Insights

The EU is asking questions about tax sovereignty - but the clue is in the title

Tom Maguire

Tax sovereignty means one country effectively saying to another country: what's yours is yours and what's mine is mine, okay. I've always said "consultation with us decreases consternation amongst us" - and the EU Commission is now consulting and questioning tax sovereignty.

Just before Christmas, the EU Commission published a 'tax roadmap' in relation to decision making in tax matters. The proposal would explore how EU decision-making on certain tax issues could be 'streamlined' by removing the need for unanimous agreement by all countries. These matters would instead be decided by a weighted system (qualified majority voting) where measures can be carried if supported by a minimum number of EU countries.

We could resist certain proposals in the past because of this unanimity criterion, so is this EU proposal along the lines of the late Chris Cornell's lyrics to 007's Casino Royale (2006) soundtrack "if you think you've won then you never saw me change the game that we have been playing"? Except this isn't a game.

We published a corporation tax roadmap last year which says what was going to happen outlining various public consultations, etc whereas the EU regard what might happen as a roadmap by questioning tax unanimity's effectiveness ie decisions on tax have to be agreed by all member states. Does this choice of words mean that it's a fait accompli? Au contraire mes amis.

To be clear, this roadmap approach has been used by the EU Commission for other matters, so it's not just a tax thing.

Such matters included revising the rules for free allocation in the EU Emissions Trading System early last year as well as legal guidance on the Working Time Directive in early 2017.

There have been many more including a maritime one on the 'Evaluation of the Eel Regulation' which closed last May.

Finance Minister Paschal Donohoe has cited the unanimity requirement a number of times in the Dail. Back in February last year when asked about proposed changes on tax harmonisation, for example the infamous Common Consolidated Corporate Tax Base (CCCTB), he noted that "... taxation remains within the competence of individual member states and unanimity is needed before any tax changes can be agreed at EU level.

Ireland's position has always been clear - we do not support tax harmonisation that undermines a member state's ability to set its own tax rate and to determine its own tax base. We have, however, shown we are willing to agree EU tax directives that seek to implement agreed international best practice in a consistent manner across the EU. This remains Ireland's position."

The CCCTB has been around since the start of this century and it hasn't gone away. Nothing dies at the EU, it merely hovers.

The threat to Ireland on this matter is significant with Seamus Coffey (economist and head of the Fiscal Advisory Council) previously giving the view that it could be bigger than Brexit. Why? Because it allocates profits to countries on a quantitative rather than a qualitative basis, being sales by destination, labour and assets by location, which almost ignores what happens back home.

Ireland is a small open economy so you really don't need to do the 'formulary apportionment' maths to conclude that profits, and hence tax revenue, would be allocated away from Ireland.

Donohoe said that we have agreed and enacted EU tax directives that seek to implement agreed international best practice in a consistent manner across the EU, eg we've signed up to the EU Anti-Tax Avoidance Directive (ATAD) some of which we implemented in the most recent Finance Act. Why 'some' bits and not others? We already had some bits of the ATAD in our law and some others don't have to be implemented until later years but we even went ahead of schedule by enacting an exit tax before we had to. So it can't be said that we're not doing our bit.

The ATAD's Controlled Foreign Companies (CFC) rules effectively allows us to tax other countries' money with terms and conditions based on the principles enshrined in the Treaty for the Functioning of the EU.

The European Court of Justice has said in connection with CFC rules that relieving provisions in the treaty can't be relied upon where the taxpayer engages in "wholly artificial arrangements" and that's fair enough.

But if we stop there for a moment, then this means that if a taxpayer is carrying on genuine activity in another country then we, or other countries, can't reach out and pull those profits back home and tax them here; what's yours is yours etc. Genuineness of activity is the key here.

The Commission says in its roadmap that the historical justification of unanimity has been that it was "the only way to guarantee national sovereignty over tax matters", which makes sense based on what the court has already said. The Commission continues: "Reality, however, turned out to be more complex. Subsequent case law [of the European Court of Justice] has shown that the Treaty freedoms and principle of non-discrimination create limits on national sovereignty in taxation. … As a result, member states are increasingly constrained in their capacity to raise revenues to finance expenditures programmes in line with their national preferences."

But sticking with the CFC example for a moment, then whether Ireland (or another country) wants to tax a CFC's profits then that is determined by the genuineness of those profits in that country. If they're not genuine, then EU law won't protect them and then the countries concerned can tax them on a what's really mine is mine basis. So why move from a genuine what's mine is mine basis to a what's mine can be yours basis of taxation?

This debate will continue and our view on this has been clearly articulated in the Dail by the minister.

The roadmap consultation ends on January 17. The game may be for changing but surely not on our watch.

Tom Maguire is a tax partner with Deloitte and his fortnightly columns on tax matters appear in the Sunday Independent. The above article was first published on 13th January 2019.

Did you find this useful?