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Jean-Claude Juncker: The Unsung Transparency Advocate

Posted on Dec. 16, 2019

In his October goodbye address to the European Parliament, former European Commission President Jean-Claude Juncker of Luxembourg gave lawmakers two short instructions: “Take care of Europe . . . and fight stupid, narrow-minded forms of nationalism with all your might!”

Those instructions are easier said than done for an EU that is reeling from the ultimate nationalistic event — Brexit — and is feeling pressure to maintain the robust economic growth that marked the Juncker years. In the background, the EU remains bitterly divided over its long-running immigration crisis, which witnessed millions of refugees pour into Europe for the better part of the decade. In March EU officials declared the crisis officially over, but there is still plenty of hard work to be done in determining how some of the refugees will be relocated among member states. Those negotiations go to the heart of the EU’s existential questions: How open should the EU’s external and internal borders remain? And how should EU leaders balance member state freedom and sovereignty against the greater needs of the union?

A self-proclaimed European patriot, Juncker assumed office in November 2014 at a time when the EU was, in his own words, “weakened,” “unpopular,” and approaching a critical juncture. Would the EU move toward a more federalist vision like the one he championed, or would a rising coalition of Euroskeptics and nationalists threaten to undermine the system? It wasn’t immediately clear in the lead-up to that year’s EP and commission elections.

Parliament’s centrists hand-picked Juncker as their presidential candidate. This didn’t go over so well with Euroskeptics like then-U.K. Prime Minister David Cameron, or critics who saw Juncker as part of the old, stale establishment. Juncker never shied away from what he is: a career politician who alternately controlled his native Luxembourg as prime minister or finance minister for an uninterrupted 24 years, and who deeply embedded himself in the European Commission over those decades. Many questioned whether Juncker could appropriately breathe new life into the commission presidency.

In some ways he did. In others, he followed the same playbook as his predecessors. Juncker set out to draft a distinctly political commission. He shunned technocrats and surrounded himself with what he knew: other European finance ministers, prime ministers, deputy prime ministers, and the like, leaders who had been popularly elected in their home countries and already had a level of trust and rapport with constituents. This decision wasn’t inherently controversial. Every commission relies on former ministers to fill its ranks. But Juncker relied on them in greater proportion. And their knowledge, combined with Juncker’s extensive fiscal expertise, distinguished his commission from many others. The result is that Juncker stands out as the most productive commission president on tax policy and legislation in EU history. From the start of his presidency to the very end, the European Commission introduced 21 tax legislative proposals and the European Council adopted 14, according to the European Commission.

Compared to its predecessors, the Juncker commission greatly accelerated the pace of the Commission’s direct tax work, according to Rick Minor, a former adviser to Juncker’s Luxembourg government. Minor pointed out that it took 20 years for the first two substantive direct tax directives — the merger directive and parent subsidiary directive — to be agreed upon, which stands in direct contrast to the drafting pace under the Juncker commission.

“What the Juncker commission really achieved was using its limited authority to draft direct tax legislation,” Minor told Tax Notes. “Historically, leadership came more from individual member states than the commission itself.”

“Because of the good job that was done under the Juncker commission, people are expecting contributions from the commission now on direct tax developments. Juncker set a new standard and now people expect the commission to help to drive international legislation in a relatively efficient and transparent and effective way,” Minor said.

It sets a particularly high bar for the new commission led by Ursula von der Leyen of Germany, especially given the challenges of drafting implementing legislation related to the OECD project, he added.

The Juncker Plan

Juncker won the commission presidency on a platform of fairness. Precisely what that fairness entailed and what it might cost member states was an open question that his administration and its detractors repeatedly revisited. But Juncker was clear from the outset that he wanted to strengthen and expand the EU’s internal market, which he considered its best asset amid globalization and competition. He opened his commission with the Juncker Plan — a 10-point priority plan for the EU that featured tax amidst two of its priorities:

  • a connected digital single market; and

  • a deeper and fairer internal market with a strengthened industrial base.

To accomplish that, Juncker tapped former French finance minister Pierre Moscovici to serve as his commissioner for economic and financial affairs, taxation, and customs.

“He had a preexisting and excellent relationship to Juncker, so it was a good pairing. The value of having two fiscal experts at the top of the commission at the same time really paid dividends,” according to Minor, who now practices tax law with Womble Bond Dickinson. “They were much more effective together than either could have been on their own.”

In a mission letter to Moscovici, Juncker laid out what was at stake: The EU needed to modernize its tax systems in order to achieve economic policy coordination.

“Reforms should involve promoting a broadening of the tax base, shifting the tax burden away from labour, improving tax compliance and addressing the debt bias in corporate and personal income taxation,” he told Moscovici. “All efforts should also be made to combat tax evasion and tax fraud.”

Juncker also highlighted a few pet projects: developing a definitive VAT system; crafting anti-base-erosion and profit-shifting measures in accordance with the OECD project; tackling the digital economy; and finalizing negotiations started by his predecessor, José Manuel Barroso, on an EU-wide financial transaction tax and a common consolidated corporate tax base (CCCTB).

LuxLeaks

But the Juncker Plan nearly fell apart before it began. Days after Juncker took office, the International Consortium of Investigative Journalists published a massive investigation series detailing how Luxembourg, during the Juncker years, inked hundreds of secret tax rulings with multinationals allowing them to move billions of dollars through the country and pay barely any taxes.

These revelations destroyed Juncker’s credibility. He took political responsibility for the fallout but denied any part in creating the schemes. He mostly stayed quiet, enraging critics who insisted that Juncker’s handiwork was all over the documents. It came to light that he had allegedly positioned himself as a business partner and problem solver for multinationals like Amazon, whose former head of tax, Robert Comfort, told Luxembourg media that Juncker gave him wide access.

Comfort reported to d’Lëtzebuerger Land, a Luxembourg weekly, that Juncker told him, “If you encounter a problem that you think you cannot solve, come back to me. I’ll try to help.”

It also didn’t help that Juncker waffled on the specifics. Several months after the release of LuxLeaks, an EP committee called Juncker to testify, and he pleaded ignorance. “Of course I met with companies like Commerzbank, but I never talked about tax issues with them,” he said. “Tax rulings are common practice in many member states. It should instead be ‘EUleaks.’”

Two years later, Juncker backpedaled at another EP tax hearing, telling legislators, “I never said I didn’t talk about tax issues; I said I didn’t talk about particular arrangements and never discussed fiscal arrangements with a company.”

The revelations weren’t enough to unseat Juncker; he sailed through an EP no-confidence vote weeks after the investigative report. Still, the allegations shadowed him and at times he didn’t seem to have a good explanation as to why Europeans should trust him. That became painfully apparent in the ensuing weeks, when reporters asked him at a briefing why the public should believe that he would actually tackle tax avoidance and evasion during his presidency.

“Because I said so,” Juncker answered.

Transparency Is the Name of the Game

At the beginning of 2015, Juncker’s commission set out to make amends with a brand new tax transparency package targeting member state tax rulings, public multinational tax disclosures, and other matters. It was a savvy move on the part of Juncker, who used the ongoing political frustrations that he helped create to give himself a policy victory. The first proposal, a special directive allowing for the automatic exchange of information on cross-border tax rulings, sailed through the EP and European Council in an extremely short seven months, giving Juncker a new voice on tax transparency.

Previously, Juncker had staunchly defended Luxembourg’s tax rulings as legal. Now, he had sharply pivoted and criticized the EU’s corporate tax system as “unjust and unfit for purpose.”

“There is a plethora of national rules that allow some companies to win, while others lose out,” Juncker said. “This unfair competition is anathema to the principles of fair competition within our internal market.”

As lawmakers continued to negotiate other parts of the package, the commission continued to roll out new proposals in tandem with the OECD’s base erosion and profit-shifting project. Chief among them: the anti-tax-avoidance directive (ATAD), which was designed to stop corporate taxpayers from exploiting various tax loopholes. The ATAD scored quick approval after its introduction in 2016.

The first part, ATAD 1, established minimum antiabuse standards for several key corporate taxation areas, including controlled foreign corporation rules, exit taxation, and interest deductibility. It is now in effect across the EU. The second part addresses hybrid mismatch arrangements involving non-EU countries and is largely scheduled to go live January 1, 2020.

Europe has long had a letterbox problem. The fluidity of the EU’s internal market makes it very easy for taxpayers to move billions of euros across member state borders and stash it in shell companies. Juncker’s Luxembourg is a particularly notorious offender: A 2018 Belgian report revealed that Luxembourg’s letterbox companies held a whopping €48 billion from just 100 Belgian families. In response, the commission implemented cross-border merger legislation in April that makes it harder for such firms to move across member state borders and avoid taxes.

The European Commission also recognized that it could not adequately address taxpayer abuses unless it addressed the intermediaries — lawyers, tax accountants, and other professionals who help facilitate aggressive schemes. In response, it generated new mandatory disclosure rules (DAC6), which require intermediaries to disclose potentially aggressive tax schemes to authorities.

These are just a sampling of the most important transparency-related measures to come out of Juncker’s commission. Yet it is important to note that several of these ideas predated Juncker’s tenure and traced their origin to a small, highly private EU committee — the Code of Conduct Group on Business Taxation. Various member states had wanted to act sooner but could not because Juncker allegedly blocked them when he was prime minister of Luxembourg, according to leaked German diplomatic cables obtained by The Guardian. These revelations do not diminish, but perhaps qualify, the nature of the Juncker commission’s accomplishments.

“There’s never been so much activity around taxation as in this commission, so it’s quite unprecedented,” Sven Giegold, a German member of the EP, told Tax Notes. “With Mr. Juncker there were lots of fear that since he is from Luxembourg he would block everything, but that was quite the contrary.”

The EU’s Whistleblower Reckoning

Antoine Deltour, the former PwC employee whose leaks powered LuxLeaks, fought for years to be recognized as a whistleblower. But Luxembourg courts initially were not sympathetic to him: He was convicted of theft in 2016, handed a yearlong suspended prison sentence, and fined €1,500. A subsequent appeal cut his suspended sentence in half. But Deltour continued to fight the case. Luxembourg’s highest court — the Court of Cassation — affirmed him a whistleblower under EU law and quashed his sentence and fine in January 2018. Shortly after, he faced new theft charges for taking PwC internal training materials and finally in May 2018 Luxembourg’s Court of Appeal found that he breached the law, but withheld a sentence. The case highlighted the difficulty facing individuals trying to obtain whistleblower protection in the EU.

As Deltour’s case was winding down, in April 2018 the European Commission released a comprehensive whistleblower directive to protect public and private sector workers who disclose breaches of EU law, including competition rules violations, and violations and abuse of corporate tax rules. At the time, whistleblower laws were inconsistent across EU member states. Ten countries had comprehensive laws and the rest had sector- and incident-specific laws. Although critics complained that the European Commission took too long to introduce the measure, it has nevertheless arguably been a success through the message it sends to European whistleblowers and the rest of the world.

Juncker’s administration was less successful in its attempt to name and shame tax havens. The problem was that the EU failed to play by its own rules. In December 2017 the EU released its first tax haven blacklist, which highlighted 17 countries accused of undermining the bloc’s fair taxation rules. It promised to impose sanctions on the most intransigent offenders. However, none of those countries were European, and critics almost immediately seized on the apparent hypocrisy. They wanted the EU to explain why a small territory like American Samoa, which does not have a robust offshore industry, could make the list but Ireland, which has the EU’s lowest corporate tax rate, could not. That episode significantly diminished the list’s credibility, even into the following year when the EU published an updated ranking.

A New VAT

Politically, Juncker fared much better on his VAT reforms, some of which are still pending before EU lawmakers.

European policymakers had long wanted to upgrade the EU’s VAT system for cross-border business-to-business (B2B) transactions. The original system went into effect in January 1993 and was designed to be a “transitional arrangement” until member states could create a definitive VAT system. Member states knew that the transitional VAT system was leaky and riddled with loopholes — particularly since the system taxed domestic, but not cross-border, B2B sales. But political and technical conditions were not ripe for change until the Juncker administration stepped in.

The most important development is the switch to a destination-based approach, which will tax cross-border B2B transactions at the VAT rate of the destination country. Vendors will be liable for collecting VAT unless the buyer qualifies for an important new classification — the certified taxable person standard — which will enable designated trustworthy businesses to pay tax authorities directly.

Vendors will file their VAT payments, declarations, and deductions in their home country and home language using an online one-stop shop portal instead of having to separately pay VAT in every country in which they have customers. The one-stop shop will be an expansion of the mini one-stop shop system the EU uses for cross-border e-service transactions.

The commission promised to help member states transition into the new system by releasing four “quick fixes” to simplify VAT administration. Those go into effect January 1, 2020. If all goes according to plan, the definitive regime will begin in 2022 and will mark another major victory for the Juncker commission.

State Aid on Steroids

When Juncker appointed Margrethe Vestager as the EU’s commissioner for competition, he promised her that his commission would be more efficient and better than its predecessors at collaborating and working across portfolios. “I want the European Commission to be bigger and more ambitious on big things and smaller and more modest on small things,” he wrote. Vestager certainly ran with that in the tax context and demonstrated that the EU was willing to play hardball when her office filed a slew of cases alleging that some of the world’s largest multinationals had benefited from illegal tax rulings. Among her targets were Starbucks, Fiat, McDonald’s, Amazon, Nike, Apple, and Ikea. The state aid strategy didn’t start with Juncker’s administration, but his people significantly expanded its reach and put a lot of companies on edge.

“Our rules on state aid have always been clear: National authorities cannot give tax benefits to some companies and not to others. This is the level playing field that the commission is always working to defend,” Juncker said in 2016. “We apply these rules without discrimination and without bias.”

Like all litigation, the commission’s successes were mixed. But one of the most important outcomes was the affirmation from the General Court of the European Union that the European Commission has the authority to investigate tax rulings issued by member states. It was a vindicating ruling for a commission that had worked to set an aggressive precedent on state aid. The important question now is whether the new commission led by von der Leyen will continue the work, especially with von der Leyen retaining Vestager as competition commissioner.

Unresolved Priorities

Three of the priorities that Juncker mentioned in his mission letter to Moscovici are still unresolved: the financial transaction tax, the CCCTB, and solutions around the digital economy. When Juncker inherited the financial transaction tax proposal in 2014, it was already weakened. The Barroso administration, in 2011, had suggested a minimum 0.1 percent tax on transactions involving financial instruments and a minimum 0.01 percent rate on transactions involving derivatives. It quickly encountered stiff pushback. The commission regrouped and returned with a revised proposal in 2013 that would apply to a small handful of supportive member states via an enhanced cooperation scheme. It kept the same tax rates suggested in the original 2011 proposal.

The enhanced cooperation country negotiators didn’t get very far during the Juncker administration. Participating countries could not agree on the rates, the proper scope of the tax, appropriate exceptions, and how the tax resources would be managed. The countries involved are still discussing a proposal that is modeled after France’s financial transactions tax and would impose a minimum 0.2 percent tax on share acquisitions of EU-based public companies with more than €1 billion in market capitalization.

The Juncker commission split the CCCTB proposal into two steps, hoping that it could implement the provision faster. That strategy, albeit ambitious, did not work. The first step, the common base, would allow large multinationals with over €750 million in global revenue to file one consolidated blocwide corporate tax return using a new set of EU-wide rules.

The second step, consolidation, would apportion each taxpayer’s profits between the member states where they do business, with member states then applying their own corporate tax rates.

But the European Commission could not get a handful of states — including Ireland, Malta, and Denmark — to agree on the proposals because of budgetary concerns. Several reports have indicated that smaller EU economies might see significant portions of their tax base evaporate under a formulary apportionment scheme. These issues are yet to be solved.

Juncker unsuccessfully tried to bypass the EU’s tax unanimity rules on the CCCTB and suggested that qualified majority voting rules should apply. Tax unanimity was a big issue for Juncker; over the course of his presidency he tried to winnow down the unanimity rules for his main priorities: the CCCTB, VAT, the financial transactions tax, and digital economy taxation. “Europe has to be able to act quicker and more decisively,” he said during a 2017 speech. He presented a four-step plan that would ease the EU into qualified majority voting. The plan would first apply to tax-related mutual assistance and cooperation measures, and then expand to tax-policy-related measures like climate change or public health. In the latter two stages, member states would rely on qualified majority voting to modernize existing EU tax rules and apply them to major projects like the CCCTB, digital taxation, and so forth.

By the beginning of 2018 it became clear that Juncker’s administration needed to release a coordinated approach to the digital economy. A solution had long been in the works, but several member states were splintering off and introducing their own unilateral measures. Juncker also saw an opportunity for Europe to step into the global discussion and create an example. “With profits comes the duty to pay taxes. And the amounts that are going untaxed are both unsustainable and unacceptable,” Juncker said.

“Every company, no matter how big or small, has to pay its taxes where it makes its profits. This goes for giants like Apple too, even if their market value is higher than the GDP of 165 countries in the world,” Juncker said in a 2016 address. “In Europe we do not accept powerful companies getting illegal backroom deals on their taxes.”

The commission offered up a new nexus standard: a virtual permanent establishment that applies to companies with over €7 million in annual revenue, more than 100,000 users, or more than 3,000 business contacts in a member state. It also offered a new digital services tax on large multinationals, who would face a 3 percent interim tax on revenues generated in a given member state.

However, the European Commission ultimately abandoned the tax because of the OECD’s digital economy work and objections from several member states worried about U.S. retaliation. Even so, Minor does not see this result as a failure because the new commission hasn’t ruled out a digital services tax, and regardless, the work that already has been completed has many opportunities to continue.

“I think the EU took a very unemotional approach to drafting the legislation and really advanced that work significantly, so it’s provided a template for other member states to pick up and emulate,” Minor told Tax Notes.

Juncker also failed to land approval for a public country-by-country reporting proposal that would obligate large multinationals with over €750 million in group revenue to publicly disclose the taxes they pay in each EU country and other information from the private CbC reports they share with tax authorities. That said, the EU is not alone in this respect; no country has a generally applied public CbC reporting proposal on the books, although there are several sector-based ones. The OECD dislikes the idea, and several EU countries are concerned that public CbC reporting will hurt their competitiveness.

Ongoing Criticisms

At times, critics accused Juncker of ceding too much power to member states and special interests. Juncker, a self-proclaimed supporter of “fair” tax competition, never shied away from supporting the right of member states to set their own tax rates, within reason. “The level of taxation in a country like Ireland is not our issue. Ireland has the sovereign right to set the tax level wherever it wants,” he said in a 2016 address. “But it is not right that one company can evade taxes that could have gone to Irish families and businesses, hospitals and schools. The commission watches over this fairness. This is the social side of competition law. And this is what Europe stands for.”

Juncker’s opinion — that Irish tax rates are Ireland’s business and Ireland’s business alone — is far from universal. Over the course of his presidency he attracted a lot of criticism from various factions that wanted him to take a firmer stand on some aspects of tax competition between member states.

The Greens/European Free Alliance political coalition was particularly vocal on this front and detailed how EU countries were seemingly engaged in a race to the bottom to attract the wealthy via tax breaks and preferential tax treatment. In an April report, the coalition argued that lax tax competition rules were clashing with the EU’s freedom of mobility principles — which allow EU citizens to move freely between member states — and enabling EU countries to engineer special tax regimes encouraging citizens to switch their tax domicile.

In their estimation, over 160,000 people in a small handful of EU countries benefit from special tax schemes that ultimately deprive their home countries of income tax revenue. They warned that the European Commission needed to shift some of its focus away from corporate taxation and VAT issues and redirect it to personal income tax and ways to prevent double nontaxation and tax evasion without penalizing those who move for legitimate reasons.

On the corporate side, watchdogs express discomfort over the EU’s relationship with the Big Four accounting firms and their purported influence over EU tax avoidance policy. Lobbying transparency group Corporate Europe Observatory notably criticized the European Commission for including Big Four firms within its tax avoidance policy groups and paying them millions of euros for tax policy research (according to commission budget disclosures).

“Despite all the evidence — from the various tax leaks, scandals, and parliamentary enquiries and reports — of the role the ‘Big Four’ global accountancy firms play in facilitating, encouraging, and profiting from corporate tax avoidance strategies, they continue to be treated in policy-making circles as neutral and legitimate partners,” the organization said in a July 2018 report.

The European Commission dismissed the report as barely even a story, telling the Financial Times and other news outlets that the Big Four are among thousands of companies that provide studies for the administration. But these sorts of dust-ups and conflict of interest allegations partially highlight the uneasy relationship between some activists and the Juncker administration.

Juncker also caught heat after his commission failed to investigate LuxLeaks. From the start, he maintained that he would not discuss the issue with Vestager or other members of the commission so as not to interfere with the process and deferred authority to them. Some critics wanted more from him, but Giegold pointed out that Juncker — potentially to his own detriment — always supported the fiscal state aid cases. That was very important because, unlike other tax related measures, those matters did not need to be shrouded in unanimity, he said.

Tax Influence on the World Stage

In many ways, the great European experiment is still unfolding. Sometimes, it is easy to forget that the single-market EU as we know it is less than 30 years old, although the groundwork was laid in the post-World War II era. And within its first three decades the EU has experienced many shifts that make its future economic dominance uncertain: population decline, the rise of emerging markets, and a splintered union in the wake of Brexit.

“Europe is the smallest continent, yet we imagine we are the greatest,” Juncker said in a September 2016 speech. “[But] Europe’s relative economic power will wane dramatically in the years ahead. From the 25 percent of global value added that we account for today, our share, if all goes well, will drop to 15 percent in 10 to 15 years from now. No European Union country, however large, will be able to survive in the concert of nations and fiercely competitive economies,” he added.

So where does this leave the EU moving forward? For Juncker, Europe’s future partially hinges on a “sovereign Europe” — a more united Europe with a strong economic social contract. And taxation factors strongly into that plan. “I want Europeans to wake up to a Europe where we have managed to agree on a strong pillar of social standards. Where profits will be taxed where they were made,” he said in his 2017 State of the Union address.

Juncker viewed the EU as a global leader in this arena — an international standard-bearer that could help steer the global discussion. He may not have explicitly set out with this goal; his main priority was the health of the EU. But Juncker’s presidency collided with several defining international tax developments that required a quick response: the ongoing release of the OECD BEPS project; the highly publicized LuxLeaks, Paradise Papers, and Bahamas Leaks; frustrations over the digital economy; and proper taxation of multinationals.

In the process, the EU became one of the most vocal advocates for international corporate tax reform and various BEPS transparency and administrative cooperation proposals. Not only did Juncker challenge individual member states, he challenged the world, particularly on the eve of the 2016 G-20 summit. It was at that summit that he and European Council President Donald Tusk offered a new three-pronged challenge to the G-20: persuade all countries to exchange tax information under the OECD’s automatic exchange of information within two short years, join the BEPS inclusive framework, and follow the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

Conclusion

During his 2016 State of the Union address, Juncker stood before European lawmakers and offered a blunt self-assessment of the commission’s work to that point: “I promised you that my commission would fight against tax evasion. And many of you didn’t believe me but that is what we are doing. We are delivering,” he said.

Those remarks received a lukewarm reception. Some lawmakers acknowledged the commission’s work but were disappointed that the speech failed to drop new reform ideas. Others had hoped that Juncker would use the opportunity to take a firm stand on whistleblower protections, especially since Deltour and other LuxLeaks whistleblowers were concurrently under trial in Juncker’s Luxembourg. Those criticisms were fair, but also fed into a running theme throughout Juncker’s presidency. In some circles, because of his history in Luxembourg, anything he did on tax matters was perceived as not fast enough. The trust and buy-in from some lawmakers and stakeholders simply wasn’t there, a reality that wasn’t always fair.

“As president of Luxembourg and also in his role as finance minister, he created one of the most successful tax havens in Europe and obviously I don’t like that from my political perspective,” Giegold said. “When he had a European mandate, he acted differently. Therefore I have respect for what he has done, even if I criticize what he has done in Luxembourg,” he added.

Ultimately, that record will stand for itself. Tellingly, Juncker isn’t trying to debate his legacy; his perspective is much more circumspect. At the end of his term Juncker thanked the EP for allowing him to do his work — despite their considerable reservations — and simply said, “To sum up, I’m leaving office — not sad, but not bursting with happiness either — with the feeling that I have given it my all.”

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