The EU’s Court of Justice Judgement Relaunches the Debate on Taxation

Alain Réguillon and Alain Malégaire
Alain Réguillon: President of the Maison de l’Europe et des Européens, Lyon, former President of UEF France
Alain Malégaire: Former Director General of the Euro Institute in Lyon, member of a group of experts entitled “GroupEuro” at the European Commission

Why such a decision

It is not in its power to tell the European legislator what to do in European policy. However, with its judgment of July 15, the Court is relaunching the debate on European taxation.

This ruling overturns the decision of the European Commission to impose a tax reimbursement of 13 billion euros on the Apple company. In August 2016, the Commissioner in charge of competition, Margrethe Vestager, imposed a refund to Ireland on the grounds that the tax ruling obtained by Apple in that country was akin to state aid, which European legislation prohibits. This decision is contested by Ireland, which fears that such a measure could impair the settlement in the country of other companies, which benefit from a very low tax rate, 12.5%, in theory arrangements being always possible depending on the size of companies. In the case of Apple, only 50 million were charged as taxes in 2011, out of 16 billion euros in profits (a 0.3% tax rate!), which of course is not acceptable.

As Ms Vestager underlined in her press release of July 15: “If states grant certain multinational companies tax advantages that their competitors do not enjoy, it harms fair competition in the European Union. It also deprives public finances and citizens of funds needed for much-needed investments - even more so in times of crisis”. This practice is not exclusive to Ireland. Other countries apply it, including France and Germany, although to a lesser extent considering their corporate tax rates. The countries which offer the most flexibility in this area are the Netherlands, Luxembourg, Malta, Cyprus and Portugal.

In the dispute with Apple, the European Court ruled that the European Commission has not formally proven the nature of state aid which is the basis of this fine. Apple, who paid 14.3 billion euros in 2018 (13 for the fine, 1.3 for late payment interest), money then placed in escrow, could, therefore, recover this amount. However, the Commission still has the possibility of appealing to the Court of Justice, the Court being a jurisdiction of first resort. This is what Ms Vestager suggests: “We will carefully study this judgment and consider possible next steps."

The reason behind this situation

The problem of taxation in the various countries of the Union is not new. Several attempts at harmonisation took place. They have always encountered the veto of some states. There is a simple reason for this. Taxation is not a competence of the Union. It remains a prerogative of the member countries. It is only in the field of VAT that rate reconciliations have taken place, and yet, the harmonisation is not complete. This reconciliation of rates was imposed for competition reasons with the relaunch of the single market in 1986 and the advent of the internal market in 1992.

Moreover, since VAT is a source of revenue for the Union's budget, no state can lower its rates without the approval of its partners. The intergovernmental functioning of the Union does not favour the search for optimum clauses to harmonize tax rates, especially on companies. Differences in rates between states are a distortion of competition in an open market. All the economic actors are saying it, and nothing is being done. There is one reason for this. To make a decision in the tax area, the vote needs to be unanimous. In other words, there will never be a solution as long as this practice of decision making is kept the same.

Even within the Union, there are tax havens, which is unacceptable. On July 15, Commissioner Gentiloni, responsible for the economy, made several proposals on behalf of the Commission to make taxes simpler and fairer in Europe, and to hunt down tax havens. It is worth noting that the European Parliament supports such an initiative. The objective of the proposed tax package is to fight against tax fraud and dumping. The Commission estimates the sum lost each year by member countries at 130 billion euros.

What is not normal in the case of Ireland, but it is also valid for other countries, is that everybody benefits from a single market whose basic doctrine is "free and undistorted competition", earning substantial economic profits and not playing the game of European solidarity. It should also be noted that Ireland received massive support from its partners during the 2008 crisis. They then agreed that the Irish tax rate would only be increased by 2% to 12.5%, compared to the European average of 21%. This was a step forward, but gradually this rate had to be adjusted, which did not happen. It is also the responsibility of the states to enforce European rules, particularly tax rules, but none of them are really clear!

The solution is majority decisions

Nothing will be possible as long as the vote remains unanimous. We must, therefore, go beyond and adopt qualified majority voting. But for that to happen, the Council must vote unanimously!!

A window does exist, however. It is that of the European recovery plan of 750 billion euros. By pooling debt and borrowing on behalf of the European Union, the rules change. It is not reasonable to put into debt the Union to help Member States without changing tax practices. Aid should, therefore, be linked to a radical change in tax practices, harmonisation and the adoption of qualified majority voting. But European decisions are not enough. We also need agreements within the OECD, because multinational companies will always go to the territories where they find their advantage.

The solution is also to reinvent the Union

The project is vast, sensitive and irritating. But we have to start it up and find the right solutions; the very existence of the Union and integration are at stake, as it can only evolve towards a federal organisation, respecting everyone, but imposing real solidarity between Europeans. The decision of the Court of the European Union has the merit of showing that interpretations of common rules are not enough to shift position lines. We have to get back on track and have the courage to say that the Union as it is is no longer viable.

It is essential to reconsider the organisation of the Union, taking into account the global context, increasingly competitive and sometimes aggressive, as well as the proximity of Africa with its migrants and the powder keg of the Near and Middle East.

Without a stronger, more united, more integrated Union, with asingle diplomacy and a real common defence, the Europeans will no longer have any influence on the international scene, in the face of the giants of today and tomorrow.

Translated by Elena Vardon