Analysis: Fair and simple – a new direction for EU tax?

The European Commission’s Directorate General for Taxation and Customs Union (DGTAXUD) is going to be a busy place over the next few years. 

With the Commission’s recent publication of its Action Plan for Fair and Simple Taxation Supporting the Recovery, it is tasked with producing no fewer than 25 legislative and non-legislative initiatives between 2020 and 2023, as well as considering improvements to the Directive on Administrative Cooperation (how Member States share tax information with each other), and reviewing progress made in enhancing tax good governance not only in the EU but in the wider world.

This is an ambitious agenda to say the least, but one which the Commission feels compelled to set given the current crisis and the ongoing Green Deal. It is presented as a moment of opportunity to completely review the tax landscape, to simplify where things are complicated, and to even out the discrepancies and unfair tax advantages where they exist, with a particular eye on modern digital business practices. 

While not explicitly mentioned as one of the initiatives in this package, the Commission’s ongoing work on a Digital Services Tax is highlighted, with the Commission promising its next steps before the end of the year.

Sensible approach or tinkering at the edges?

One can admire the Commission’s tenacity. It wants to be seen to be progressive and forward thinking, to have solutions to difficult tax issues. It takes as its logic base the various steps taxpayers are required to undertake in order to fulfil their obligations, all the way from registration to tax returns, payments, monitoring, and dispute resolution, with a focus on operating in the single market. 

This is a sensible approach in that it seeks to wheedle out the tangible problems rather than get bogged down in the minutiae of the tax landscape. But – and there is always a but – this approach to a fair and simple tax can be regarded as merely tinkering at the edges of a set of rules that were designed for a different world, and is not the fundamental reform that perhaps the system needs.  

Amongst the initiatives, we have another attempt to reform the rules for VAT on financial services, an update of the Tour Operator’s Margin Scheme, a single EU VAT Registration, a further step towards making e-invoicing more acceptable. These will be familiar themes to those with even fairly short memories of life in the EU tax world. 

But what makes this time different? What makes the Commission think that asking the same questions will give different answers? These are different times: we are all living in an “unprecedented crisis”. 

A moment of opportunity for businesses

This is the moment of opportunity for tax to fully commit to the Commission’s Green Deal by removing the VAT exemption for passenger transport, for example. A time when Member States must pull together, show solidarity not only with each other, but also with the citizens of the EU. EU businesses need help to get back on their feet, make the payment of tax easier and fairer, and look towards a bright, new, fair-tax future.

But this is tax, and Member States have in the past been very unwilling to cede power in this respect. This is money which they collect from their taxpayers for (mostly) activities that these taxpayers carry out in their own Member State. This is money they collect to build schools and hospitals, roads and bridges. Member States have always fought hard to stop the Commission chipping away at their right to set and operate their own taxes in the manner that they see fit. It is hard not to see that, despite everything, this will always be so.

But there is frustration in the Commission circles. Fed up with their initiatives being bogged down in endless Council discussions until all involved concede defeat and the proposal is quietly withdrawn, the Commission’s Communication talks of using Article 116 of the Treaty to circumvent unanimity. 

It talks bluntly of using “all existing policy levers” to deliver its agenda. It wants to turn an advisory Committee into a comitology Committee. All these measures express weariness at how tax discussions have gone in the past, but will be equally seen by some Member States as an attempt by the Commission to hack away at their sovereignty. One can expect a bumpy road for some of these initiatives.

And what does this mean for businesses? With tax policy, the devil is always in the detail. But with so many initiatives coming out in such a short period, it is hard to imagine any business not being impacted in some way. There are those of particular concern for certain sectors (passenger transport, for example), whilst other more general initiatives will have a wider but perhaps more gentle impact (an EU wide VAT number, for example, if implemented properly, would perhaps be welcomed by many businesses which operate across the Single Market). 

What is certain is that businesses will need to keep a close eye on the comings and goings of those industrious bodies in DGTAXUD and be ready to give clear input not only during the development of these initiatives, but also during their onward discussions in Council.  

Member States are often keen on tinkering with Commission proposals without a clear view of the potential collateral damage (because they regard proposals through the prism of their own taxpayer experience), and as such it is important that businesses remain focussed on tax and contribute their own views on how we can achieve the fair and simple tax landscape the Commission so desires.