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European Commission Coming After EU’s Low Tax Countries

EU low tax state aid

In a surprising decision, the European Commission is preparing to come after low tax countries in the region in an effort to curtail preferential deals resulting from favorable corporate tax rates.

According to the Financial Times, “the European Commission is exploring ways to trigger an unused treaty instrument to reduce multinationals’ ability to exploit highly advantageous corporate tax schemes.”

More specifically, as reported by the FT’s Mehreen Khan and Sam Fleming, European Commission representatives explained that “the plans, under Article 116 of the EU’s treaty, were at a very early stage but would aim to identify certain competitive national tax schemes as distortions of the single market.”

Article 116, which has never actually been applied, allows the EU to “propose a directive designed to correct distorting tax schemes and sue governments at the European Court of Justice if they do not comply.”

Furthermore, applying Article 116 would not require unanimity but only a qualified majority for the decision to be passed, therefore eliminating a member state’s right to veto the proposal.

The Commission said: “From the beginning of this mandate, the commission has been clear that we would explore how to make full use of the provisions in the treaties that allow taxation proposals to be adopted by qualified majority rather than unanimity. The commission is now looking at various options to deliver on this political commitment.”

According to the Irish Times, a European diplomatic speaking under anonymity said “the commission was taking its time preparing the highly sensitive measure as Brussels needed guarantees that it would not be struck down by a blocking minority of governments.”

This move stems from the EU’s need to raise revenue as a result of the COVID-19 pandemic and its harsh impact on the region’s economy.

Additionally, European officials said this move is bound to lead to heavy criticism and opposition from those member states affected. Countries to be impacted by this decision include the Netherlands, Ireland, Belgium, Luxembourg and Cyprus, among a host of others.

EU low tax state aid

Reactions from EU member states to this news varied greatly.

In a statement to the press, the Irish Finance Ministry said, “We are not aware of any commission plan to launch any specific tax proposal under article 116,” adding that “Ireland has always been clear that unanimity is the appropriate voting system for any tax proposals at EU level.”

On the other hand, Germany showed vast support for this European Commission proposal.

Christoph Kuhn of Germany’s Finance Ministry said: “The German government is committed to fair and effective taxation of international companies operating in the EU and worldwide. Tax justice is an important priority for the German EU Council presidency . . . Following negotiations at an international level, we want in particular to press ahead with the implementation of effective minimum taxation in the EU.”

This comes at a time when the EU’s general court overturned a decision that called for US tech giant Apple to pay close to 13 billion Euros in owed back taxes to Ireland, a sum that stemmed from the American firm allegedly receiving illegal state benefits from the Irish government.

The European Court of Justice (EJC) said, “The Commission did not succeed in showing to the requisite legal standard that there was an advantage,” adding that the US multinational company had not “been granted a selective economic advantage and, by extension, state aid.”

Following this decision, the Irish government reiterated, “there was no special treatment provided to the two Apple companies” and that “the correct amount of Irish tax was charged…in line with normal Irish taxation rules.”

Now the EU has two months to appeal this decision and send it to the EU’s highest court for a final decision.