules.
On Jan. 15, Commissioner Pierre Moscovici, responsible for taxation issues, is expected to make public a proposal requiring that certain tax decisions -- for example, on digital levies, sales taxes and tax-base harmonization between countries -- be made by a qualified majority of national leaders in the European Council. The current requirement of unanimity is a major obstacle to tax harmonization in the EU and to any moves against tax avoidance, as some of the bloc’s smaller members, such as the Netherlands, Ireland, Malta, Cyprus and Luxembourg have always objected to bigger states’ attempts to limit their tax competitiveness. These countries specialize in allowing multinationals’ tax-avoidance tactics, which often involve large royalty payments for the use of intellectual property held by offshore entities.
Just before Christmas, the commission published a road map for doing away with unanimity, which it said was “an obstacle to efficient decision-making” that meant “there is no effective Single Market in taxation.” The document mentioned an obscure provision in the EU treaty that says the European Council can decide to drop the requirement for unanimity in any area except defense.
If the commission decides to use this procedure, the smaller nations can be easily outvoted: 55 percent of member states, representing 65 percent of the EU’s population, is enough for a qualified majority. A lower threshold for approving tax measures could lead to painful changes for the nations that offer aggressive tax-planning opportunities. It could also lead a completely new reality for multinationals operating in Europe.
At the moment, the EU is powerless to plug tax loopholes, and the European Commission can only go after aggressive tax minimizers by applying its state-aid rules. It is on this basis that the commission ruled in 2016 that Apple should pay Ireland 13 billion euros ($14.9 billion) in back taxes. Other commission rulings against companies that use tax-avoidance strategies, such as Starbucks in the Netherlands and Fiat in Luxembourg, are also based on the contention that these countries have illegally granted a competitive advantage to these companies.
The commission announced Jan. 10 that it was starting an investigation into Nike’s tax arrangements in the Netherlands. But it can’t question the substance of Nike’s actions, which involve large tax deductible royalty payments. The commission can only argue that the Dutch tax authorities’ tax rulings gave Nike an unfair advantage.
In other words, even though the commission knows all about different tax-avoidance practices, it can only punish companies that it concludes are getting special treatment. If the EU changes its decision-making process for tax changes, there’s a good chance the practices themselves will be outlawed or severely limited; that could drive up most multinationals’ effective tax rates and redistribute tax revenue toward the bigger EU countries such as France and Germany, which account for a larger share of sales.
But abandoning unanimity would be a scary move politically. During the Brexit negotiations, the EU has gone out of its way to show that it’ll do anything to help out Ireland, the country that would be most affected by the U.K.’s departure. But outvoting Ireland on taxes could wreak havoc on its public finances. Generally, the optics of Germany and France lording it over the smaller member states could be devastating for the EU even as it struggles for more cohesion.
If these political considerations outweigh the commission’s desire to harmonize taxes and go after avoidance practices, it’ll propose giving member states a veto on the decision to drop unanimity, essentially burying the initiative. A report on Jan. 11 suggested that is the plan anyway. If so, the outgoing commission, led by Jean-Claude Juncker, a former prime minister of Luxembourg, is merely going through the motions, trying to show it was in favor of fixing the EU’s tax mess but failed to get enough support from the national leaders.
In that case, it’ll be up to the next commission, which will be formed this year, to deal with the mess of 27 different tax regimes across the EU, or to keep kicking the can down the road.
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Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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