Documents considered by the Committee on 13 February 2019 Contents

4EU tax policy: from national veto to Qualified Majority Voting

Committee’s assessment

Legally and politically important

Committee’s decision

Not cleared from scrutiny; further information requested; drawn to the attention of the Committee on Exiting the EU, the Treasury Committee and the Northern Ireland Affairs Committee

Document details

Communication from the Commission: Towards a more efficient and democratic decision making in EU tax policy

Legal base

Department

HM Treasury

Document Number

(40334), 5472/19, COM(19) 8

Background and Committee’s conclusions

4.1The EU has an extensive body of law relating to taxation, especially on indirect taxes like Value Added Tax and excise duty. It is also legislated—or tried to—in areas like energy taxation, financial transaction taxes and corporate taxation. Following the entry into force of the Lisbon Treaty in 2009, tax policy is one of the few areas of EU competence where the unanimity requirement still applies for the adoption of new policy measures, given its political sensitivity.19 This means that many proposals by the European Commission to introduce or amend EU tax laws are vetoed in the Council of Ministers and never make it onto the statute book.

4.2In addition to having withdrawn a number of tax proposals that were vetoed by Member States,20 the Commission has also recently tabled draft EU legislation in the area of taxation that are currently, by default, subject to the unanimity requirement.21 To facilitate adoption of such measures, and potentially allow for the revival of earlier failed efforts, in January 2019 the Commission asked the Member States to consider relinquishing their national veto over the adoption of new EU taxation policies. To do this, it has suggested using the so-called ‘passerelle’ clause in Article 48 of the EU Treaty, which would allow the applicable procedure to be changed from unanimity to Qualified Majority Voting (QMV) without the need for a formal amendment to the Treaties.

4.3The Commission has suggested rolling out QMV to different sections of EU tax policy gradually, using the passerelle, in four stages:

i)The first stage would see the introduction of Qualified Majority voting for EU measures which focus on addressing tax fraud, evasion and avoidance, and facilitating compliance.22 This would also introduce QMV for the conclusion of tax-related agreements between the EU and ‘third countries’, like the UK after Brexit;

ii)As a second step, QMV rules would be introduced for tax policy measures that aim to achieve public policy objectives in areas like the environment, public health or transport, for example to implement the ‘polluter pays’ or ‘user pays’ principles;23

iii)In the third stage, the national veto would be relinquished for EU measures in the field of indirect taxation (VAT and excise); and

iv)Finally, QMV would be applied to all remaining EU tax policy measures, “including areas such as the Common Corporate Tax Base, Financial Transaction Tax and taxation of the digital economy”.

4.4Use of Article 48 TEU does not allow the EU expand its competence in the field of taxation: it would give it power to adopt any tax rules or legislation that it could not, theoretically, already put into law at present. The change would only affect the procedural requirements for such policies to be agreed. Even this, however, is much easier said then done. The decision to introduce Qualified Majority Voting rules for EU tax law using the passerelle for any of the four areas identified by the Commission would be subject to a triple lock because it can be vetoed by:

4.5The Financial Secretary to the Treasury (Rt Hon. Mel Stride MP) submitted an Explanatory Memorandum on the Commission document on 5 February 2019. In it, the Minister explained the Government “is not convinced” by the Commission’s recommendation to introduce QMV for the adoption of EU tax policies, primarily because “unanimous decision making and Member States’ right to veto proposals protects national sovereignty over tax policy and their ability to design their domestic tax regime as they see fit”. He added that, in view of the UK’s decision to withdraw from the EU, the decision on whether to invoke the passerelle is primarily for the remaining Member States. (The Government is also of the view that “the EU-27 are unlikely to reach agreement quickly, if at all, on a way forward, given that the decision to move from unanimity to QMV must itself be taken unanimously”.)

4.6The likely political opposition to the Commission’s suggestions at Member State level notwithstanding, its policy paper in itself does not constitute a legal proposal to make the changes to the EU’s voting rules it recommends. That would require a formal decision by the European Council at a later stage, for which no proposal will be prepared until the notion of introducing Qualified Majority Voting rules for some areas of EU tax policy (even if not of the same scope as suggested by the Commission) has received the political endorsement of the EU’s Heads of State and Government. It is unclear when Member States might formally discuss whether to take the Commission’s recommendations on EU tax policy forward. However, on 12 February 2019, a “considerable number” of EU Finance Ministers said their Governments would prefer to keep unanimous decision-making for EU tax measures.25

Our conclusions

4.7The passerelle clauses in the Lisbon Treaty, allowing the Member States to agree to an abolition of their right of veto over certain EU policies without the need for a formal Treaty amendment, have always been controversial.

4.8The European Commission’s recent suggestion to make use of the passerelle option to remove Member States’ national veto over EU tax policy—one of the few remaining areas of unanimity decision-making in the Council of Ministers—would allow for reforms with potentially far-reaching impacts on national tax systems to be adopted more rapidly and despite Member State opposition. This could lead to the potential revival of earlier failed Commission efforts like the EU-wide standardised VAT return, higher mandatory rates of excise duty on alcohol, and the reform of the Energy Taxation Directive. It is also unclear to us how the distinction between the different steps identified by the Commission to gradually expand the QMV rules for EU tax policy would be demarcated in a legally water-tight way. The different areas where Qualified Majority voting applied, and where unanimity remained the norm, would have to be set out clearly in law so that it was indisputable which voting rules were applicable for any given Commission proposal to change EU tax policy.

4.9The Commission’s proposals are also clearly linked to the UK’s withdrawal from the European Union. It is inconceivable that a British Government of any political stripe would have consented to be stripped of its veto powers over EU tax legislation while the UK remained a Member State. Indeed, under section 6 of the European Union Act 2011, a Government could not legally have allowed the use of any of a passerelle clause to introduce QMV for EU taxation policy, except if it secured approval for such a decision by both Act of Parliament and by referendum.26

4.10With the UK’s withdrawal from the EU scheduled for 29 March 2019, this particular British obstacle to removal of the veto right for each Member State over EU tax policy will not exist for much longer.27 However, as the Minister rightly notes, that does not mean the Commission’s recommendations will be accepted by the remaining Member States. Given that any of the EU-27, and indeed any of the EU’s national parliaments,28 can veto use of the Article 48 TEU passerelle, we consider it unlikely there will be any rapid decisions to move away from each Member States’ veto rights over EU tax law (or to introduce more powers for the European Parliament in this area).29 We welcome the outcome of the meeting of EU Finance Ministers of 12 February 2019 in this regard, which made clear unanimous support for the use of the passerelle does not currently exist.

4.11However, in light of the UK’s imminent withdrawal from the EU, the eventual use of the passerelle cannot be ruled out if the other Member States can be persuaded of its merit. We consider that the introduction of QMV for some or all areas of EU tax policy would be potentially significant for the UK, even as a non-Member State.

4.12First, the draft Withdrawal Agreement on EU exit the Government has negotiated provides for a post-Brexit transition. During this period, which could last until 31 December 2022, the UK would remain bound by all EU legislation which takes effect during that period (even if it was adopted after the UK had already ceased to have voting rights in the Council). There is therefore a possibility, however remote, that the remaining Member States could agree to adopt some forms of EU tax legislation by QMV during the transition period. Removal of the national veto could substantially alter the substance of European tax policy to which the UK would be subject until the end of the transitional period, especially since a large number of proposals—especially relating to VAT30 and corporate taxation—are currently being drafted in Brussels. These could be caught by the new voting rules if the passerelle is used, and potentially adopted where under current circumstances one of the remaining Member State would have exercised its veto.

4.13Moreover, under the controversial Irish backstop, Northern Ireland would remain bound by substantial sections of the EU’s legislation relating to Value Added Tax and excise duty.31 Under the Commission proposals, any future changes to these laws would be decided by QMV by 2025, potentially affecting how future changes to substantial part of the tax system of Northern Ireland are decided at EU-level. We also note in this respect that the Government has failed to produce any convincing proposals for the ‘alternative arrangements’ to supersede the VAT and excise-related elements of the backstop with a UK-wide agreement with the EU which does not rely on continued adherence to parts of the relevant EU Directives.32

4.14As a result, under the draft Withdrawal Agreement EU taxation law—whether adopted by unanimity or, as the Commission wants, by Qualified Majority—could have a direct impact in all or parts of the United Kingdom for many years to come. However, our concerns specifically about the implications of the taxation passerelle for the UK during the transition and under the backstop are, at this stage, only hypothetical. We note the Minister’s view33 that use of Article 48(7) TEU to introduce Qualified Majority rules for EU tax legislation is unlikely to be done in such haste as to affect the passing of new laws in the near future.34 Moreover, the Withdrawal Agreement has not been ratified, and as such it is not yet known whether the transitional period and the backstop will actually take effect.

4.15Beyond the implications of EU tax law during the transitional period and under the backstop, the UK will retain an interest in any developments in the EU’s tax policy after its withdrawal from the EU for the long term. Given Britain’s close economic links with Europe, the way in which the EU approaches matters like corporate taxation, financial transaction taxes35 or Value Added Tax could offer opportunities for, and pose risks to, the British economy. Those implications, and how the UK might respond in its domestic tax system, will need to be assessed on a case-by-case basis as such changes are debated at EU-level.

4.16Taxation is also explicitly identified as an area of cooperation after Brexit in the Political Declaration on the future UK-EU economic partnership accompanying the draft Withdrawal Agreement.36 As noted, the Government has said in particular that it wants to agree a new common approach with the EU to VAT and excise duty on cross-border movements of goods, to remove the need for any fiscal controls at the border when the UK leaves the Customs Union and Single Market and supersede the relevant elements of the Northern Ireland backstop. The introduction of QMV rules would affect the necessary majority in the Council to conclude any such tax-related agreements negotiated with the UK Government (which, at present, could be vetoed by any Member State).

4.17For the various reasons described above, any use of the passerelle could affect what EU tax law the UK may have to implement during the putative post-Brexit transitional period or beyond, especially in Northern Ireland under the backstop. Equally, it would impact on tax cooperation agreements the Government may wish to strike with the EU in the longer-term to combat tax fraud and evasion with a cross-border aspect. We therefore consider the Commission’s recommendations to be of major political importance. This Committee is of the view that EU tax policy—while the UK is a Member State or remains bound by EU tax legislation—should remain subject to unanimity in the Council in all cases. We therefore expect the Government to exercise its veto over use of Article 48(7) TEU for as long as it retains its right to do so.

4.18We have also decided to retain the Commission document under scrutiny in anticipation of further information from the Treasury in due course about either:

4.19We also draw our conclusions to the attention of the Treasury Committee and the Committee on Exiting the EU and, given the specific implications for Northern Ireland under the backstop, the Northern Ireland Affairs Committee.

Full details of the documents

Communication from the Commission: Towards a more efficient and democratic decision making in EU tax policy: (40334), 5472/19, COM(2019) 8.

Background

4.20Following the entry into force of the Lisbon Treaty in 2009, tax is one of the few areas of EU economic policy where the unanimity requirement still applies, given its political sensitivity. As a result, EU tax legislation—for example in areas like VAT, excise duty, corporate taxation and energy taxes—can only be adopted with the unanimous agreement of all EU Member States. (The European Parliament also only plays a consultative role in the making of EU taxation legislation.)

4.21These procedural requirements mean that decision-making on European tax policy is often slow, and not infrequently results in the Commission having to withdraw proposals for which no unanimity is ever likely to be found. Recent examples of this include the proposed revision of the Energy Taxation Directive, raising the minimum duty on alcohol in all Member States, and the proposed introduction of a standardised EU-wide VAT return for businesses. It has also required the Commission to re-think its proposal for a Common Consolidated Corporate Tax Base for multinationals in the EU.

4.22As a result of this, the European Commission has long argued that the inflexibility inherent in the unanimity requirement has acted as a block on coherent and flexible EU decision-making when tax policy is discussed in the Council of Ministers. However, the Lisbon Treaty contains provisions that allow Qualified Majority (QMV) to be introduced for draft EU legislation still subject to the unanimity requirement—including those taxation—without the need for another formal Treaty amendment (which would entail a full national ratification process by national parliaments). The relevant so-called ‘passerelle’ clauses that could be applied to introduce QMV rules for EU tax policy are:

4.23Combined, these two Articles allow the Member States to unanimously adopt a legal decision extending the use of QMV to the adoption of EU measures in the area of tax policy. In practice, this means the necessary majority in the Council would be reduced from unanimity to a qualified majority representing 55 per cent of Member States39 and 65 per cent of the EU’s total population. This would primarily affect legal acts to amend the EU’s VAT and Excise Directives, but also the conclusion of international agreements with non-EU countries on tax matters (and other acts by the Member States that relate to taxation, such as Council conclusions) where currently each Member State has a veto.40

4.24The use of the two different passerelle clauses that could be used to introduce QMV voting for tax legislation are different, as shown in the table below. In summary, it would be easier to invoke Article 192 TFEU for tax-related environmental measures because—as a policy-specific passerelle—would not be subject to a veto by the EU’s national parliaments or the European Parliament.

Table 1: Passerelle clauses proposed by the Commission to introduce QMV voting for EU tax policy

Passerelle

Scope

Level of support needed among Member States 41

Veto for national parliaments

Veto for the European Parliament

Article 192(2) TFEU

Introduce QMV for environmental measures “of a fiscal nature”, such as energy taxation, as well as co-decision powers for the European Parliament.

Unanimity

No

No

Article 48(7)

Introduce QMV to all other EU tax policy, with or without co-decision powers for the European Parliament.

Unanimity

Yes

Yes

The European Commission’s recommendations

4.25In January 2019, the Commission published a policy paper recommending that the passerelle clauses described above should be invoked to introduce QMV for new EU tax legislation.42 The Commission argues that unanimous decision-making on tax policy, which gives each Member State the ability to veto any tax legislation, “slows down decision-making and discourages Member States from seeking to reach a compromise”, as they can block any proposal indefinitely. The Commission further suggest that unanimity in tax policy is used as a bargaining chip to extract concessions on other areas of policy, or between unrelated tax policy proposals.

4.26In its new paper, the Commission proposes to make the shift from unanimity to QMV for EU tax measures in four stages:

(1)The first stage would see the introduction of Qualified Majority voting for measures “which do not impact directly on Member States’ taxing rights” but which focus on addressing tax fraud, evasion and avoidance and facilitating compliance. This would remove the national veto for changes to the Regulations and Directives that establish administrative cooperation between the EU’s tax authorities, and for harmonised reporting requirements for businesses (like the proposed standardised VAT return that was rejected by Member States).43 This would also introduce QMV for the conclusion of tax-related agreements between the EU and ‘third countries’, like the UK after Brexit;

(2)As a second step, Qualified Majority rules would be introduced for tax policy measures that aim to achieve public policy objectives in areas like the environment, public health or transport (by incentivising or discouraging consumer and business behaviour, implementing the ‘polluter pays’ or ‘user pays’ principles via EU-wide tax legislation). For environmental tax measures of this kind, the passerelle in Article 192 TFEU could be used;

(3)In the third stage, the national veto would be relinquished for EU measures in the field of indirect taxation (VAT and excise); and

(4)Finally, QMV would be applied to all remaining EU tax policy measures, “including areas such as the Common Corporate Tax Base, Financial Transaction Tax and taxation of the digital economy”.

4.27The Commission has not, at this stage, issued formal proposals to give effect to its recommendations. Instead, it has asked the Member States to discuss—and endorse—its proposed course of action, focussing on a swift decision to introduce QMV for the areas of tax policy described under steps 1 and 2 above as soon as possible, with steps 3 and 4 completed by the end of 2025.

The UK Government’s position

4.28The Financial Secretary to the Treasury (Rt Hon. Mel Stride MP) submitted an Explanatory Memorandum on the Commission’s policy paper on 5 February 2019. This notes that the Government “is not convinced” by the Commission’s recommendation:

Since 2015 the EU has agreed several tax policy measures and therefore we disagree that unanimous decision-making hampers the progress of EU tax policy proposals. Furthermore, we think that the unanimous decision making and Member States’ right to veto proposals protects national sovereignty over tax policy and their ability to design their domestic tax regime as they see fit.

4.29Many other Member States will share these concerns. The UK will also retain an interest in any developments in the EU’s tax policy after its withdrawal from the EU. Firstly, EU tax law will continue to apply during the post-Brexit transitional period (if the Withdrawal Agreement is ratified). In the longer term, taxation is also identified as an area of cooperation after Brexit in the Political Declaration on the future UK-EU economic partnership accompanying the draft Withdrawal Agreement.44

4.30Nevertheless, the Minister notes that the applicable voting rules in the Council are “largely a political discussion for the EU27 Member States to have following elections to the European Parliament and the appointment of a new College of Commissioners” in late 2019. The Explanatory Memorandum also explains that the Government expects no impact of the specific recommendation to introduce QMV for the UK because “the EU-27 are unlikely to reach agreement quickly, if at all, on a way forward, given that the decision to move from unanimity to QMV must itself be taken unanimously”. Therefore, any EU tax legislation that would be decided under the new voting rules would take effect beyond the end of the proposed post-Brexit transitional period (which could last until 31 December 2022).

4.31We have set out our assessment of the potential implications of the use of the EU Treaty passerelle for tax policy in paragraphs 7 to 19 above.

Previous Committee Reports

None. We considered a similar recommendation by the European Commission to introduce QMV in certain areas of EU foreign policy in October 2018. See: (40085), 12425/18, COM(2018) 647: Fortieth Report HC 301–xxxix (2017–19), chapter 13 (17 October 2018).


19 It follows that all EU tax law approved since UK accession to the EEC in 1973 was agreed to by the UK Government.

20 Recent examples of Commission proposals on tax that were withdrawn since they failed to meet the unanimity threshold are the proposed revision of the Energy Taxation Directive (COM(2011) 169), raising the minimum excise duty thresholds in all Member States (COM (2006) 486), and the proposed introduction of a standardised EU-wide VAT return for businesses (COM(2013) 721).

21 See for example our recent Report on EU proposals for far-reaching VAT reform.

22 This would affect, for example, any future changes to EU Regulation 904/2010 on administrative cooperation in the field of VAT.

23 For environmental tax measures, the passerelle in Article 192 TFEU could be used. See for more information the ‘Background’ section of this chapter.

24 The passerelle in Article 192 TFEU to introduce QMV for tax-related environmental measures is not subject to a veto by national parliaments or the European Parliaments. It only requires unanimous agreement of Member State Governments in the Council.

25 Outcome of the ECOFIN Council of 12 February 2019, p. 5–6.

26 Articles 113 and 115 TFEU, which are the overarching legal basis for EU taxation policy, were specifically listed in Schedule 1 of the 2011 Act. This means that the UK Government could only approve use of the passerelle to introduce Qualified Majority Voting under those articles after securing support both through an Act of Parliament and through a referendum. The same applies to use of the passerelle to remove national veto for environmental measures of a fiscal nature under Article 192(2) TFEU.

27 In addition, the European Union Act 2011 was repealed by means of regulations under the European Union (Withdrawal) Act 2018 in July 2018. Therefore, the UK Government is technically free to consent to the use of the passerelles—while the UK remains a Member State—without the need for parliamentary and public approval.

28 Use of the passerelle procedure set out in Article 192(2) TFEU—to introduce Qualified Majority voting for tax policies linked to environmental objectives—is not subject to vetoes by national or the European parliaments. However, it still gives every Member State government a veto over its use, because its activation requires unanimity in the Council.

29 The UK’s withdrawal from the EU will also affect the position of the remaining Member States when considering whether to accept any move from unanimity to Qualified Majority voting. After the UK’s weighted voting rights in the Council are removed, France and Germany will move closer to representing the 35 per cent of the EU’s population required to block new legislation under QMV rules (although they would still need two more Member States to vote against as well, as a blocking minority requires at least four EU countries). The removal of the national veto over EU tax legislation would therefore, in practice, represent a more significant loss of direct influence in the Council for the smaller Member States than it would for the largest.

30 See for more information our Report on VAT and the implications of Brexit (March 2018).

31 The Protocol on Ireland/Northern Ireland provides in article 9 that “provisions of Union law [on VAT and excise] concerning goods shall apply to and in the United Kingdom in respect of Northern Ireland”.

32 Principally, the VAT Directive (Directive 2006/112/EC) and the Excise Duty Directive (Directive 2008/118/EC).

33 The Ministers’ Explanatory Memorandum explains that the Government expects no impact of the specific recommendation to introduce QMV for the UK because “the EU-27 are unlikely to reach agreement quickly, if at all, on a way forward, given that the decision to move from unanimity to QMV must itself be taken unanimously”.

34 This does not address our wider concern, as we have set out in a number of recent Reports, that the remaining Member States, by unanimity, could still adopt changes to EU tax law that will need to be applied directly in the UK if the transitional period does take effect.

35 We note with respect to the Financial Transactions Tax that this is currently subject to an enhanced cooperation procedure in which only 10 Member States participate. They would not meet the threshold for a Qualified Majority, and as such the FTT could not be adopted for the EU as a whole after use of the passerelle unless more Member States support the proposal.

36 The Political Declaration calls for “administrative cooperation […] for the recovery of claims related to taxes and duties” on UK-EU trade, as well as provisions on “open and fair competition” which cover “relevant tax matters”. The Treasury’s Explanatory Memorandum states: “In potentially allowing the EU to reach agreement on tax policy more quickly, [the introduction of QMV] may have an indirect impact on the UK in terms of the initiatives the EU is able to pursue in its own tax agenda”.

37 The Article 48 TEU passerelle covers any area where the EU Treaties require decisions to be taken by unanimity, except those “with military implications or those in the area of defence”. As shown in the Annex to this chapter, several policy area-specific passerelle clauses also exist for employment, foreign policy and family law policy. There is no passerelle clause specific to EU tax legislation.

38 Under Article 192(2) TFEU, any move to QMV also requires the introduction of full co-decision powers for the European Parliament under the ordinary legislative procedure. For decisions under Article 48(7) TEU, that is optional at the discretion of the Member States.

39 While the UK remains a Member State, this means QMV requires 16 Member States to vote in favour. After Brexit, this will drop to 15.

40 Article 116 TFEU allows the Council to act by QMV to eliminate distortions of competition due to different tax rules if the distortion could not be removed by unanimity. However, this Article has never been used.

41 In a strict legal sense, a decision taken under Article 192(2) would be taken by the Council and under Article 48(7) by the European Council.

42 Commission document COM(19) 8. The Commission previously issued a similar policy paper on introducing QMV for certain areas of EU foreign policy. Further papers are to be published in spring 2019 in relation to energy and climate policy (March 2019) and employment law (April 2019).

43 See for more information the European Scrutiny Committee’s Report of 25 February 2015.

44 The Political Declaration calls for “administrative cooperation […] for the recovery of claims related to taxes and duties” on UK-EU trade, as well as provisions on “open and fair competition” which cover “relevant tax matters”. The Treasury’s Explanatory Memorandum states: “in potentially allowing the EU to reach agreement on tax policy more quickly, it may have an indirect impact on the UK in terms of the initiatives the EU is able to pursue in its own tax agenda”.




Published: 19 February 2019