The European Parliament Signals a More Integrated Tax System

October 2, 2014

The European Union is in the process of appointing new commissioners. The resulting confirmation hearings have shown clear disagreement between pro-integration groups and the “Eurosceptics,” whose U.K. members are the most vocal.

One of the most contentious appointments is the commissioner for Economic and Financial Affairs, Taxation and Customs Union. The nominee for the position, Pierre Moscovici the Minister of Finance in France, is a strong advocate of European integration, particularly in banking regulation and taxation. In his briefing for his confirmation hearing he stated:

"In keeping with the aim of making taxation fair, effective and conducive to growth, priority has been given to the fight against tax fraud and evasion, as regards both direct (in particular measures to combat damaging tax practices) and indirect (unpaid VAT) taxes; tax transparency and cooperation; taxation of online traders; taxation of energy products; taxation of financial transactions.

"In addition, progress has been made in the areas of cooperation, transparency and exchanges of information (among Member States and with third countries, for example as regards the taxation of savings), measures to combat aggressive tax planning (corporation tax, agreement on the issue of hybrid loans in the context of the revision of the Parent-Subsidiary Directive) and improvements to tax rules."

In his hearing he expressed a commitment to an “automatic exchange of [tax] information” among European nations, a key recommendation in the BEPS initiative. Overall, it seems that Moscovici’s tax policy echoes the preliminary recommendations of BEPS. Given his current support for the measures, it is a fair assessment that he will continue to support the recommendation coming from the OECD.

Despite the growing ranks of Eurosceptics, the nomination of Moscovici seems to signal that the European Parliament is pressing ahead with greater integration and tax code harmonization among member states.

Harmonization of tax codes could pose problems for low-tax members such as Ireland and Estonia. Unlike the OECD whose decision are only advisory, the EU has several levers to apply pressure to member states, particularly when those members are part of the EU’s monetary union. If Ireland or Estonia fail to adhere to tax harmonization rules, their banks may face increased scrutiny by the European Central Bank, or their farmers may see a reduction in farm subsidies from the Common Agricultural Policy. As such, low-tax countries may have to weigh political disharmony with the EU against maintain their current tax systems.

The EU’s teeth could extend beyond its member countries as well. With more than $18 trillion of economic activity, the union could use trade agreement to apply pressure to other OECD countries, but given the schism in the European Parliament, such unified action is unlikely to happen.

European countries, such as Estonia, have shown considerable innovation in their tax codes, which has resulted in increased revenue and economic growth. Increased integration may ultimately put an end to these policy innovations.

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