Can The EU Levy Its Own Taxes?

The budgetary dance in the EU budgetary cycle always starts early and seems to follow similar patterns: the heads of state assess their positions, the press then divides them into camps (usually a frugal and an expansionist one), and the European Commission proposes measures that would expand the Union’s budgetary autonomy. The latter is, historically, often with little success, which is also painfully exposed by the fact that most of the Union’s resources still flow directly from the GNI-based contributions the Member States make.

With the announcement of a new “Corporate Resource for Europe” (“CORE”), the Commission has relaunched an age-old debate: can the Union levy its own taxes, and if so, on what legal basis? As we will see, while the establishment of a genuine EU tax is possible, it requires overcoming significant legal hurdles.

Is it a tax, and does it matter?

Firstly, we need to establish whether CORE qualifies as a tax and whether this matters. The proposed new levy seems relatively straightforward: entities with a net turnover above 100 million euros a year will pay a lump sum to tax administrations in the EU Member States, which will flow directly to the EU budget. Such a lump sum payment from a market operator above a turnover threshold operates in a grey area. Taxes usually have a more targeted tax base (object) and a rate that usually corresponds with specific normative goals. For example, the income tax system is (usually) designed to be progressive, designed to redistribute and reflect taxpayers’ ability to pay. Similar goals and structures can, e.g., be found in inheritance taxation. Therefore, it seems that the levy is not designed in such a way as to align with national levies on companies, such as corporate income tax or turnover-based taxes for companies (whereby the latter exist much more limitedly).

The current proposal seems to levy an entry fee for the internal market, assuming that every company above the threshold would use this infrastructure, which is more akin to an indirect tax. Nevertheless, it is somewhat randomly applied and would also subject market operators operating solely domestically. Its indiscriminatory nature, the only deciding factor seemingly being the threshold, gives it a more tax-like nature.

In fact, the levy would score well on the aspects that are usually the benchmark for determining if something is a tax, the latter being defined as an involuntary sacrificial contribution for which no immediate reward is given. Given these criteria, a road toll is not a tax, as there is a direct reward for the contribution, and neither is a purchase of emission rights. In the case of CORE, the arbitrary nature of the measure, applying to both domestic and cross-border business, hints at the possibility of it being a tax.

Why it matters if CORE is a tax

Constitutionally, the qualification matters a great deal, as the imposition of a tax comes with a wholly different set of constitutional approvals and its own body of rules and principles. The power to tax is generally reserved for parliament only, and a tax can only be levied on the basis of a (non-delegated) law.

Take, for example, the line of the German Federal Constitutional Court, which demands that the “German Bundestag remains the place in which autonomous decisions on revenue and expenditure are made”.  This budgetary responsibility is part of the “indispensable elements of the constitutional principle of democracy”.

A slight nuance to the above might be added in that this control of the Bundestag must be retained over “fundamental budgetary decisions”, and “essential decisions on revenue and expenditure”. There thus might be wiggle room to adopt measures that are not to be deemed a fundamental budgetary decision or an essential decision on revenue and expenditure. However, the open question is what room for manoeuvre there is in adopting EU revenue measures for them to be or not to be deemed fundamental or essential. The level of control for the national parliament and the mode of levying will likely be decisive in this regard.

The mode of levying CORE

The CORE proposal leans on the fact that the levy would be collected on behalf of the EU by national tax administrations and, thereafter, transferred to the EU budget. This traditional system has long been in place for other instruments in the EU budget and exposes one systemic feature of the collection of EU’s own resources: they distribute a financial burden among Member States, not among taxpayers. It is a national law that identifies the taxpayer. For EU own resources, there is an established workaround in making the levy not an “EU tax” but a national contribution calculated as a tax. An example is the so-called Plastic Tax, which did not contain a duty for Member States to introduce such a levy in the national context, just to pay a certain amount on the basis of the amount of plastic waste produced in the country.

The design of the levy and how strong its wording will be is going to be decisive to see if it breaks with the tendency that the Union is only asking for a contribution from Member States and proposes a way of collection in the Member States (such as for the Plastic Tax) or if the Union is actually dictating the terms under an exclusive competence (such as for Customs Duties). In other words, is the Member State “transparent”, i.e., used as a mere implementer/administrator but without adding normative value, or is it only attracting a new way of calculating its payment obligation to the Union.

The difference is highly important from the perspective of the democratic demands for tax measures, as the latter imposes greater constraints on the national legislature, which can become problematic considering the parliamentary prerogative and the democratic decision-making required for the imposition of a tax. In that sense, it would be good to give broad leeway to Member States in implementation, which does not seem to be the case now.

The legal basis discussion

Next to the actual mechanics of the levying of CORE, its legal basis becomes highly determinative for its constitutionality in the national setting. Article 311 TFEU, which reads in the first sentence: “The Union shall provide itself with the means necessary to attain its objectives and carry through its policies,” is the legal basis for adopting its own resources. Textually, there is no boundary in Article 311 that says the Union cannot adopt taxes as its own resources. Martha Caziero also takes this line. She points out that if the measure simultaneously harmonises other substantive aspects covered by the Treaties, it should rely on a dual legal basis.

For tax purposes, this would most likely be Articles 113 or 115 TFEU, the former for indirect taxes and the latter for direct taxes (the latter being exempt from harmonisation under Article 114 TFEU, which does not apply to fiscal provisions). It is hard to see what the current levy harmonises as there exists no equivalent in Member States. Also, as mentioned, it is shaped rather broadly and seems disconnected from the rationale of other taxes levied on companies.

Its turnover-based nature makes it difficult to categorise, but it could fall in either Articles 113 or 115 TFEU. These provisions apply, however, to roughly similar tests of subsidiarity: the measure needs to be necessary to “ensure the establishment and the functioning” or “affect the establishment or functioning” of the market. Considering the debate in the tax area over the too-wide use of the legal basis of (in this case) Article 115 TFEU (in the case of anti-abuse measures), revamped by an Opinion of AG Kokott, it is good to be cautious in deeming any tax measure also always a ground for harmonisation of the internal market.

Going with “only” Article 311 TFEU

In any case, and more hypothetically, it might actually be held that an EU own resource that is based on a harmonising provision found elsewhere in the Treaties might run into more trouble in its adoption than one that is solely based on Article 311 TFEU.

Article 311 TFEU provides a special legislative route to adopting the decision on own resources: it demands approval by the Member States in accordance with their respective constitutional requirements. In effect, it carries within itself the capacity to remedy the abovementioned concerns, as it requires parliamentary approval in the national setting. A few things should be considered in the design to remedy any problems.

As mentioned, if the measure is adopted in conjunction with another legal basis in the Treaties, avenues of trouble might open up. If, for example, the measure is accompanied by a legal instrument under Article 115 TFEU, it will continue to exist after the budgetary period of the multiannual fiscal framework (MFF) has lapsed if that instrument is not equipped with a sunset clause, as the secondary law implementing the levy would generally not cease to exist after the budgetary cycle. There is also the option to match the duration of the instrument with that of the budgetary decision, so that the process of national ratification of Article 311 TFEU, in line with constitutional requirements in the Member States, is required to continue the tax.

Next to the timing question, another part of the working with another legal basis, adjacent to Article 311 TFEU, can become contentious. If the chosen legal basis falls within a shared competence – such as Article 113 or 115 TFEU (see Article 4(2)(a) TFEU) – it would pre-empt future national action in that area (Article 2(2) TFEU), thereby limiting the Member States’ ability to adopt their own policies. This may be problematic from the perspective of national parliamentary prerogatives. From that standpoint, it would be preferable for Member States to rely on the exclusive competence provided under Article 311 TFEU, thereby avoiding the more delicate questions concerning the conferral of taxing powers to the Union under an internal market legal basis.

Conclusion

It seems that the proposal of a new EU own resource asks scholars once again to enter the minefield of “genuine” EU taxes and own resources based on taxes. It is not impossible to get to that point, however, as seen once again with this new proposal, if the political agreement can be brokered, the legal puzzle to be laid afterwards is not easy. Thus, to borrow the words of de Feo, it remains to be seen if the EU budget will become a motor or remain a brake on European integration. Without speculating too much on how that politically will play out, one thing that does seem certain is that this newly kicked off budgetary cycle will at least supply fresh legal questions and perspectives, as many questions remain unanswered. Can countries with a clear constitutional demand for a progressive tax system accept a regressive levy? Can CORE be levied when a company is in distress or unable to pay? Especially when the amount seems disproportionate in relation to the right to property. How does CORE interact with the wider network of bilateral tax treaties, both among Member States and between them and third States? In that respect, it seems that the budgetary discussion has not started one second too soon.