Plans to tax

EU plans to tax its way out of recovery debt

Three new EU levies to be unveiled next week will need the backing of all 27 capitals.

BY BJARKE SMITH-MEYER AND PAOLA TAMMA

The European Commission is set to propose three new levies aimed at repaying the €800 billion debt mountain it plans to issue to reboot the EU’s economy.

The package of so-called “own resources,” to be adopted on December 22, includes revenues from a looming levy on the world’s 100 biggest companies, from the EU’s planned carbon border tax, and from a proposed extension of the bloc’s cap-and-trade carbon market, as POLITICO reported last week.

“These initiatives require EU action, and therefore constitute an appropriate base for EU own resources,” the Commission wrote in a draft communication on the proposals, obtained by POLITICO.

Own resources — taxes raised on behalf of the EU— are central to the Commission’s plans of paying back the EU debt it is issuing to finance the bloc's massive recovery fund that is set to pay out a total of €800 billion to capitals over the next five years. Without them, governments will have to either increase the amount of money they pay into the EU budget or cut down existing EU programs, both of which are unpopular prospects for politicians.

The draft communication stops short of saying how much revenue the Commission will seek to appropriate from each policy, but officials told POLITICO that Brussels aims to raise about €15 billion per year. The three new levies should start applying from 2023.

Getting all 27 EU countries to sign up won’t be easy, with many wary of entrusting even more revenue-raising powers to Brussels.

“We will discuss but still our core feeling is we’re reluctant on it,” said a diplomat from a so-called frugal country. “We need to be convinced.”

Looming criticism

The Commission's plans to use part of the EU's income from the global levy for multinationals to help pay back its debt could also complicate an international accord to reform corporate tax rules.

The levy, known as Pillar 1, is part of a two-pronged global accord that the Organization for Economic Cooperation and Development brokered in the fall to ensure multinationals and tech giants pay their fair dues. Pillar 2 of the OECD agreement sets a minimum corporate tax rate of 15 percent for companies with revenue above €750 million. Leaders from G20 countries rubber-stamped the global tax deal in late October.

The Commission's draft communication specifies the levy for multinationals would only be introduced once a “multilateral convention” is negotiated by global policymakers and the related EU directive is agreed and in force. The EU bill for Pillar 1 is expected in late July.

But skeptics abound. “As long as these objectives have not been reached, I think it is a bit pointless to talk about the possibility of redistribution,” a top official in the French finance ministry said.

There are also questions over how much revenue the levy would generate. Pillar 1 aims to reallocate $125 billion of residual profits worldwide, of which only some will end up in the EU.

“If you take a small amount from a small amount, it doesn’t add up to much,” said Dutch S&D member Paul Tang, who heads the European Parliament’s subcommittee on tax. Changing the terms of a contentious global deal could also prove complicated, he added. “We need a stable source for own resources.”

The other two options aren’t without critics.

The Commission will propose that a — still to-be-determined — share of revenues from auctioning emission permits, currently accruing to national coffers, will flow into the EU’s budget.

Given plans to extend the EU’s carbon market to shipping and aviation, while creating a new one for heating and transport fuels and factoring in the recent spike in carbon prices, revenues from emission permit sales are expected to boom to several hundred billion euros per year by 2050, according to some estimates.

But shifting part of that cash to the EU budget would hurt countries’ balance sheets at a time of much-needed public investment. 

“You get a certain redistribution towards countries with less CO2 intensive industries … the beneficiaries are countries like France with nuclear power, rather than fossil [energy] and so on,” said Clemens Fuest, president of the Munich-based Ifo Institute for Economic Research. But he added that an EU levy based on its own carbon market makes sense as “it is related to a policy, and a policy problem, which is genuinely European.”

“The result will be that you have some losers; Poland is probably the biggest loser,” he said.

Brussels is aware of that risk and that is why it’s proposing to cap the contributions from lower income and carbon intensive countries and set a minimum contribution for low-carbon countries until 2030.

“This will avoid that some Member States contribute [disproportionately] to the EU budget in comparison to the size of their economy, during the period of transition to more sustainable economies and societies, and ensures a just contribution from all,” the Commission wrote in the draft communication. 

Finally, the Commission’s plan to direct part of the profits from a new carbon border levy isn’t likely to go down well with countries that are just starting negotiations on it. 

“An agreement on [a carbon border adjustment mechanism] is not an agreement on a new own resource based on it. That’s a next step and part of the broader discussion on own resources,” said the EU diplomat from a frugal country.

Tax plan

Two more tax bills will emerge Wednesday alongside, but unrelated to, the own resources package. They aim to crack down on tax havens and companies that use accounting tricks to avoid paying their fair share of dues.

The big-ticket item is the EU’s bid to implement the 15 percent minimum corporate tax rate, as part of the OECD accord. The initiative already has the political backing of all 27 capitals but some treasury officials harbor fears over Estonia and Hungary, which were among the last holdouts over the OECD deal.

Budapest could hold the initiative hostage in retaliation to drawn out talks with the Commission over getting money from the recovery fund, officials said. Tallinn, meanwhile, is wary over how the global overhaul will complicate its tax code. Tax initiatives need unanimity before they can become law in the EU.

The second initiative will aim to make letterbox companies across the bloc useless as a means of getting tax breaks. The initiative will require national tax authorities to scrutinize these shell companies to ensure they serve an economic activity. If not, tax authorities will have to wind them down.

All the draft documents are subject to change prior to approval by the Commission next week.