Keep the Gatekeeper

Jan 21, 2019

Sunday Business Post, 20 January 2019
I'm studiously trying to avoid any comment on the Brexit shenanigans this week on the other side of the Irish Sea.  It is not easy.  From travelling back and forth on a regular basis over the last two years, I've been struck by how difficult it is for many Brexiteers to articulate their reasons for wanting to leave using any kind of concrete examples.  They may claim they wish to take back control, but when it comes to the specifics of the controls they want back, often they are at a loss.

Feeding that unspecified unease are the many ill-conceived initiatives European Institutions regularly dole out.  Some of these offer ample excuse to even the most committed Europeans to want out.   Whether it was with a keen sense of irony, or mere tone deafness to the political situation in Britain, the European Union gave us a new reason to dislike it this week on the same day as the substantive Brexit vote.

When EU law is formulated, consent from all of the EU countries is required.   About 80% of all EU legislation is adopted through a procedure known as qualified majority voting or QMV.  As with everything EU based, there are some small wrinkles and exceptions under QMV, but in general 55% of the member countries have to agree, and the countries in agreement must represent at least 65% of the EU population. 

For the other 20% of new rules, unanimity is normally required.  For instance all of the EU member countries must agree on the accession of a new country to EU membership.  Taxation across the European Union also fits in to the unanimity category, but unanimity is hard to come by.  Tax is a sovereign competence, closely guarded by national governments who quite rightly prioritise the needs of their own exchequers.  But the Commission is now proposing that taxation decisions be taken by QMV rather than by unanimous agreement.

It seems to me that the Commission has been its own worst enemy in how it has justified this proposal.  They claim that citizens demand action in the fight against tax avoidance and tax evasion.  This ignores the very significant tax enforcement changes across the EU in recent years.  A large volume of cross-border information is now flowing between the revenue authorities in EU countries since the implementation of an EU directive on administrative cooperation which has been in effect since 2014.  Try opening a foreign bank account or buying a property in the EU without notifying Revenue, and see how you get on. 

Another justification offered is that qualified majority voting on tax would in some way make for more democratic decision-making.  That’s not right either.  Every Finance Minister, Treasury Secretary or Chancellor of the Exchequer in every EU member country has to push their own tax legislation through their own national parliaments.  This is about as democratic as it gets.

Nor is the Commission’s claim that QMV could lead to a stronger single market fully credible.  The single market is all about the capacity to compete, and the US experience bears this out.  No one would deny that the US is a colossally powerful single market, but there is no impediment to the states of that great country competing with each other to try and attract investment and jobs.  In fact, individual US state governments have a latitude for so doing that many a European finance minister could only dream of.

One of the Commission’s pleas should ring alarm bells by virtue of its title alone.  Whenever you see “fairer taxation” offered as a justification, you can take it to mean that somebody else ends up paying.  The international tax debate has ceased to be about how much tax is paid, but is rather about where tax is paid.  Displaced taxation doesn't make for fair taxation. 

Wrapping up the series of justifications is the expressed desire for the EU to become a “global leader”, whatever that means.

A lack of self-confidence permeates the whole policy.  Moving the basis of EU tax policy agreement from unanimity to QMV suggests lack of confidence in the governments of the EU member countries to do the right thing when it comes to taxation. 

The proposal also signals a lack of confidence in what has already been achieved.  There has in actual fact been significant progress made at EU level on taxation matters affecting all EU member countries.  EU directives on administrative cooperation, which mandates the tax information sharing I've already mentioned, are now supplemented by the Anti-Tax Avoidance Directive.  This newer directive is already taking hold and is extinguishing the opportunities for multinational companies to arbitrage tax regimes across Europe.  These directives got through the European system without any particular hindrance from the decision-makers in the various countries.  QMV was not required, as unanimity could be secured.

The timing of the Commission’s QMV proposal is also suspicious.  While the current Commission only has months to run, late stage policies or thinking may be adopted and retained by the new Commission due to be formed towards the end of the year. 

The great virtue of the current unanimity requirement is that it serves as a policy gatekeeper.  Only the most coherent strategies need apply.  Tax policies must fundamentally make sense, economically as well as politically.  Introducing QMV on tax matters invites the possibility of incoherent or deferred policy-making by the EU institutions. 

And if you think that incoherent or deferred decision-making on key issues is ever a good idea, again look across the Irish Sea.

Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland