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A Look Ahead: How Will the EU Pay for the Pandemic?

Posted on Dec. 29, 2020

As the EU prepares to roll out the bloc’s largest-ever stimulus package, its ability to pay for the pandemic hinges on all 27 member states agreeing to introduce new EU-wide taxes, known as own resources.

The EU Council adopted the €1.1 trillion EU long-term budget — the 2021-2027 multiannual financial framework — on December 17. Earlier that week, the council adopted a decision on new own resources that will finance part of the bloc’s €750 billion coronavirus recovery package, but negotiations continue between the council and the European Parliament over some of the sectoral acts for the instruments it will fund.

To finance the economic recovery, the EU will borrow €750 billion in 2018 prices on the capital markets. Almost €400 billion will be reimbursed by the EU budget, with the rest granted through loans to member states. For the European Commission to borrow money, member states must approve the own resources decision.

Once approved by all 27 member states, the own resources decision will raise the own resources ceiling — the amount of resources member states may be called on annually to put toward EU expenditures — from 1.2 percent to 1.4 percent of the EU’s gross national income, according to a December 14 council release. The decision also temporarily increases the own resources ceiling by 0.6 percentage points to cover EU liabilities from borrowing until the funds have been repaid.

The EP and the council struck a deal December 18 on the €672.5 billion Recovery and Resilience Facility, which will allow member states to access necessary funds by summer. Member states’ approval of the own resources decision will allow the EU to speed up its borrowing so that national governments can submit recovery plans by spring to receive funds by summer. The council and the EP plan to formally approve the agreement on the facility in January 2021 after conducting talks to smooth out technicalities.

Hungary and Poland ended their blockade of the stimulus package on December 10 in exchange for a delay in the sanctions process that could strip the countries of access to the funding. The two Visegrad countries had opposed the package for its conditional linkage of funding to rule-of-law standards, under which both countries are being investigated for alleged violations.

But the question remains: How will the EU pay back the funds it has borrowed to finance its historic budget and recovery fund?

In a landmark summit, the council agreed July 21 that the commission would make proposals “in the first semester of 2021” for a carbon border adjustment mechanism (CBAM) and a digital tax “with a view to their introduction at the latest by January 1, 2023.” But in September, member states said they could not back a binding implementation timeline (demanded by the EP) for introducing new levies to fund the recovery without seeing legal proposals.

Finally, in November negotiators from the commission, council, and EP reached an agreement on the EU budget and development of new levies to finance the €750 billion recovery plan, including a digital tax, a levy based on an expanded EU emissions trading system (ETS), and a CBAM. The EU will introduce on January 1, 2021, a plastics contribution — a penalty on countries that do not recycle plastic — that is expected to raise €6 billion annually.

What’s Next for Own Resources?

While member states broadly back the CBAM and plastics contribution, challenges remain to introducing an ETS-based own resource, a digital tax, or a financial transaction tax (FTT), which the council has also floated.

The commission plans to introduce the first tranche of own resources — a digital tax, a portion of the EU ETS revenues, and a CBAM — in a June 2021 legislative proposal. For the proposals to pass, the council must negotiate and agree on them, while consulting the EP. The outcome could change if countries engaged in the OECD’s inclusive framework on base erosion and profit shifting agree on a proposed two-pillar approach for modernizing international corporate tax rules by the mid-2021 deadline.

Several European lawmakers and officials have said they believe negotiations on a global solution to taxing the digital economy will be easier under the Biden administration in the United States, but they still expect the administration to defend U.S. interests and companies.

New levies must raise between €15 billion and €30 billion annually by 2028, when the EU must start paying back the principal of the loan, according to internal documents seen by Tax Notes. The documents show the ETS-based own resource is expected to raise between €3 billion and €10 billion per year, the CBAM between €5 billion and €15 billion, and the digital tax €1.3 billion, with council deliberations predicted to take place until July 2022.

Poland, Hungary, and the Czech Republic oppose lowering their ETS allowances because of their economic reliance on coal. Germany, on the other hand, has added ETS-based revenues to its national budget. As the world’s largest carbon market, the EU ETS sets a cap on emissions and distributes emissions permits to companies in several sectors. About 40 percent of annual emissions allowances are handed out free of charge, and the rest are auctioned.

Other potential own resources — like an FTT, a financial contribution linked to the corporate sector, or a share of a common consolidated corporate tax base — have only been mentioned in documents as possibilities. Proposals could surface by June 2024 with an aim to introduce them in January 2026.

An FTT has been under negotiation among several member states for almost 10 years. In fact, countries involved in the enhanced cooperation process have not met since December 2019. Many leaders and lawmakers, including Sven Giegold, a German member of the EP from the Greens/European Free Alliance, have doubts about the political progress of the current FTT proposal.

Worries also persist that any viable but controversial own resources proposals could be blocked in council indefinitely, like a proposal on public country-by-country reporting.

The commission is urging member states to ratify the own resources decision and says it is supporting the EP and council negotiations to push the recovery package through.

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