Fiscal dumping in the European Union: towards harmonization?

In a global environment in which multinational companies are acquiring more and more power at multiple levels, from the economic to the political, in many cases, we find ourselves facing a scenario where it is customary to cross state borders and settle wherever they find an environment. more favorable for their activities.

In this framework, there are numerous scandals that have been uncovered over recent years in relation to the malpractice of certain companies in different regions of the globe, but, specifically, this article wants to highlight this practice of companies in European territory and the consequences that are reflected in the reality of the European Union and its Member States.

LuxLeaks scandal

We must move, then, to 2014, when what was later known as the “LuxLeaks scandal".

This saga of trials and news in the heart of Europe revolved around the leak of secret tax agreements (Tax rulings) between companies and European countries with more lax tax regimes.

The LuxLeaks scandal (an acronym formed by LUX, from Luxembourg, and “LEAKS”, from leak) came to light after the public leak of this type of agreements by an employee of PricewaterhouseCoopers (PWC), one of the four consulting companies commonly called as "Big Four" and which mainly represent corporate clients.

This leak denounced that the consulting firm created complex tax structures, designed and also to share loans between Luxembourg parent companies and subsidiaries from other countries, thus transferring profits between subsidiaries in different countries with the aim of reducing or even eliminating income subject to tax payments in a certain territory.

View: “More than 300 companies have agreements with Luxembourg to pay less taxes” [2014] El Confidencial (21 / 09 / 2020).

Despite not being the only form of tax evasion that exists, this scandal gave rise to a great debate within the EU about the need for tax harmonization at European level, the erosion of national tax systems, unfair competition in tax matters and the continuity of the internal market, with what is known as a “level playing field".

Crisis derived from Covid-19

Currently, the crisis derived from Covid-19 has reopened the debate around “tax injustice” in the European Union.

It is recognized that this crisis has hit companies across Europe hard, from multinationals to small and medium-sized companies, either by closing or slowing down their economic activities.

Furthermore, it is recognized that this is a crisis without borders, which hits all European countries simultaneously.

Therefore, the approach to European economic recovery focuses on burden sharing and solidarity throughout the territory of the Union, therefore reopening the debate on tax competition.

The Italian and German governments called on all Member States and European institutions to concentrate the generation of the resources necessary for recovery in the fight against dumping and tax fraud, as well as the Money laundering.

Tax dumping

With all the above, this article tries to clarify, first of all, concepts related to the tax dumping and how it interacts with the European integration and the achievement of an internal market.

Likewise, the problem of support from the Member States and the division of powers at the European and national level will be analyzed, attempting, therefore, to give a global image of the phenomenon of fiscal dumping.

First of all, it is important to highlight that the term “fiscal dumping” is not defined at the European level.

The Council of the European Union, more specifically its Economic and Financial Affairs subgroup (ECOFIN), mentions pernicious or harmful tax competition.

In its 1997 resolution, it established the need to act in a coordinated manner to avoid distortions of the single market, tax evasion in Member States and ensuring tax withholding on cross-border payments between companies.

View: European Council, “Conclusions to the ECOFIN Council of 1 December 1997” (98/C 2/01).

As can be deduced from the above, tax dumping refers to a series of tax measures taken in one Member State, to the detriment of another, that seeks to grant tax advantages to corporate entities, thus achieving a competitive advantage for the State that leads it to cape.

Despite not having a harmonized definition at European level of this concept, ECOFIN does include some guidelines to define this pernicious or harmful tax competition.

In this way, harmful tax competition is considered to be that which:

• Grants advantages only to non-residents or transactions with non-residents,
• They allow a tax advantage without real economic activity in the territory of the country that grants it,
• It implies that the rules applicable to the calculation of the profits of multinationals or business groups diverge from those internationally recognized, or
• Lack of transparency.

How does the disparity in tax regimes affect?

At this point, it is worth asking How the disparity in tax regimes affects the European Union, its Member States and the relationship with the European single market.

It must be remembered that the taxation of economic activities is an expression of the fiscal sovereignty of every State, in the exercise of its tax authority.

Therefore, a priori, it seems indisputable that each Member State of the Union can exercise this power to the extent of its needs and interests.

However, one cannot ignore the fact that the Member States decided to proceed with integration into a single market, on the basis of four indivisible freedoms: freedom of movement of capital, companies, work and people.

However, as Craig and De Búrca point out, the realization of the internal market can generate macroeconomic and social tensions between the rich and poorer countries of the European Union.

See: Paul Craig and Gráinne de Búrca, EU Law: Text, Cases, and Materials, (5th Ed, Oxford).

It would therefore be the case set out in the introduction: the possibility that a country, in order to gain a competitive advantage for the actors in its economy, would establish benefits to the detriment of third countries.

These tensions are what subsequently give rise to the “tax dumping” or to “social dumping”, when the focus of the fraudulent action is the workers and the costs associated with them.

European single market

El European Single Market It ensures that a company can freely market its products or services between the different member countries once they have passed the Union controls (whether border or quality, among others).

In this context of freedom of movement, a multinational company will be tempted to establish its tax headquarters in the country that provides it with the most advantages, then taking advantage of the market without internal barriers to market its products in other European countries.

Therefore, we find that the different tax policies applicable to the Member States mean that the European single market cannot be constituted as a level playing field for all participants.

In fact, the European Commission has identified tax differences between Member States as one of the main barriers for the internal market.

Precisely The report states that the lack of harmonization of direct taxation in the Union is a clear barrier to achieving the Internal Market that causes unfair competition in labor costs and social dumping between Member States.

Since social dumping is the subject of another article, below, we will collect a brief analysis of the phenomenon of fiscal dumping in the European Union.

Analysis of Social Dumping

As can be seen, the mobile factors of the economy, especially the services sector, find in the domestic market an incentive to move from locations with high tax levels to those other regions with lower taxes and more favorable economic conditions.

In addition, The differences between tax regimes can alter trade flows and productive factors..

Finally, we find another determining factor when studying taxation at the European level: Member States do not have incentives to study and take into account the indirect effects that their fiscal policies may have on neighboring countries.

This factor being traditionally considered a competitive advantage for the country that establishes it, the situation is reversed in light of integration into the single market.

Now, to understand in a more complete way the consequences of this problem in European territory, it is necessary to interrelate those elements that lead to two fundamental problems for the EU: lack of legislative powers and the erosion of the internal market. 

And that, in turn, highlights another conflictive element within European development, the voting problem.

The barrier that fiscal dumping represents for the internal market originates in the choice of the actor who has the authority to legislate on fiscal matters: Taxation has not been harmonized at European level, so national regulations on tax matters are applicable, giving rise, therefore, to the tax competition by countries to attract companies.

As regards the regulatory powers, In relations between the Union and the Member States there are three types: exclusive, shared y support, coordination and complementary action.

While the former refer to the powers attributed to the Union that They can only be developed by their legislative bodies, those shared are included in article 4 of the Treaty on the Functioning of the European Union (hereinafter “TFEU”) in format numerus clausus.

Finally, the support competence is included in article 6 and does not grant power for harmonization at the European level, but rather, as the name indicates, for support and coordination.

Lack of powers in tax matters

The problem is that the European Union does not have powers assigned to it regarding direct taxation, these falling on the Member States.

Treaty articles that refer to tax issues only mention indirect taxes.

European action on direct taxes is focused solely on enhanced cooperation.

Therefore, discussions within Europe on taxation revolve around achieving greater coordination between countries and their tax systems.

However, the problem of the division of powers is not the only one that we can encounter when we talk about tax harmonization at the European level.

The main characteristic of the process aimed at the adoption of acts at European level in tax matters is the fact that The Council of the European Union decides on the basis of a proposal presented by the Commission unanimously, and after consultation of the European Parliament.

The unanimous vote represents a veto right.

All countries have to agree on a certain text to adopt it, since when a country is reluctant, it may vote against it and, therefore, paralyze the adoption of a certain legislative act.

In tax matters, we find many competing interests at the European level.

There are countries that, benefiting from the particularities of the internal market, have no interest in harmonizing direct taxes, given that their main incentives in attracting capital and companies are based on the tax advantages they offer.

An example of this right of veto and national interests is found in the harmonization of the consolidated corporate tax base.

This harmonization has been on the negotiating table for a long time, without any agreement having been reached to date.

Ya In 1988, a draft proposal was presented to harmonize the consolidated base which was blocked even before becoming a final proposal.

The motivation for this draft legislative act was the internal market: There cannot be real freedom of movement if tax regimes between countries vary drastically.

However, this proposal was rejected since it was understood that, by forcing all companies to establish a common base, it would entail a disproportionate economic burden, opposing the objective of achieving an internal market without barriers.

The 2011 proposal aimed to improve the competitiveness of European companies by giving them the possibility of using a set of common rules to compute profits.

However, a significant number of European countries opposed this initiative (including Belgium, Cyprus, Hungary, Malta, the Netherlands, Ireland and Luxembourg).[14]

These countries feared the possibility of losing competitiveness as a result of harmonization. In 2015, a third proposal was presented, which we will call 2016, for harmonization.

Its main novelties lay in the fact that the common consolidated corporate tax base would be mandatory for multinational companies, but not for small and medium-sized businesses.

Therefore, this proposal sought to respond to the problem of tax evasion by multinationals, while favoring the growth of small and medium-sized companies and eliminating barriers to the domestic market.

This proposal continues its legislative path at present.

Recent developments include the European Parliament consultation in March 2018 and the Council presidential commitment in November 2019.

As already noted in the introduction, the crisis derived from Covid-19 has given impetus to the debate on fiscal dumping and the need for harmonization in the matter to obtain absolute performance from the internal market.

We will therefore have to wait for the legislative development of this proposal to know if this harmonization will finally see the light of day or if, like its predecessors, it will be blocked in the Council vote.