The EU’s Never-Ending Quest for More Taxation Powers

By
Pieter Cleppe
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EU Commissioner Wopke Hoekstra - Copyright: Belgian Presidency of the Council of the EU 2024 from Belgium, CC BY 2.0 , via Wikimedia Commons

This Summer, the European Commission proposed five new proposed income sources for the EU’s new long term budget (Multiannual Financial Framework (“MFF”), scheduled to run from 2028 until 2034. Reportedly, EU member states are fiercely resisting two of the five. In particular, the proposals for a “Corporate Resource for Europe” (CORE) and “Tobacco Excise Duty Own Resource” (TEDOR) face heavy resistance.

CORE, which would generate around €6.8 billion per year by taxing companies with over €50 million in annual turnover and a permanent establishment in the EU, was sharply criticised by the German government at an EU Council meeting last month, as it claimed this would endanger the international competitiveness of EU companies. It thereby even questioned if the tax was legal. Euractiv quotes an EU diplomat pointing out that no one was open to or even positive about this particular proposal. It is telling how out of touch the European Commission bureaucracy has become.

Also the Commission’s proposed tobacco tax TEDOR faced strong resistance, with 14 EU member states, including Italy, Greece, Austria, Sweden, Portugal and Romania opposing it.  They thereby also argued that any new EU-level income – EU taxes – should relieve national governments of their contributions to the EU budget, rather than transfer funds from national budgets.

Troubling in this regard is that the Commission’s proposed tax hikes  would also cover “tobacco-related products”, even when they do not contain any tobacco, as for example vaping products. The European Commissioner responsible for this, Dutchman Wopke Hoekstra, thereby continues to equate traditional tobacco products, like cigarettes, with new alternatives. On LinkedIn, he calls those alternative products “also extremely harmful”. The UK government’s health department has however pointed out that “best estimates show e-cigarettes are 95% less harmful to your health than normal cigarettes.”

With science, there are always unknowns, and nobody will claim that regulators should not be careful, especially when it comes to children, but should we find it normal that a European Commissioner ignores the current scientific consensus in this way?

Even more regretful is that the Commissioner never seems to look at what has worked to drastically reduce smoking rates. Snus is an older  alternative to cigarettes. In the whole EU, it has been outlawed, apart from Sweden, which enjoyed an exemption from the EU ban in the 1990s, when it joined the European Union. In this way, Sweden serves as some kind of a control group. After thirty years, the results are in, and they are deeply embarrassing for EU health policy. Currently, Sweden has among the lowest smoking rates in Europe, and it also has a much lower incidence of smoking-related diseases. In the 1960s, almost half of Swedish men smoked. Today, only around 5% of Swedish adults smoke, while the European average is 24%. Compared to other EU countries, Sweden has 44% fewer tobacco related deaths, 41% lower lung cancer rates and 38% fewer cancer deaths.

While snus was originally a product containing tobacco, there are now varieties on the market without any tobacco that only contain nicotine. Several EU member states have however outlawed them. Surely, banning unhealthy products may work for a small segment of the population, but to provide those addicted to nicotine with an alternative that avoids exposure to the burning process has clearly worked in the case of Sweden. Nevertheless, the likes of Hoekstra seem to be blissfully unaware of this alternative policy approach.

Hoekstra’s colleague, EU Health Commissioner, Olivér Várhelyi even went further than the Dutchman. He recently told MEPs that “new tobacco and nicotine products pose health risks comparable to traditional ones.” This alone suggests the EU should have no say over health policy, apart from preventing it to acquire more taxation powers.

EU Finance Ministers are planning to debate CORE, TEDOR and other proposed income sources on 10 October. The opposition is likely to remain fierce, but this should not overlook that over the years, the European Union has acquired great influence over taxation.

Earlier this year, 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”. The initiative is meant to help improve the competitiveness of European countries, which is badly affected by high energy prices but also costly regulation and a high tax burden. For a long time, taxation was mostly the competence of EU member states, but this has definitely changed. The EU has great control over this important policy lever.

EU member states thereby stated they want the European Commission to “introduce an operational, pragmatic and ambitious action plan”, to deliver a “tax decluttering and simplification agenda”, aimed at “reducing the reporting, administrative and compliance burdens for member states’ administrations and taxpayers”.

As often, the one hand of a bureaucracy is not always aware what the other does, because in April, EU governments have approved the implementation of the 15% global minimum corporate tax rate in the EU. This is quite something, as it reduces tax competition within the bloc, with as a result, there is less pressure on governments for budget discipline, as they no longer need to fear as much losing tax income to companies opting for Member States with a more attractive corporate tax rate. In June, U.S. President Trump announced the withdrawal of the U.S. from this global tax arrangement that had been agreed at the level of the Organisation for Economic Co-operation and Development’s (OECD). One can only wonder why European governments would continue with this now.

Trump’s pressure already forced the European Commission to drop plans to levy a tax on digital companies, which the EU also hoped to push through to bring in revenue for its long term budget. Then, this plan already dates back more than a decade, and as often with these EU Commission proposals, one can be fairly certain it will be brought back in one way or another. Fundamentally, the Commission thereby simply ignores evidence that such digital services taxes tend to mostly end up being invoiced through to small sellers who increase prices for local consumers.

Also due to pressure from Trump, US companies would enjoy an exemption from the Carbon Border Adjustment Mechanism (CBAM), a new EU customs tariff that imposes a levy on emission-intensive products entering the EU. Trump thereby also secured that American products will be largely exempt from the new European deforestation regulation, which imposes a lot of new bureaucratic red tape.

This, in turn, has angered other trading partners such as Indonesia and Malaysia, which are also affected by the new rules due to their large palm oil exports. Malaysia considers it unfair that its imports are classified as “standard risk”, as opposed to the US classification of “low risk”, given that deforestation there has improved significantly, with NGOs recognising a reduction of 13 per cent last year. The new EU directive effectively installs a two-tier system for its trading partners, and as a result of the pressure by Trump, they are likely to continue to push for equal treatment.

ETS

At the moment, one specific EU tax arrangement is truly hurting the competitiveness of the European industry. The current cost component of the EU’s Emissions Trading System (ETS), a de facto EU climate tax, in the natural gas price in the EU 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. In other words, while the EU and its member states could embrace nuclear power, gas exploration in the Netherlands and Italy, and shale gas exploration in Poland and Germany, these are all long term measures. Simply scrapping the EU’s climate taxation scheme would already massively help EU industry. Yet, no serious EU policy maker is even contemplating this. Even those that only care about CO2 emissions should realise that in the US, where there is no such climate tax, CO2 emissions fell more sharply in percentage terms since 2005, when EU ETS was launched.

Ineos, one of Europe’s largest chemical concerns, warned this year that “the European chemical sector is on the brink of extinction”, but few seem to care about the fate of this energy-hungry sector which forms the backbone of industry.

Instead of focusing on profound distortions like its ETS climate taxation, the European Commission is however focused on acquiring ever more tax powers. Again European Health Commissioner Olivér Várhelyi recently signalled his openness to a taxation system on products high in sugar, fat, and salt to help finance public health during a meeting with the European Parliament’s health committee. He thereby even suggested his institution’s “EU4Health” spending programme as a recipient of the cash.

Is the European Commission a hopeless case?

 

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