Sunday, 8 June 2008

EU TFEU: Tax harmonisation II

Is Article 113 of the Treaty on the Functioning of the European Union (TFEU) concerned only with indirect taxation, not direct taxation like company tax or income tax?

Are the words added by the EU Treaty of Lisbon (ToL) – and to avoid distortion of competition – a fairly innocuous clarification or even an additional requirement for new tax legislation, or are the sappers at work, undermining the castle walls?

What did the European Convention propose with regard to harmonising taxes, and what happened to these proposals during the intergovernmental conference (IGC 2004), which led to the Treaty establishing a Constitution for Europe?

The first post, EU TFEU: Tax harmonisation I, mapped the road of the provisions on EU tax legislation from Article 93 on the Treaty establishing the European Community (TEC), through the draft Constitution and the Constitutional Treaty, to the Treaty of Lisbon and the consolidated version of the amended EU treaties.

We checked the Lisbon Treaty amendments against our usual sample of the best general comments on the new treaty. The selected documents gave little cause to become wrought up, but something seems to have been afoot, so there seemed to be cause to double-check.

The fate of the Convention’s proposals looked intriguing, but this may require a post of its own.

This left us with the first two questions above. Let us start on the first one.


Direct or indirect taxation?

My preliminary reading of Article 113 TFEU (Article 93 TEC) led me to believe that its scope was restricted to various forms of indirect taxes. That was my understanding of ‘turnover taxes, excise duties and other forms of indirect taxation’.

This was substantiated by the UK House of Commons Library Research Paper 07/86, which presented a number of examples of such indirect taxes. This was further corroborated by the draft ratification bill of the Swedish government ‘Lagr√•dsremiss – Lissabonf√∂rdraget’, which mentioned turnover taxes (VAT type taxes), selective purchase taxes and other indirect taxes or charges in the internal market.

The Finnish government’s ratification bill spoke of the harmonisation of indirect taxation, but had I not concluded in my 6 June 2008 post ‘EU TFEU: Prohibited remissions, repayments and countervailing charges’ that the drafters seemed to have confused direct and indirect taxes (the first direct mistake I have encountered)? Surely an additional reason to check again, in spite of the evidence at hand? So I did reread my sources.


In addition, flying in the face of these sober assessments, assertions to the contrary abound. Here are a few from Ireland, mainly emanating from or echoing Anthony Coughlan, and branded ‘legally accurate’:

Free Europe “Harmonizing Company taxes in the EU – The Lisbon Treaty amendment to Article 113: a significant and virtually ignored amendment affecting Ireland’s company tax”

The National Platform EU Research & Information Centre “EU Misinformation: Barroso, Bonde and Ireland’s company taxes”

The National Platform EU Research & Information Centre “Lisbon Treaty: Mandatory Tax Harmonisation”

Bruce Arnold “Yes vote would open way for Europe to outlaw our low tax” (

Irish Issues . org “Treaty amendment on EU harmonized taxes”

Citizens’ European Movement Network “Tax & Investment”


These ‘legally accurate’ allegations, variations on the same theme, seem to require a logic of its own kind to concoct (and to follow).

Naturally, it is easy to assert that few EU leaders have been inventive enough to trumpet the consequences for company taxes (direct taxes) of an Article and an amendment concerning VAT and other indirect taxes. Because the Commission or the responsible national leaders have not discussed pears in the context of apples, it has been easy to brand this lack of communication as a conspiracy, misleading the public, not to mention the worst allegations.

Suddenly, an Article on harmonisation of indirect taxation would open the doors to force Ireland to scrap its low corporate tax (direct taxation).

This is nonsense.


What does the amendment mean?

The amendment – ‘and to avoid distortion of competition’ – was described by the Swedish government as a clarification and by the Finnish government as an additional requirement.

Neither sheds more light on the meaning of the added words, and I remain in some doubt about how they should be interpreted. On the face of it, joining ‘necessary to ensure’ with an additional ‘AND to avoid’ reads like an additional requirement, in other words one hurdle more.

If the drafters wanted to open up an alternative base for legislation, they should have said ‘OR to avoid distortion of competition’).

But the added words appear in the context of ‘the establishment and the functioning of the internal market’, of which undistorted competition is a fundamental aspect.

Therefore, it may be reasonable to understand the added words as an effort to underline one aspect of a functioning internal market, thereby giving it more visibility and some added weight.

In other words, this aspect may be brought to light when the Commission prepares proposals in the area of VAT, excise duties and other indirect taxes, and the Court of Justice may be called upon to interpret the provision.

But it has nothing to do with company tax or other direct taxes.


The texts of the detractors make for confusing reading. Shortly, the ‘truths’ first trumpeted are abandoned in favour of a new line. Even if the Article 113 TFEU is restricted to indirect taxation and the unanimity requirement is preserved, the European Commission and the Court of Justice of the European Union could possibly somehow circumvent the whole provision by applying the rules on undistorted competition in the internal market in order to erode Ireland’s low rate of corporate tax. The chain between the amendment and the allegations is broken, because all of a sudden a new set of rules is called into play.

How could the Court of Justice enter into this? Does Article 113 TFEU bear any of the hallmarks of a directly applicable treaty provision? Is the Article clear, precise and unconditional, in order to have direct effect?

The answer is no. It offers a base for secondary legislation on VAT and other indirect taxes, requiring unanimous decisions by the Council.

With or without the Lisbon Treaty, the Court of Justice will have to assess and to demarcate areas of competence described in general terms, and to find the predominant features in a specific case. Situations leading to future court cases are hard to predict, and the outcomes are going to be based on the facts of the individual cases.


An outside observer would expect the representative business interests of a member state threatened by erosion of its favourable company tax to be up in arms at the least hint. What does IBEC (Irish Business and Employers Confederation) say about the Lisbon Treaty?

In short, Irish business supports the Lisbon Treaty, vote yes. All EU member states remain free to determine their own policies regarding taxation and foreign direct investment. No change can be made in the area of taxation without the approval of all member states, including Ireland.


For reasonable people – but only for them – this should put the allegations concerning Article 113 TFEU to rest.


Direct taxation

Back to the difference between indirect and direct taxation. There is no explicit treaty provision on the harmonisation of legislation on direct taxes, but the current Article 94 TEC allows unanimous directives for the approximation (harmonisation) of laws, regulations and administrative practices which directly affect the establishment or functioning of the common market. With cosmetic change, this will become Article 115 TFEU, and it will continue to be the legal base for harmonising direct taxes.

Why were the allegations mentioned above based on the wrong Article?



As far as I understand, the position of the member states, including Ireland, in matters of EU harmonisation of indirect taxes does not change at all or only marginally as a result of the Treaty of Lisbon.

There has been and will continue to be political pressure towards elimination of tax obstacles in the internal market and against harmful tax competition. The European Commission has tried to convince the member states to move from unanimity to qualified majority voting, at least in some fiscal matters, but it has failed to move them.

The Commission has presented reasons for a single consolidated tax base for companies with EU activities, and it may dream of future harmonised company tax rates, but very little will probably happen as long as the unanimity rule stands.

Critical voices, sometimes even strident ones, from some member states have shown the existing tensions between countries with different levels of taxes for companies and capital. Member states with high taxes tend to see low rates as unfair competition.

Harmonising taxes, especially direct taxes, has been a frustrating field of endeavour for the Commission. Little progress has been possible, but the Commission has been able to investigate and to define tax arrangements seen to be unfair or distorting. Here is an opportunity for those who want to dig deeper, preferably with a cool head.


The history of European integration shows how decisive the shift from unanimity rule to qualified majority voting has been in order to achieve results. To name just one example, without the Single European Act there would still be mainly the idea of a common market, not the reality of a working internal market, in spite of its shortcomings.

The general European interest would be better served by fewer areas hampered by veto powers, but the reality is that our common mansion continues to be a house of cards in the fields where unanimity rules, and the deepening of European integration is a long term project.


What did the European Convention propose with regard to harmonising taxes, and what happened to these proposals during the intergovernmental conference (IGC 2004), which led to the Treaty establishing a Constitution for Europe?

The third question and post may shed some additional light on the tensions and the exertions in the field of European taxation.

Ralf Grahn