December 01
Anjum Shabbir
20th October 2020
Banking & Finance Covid-19 Institutional law Internal Market Tax

Editorial Comment: “Is it time to talk about genuine EU taxes and the reform of the EU’s ‘tax architecture’?”

The EU’s budget represents approximately 1% of the Union’s GDP. This is in stark contrast to the size of Member States’ budgets, which amounts to a range of 30 to 35% of the respective national GDP. The dwarfish volume of the EU’s finances pales in comparison to the scope of national chequebooks, as it also strikes a powerful contrast to the ambitious goals that the EU is committed to pursue. How is the EU to ensure peace, prosperity and equality when its budget amounts to approximately a fifth of the United States’ annual military spending? Moreover, two thirds of the revenue side of the EU’s current budget still depends on contributions from the Member States.

To a large extent, these anomalies can be explained by the fact that the EU provides no direct services in areas such as education, health or security, transport, and so on, at least in the way in which Member States have traditionally secured them for their citizens. The EU was conceived as, and still is, mostly a regulatory machine, endowed with supremacy, in the quest to build an internal market of 27 countries as a means towards creating ‘an ever closer union among the peoples of Europe’. And yet, the EU is no State in the making, so far. As long as the EU is focused on creating rules and in ensuring their enforcement, its modest budget can be justified.

However, in recent years – under the impression of crises that were disastrous for the national economies of the Member States – Member States seemed to have realised that the EU is better equipped  to preserve financial stability and to ensure mid-to-long term objectives of economic soundness and resilience, also essential for the proper functioning of the internal market. The eurozone’s monetary policy worked as an engine for change and called for the unexpectedly rapid establishment of a Banking Union, which in turn needed a true Capital Markets Union (recently boosted by the Commission). The creation of a common currency and the need to do ‘whatever it takes’ to save it, has also created incentives to push forward a ‘federalising’ or (however limited) ‘centralising’ agenda in the fields of economic and fiscal policy. This has also led to significant advances in budgetary supervision of the Member States. The embryo of a fiscal Union is clearly in the making, but its limbs, gender and features have been very much determined.

COVID-19 has accelerated the creation of a fiscal Union in a dramatic way. The collapse of national economies has driven the EU to take a gigantic leap forward, as exemplified in the outcome of the European Council of 14-17 July 2020 or the Draft Council decision on the system of own resources of the European Union derived from it and still in the legislative process (fn 1). The Recovery Fund, the creation of new own resources, the possibility for the EU to issue significant debt, SURE and other innovative policy measures will transform the EU’s ability to use financial firepower to save the European economies in unknown ways. The link of these extraordinary measures with the need to increase the EU budget is one of the most crucial political and legal issues at the heart of the EU’s response to the crisis, but it is also likely to shape the development of fiscal law in Europe in the years to come. For the short and medium term, the Commission has already proposed, and the Council and European Parliament have considered, a number of changes in traditional own resources or new ones in order to provide funding for the proposed Multiannual Financial Framework (MFF) 2021-2027. These complements include: (i) a simplified value added-tax based own resource; (ii) ‘green’ own resources, such as a new resource based on the Emissions Trading Scheme, a new Carbon Border Adjustment Mechanism, and a tax on non-recycled plastics; (iii) a less homogeneous own resource basket including a financial transaction tax, the common consolidated corporate tax base or a new digital tax. The Commission also added, initially, a sort of levy for companies that ‘draw huge benefits’ from the common market which does not appear to have been considered further in the legislative process.

The path taken by the EU in 2020 is now slowly but steadily heading towards a more central, if not federal, fiscal Union. The time at which we will reach a final destination is a matter of speed and nuance, but the overall goal seems to be settled with a broad consensus among the Member States and EU Institutions (having left behind a sceptical Britain, whose scarce appetite for federalising adventures might have facilitated the bold European move). Now, the question is whether the tailored measures proposed by the Commission and still in the legislative process will be enough to truly advance in the establishment of a consistent and sustainable fiscal Union in the long term or should be seen just as a promising starting point. It is doubtful that the former will be the case.

To that end, rethinking the issue of EU taxes becomes critical. The power to tax and the power to spend have been sacred terrains of Member State sovereignty, and the EU is limited in this terrain in two significant ways. First, by its limited powers to raise taxes and, second, its modest outreach and ability to interfere in the taxing and spending powers of the Member States. Furthermore, the EU has evolved in almost all (former first pillar) areas towards majority voting and more involvement of the European Parliament except in taxation, up to a point that there is a serious asymmetry and tension between the revenue side of the EU budget, the EU spending power and the evolution of the EU competences (or what the EU can and is expected to do).

The time has come to reconsider the EU’s competences in the field of taxation, both from the perspective of EU taxes and the EU’s ability to condition national taxes. The debate is an old one, but the circumstances have changed radically since the times in which pioneering tax lawyers envisioned the creation of genuine European taxes. The creation of the euro, an integrated banking and financial market, massive EU bond issuance to support domestic economies, macroeconomic surveillance of the Member States and collective risk-taking or some common and new policies, have all driven the EU to a scenario in which EU taxes are not a choice, but a necessity.

Reconsideration of the EU’s tax competences requires a thoughtful debate and disentangling several different problems too often conflated. This is a truly fundamental issue, but not one to be solved quickly, since the role of new or harmonised taxes in the current debate on the first post-COVID decision on the system of EU own resources for the 2021-2027 MFF (currently under discussion) will probably be a minor one for several reasons. First, the basket of taxes already identified as candidates to join the EU own resources are either of limited revenue-raising capacity or, to their limited relevance, digital taxes add the potential, if unilaterally enforced by the EU, to create new distortions, trade conflicts and to undermine the efforts of other international organisations to build a truly international tax system (this is not to say that the OECD’s ongoing works in this field, mainly the so called Pillar 1, are problem-free themselves, or should be simply assumed by the EU without critically reviewing their virtues or flaws).

Second, more importantly, the current institutional architecture of the EU is (traditionally) deemed to require a ‘double unanimity filter’ if taxes are to become harmonised through EU legislation and are included within the EU’s basket of own resources: on the one hand, Article 311 TFEU (own resources) and, on the other, Articles 113 (indirect taxes) and 115  (direct taxes) or Article 192.2 (environmental taxes) TFEU. The chances of using Article 116 (distortions of competition) – which the Commission has recently evoked, but that has been an old aspiration, are hard to predict. Given its ambitious requirements, the bar for the successful use of Article 116 TFEU is set quite high. The major advantage of this legal basis – the use of the ordinary legislative procedure – may turn out to be its major flaw in the field of tax legislation. All legal bases in the Treaties that refer explicitly to taxes require a unanimous vote in the Council, which seems to be a condition that may not be circumvented by relying on more general legal bases that allow for a qualified majority voting.

Therefore, it seems likely that the lion’s share of the funding of the EU budget will continue to rest, at least in the short run, on the shoulders of the Member States (fn 2). The current institutional setup (the unanimity rule of the Member States for taxes) truly acts as an insurmountable obstacle for any chance of the EU to pursue a genuine tax (and, consequently, other) policy independent from the Member States.

In the medium or long term, the situation should change and all this calls for a limited reform of the EU’s tax architecture. While it is natural that some Member States and EU citizens try to retain control of the resources transferred to the EU, it is no less important to recognise that a more robust European Union calls for taxes that make EU institutions more democratic, transparent, accountable and closer to the peoples of Europe (fn 3). In an inversion of the leitmotif of the American revolution, representation is hardly conceivable without taxation: the power to levy taxes makes institutions accountable to their citizens and, at the same time, independent to pursue their own policy goals whatever they are (true EU solidarity in a post-COVID era, as claimed by many European citizens, a more robust, transparent and legitimate EU economic policy that could back the euro, EU leading environmental and digital transformation policies and so on). Reflecting on having truly EU taxes entails a profound pondering on the type of Union we may want or whether we want it at all, its size (with more or less revenues), accountability, solidarity and relations among their people and Member States.

In this context, it can even be argued that more reflection is needed than really new taxes, since VAT is already there, with an (always evolving) harmonised EU legislation and a consolidated case law. The reform of the VAT own resource – along the lines proposed by the Monti Report (fn 4), which the EU Council of 17-21 July 2020 has agreed to simplify – might save time in technical discussions, legislative processes and avoid the problems that may be encountered with other taxes (new or national ones that need to be harmonised). In some fields, new taxes should not be excluded. However, for the latter (and also for VAT), radical reform of the current institutional setup to attribute to the EU the power to levy taxes does not appear as a viable or even realistic option.

The passerelle clauses of Article 48(7) TEU or for environmental taxes, Article 192(2) TFEU, as proposed by the Commission (fn 5) (or with a more limited and slightly different scope) seem to be a better and more feasible form of achieving majority voting in taxation and more involvement of the EU Parliament in the design (and selection) of new EU taxes. For the Euro area, the use of the passerelle in Article 333 TFEU could be a further option, which allows for the purposes of an enhanced cooperation (which would be amongst Euro area Member States) to switch to the ordinary legislative procedure, although to date the experience with enhanced cooperation in taxation has not been very promising. Whatever the options in taxation for a shift towards majority voting,  in a post-COVID context the appetite for the new EU taxes may not be high, in view of the own financial needs of the Member States, unless these taxes foster policies to transform the EU and have the effect of reducing their contributions to the EU budget.

To date, national taxing powers and unanimity in the Council have acted as a brake to further European integration or have not evolved in parallel with the EU’s main institutional developments. After the giant step taken by the European Council in July, EU taxes should probably be the essential corollary of the decisions taken and a fundamental element of a more democratic, transparent and accountable EU. The Treaties have the right tools to eliminate (in all or in part) the obstacle of unanimity in tax matters and allocate new tax tools to the EU without radical institutional reform. The question is: when will the Member States have the political determination and willingness to cross this Rubicon, albeit keeping the core of their tax sovereignty? In the answer lies the future of the EU.


By The Editorial Board of EU Law Live.


(fn 1) See European Parliament legislative resolution of 16 September 2020 on the draft Council decision on the system of own resources of the European Union (10025/2020 – C9-0215/2020 – 2018/0135(CNS)), with relevant amendments to the text from the Council.

(fn 2) See C. Fuest and J. Pisany-Ferry, ‘Financing the EU: New Context, New Responses’, Policy Contribution 2020/16, Bruegel (presented by these authors to the Informal Meeting of EU Ministers for Economic and Financial Affairs, ECOFIN, 11-12 September 2020). After studying the policy options within the current constitutional setup, they conclude that the only viable new resource might come from the emissions trading system and its transfer to the EU level. For them carbon border adjustments are intended to limit competitive distortions rather than to generate revenue, and digital and minimum taxes are better left to the OECD, financial transaction taxes will probably not meet the needed consensus and taxes on non-recycled plastic is not fit for purpose due to its limited capacity to raise revenue and its mainly environmental local purpose (reduction of plastic in a specific jurisdiction).

(fn 3) See the manifesto of a group of EU Tax Professors:

(fn 4) Final report and recommendations of the High Level Group on Own Resources (‘Monti Group’), Future Financing of the EU, 2016, pp. 53 ff., available at See also the Commission’s Proposal for a Council Decision on the system of Own Resources of the European Union, Brussels, 2.5.2018 COM(2018) 325 final.

(fn 5) Communication from the Commission to the European Parliament, the European Council and the Council ‘Towards a more efficient and democratic decision making in EU tax policy’, Strasbourg, 15.1.2019 COM(2019) 8 final.


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