Article 116 faces scrutiny following European Commission proposal

Article 116 faces scrutiny following European Commission proposal

The Commission’s proposed tax initiatives may harshly impact low-tax member states, say tax professionals from Mazars, Crowe UK and Andersen Tax UK

Article 116 faces scrutiny following European Commission proposal

Tax-based competition could be negatively impacted by the European Commission’s use of Article 116, warn international tax professionals.

Introduced alongside 24 other taxation initiatives being rolled out by the Commission until 2024, the formerly-unused provision would circumvent the need for unanimity on taxation issues. This would directly impact low-tax member states like Ireland, which has already criticised the plan.

“The risk is that this kind of strangles [competition], really, and stops countries operating as flexibly as they wanted, especially coming on the back of coronavirus,” says David Sayers, international tax partner at Mazars.

Sayers says while the Commission has good intentions, the scale of initiatives being proposed may not be necessary – nor beneficial – for countries already recovering from the pandemic’s impact.

He also says that the use of a ‘back-door’ approach to bypass low-tax member states, who would likely vote against the measure, is unfair and distorts competition – a thought shared by Miles Dean, head of international tax at Andersen Tax UK.

Dean argues that these proposed changes are a “power grab” by the Commission to hamper tax competition and succinctly remove the advantages held by low-tax member states.

“As a practitioner, as someone who deals in cross-border tax every day of the week, I’m not sure what [the Commission is] looking for,” Dean says, speaking of the Commission’s line of proposals. “I think it’s yet another warning shot, and there’ll more red tape, there’ll be more additions to DAC6.”

Given that DAC6 already handles cross-border tax arrangements, which Dean says mirrors existing legislation within the UK, these propositions may not be a general-purpose agreement.

Dean continues that the Commission’s goal to harmonise taxes will alter the overall sovereignty of impacted member states, where attempts to create a level playing field could negatively impact those states’ economies.

In response to these concerns, a Commission spokesperson said via email that: “The Commission has been clear that we would explore how to make full use of the provisions in the Treaties that allow taxation proposals to be adopted by qualified majority rather than unanimity.

“The Commission is now looking at various options to deliver on this political commitment.”

However, the use of Article 116 to “eliminate distortions of competition due to different tax rules” has been a point of discussion for over a year, with the European Parliament saying in 2019 that it was ready to trigger it when necessary.

Further complicating the situation is Ireland’s latest victory against the Commission, which overturned a 2016 ruling which argued that Apple, by paying taxes to Ireland, received an economic advantage by doing so.

“In reality, the case was never about the €14bn, but was about the ability of the Commission to clamp down on tax competition between member states,” Laurence Field, corporate tax partner at Crowe UK, said via email.

“The Commission disapproves of such activities and member states try to get away with as much as they can, while at the same time, also saying they disapprove.”

Although Article 116 has not yet been utilised, the Commission has confirmed it is exploring its options, which may also include moving both the Commission and European Parliament to a qualified majority vote.

“The likelihood is that the Commission will eventually get its own way and tax regimes will eventually be harmonised,” Field said. “The Commission probably doesn’t know when or how, but it’s clearly signalling it’s up for the fight.”

A further business taxation action plan is expected from the Commission this autumn.

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