There’s been a lot of discussion about the effects of BREXIT on the United Kingdom. There has been a lot less discussion about the future of the European Union and how it might evolve its tax policies.
In the aftermath of the referendum, a number of commentators thought that this would be the start of the unravelling of the European Union. It is clear that this is not the case. The EU 27 presented a united front throughout the BREXIT negotiations. And whatever your views on the merits or otherwise of leaving the EU, it has been shown to be a difficult path to follow.
In a number of crucial ways, the UK was in a better position to leave the EU than other member states. It only has one land border with another EU member state and that proved difficult enough to deal with. It was not part of the single currency which again made it logistically easier to deal with. Moreover, the Bank of England could deal with any economic disruption because it had control of the currency. The UK with a population of nearly 70 million people and the fifth largest economy in the world is in a better position to strike its own economic course than a much smaller economy. Finally, long political traditions which stretch back centuries enabled the UK (just about) to deal with the political fallout.
Even so, both Remainers and Brexiteers recognise that this has not been an easy process and there is no other country in the EU that would have the same circumstances as the UK. This is probably why even amongst populist parties, there has been some caution in taking on EU institutions and suggesting a loosening of ties. Even if the EU fails to confront the challenges of the 21st Century effectively and falls further behind its international competitors, I think that the deterrent effect of the disruption to the country leaving the EU would deter almost all governments and electorates; possibly with the exception of the Scandinavian periphery of the EU.
Shorn of the U.K.’s objections to further centralisation, one could see significant shifts of power in terms of direct taxation. Unlike indirect taxation and customs duties, member states at the moment have a veto on changes to direct taxation. This means that the Republic of Ireland has been able to maintain its corporate tax rate of 12 ½%. The EU has recently lost its tax case against Apple in respect of state aid.
However, the centralising tendency within the EU is unlikely to abate any time soon. Member States are increasingly reluctant to use the veto. The reasons for this are twofold, one is that, as was shown when David Cameron wielded the veto, the EU is quite adept at finding ways around it. Secondly, the veto is increasingly seen as the equivalent of the nuclear deterrent and its use normally creates blowback for the member state that wields it. Increasingly it’s like the UK Monarch’s veto. It is there in theory but not deployed in practice.
The EU has therefore drawn up plans for a Common Corporate Tax Base (CCTB) for Corporation Tax. It is still looking to impose a minimum rate of corporation tax; similar to the floor agreed for VAT. It is looking to increase its supervision of cross-border transactions involving taxation. DAC6 is a good example of this.
The €750 billion COVID recovery fund also comes with strings and may see the creation of a European supervisory body to deal with this, which may evolve into an EU wide tax authority. The EU Joint Transfer Pricing Task Force (EUJTF) is also looking to increase its role within transfer pricing disputes. The EU has also looked at the findings of the OECD BEPS project to increase its role within cross-border tax affairs of the member states.
A number of Member States, notably the Republic of Ireland, are somewhat sceptical regarding some of these moves. However, without the UK playing the role of the awkward squad, it is unlikely that these moves can be resisted unless a number of states get together. The imposition of a qualified majority voting in tax matters which only requires a 55% agreement in terms of the votes cast will allow a greater centralisation in tax matters. At present, Direct Taxation is primarily the responsibility of member states. I anticipate that this will change over the next few years.
