This blogpost is based on: G. Portolese, The Commission’s Political Strategy to Promote Direct Tax Policy Convergence in the EU: Actors, Narratives and Policy Groups.
In the last five years, the European Commission launched a series of direct corporate tax initiatives. Among these initiatives, the State aid investigations on tax rulings and the adoption of Anti-Tax Avoidance Directives (ATAD 1 and ATAD 2) attracted much attention of politicians, academics and public opinion. These tax initiatives, putting it simply, aimed at tackling harmful tax competition and aggressive tax planning practices.
Coordinating a solution to these problems at the supranational level has been long on the political agenda of the Commission. However, Member States’ sovereign powers in the field have always hindered tax harmonization based upon Article 115 TFEU. What has then changed in the EU direct corporate taxation scenario enabling the Commission to obtain positive results from the recent initiatives?
In this blogpost I argue that the Commission’s tax initiatives of the last five years can be attributed to the evolvement of the political strategy adopted by the institution in the early 1990s. Around these years, after decades of political stalemate in the Council, the Commission shifted its political strategy from proposing legislative harmonization alone to the articulation of legislative measures with imposition of policies and transnational problem-solving mechanisms.
With regards to transnational problem-solving, the Commission focused on balancing power relations among the many actors playing in the EU direct corporate taxation arena: Member States, business community, epistemic community, civil-society organizations. The institution invested in new forms of governance encompassing political steering through soft means such as coordination, negotiation and cooperation. To the end of coordinating corporate tax policies at the EU level, the Commission enabled the creation of policy spaces within which the constellations of actors could meet to discuss and negotiate on the meaning of a corporate tax reform.
Throughout the years, the Commission’s political strategy has been adapting to the changes in the international and supranational scenarios and expanding around three basic elements of these policy spaces: (1) the actors involved in the direct tax policy discussions and their preferences for a corporate tax reform; (2) the construction of policy narratives aligned with actor’s preferences and meanings; and (3) the institutionalization of policy groups.
The evolvement of the Commission’s Political Strategy around actors, narratives and policy space and its impact in the recent tax initiatives of the institution is present briefly in this blogpost. The topic is explored more in depth in the working paper ‘The Commission’s Political Strategy to Promote Direct Tax Policy Convergence in the EU: Actors, Narratives and Policy Groups’.
- Actors, Narratives and Policy Groups
From 1967 to 1990, the Commission grounded its initiatives to promote the transfer of direct tax policy to the supranational level on the narrative of ‘the functioning of the internal market’. This narrative, however, proved to be excessively vague to provide a meaning for a corporate tax reform. For instance, while for the business community reform meant elimination of tax obstacles for cross-border activities and shareholding, for Member States it meant protection of their tax base without transferring taxing powers to the Union.
By identifying the constraints and interests of Member States and business community, the Commission adopted the strategy of splitting up the corporate tax reform into two parts. This functional differentiation of the tax reform attended to the preferences of these two constellations of actors and was operationalized around two policy narratives: ‘the protection of Member States’ tax bases’ and ‘the elimination of obstacles leading to double taxation in cross-border activities and shareholding’. When the negative effects of the financial and economic crises started to hit Member States’ budgets, the public opinion put into question whether Member States would equally distribute the tax burdens within the society. The Commission, therefore, encapsulated the preferences of Member States, business community and civil society into the policy narrative of ‘tax good governance and fair and efficient tax systems’.
Protecting Member States’ Tax Bases
The Commission started to elaborate and specify the meaning of the narrative of protection of the tax base in cooperation with its Members States in the 1997 Harmful Tax Competition Package. This package introduced the Code of Conduct for Business Taxation (Code of Conduct) and the institutionalization of the Code of Conduct Group (CoCG). In its first years, the CoCG concentrated its efforts in the assessment of Member States’ tax measures against the criteria of harmful tax competition set in the Code (one-country issue). Later on, around 2008, the mandate of the CoCG was enlarged to cover the development of horizontal measures aimed at promoting the homogeneous approach at the EU level of tax issues involving two or more EU countries (two-country issues). This latter function of the CoCG has continuously expanded, particularly in the post-OECD-G20/BEPS project.
Eliminating obstacles in cross-border activities and share holding
In turn, the narrative of ‘elimination of obstacles leading to double taxation in cross-border activities and shareholding’ was introduced in the 2001 Communication ‘Towards an Internal Market Without Tax Obstacles’. The Commission’s initiative aimed at promoting technical exercises focusing on cross-border double taxation issues. The meaning for a tax reform encompassed measures relating to issues on transfer pricing, dividend taxation, exit taxation, etc. The actors involved in the initiative were the Commission along with Member States, and business and epistemic communities. The Joint Transfer Pricing Forum (JTPF) and the Common Consolidated Corporate Tax Base (CCCTB) working group emerged from the initiative.
The JTPF was conceived to propose non-legislative solutions to problems related to EU transfer pricing practices and is still active. Conversely, the CCCTB working group functioned with the limited mandate of assisting the Commission from 2004 to 2008 in the formulation of the CCCTB Directive proposal launched in 2011. Scholars argued that the long path between the introduction of the narrative of an internal market without tax obstacles (2001) and the proposal of the CCCTB (2011) could be explained by the declining of political interest in a corporate tax reform in the EU around 2008.
Tax Good Governance and Fair and Efficient Tax Systems
The negative impact of the economic and financial crises in Member State’s budgets, however, inaugurated the political momentum to re-propose a direct corporate tax reform not only in the EU, but also worldwide. The opportunity for a reform marked a third expansion in the Commission’s political strategy departing from 2009. In this phase, the new meaning for a corporate tax reform was constructed around the narrative of ‘good tax governance and fair and efficient tax systems’.
The narrative emerged to address the pressures that the crises were exerting in three different constellations of actors. For the Member States, the meaning for a tax reform anchored on the narrative of tax good governance and fair and efficient tax systems was translated into the fair tax competition among countries, within and outside the EU. For the business community, reform meant the elimination of double taxation and the reduction of compliance costs for cross-border activities. For citizens, tax good governance and fair and efficient tax systems represented the fair distribution of tax burden throughout the society and the financing of public goods.
To a certain extent, it is possible to assume that the ‘good tax governance and fair and efficient tax system’ narrative articulated and expanded the two narratives developed before 2009. For instance, the concept of tax good governance comprehends the ‘protection of Member States’ tax base’ by tackling harmful tax competition within the EU and harmful tax practices adopted in third countries. Fair and efficient tax systems, in turn, involve the elimination of double taxation of cross-border activities as well as the fight against tax fraud, evasion and aggressive tax planning.
In 2013, the Commission set up the Platform for Tax Good Governance (Platform) in order to make the three constellations of actors playing in the EU tax policy field – Member States, business community and civil society – to meet, discuss, and negotiate. The policy process in the Platform helped the institution to refine the narratives of good tax governance and fair and efficient tax systems and convert them into a single narrative for a comprehensive corporate tax reform: a fair and efficient tax system to the EU adopted in the 2016 CCCTB Directive proposal.
- Refining the Narratives: The Role of the Policy Groups in the Post-BEPS Era
In the post-BEPS era, the political and technical knowledge developed within the CoCG, the JTFP and the Platform played an essential role in the implementation of the G20-OECD BEPS project action in the EU.
Anti-Tax Avoidance Directives
For instance, the implementation of anti-avoidance measures, in particular the adoption of a EU General Anti Abuse Rule (GAAR), was intensively debated among the Platform members. The Commission also called on the Platform to work on the findings of a CCCTB study pointing out seven structures used for aggressive tax planning, including BEPS and non-BEPS issues. The Commission applied the policy and technical learning from these discussions in the design of the Anti-Tax Avoidance Package (ATAP).
With regards to the CoCG, the work conducted on hybrid mismatches, exit taxation, provisions on limitation on benefit were reverted into the ATAP and into the Anti Tax Avoidance Directives (ATAD 1 and 2).
Fiscal State Aid Control on Tax Rulings
Since the 1997 Harmful Tax Competition Package, some Member States were exerting political pressure on the Commission to deal with some illegal State aid measures. In this sense, the use of tax rulings as means of conferring potentially illegal State aid was also debated in the framework of the group. Some of the agreements reached in this context were made public in the Lux Leaks affair, leading the European Parliament Committee TAXE to criticize the deficit of transparency in the work of the CoCG.
The Commission, therefore, well-knowing the policy process within the CoCG, chose to apply its Treaties powers on State aid control to deal with the loopholes that some Member States tax rulings practices were creating at the EU level.
The policy process within the Platform also contributed to the Commission’s State aid investigations. For instance, a report produced by a non-governmental organization member of the Platform on the McDonald’s tax planning structure served as input to the tax rulings investigations provided to this business.
The role of the policy groups in the making of the Commission’s tax initiatives is discussed in more detail in the working paper ‘The Commission’s Political Strategy to Promote Direct Tax Policy Convergence in the EU: Actors, Narratives and Policy Groups’.
Following these lines, in this blogpost, I assume that the political strategy of the Commission – narratives, actors, and policy groups – allowed the institution to refine the meaning of a corporate tax reform through the discussions and negotiations within the CoCG, Platform and JTPF. Moreover, the preparatory work within the groups may explain the fast adoption of the ATADs in the Council as well as justify why the Commission opted to crack down on tax rulings practices through fiscal State aid control.
Finally, the policy work carried out within these three groups is helping the Commission to make the three policy narratives explored in this blogpost to converge into a single meaning for a comprehensive tax reform. This single meaning is epitomized in the re-launch of the 2016 CCCTB proposal around the narrative of ‘a fair and efficient tax system to the EU’.
 Claudio M Radaelli and Ulrike S Kraemer, “Governance Areas in EU Direct Tax Policy,” JCMS: Journal of Common Market Studies 46, no. 2 (2008): 324