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Paul Tang Discusses The Future of EU Tax

Posted on Dec. 4, 2020

Is the EU finally ready to implement several corporate tax measures it has long held at bay: a financial transaction tax, a common consolidated corporate tax base, and even a digital services tax, if OECD tax reform negotiations fall through? Dutch member of the European Parliament (MEP) Paul Tang hopes so, and he is uniquely poised to push for them as the first chair of the European Parliament’s new subcommittee on tax matters.

Fiscally, things have been a little strained for the EU, which spent the entire summer locked in heated negotiations over its long-term budget and how it will fund a massive €1.8 trillion plan that includes €750 billion for the bloc’s COVID-19 recovery. MEPs voted to fund it with new taxes — EU own resources — but the EP and EU member states disagreed over the precise mix.

As lawmakers hashed out the details, discussions evolved from the EP’s chambers to a hunger strike by one MEP, underscoring just how fraught these negotiations were. But on November 10 the European Parliament and European Council reached an agreement. That deal, which is pending final approval, commits to some — but not all — of the EP’s tax proposals. Notably, it punted on the financial transaction tax and CCCTB but said they might be included later.

When the EP decided last year to create a new tax subcommittee, Tang quickly became a top contender to lead. The group’s mandate is to address tax fraud, tax evasion, tax avoidance, and financial transparency for taxation purposes.

Tang has been a leading voice on EU tax matters ever since he was elected to the EP in 2014. He has long advocated for reforming the EU’s tax system and maintains that the EU should hold member states to the same standards as it holds other countries. Last year, at Tang’s insistence, the EP designated five member states as tax havens, including his home country, the Netherlands. However, none has been placed on the EU’s tax haven blacklist, because it applies to non-EU countries only.

Tang assumed the subcommittee chairmanship in September, and recently spoke with Tax Notes about its agenda, the prospect of international tax reform, and his hopes for the future of EU tax.

Tax Notes: What are some of your priorities for this term?

Paul Tang: What we really need is reform in corporate taxation and wealth taxation, and more structural reforms. We’re developing our working program and plan to issue reports on harmful tax practices, the prospect of introducing article 116 [of the Treaty on the Functioning of the European Union], and also on building a sustainable tax system — one that is sustainable environmentally and also socially and economically.

I think the OECD is preparing some interesting changes with BEPS 2.0, but you can’t stop there. I think there’s more urgency in addressing tax avoidance, not just from outside the EU, but also inside the EU. We know that the European Parliament says — and I asked for this statement — that there are tax havens within the EU, including my home country, the Netherlands, and Luxembourg and Ireland.

Right now we have a double challenge, trying to recover from the COVID-19 crisis and at the same time transforming our economy and society to make it sustainable. So expenditure also needs to be sustainable and support the recovery, but the same is true for taxation. And I’ve no doubt that the new subcommittee will very much push for that. Not just in Brussels but also in the capitals. We are determined, the political groups are determined, and we’d like to see the subcommittee as a European hub for discussion on taxation. So we would like to bring this debate to the capitals.

TN: What kinds of collaborations are you envisioning with individual member states?

Tang: Well, of course, we need to build this over time. But what we see is that we invite ministers of finance, or state, secretaries of finance, to come and visit the committee. I very much hope that we can also find a way to work with national parliaments. In a sense COVID-19 is helping us with this; we have learned how to communicate online. So it makes it easy to get it organized. And I think there’s keen interest also from national parliaments — they are not always as well informed as the European Parliament. We have 27 national parliaments, and they are fragmented but they are, in fact, in a position to make changes. So I very much hope that we can also improve the position of the national parliaments.

TN: That’s very interesting. I did not realize that the national parliaments are less informed.

Tang: Well, of course, they are informed, but they are in a poor position — they can only vote yes or no on EU matters. Whereas the European Parliament discusses forms of amendments. If we can find a way by cooperating together to reform the right to amend laws, there will be a great improvement in the position of national parliaments. The control of national parliaments on these negotiations is not very good.

TN: OK, so circling back to tax avoidance. The European Council generated quite a bit of controversy when it decided to remove the Cayman Islands from its tax blacklist. You criticized this move and said the subcommittee “will not let the Cayman decision pass lightly.” How is the subcommittee thinking about responding to this?

Tang: At least in two ways. First, we decided to draft a resolution in the European Parliament to discuss the issue of the blacklist, or the empty blacklist, if you wish. The instrument by itself, by the way, is potentially good. Europe is setting the standards for countries outside the EU, the small jurisdictions, but the instrument doesn’t live up to its potential. We also will invite German Finance Minister Olaf Scholz, who is currently holding the presidency of the EU Council, to come and explain this.

TN: You do believe that the blacklist is a productive exercise, if implemented correctly?

Tang: It could be, yes. I think it could be. It has already had some effect in that some countries have adopted exchange of information rules. But the problem with the Cayman Islands is the fact that they do not have a corporate tax. Their tax rate is zero! That is not the standard. So in that case you need to improve the standard and really lift it up. Suppose that the OECD comes to an agreement on a reallocation of taxing rights, primarily for digital companies, and a global minimum tax. The blacklist is already outdated in that sense. We have to be very clear that zero is not a realistic, valid corporate tax rate.

When you think about it, isn’t it odd that Europe and some countries in particular are pushing very much for a global minimum tax in the OECD negotiations but when it comes to a blacklist, they do not consider the minimum effective tax rate? It’s not a very smart position.

TN: What else would you like to see?

Tang: Certainly ultimate beneficial ownership. It’s not just about corporate taxes, it’s also about hidden wealth in jurisdictions. I saw a paper by Gabriel Zucman and others that said it’s not even the 1 percent that we’re talking about but the 1 percent of the 1 percent that’s holding hidden wealth in other jurisdictions. And they own half of the wealth that is hidden in jurisdictions like Cayman Islands or the Bahamas. So that shows the importance of transparency, so we know who owns what.

One of our next hearings will be on the COVID-19 recovery plans that EU countries need to introduce and their link with tax avoidance. The commission already made clear it wants countries to address the possibilities of aggressive tax planning, also in the COVID-19 recovery plans.

What you see now is, if you spend so much public money, there must be reciprocity there. At the level of the firms — they need to support society — but also at the level of the member states. What could they do to make sure that the countries get the tax revenue that they should get? My country has been vocal against giving grants to other member states, but in return the Netherlands is one of the usual suspects of tax avoidance and other countries hold that against the Netherlands. I think that’s a fair point in all of this.

TN: Does this mean the discussion might extend beyond the EU tax blacklist and other jurisdictions might be considered?

Tang: I would say that we would need to expand the blacklist, make sure that every tax haven is in fact listed on this list. It’s fair to derive from that that we want it to be as strict as possible. When it comes to EU countries, however, we have a range of other ways to pressure them into implementing reforms.

TN: You’ve brought up the OECD a few times. Will the subcommittee respond to the OECD’s public consultation on BEPS 2.0 reform?

Tang: I think the European Parliament already did in the sense that they had a resolution on BEPS 2.0. We were all waiting for November 3 and hoping that it would be Biden, and now that he has won we hope we can continue with negotiations. Europe does not want to derail the negotiations at the OECD, but at the same time it must be very clear that there is a willingness on the European side to act on these same issues.

Now having said that, we also know that European countries put different emphasis on the different pillars. Germany is more inclined to support a minimum effective tax rate, whereas France is more inclined to support pillar 1, similar to China and India. So what the committee wants is to have a strong unified European approach on the two pillars combined. That would have the best impact.

If the OECD negotiations fail, other countries will act. In Germany, elections are coming up. I can’t imagine that Olaf Scholz [who is running for chancellor] will not embrace a form of digital taxation.

And, of course, a unified European response will only help the OECD negotiations to become effective because this is what, in fact, pushed the United States back to the negotiation table in Paris. It was the proposal for a digital services tax. It’s interesting to see that the Obama administration was unable to discuss taxation in a digitalized economy, whereas the Trump administration was.

TN: Why do you think that’s the case?

Tang: Well, because Europe came up with a proposal and it made very clear that Europe will move in that direction. And you already see that some countries, like France and Czechia and Italy, are moving to a national digital services tax. The U.K. also, by the way. So it just made very clear that we better start negotiating about it rather than having every country going its own way. And that signal was enough to bring the U.S. to the table and really start discussing. I also don’t think that the big five [Google, Apple, Facebook, Amazon, Microsoft] are very popular with the public anymore.

TN: Moving on to the EU Code of Conduct Group . . . we know they are now reviewing their mandate. What would you like to see from the group?

Tang: I would very much like to have the Code of Conduct Group appear before the subcommittee, that would be wonderful. Tell us what you did do and what you did not do.

I think that the Code of ConductGroup has failed in addressing more systemic issues in taxation, so they have not been effective in really changing the tax systems. They have had an effect but have not fundamentally changed the race to the bottom in the tax system. My experience is that transparency in tax matters is crucial. Usually, what happens doesn’t stand the light of day so to say, because then it has to change. The same is true for the Code of Conduct Group. If they show what the position of countries is, if they show what the discussion is, the debate will definitely change.

TN: Tactically, do you think that relying on article 116 could be better than the EU state aid strategy? Approving cases via qualified majority is one matter. But ultimately proving distortion in the courts is another matter altogether.

Tang: That is true. Then again, I would like to defend the cases that were brought under the responsibility of Margrethe Vestager to the Court of Justice. I think the fact that she brought these cases forward makes the public aware of what the situation is, and that helps. And I think that the commission shouldn’t shy away from this point. Like I said, transparency is crucial in tax matters, and if they can help make the public and politics aware of the current practice of aggressive tax planning, it’s already helpful. Then again, of course, they need to prepare it in such a way that they win before the European Court of Justice.

TN: Speaking of transparency, last fall a proposal for EU public country-by-country reporting failed to advance in the European Council, despite support from the European Parliament. Will this subcommittee continue to advance the issue?

Tang: Absolutely. At the end of the day, we can change the tax laws, and we will change the tax laws, but there will always be tax advisers that will find ways around that. The best way is to show what is happening, so politics and public can react to that. We already see some companies moving in that direction. Even a company like Shell in the Netherlands, which has been hiding its tax payments in some countries, chiefly in Russia and the Netherlands, is now going for full-fledged country-by-country reporting. It is the way forward, one way or another. I have no doubt it will come.

TN: Lastly, the EP wants the EU to adopt several tax measures as own resources — do you believe there is the political will to implement these measures? Two in particular have been debated for years: the financial transaction tax and common consolidated corporate tax base.

Tang: I agree with you that some of the candidates are more likely than others. There are other possibilities as well, it could also include the carbon border adjustment mechanism, revenue from the emissions trading system; it could also take the form of a digital services tax. But the European Parliament has made very clear that it fears that if there aren’t enough own resources to finance recovery plans, it will come back as cutbacks on the EU budget.

For member states, I think it’s interesting to look at taxation of the big polluters or the big companies, because they don’t pay enough taxes or they don’t pay taxes at all. And in fact the big companies are the main beneficiaries of the internal market. So I think that’s a welcome discussion. But I do think it will take time, it won’t be introduced overnight. But I hope and expect movement there.

For me it’s also an issue of principle. We know the saying, “No taxation without representation.” But to me, the opposite is also true: No representation without taxation. For a mature European democracy, you need to have own resources. They allow for more advanced political discussions on how to raise funds and where to spend them. There’s so much to do, and there will be so much on the table. It is not an exaggeration to say that the outcome of our discussions will shape the future of the European Union.

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