The EU’s control over taxation is tightening

By
Pieter Cleppe
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Copyright: : "CC-BY-4.0: © European Union 2022 – Source: EP"

At the beginning of this year, more than 145 countries agreed to amend a 2021 global minimum corporate tax agreement, to align it with the legal framework in the United States, which has decided to no longer take part in this arrangement under President Donald Trump. He has threatened  retaliatory taxes against any countries that  impose levies on U.S. firms under the 2021 deal.

When Trump took office, at the start of 2025, he declared that the OECD global minimum tax deal would have “no force or effect” for the U.S. Despite this, the latest records show that more than 65 countries have already begun implementing the global tax deal, which requires countries to apply a 15% corporate tax or impose a top-up levy on multinationals booking profits in jurisdictions with lower tax rates.

Last Spring, EU governments approved the implementation of the 15% global minimum corporate tax rate in the EU, despite the fact that it signifies a competitive handicap for European companies now that the United States no longer participates – even if US companies will still be subject to a US minimum tax, albeit at a lower rate – 14% – and a much narrower base.  This is quite disturbing, as it reduces tax competition within the bloc, with as a result less pressure on governments for budget discipline, as they no longer need to fear as much losing.  

Even more questionable is the fact that the whole policy is locked in at the EU level, meaning EU member states are unable to follow Trump’s lead and abandon the deal. This because the global minimum tax deal has been implemented in the EU through an EU Directive, number 2022/2523.

EU regulations affecting taxation

Even if corporate taxation is still largely a member state competence, there is lots of EU legislation affecting tax policy. The Anti-Tax Avoidance Directive (ATAD, 2016/1164/EU), dating back to 2016, has all kinds of  opaque provisions that are vulnerable for arbitrary interpretation, as for example a “general anti-abuse rule” and even an “exit tax”. In an evaluation in 2024, European business federation BusinessEurope complained that the directive “lacks clear interpretation guidelines, leading to legal uncertainty for taxpayers and increasing the risk of inconsistent application among Member States.” 

The European Commission has a long track record in attempting to gain more control over corporate taxation. Typically, legislative proposals  have been labelled with acronyms, for example the Soviet-sounding “common consolidated corporate tax base (CCCTB), launched in 2011, or the “Business in Europe: Framework for Income Taxation (BEFIT)” plan from 2021, which aimed for a single EU corporate tax rulebook involving reallocation of profits between member states.

Taxing Tobacco

Setting minimum and maximum rates for taxation is a power the EU has acquired over many years. This is the case for Value Added Tax (TAX) rates and for excise, which are set at the EU level. At the moment, a heated debate between Member States has erupted over the revision of the Tobacco Excise Directive (TED), which regulates the regulatory framework for tobacco and nicotine taxation in the EU. In January, the Cyprus Presidency of the Council of the EU drew up a new draft compromise for raising minimum rate of excise duty and extending the scope of EU-wide minimum excise duties, for the first time, to newer nicotine products such as electronic cigarettes, heated tobacco products and nicotine pouches.

This proposal is an clear improvement compared to the one tabled by the European Commission, slightly softening the increase in some areas and granting a transitional period.

However, making tobacco and nicotine products drastically more expensive would obviously hurt purchasing power of consumers, particularly in poorer EU member states, so it should not surprise to see opposition coming mostly from them. At the same time, this would fuel illicit tobacco trade. The experience of France, which has among the highest excise duties on tobacco of the EU, is telling. A few years ago, it decided to considerably hike these taxes in a bid to reduce smoking rates. Unsurprisingly, France also has the largest illicit tobacco market in the EU. A 2024 KPMG report highlights that about 43% of all cigarettes consumed in France are untaxed. Belgium had similar experiences, with falling revenues after the government increased taxes. 

Also problematic is the European Commission’s approach to treat less or non-harmful alternatives to cigarettes the same. For example, according to the UK government’s health department, “best estimates show e-cigarettes are 95% less harmful to your health than normal cigarettes.” The proposed EU regulatory update completely ignores the Swedish approach, whereby non-harmful or less harmful tobacco products, such as snus, are available and regulated, something which has led to a significant reduction in the number of smokers and, consequently, a significant reduction in smoking-related illnesses. 

Several EU member states have reportedly welcomed the more realistic approach by Cyprus, arguing that an overly abrupt increase risks fueling illicit trade, eroding tax revenues and overwhelming national enforcement authorities. These governments consider a more gradual and flexible framework as essential to maintaining control over legal markets while avoiding unintended effects on national budgets, which tend to accompany drastic tax changes.

Targeting the digital sector

A more recent popular target for EU taxation is the digital sector. Last year, EU Commission president Ursula von der Leyen floated the idea of taxing digital advertising revenue — a so-called ‘Amazon tax’ — as a possible countermeasure to US tariffs, but in the end the EU did not go through with that. However, through its antitrust competition policy, the EU has been collecting lots of money from US “big tech”, and at least for the United States, this cannot go on like this. On his social media, U.S. President Donald Trump has shared a chart showing that in 2024, the European Union (EU) collected more revenue from fines imposed on U.S. technology companies than from taxing all European public tech firms combined.

While this comparison can be disputed, the arguments of EU officials to dish out enormous fines on the basis of EU competition rules should be called opaque at best. Also the EU’s new “Digital Services Act” (DSA), which was used to impose a 120 million euro fine for Twitter / X, comes with arbitrary interpretation. Here, Elon Musk’s company was fined for allowing anyone to receive a blue verified check mark on their profile when they paid for it. In this way, EU bureaucrats argued, the platform would “deceive users” because twitter would not be “meaningfully verifying” who is behind the account, even if for every user it was evident that one could simply receive the check mark if one paid for it.

In any case, just like digital services taxes, these kinds of costs tend to mostly end up being passed on to local consumers through higher prices.

Bending the law

To push its agenda forward, the European Commission has not been shying away from pushing the boundaries of the law. In 2020, it proposed using a hitherto unused EU Treaty provision, in a bid to circumvent national vetoes on taxation. At the time, it claimed that article 116 of the EU Treaty enables decisions to be taken with majority voting, if the absence of the measure would cause a distortion in the single market. According to diplomats, the Commission had been “circling” on using article 116 for some time. The institution has admitted it would not be possible to use it to push through a directive on a Digital Services Tax (DST) or to implement its “common consolidated corporate tax base” plan. Then, it could be useful for its many other initiatives on taxation, often presented as means to make taxation simpler and fairer.

The national veto on taxation policy, which the European Commission is trying to circumvent, is no small matter. If harmonising the tax base at the EU level would be pushed through, for example, it has been estimated that mostly smaller Member States would suffer. According to simulations, this would result in a transfer of taxation income from small open EU Member State economies to large closed ones. Ireland for example would lose 7.7 percent of its tax revenue, while companies across the EU would see their effective tax burden increase. Ultimately, this would be passed on to consumers in terms of higher prices.

Climate taxation

Probably the most damaging EU taxation scheme is the EU’s Emissions Trading System (ETS), a de facto EU climate tax. This is a cap-and-trade system whereby those emitting carbon emissions are forced to pay for their emissions but are able to sell the right to emit. The idea behind the system is that it optimises the cost for emitting, but in practice, it is basically yet another tax burdening Europe’s increasingly uncompetitive industry. The United States lacks such a tax, and yet, it also managed to reduce carbon emissions since 2005, suggesting that even from a climate policy perspective, it makes little sense. To add insult to injury, the EU has decided to expand its ETS scheme to buildings and road transport from 2027, something that threatens to hit consumers hard.

At the moment, this EU climate taxation scheme is driving European industry out of the EU. The cost of the EU’s de facto climate tax (ETS, a cap and trade scheme) is about twice as big as the total US natural gas price, which is only about one fifth of the EU’s natural gas price. Estimates put the cost increase due to ETS of the cost of natural gas for European industry at 49.53 percent higher and at 59.95 percent higher for the price of electricity. By 2030, the European CO2 price is expected to almost double.

European businesses have therefore been carefully challenging ETS, but at this month’s Antwerp summit on EU competitiveness, European Commission President Ursula von der Leyen refused to disavow the EU’s climate tax, instead suggesting that companies should pressure EU countries directly, stating they currently “invest less than 5% of ETS revenues in industrial decarbonisation”. In sum, von der Leyen wants the taxes paid by industry to be recycled through the bureaucratic system as subsidies.

Following her talk, Belgian Prime Minister Bart De Wever sharply condemned the EU Commission’s stance on this, stating: “Giving money back doesn’t make your products competitive. The reasoning may sound good, but it’s completely absurd. These people have never been in a petrochemical plant.”

Almost one year ago, in March 2025, EU member states called for “a thorough analysis of the EU legislative framework” when it comes to taxation, thereby urging “a review of the complete EU taxation legislation”, this to serve the simplification agenda.

Clearly, there still is a long way to go. 

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