The aim of the dissemination event was to hold a presentation about the interaction between tax harmonization and national sovereignty as this question formed one of the cornerstones of the taxation part of the Economic Governance research project. The presentation was organized under the auspices of the University of Debrecen at the Faculty of Economics and the target audience was the bachelor and master students of the university, studying business administration or leadership. However, the participation was open to all the interested people free of charge. Eventually, 21 participants attended the dissemination seminar.
Tax sovereignty is a delicate issue for countries that participate in a regional integration. This statement holds particularly true in the context of the European Union and its Member States because they achieved a deep integration. However, the Member States retained their tax sovereignty and abstained from substantive harmonization in this field until recently. The lack of extensive harmonization merely means the absence of legislation, however the European Court of Justice carried out negative harmonization since the Avoir Fiscal case by means of testing national tax measures against EU law, resulting in dismantling a number of restrictive tax measures.
Tax harmonization has always been a sensitive topic within the European Union. On the one hand, tax measures can cause a restriction to the free movement of goods, services, capital and labor. Thus, it can be liable to hinder the primary economic objective of the EU, namely, the well-functioning of the internal market and eliminating the detrimental effects can justify the harmonization of the rules. On the other hand, taxation is the main source for the Member States to finance public services and therefore, their will to shape their tax systems in accordance to their own economic policy.
The delicacy of the issue is further increased by the fact that one can find no explicit allocation of competences in the field of taxation. It is considered to belong to the objective of the establishment of the internal market, which in turn falls within the shared competence between the EU and its Member States. It means that both the EU and the Member States are entitled to regulate this field, however, as soon as and to the extent the EU exercises its competence, Member States lose their liberty to act in parallel and the given field becomes an EU exclusive competence.
In the field of indirect taxation (customs duties, excise duties and value-added taxation), with the existence of an explicit legal basis for harmonization in the Treaty on the Functioning of the European Union enshrined in Article 113, we can observe an extensive harmonization at EU level. In contrast, in the area of direct taxation, in the lack of explicit legal basis, harmonization only took place sporadically, mostly focusing on the alleviation of certain cross-border payments or reorganizations from double or immediate taxation (Parent-Subsidiary Directive, Interest-Royalty Directive, Tax Merger Directive). More comprehensive harmonization measures occurred only recently, in 2016-17, with the adoption of the Anti-Tax Avoidance Directive and its amendment that prescribe the obligation for the Member States to tackle tax avoidance in the field of corporate taxation, irrespective of whether the abusive situation arises in a setting where EU law applies or in a purely domestic transaction.
Very recently, harmonization went even further with the adoption of the Global Minimum Tax Directive. It entails that large multinational groups with an annual net revenues of at least EUR 750 million should be subject to an effective tax rate of 15% in each jurisdiction where they operate. The rules are designed in a way that if the tax level is lower than this percentage, then the primary right to collect the Top-up Tax goes to the low tax jurisdiction in the form of the possibility to adopt a Qualified Domestic Top-up Tax. When this Member State fails to apply these rules, then the jurisdiction where the ultimate parent entity of the group is located can collect the tax. Thirdly, as a backstop, any jurisdiction where the multinational group is present can collect the tax under the Undertaxed Profits Rules.
We can experience an expansion of harmonization measures recently that can be reasoned by the publicity of low tax burden of otherwise very profitable and successful multinationals and global endeavor of tax coordination measures. This phenomenon certainly puts a restraint on the liberty of Member States to design their own tax systems. Nevertheless, the devil lies in the details and if one takes a closer look on the harmonized rules, it becomes visible that the recent significant developments did not put an end on tax competition and Member States still have leeway to pursue their tax policies in line with their economic aims and to design a competitive tax environment.
It is interesting to observe that the recent success stories regarding the progress of harmonizing tax measures did not originate from the EU. Rather, they had their roots in international tax coordination forums, most notably in the framework of the OECD / Inclusive Framework. These global tax coordination forums managed to convince numerous states to commit to the developed standards and rules and implement them in their domestic tax systems or tax treaty network. The most recent harmonization results in the field of direct taxation, such as the adoption of the ATAD and the global minimum tax directive also heavily rely on international agreements.
This can be interpreted as a sign that tax coordination and harmonization is becoming a global issue that cannot be successfully carried out at regional level, let alone at the level of individual states. However, it will raise additional problems such as how the voice of smaller and economically weaker state can be heard at large global forums and how to ensure that the agreements are to the benefit of all participants.
