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EU legislators attempt to stop unanimity tax voting

As long as unanimity requirements remain in place, the European Council will not be able to approve a directive on pillar two, political support for qualified majority voting is at an all-time high.

In September, Benjamin Angel, director of direct tax at the European Commission in Brussels, stated that negotiations about switching from unanimity to majority voting are still in progress.

According to Angel, "there is still a strong political will for pillar two to be enacted in the EU."

According to the EU's unanimity rule, every member state must concur on a policy before the union may pass any legislation. This is a significant barrier to tax reform across the EU.

Major legal and technical tax reforms in the EU, including improved pillar 2 regulations and a debt-equity bias reduction allowance, will result from replacing the unanimity norm on tax policy in the European Council.

Sources reveal that after Hungary vetoed the negotiated wording for a directive on minimal corporation taxes at the Economic and Financial Affairs Council meeting in June, efforts to end unanimous voting began.

According to Accountancy Europe's Johan Barros, who specializes in tax policy, the Council members who have been irritated by Hungary's actions have supported eliminating the necessity for unanimity.

"Hungary remains an obstacle, but there is a lot of support for pillar two in the EU with five finance ministers going so far as to issue a joint statement to enact rules even without unanimity," according to Barros.

In August, German Chancellor Olaf Scholz spoke out in favor of breaking the consensus rule for Council decisions. In addition, the Commission wants to penalize Hungary by cutting its funding by €7.5 billion for rejecting the directive and violating the rule of law.

However, Politico predicts that there will not be much movement made in the upcoming months to replace unanimity rules with qualified majority voting. The majority of member states are reportedly opposed to treaty amendments, which limits support for reforming EU treaties.

Following a ministerial meeting on September 20 in Brussels, the Czech Republic's minister for European affairs, Mikuláš Bek, stated that there should be no expectation of nations losing their veto power.

"Don’t expect the EU to strip countries of veto power any time soon. Indeed, EU reform chatter has been circulating in Brussels for weeks and is not going away," according to Bek. 

"I am not too optimistic of change, but I also do not think the debate is lost," he said in his conclusion.

Zbyněk Stanjura, the finance minister of the Czech Republic, stated in July before the Committee on Economic and Monetary Affairs (ECON) that his Council Presidency would want to reach a consensus on the pillar two directive by the end of October.

If political support for qualified majority voting wanes, there may be little progress made on pillar two under the Czech Council Presidency, which will last through December 31 2022.

Using the EU's Passerelle Clause, a mechanism to convert from unanimity to majority voting in the Council, is one way to alter the way decisions are made in the Council without modifying any treaties.

With this change, the "qualified majority" standard—which calls for at least 55% of nations representing at least 65% of the EU's population—would be lowered for several foreign policy decisions.

The Passerelle Clause, which is described in Article 47(7) of the Treaty on the Functioning of the EU (TFEU), can be used by the European Commission to go from unanimity to qualified majority vote.

According to Politico, Council papers demonstrate broad support for removing the requirement for unanimity.

The decision is ultimately up to the member states, according to Bert Zuijdendorp, head of business tax initiatives at the European Commission in Brussels, who spoke to ITR. The Council must also vote unanimously in order to invoke the Passerelle Clause.

"Lots of things are blocked in the Council, even the Passarelle Clause is totally unrealistic because it needs unanimity and the same member states blocking everything will just block that too," according to Zuijdendorp.

In order to advance structural changes more quickly, he continues, "Many want qualified majority voting and we propose a gradual approach to it for certain areas of taxation to make more rapid progress on structural reforms,"

According to Sven Giegold, a member of the European Parliament, the Commission may enforce qualified majority voting on tax matters under Article 116 of the TFEU, but the Commission lacks the majority support to do so.

Another option to agreement on tax issues is enhanced collaboration. Through improved collaboration, a proposal can become law if it has the support of at least nine EU member states.

Articles 326-334 of the TFEU provide the statutory prerequisites for greater cooperation under EU law.

Stanjura claims that the Czech Council Presidency is hesitant to employ improved collaboration since there are other concerns that need attention more urgently than agreement in tax policy. Nevertheless, EU legislators could take up the subject in the near future.

Even formally convening to discuss significant treaty changes outside of greater collaboration and the Passarelle Clause is possible.

Given that the regulations have not yet been made clear, it is less obvious that the majority of EU member states will be willing to give up additional budgetary autonomy to facilitate the OECD's two-pillar approach.

On September 8 at the IFA Congress in Berlin, Angel outlined the main distinctions between the pillar two regulation and the OECD's model standards for minimal taxes.

The regulation makes top up taxes simpler, broadens the application to include EU groups and domestic subsidiaries, and gives taxpayers access to a safe harbor provision. A four-year grace period for reporting inaccuracies is also provided.

The directive provides a provision for standardized penalty of 5% turnover when information is not made available under the pillar two framework, which is one of the regulation's other major variances. If an EU member state has less than 12 ultimate parent entities under its jurisdiction, there is also a grace period before the income inclusion rule (IIR) and the undertaxed payment rule can be implemented.

If a directive cannot be agreed upon in time, according to Angel, there is a significant chance of legal challenges. The problem of whether the income inclusion requirement is compatible with the rulings from the Cadbury Schweppes decision by the European Court of Justice exists if pillar two is implemented without a directive.

In 2006, the Cadbury Schweppes and Cadbury Schweppes Overseas v. Commissioners of the Inland Revenue decision established a precedent prohibiting taxation of a foreign corporation by one EU member state. However, when a foreign business pays less than the minimal rate, the IIR imposes a top-up tax.

According to sources, the judges in the Cadbury Schweppes case only took into account how tax legislation in one member state can affect earnings made by a company in another member state. The case cannot serve as a precedent for the EU's freedom of establishment provisions to block the adoption of global tax regulations.

If adopted unilaterally by EU member states, the OECD agreement is likely to be seen as a justifiable restriction on the freedom of establishment. Without a route to qualified majority vote in the Council, the result of the pillar two directive is still up in the air.

Despite Hungary being threatened with sanctions for rejecting the final negotiated version of the directive, tax specialists predict that pillar two will not be approved by the Council by the end of October since the unified regulations will soon become permanent.



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