Tax Unanimity in the Age of Big Tech: Competing Policy Interests in the European Union

When three EU Member States exercised their tax veto to block the European Commission’s (“Commission”) interim Digital Service Tax (“DST”) proposal, Commission leaders felt justified in moving to permanently reform EU voting procedure. Valdis Dombrovskis, Executive Vice President of the Commission, urged his fellow lawmakers that “the blocking of the Digital Services Tax by a few Member States in the Council, and previous similar experiences, should be seen as a wake-up call concerning the need for the Union to gradually move towards qualified majority voting on tax matters.”[1] Because economists expected the tax to raise just €5 billion, it may seem odd that this particular failure triggered such a strong response. Even if the DST offered the best policy response to the global challenge of taxing multi-national tech giants, why did this policy rejection of an interim tax compel the Commission leader to label it a “wake-up call” that warranted permanent change in EU tax voting procedure? The answer has something to do with the Commission’s desire to tax the digital economy and a lot to do with the current EU balance of power on taxation. Ultimately, the controversy boils down to two important treaty provisions: the Council’s tax unanimity voting requirement and the obscure never-used Passerelle clauses that allow legislators to transition from unanimous to qualified majority voting (QMV) without amending any underlying treaties.[2]

To understand Dombrovskis’ comment, we must first recognize that a tension exists between the taxation goals of some Member States and the Commission responsible for advocating the interests of the entire Union. Seeking to strengthen the single market and better position the European Union globally, the Commission benefits from consolidated legislative control. Simultaneously, many small Member States rely on strategic tax programs to attract investment, especially from highly profitable tech companies in the increasingly competitive digital economy.[3] By offering regulatory advantages for tech investors, US tech companies benefit from the policies of these tech-friendly EU states and these small EU states in return attract much-needed capital and jobs. Sometimes, though, these Member State regulatory regimes conflict with the Commission’s broader objectives. However, since the current framework requires unanimity for EU action, states may unilaterally block any proposals deemed harmful to national interests. Relying on this procedural guarantee, any move by the Commission to eliminate unanimity risks infringing on the expectation by some states that Brussels fiercely guard what they see as an essential protector of national sovereignty.

Globally, the world’s six largest tech companies—Facebook, Apple, Amazon, Netflix, Google, and Microsoft, all US-headquartered—share a $4.5 trillion market capitalization.[4] Between 2010 and 2018, though, the global tax gap for these market leaders topped $100 billion.[5] This means that over those eight years, governments legally lost $100 billion in tax revenue. The discrepancy between big tech’s market dominance and lost tax revenue prompted the international community to seek much-needed international tax reform. And the European Union emerged, anxious to lead the way.[6] 

When global negotiations stalled, the European Union’s largest Member States lobbied the Commission to take more decisive action. In early February 2018, Germany, France, Italy, and Spain united to persuade the Commission to take action on Google, Amazon, Facebook, and Apple. Approximately one month later, on March 21, 2018, the Commission responded by launching its Digital Services Tax.[7]  Responding, in part, to the demands of its most powerful states, Commission leaders believed an interim plan, set to retire once the global community reached a consensus on taxing the digital economy, would signal its commitment to global tax reform. It also hoped that the move might incentivize broader international collaboration.[8] Many larger states, having lobbied for EU action, supported the proposal. They agreed that the European Union needed a temporary response and recognized that achieving international consensus could take years. However, the proposal met strong resistance from some of Europe’s smallest states, namely Ireland, Denmark, Malta, Sweden, and the Netherlands.[9] And, given tax unanimity, the proposal failed when Ireland, Denmark, and Sweden exercised their veto.[10]  

Codified in Articles 113 and 115 of the Treaty on the Functioning of the European Union, the tax veto is an integral feature of EU legislative procedure.[11] Periodically, however, veto exercise generates opposition. Critics consider tax unanimity inefficient and ill-suited to a Union of 446 million people. [12] So, after the DST’s failure, the Commission felt justified that the European Union must finally bid adieu to the tax veto. Valdis Dombrovskis argued that the proposal’s failure by veto represents just “another example of many tax initiatives where the unanimity requirement has hampered the progress needed to strengthen the single market and avoid its fragmentation.”[13] Not only does the veto inhibit EU progress, Dombrovskis stressed, it also limits Europe’s ability to act as a united force in global negotiations.[14] “Speaking with one voice,” he maintained, “will allow the EU to put more pressure on the [international] discussions [for tax reform] and better defend our interests.”[15] His considerable dissatisfaction that just three Member States blocked the proposal explains why the Commission, backed by the largest and most influential EU Member States, felt vindicated in seeking to eliminate tax unanimity.

Fueled by the politically salient DST failure, in 2019, the Commission formally proposed eliminating the tax veto. It advocated applying the never-before-used provisions in the Treaty on European Union dubbed the “Passerelle Clauses” to effectuate the transition. [16] Through the Clauses, the Commission would extend QMV, the standard EU voting procedure, to include taxation.[17] While an arduous process, the Commission’s tax proposals would enjoy a higher likelihood of success since legislators would no longer need to obtain unanimous consent to enact time-sensitive legislation. This could lead to more opportunities, in the words of Dombrovskis, to “strengthen the single market” and allow the Union a higher chance of “speaking with one voice” in global tax negotiations, as a stronger counterweight to the United States, both now and in the future.[18]

The transition would also expand the role of large Member States, such as Germany, France, and Italy, since QMV positively biases more populous countries.  Yet, the proposal threatens small countries, who see the veto as an essential protector of their national sovereignty.[19] While supporting most of the EU agenda, Denmark, for example, vetoed the DST and reacted skeptically at the prospect of relinquishing additional authority to Brussels.[20] Thus, the proposal raises important questions about the appropriate balance of power between large and small states and the extent of EU influence over tax policy. A dual challenge thus faces EU lawmakers of an inefficient framework that allows a single country to block an important measure and a delicate balance of power prone to upset were the European Union to eliminate one of the last remaining unanimous voting provisions.

The proposal to transition to QMV would improve EU legislative efficiency, increase uniform legislation, and allow the Union to present a more unified front in global negotiations. But, simultaneously, the proposal poses a legitimate tax sovereignty threat to smaller states.Given the population thresholds in QMV, loss of tax unanimity would allow large state coalitions to enact legislation more swiftly. This change would leave small states, even if united, powerless to block popular, yet harmful, legislation. Absent the ability to effectively protect national interests in the Council, loss of veto power could lead to deeper resentment of EU economic policies and undermine EU cohesion. By contrast, in maintaining the status quo, legislators will continue to block important proposals by veto that risk fragmentation of the single market; yet, the European Union would signal its commitment to protecting equally the national sovereignty of all Member States.

Charlotte A. McFaddin is a third year law student at the University of Virginia School of Law. She has a Bachelor of Arts in Financial Management from Hillsdale College and is a 2021 Fellow of the Salzburg Cutler Fellows Program in International Law & Public Service. The author can be reached at charlottemcfaddin@gmail.com. She thanks Professor Ruth Mason, Edwin S. Cohen Distinguished Professor of Law and Taxation at the University of Virginia School of Law, for her support and assistance in the research and preparation of this article. To read her full note, see Charlotte McFaddin, Evaluating the Tax Veto in a Digital Age: Legislative Efficiency and National Sovereignty in the European Union, 62 Va. J. Int’l L. (forthcoming 2022).

This is a guest blog post and in no way represents the views of the Fordham International Law Journal.

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[1] Eur. Parl. Deb. (2695) 21 (Apr. 15, 2019) (remarks of Mr. Dombrovskis) (emphasis added).

[2] The tax unanimity requirement is found in Articles 113 and 115 of the Treaty on the Functioning of the European Union. The Passerelle clauses are found in Article 48 of the Treaty on European Union. See infra note 17.

[3] See Apple is Ireland’s largest Company, Irish Exam’r (May 9, 2019), https://www.irishexaminer.com/business/arid-30922934.html (along with Apple, Facebook and Microsoft have also moved their international headquarters to Ireland); see also Ruth Mason & Stephen Daly, State Aid: The General Court Decision in Apple, 99 Tax Notes Int’l 1317, 1329 (2020).

[4] See Edison Jakurti, Taxing the Digital Economy-It’s Complicated, Brookings Inst. (Dec. 13, 2017), https://www.brookings.edu/blog/future-development/2017/12/13/taxing-the-digital-economy-its-complicated/. These issues have only been exacerbated by the Covid-19 pandemic. See Vijay Govingdarajan et al., Tech Giants, Taxes, and a Looming Global Trade War, Harv. Bus. Rev. (Aug. 24, 2020), https://hbr.org/2020/08/tech-giants-taxes-and-a-looming-global-trade-war (“The irony is that during Covid-19, while countries are hurting, digital giants have further captured the market and revenue shares from local companies….Governments thus face a one-two punch: fund local recovery and welfare, while not getting enough taxes from digital giants who have usurped their tax base. They have no choice but to look towards digital giants to meet at least a part of their budgetary deficits.”).

[5] See Chloe Taylor, Silicon Valley giants accused of avoiding over $100 billion in taxes over the last decade, CNBC (Dec. 3, 2019), https://www.cnbc.com/2019/12/02/silicon-valley-giants-accused-of-avoiding-100-billion-in-taxes.html; see also The Silicon Six and their $100 billion global tax gap, Fair Tax Mark (Dec. 2019), https://fairtaxmark.net/wp-content/uploads/2019/12/Silicon-Six-Report-5-12-19.pdf. 

[6] Currently, international leaders seek a solution to address the challenges of taxing the intangible value creation of digital multi-national entities.  See Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy, Org. Econ. Coop. & Dev. (Jan. 2020), https://www.oecd.org/tax/beps/statement-by-the-oecd-g20-inclusive-framework-on-beps-january-2020.pdf. See also Chris Giles, OECD drafts principles for $100bn Global Corporate Tax revolution, Financial Times (Oct. 12, 2020), https://www.ft.com/content/c269d8ad-11d6-490a-b290-4d3dbf80bd03; Anjana Haines, This week in tax: OECD and UN digital tax proposals released, Int’l Tax Rev. (Oct. 16, 2020), https://www.internationaltaxreview.com/article/b1ntym05qyfq5n/this-week-in-tax-oecd-and-un-digital-tax-proposals-released (“A political agreement on the OECD’s digital tax proposals will not happen before mid-2021.”).

[7]See Fair Taxation of the Digital Economy, Eur. Comm’n, https://ec.europa.eu/taxation_customs/business/company-tax/fair-taxation-digital-economy_en (last visited Oct. 14, 2020); Ingrid Melander, France, Germany want progress on taxing tech giants, Reuters (Feb. 7, 2018), https://www.reuters.com/article/us-eu-tax-digital-france/france-germany-want-progress-on-taxing-tech-giants-idUSKBN1FR29K?il=0 (“Italy, Germany and Spain, together with France, are spearheading the push for tax reform. They face resistance from smaller nations like Ireland who are a hub for those firms’ investments and fear changes could hurt their economies.”).

[8] Not only does the Commission view tax policy as a method to ensure tech companies pay what the Commission  considers a fair share of taxes owed, it also uses regulatory policy such as antitrust enforcement to capture untapped revenue from highly profitable tech giants. See Foo Yun Chee, EU’s Vestager appeals court veto of $15 billion Apple tax order, Reuters (Sept. 25, 2020), https://www.reuters.com/article/us-eu-apple-taxation/eus-vestager-appeals-court-veto-of-15-billion-apple-tax-order-idUSKCN26G1DB.

[9] See Houses of Oireachtas Reasoned Opinion on COM(2018) 147 Proposal for a Council Directive Laying Down Rules Relating to the Corporate Taxation of a Significant Digital Presence and COM(2018) 148 Proposal for a COUNCIL DIRECTIVE on the Common System of a Digital Services Tax on Revenues Resulting from the Provision of Certain Digital Services (May 2018); Denmark Reasoned Opinion regarding the Commission’s proposed measures regarding taxation of the digital economy (May 9, 2018); Netherlands Reasoned Opinion regarding the EU proposals for a Council Directive laying down rules relating to the corporate taxation of a significant digital presence (COM(2018 147), and a Council. Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services (COM(2018) 148) (Apr. 4, 2018); Reasoned Opinion of the House of Representatives of Malta Proposal for a Council Directive laying down rules relating to the corporate taxation of a significant digital presence COM (2018) 147 and Proposal for a Council Directive on the Common System of a digital services tax on revenues resulting from the provision of certain digital services COM (2018) 148  (May 2018). .

[10] See Jorge Valero, The EU’s Digital Tax is Dead, Long Life the OECD’s Plans, Euractiv (Mar. 11, 2019), https://www.euractiv.com/section/economy-jobs/news/the-eus-digital-tax-is-dead-long-live-the-oecds-plans/. See also European Parliament Press Release, Parliament keeps up Pressure to Tax digital economy more fairly (Dec. 18, 2019). 

[11] See Suzanne Kingston, The Boundaries of Sovereignty: The ECJ’s Controversial Role Applying Internal Market Law to Direct Tax Measures, Cambridge Y.B. Eur. Legal Stud. 289 (2007).

[12] See Living in the EU, About the EU, Eur. Union, https://europa.eu/european-union/about-eu/figures/living_en (last visited Oct. 14, 2020).

[13] Here, Dombrowskis likely references the three recent failures under the veto: the Common Corporate Consolidated Tax Base, Value Added Tax reform, and the Financial Transaction Tax. See Henk van Arendonk, 2019: A Landmark Year for European Cooperation, or Maybe Not?!, EC Tax Rev. (Feb. 2019); Francesco Guarascio, EU tries to revive plan for financial transaction tax, Reuters (Jun. 14, 2019), https://www.reuters.com/article/us-eu-ecofin-tax/eu-tries-to-revive-plan-for-financial-transaction-tax-idUSKCN1TF1OG. See also Stephanie Soong Johnston, German and French Governments Agree on Common Corporate Tax Base, Tax Notes (Jun. 21, 2018), https://www.taxnotes.com/tax-notes-today-international/corporate-taxation/german-and-french-governments-agree-common-corporate-tax-base/2018/06/21/285dw (Ireland Sweden, Denmark, Malta, and Luxembourg all raised formal objections to the tax).

[14] Eur. Parl. Deb. (2695), supra note 1.

[15] Id.

[16] See European Commission Press Release IP/19/225, Commission Launches Debate on a Gradual Transition to a More Efficient and Democratic Decision-Making in EU Tax Policy (Jan. 15, 2019)..

[17] See Consolidated Version of the Treaty on European Union, Art. 48, Sept. 05, 2008, 2008 O.J (C 115) 7.

[18] Eur. Parl. Deb. (2695), supra note 1.

[19] See Friedrich Heinemann, Majority Voting on Taxation could prove explosive for European integration, Eur. Network Econ. & Fiscal Pol’y Rsch. (May 18, 2019). See Marc Morris, United in Diversity, Divided by Sovereignty: Hybrid Financing, Thin Capitalization, and Tax Coordination in The European Union, 31 Ariz. J. Int’l & Comp. L. 761, 775 (2014) (these smaller states express “Eurosceptic” sentiment in that they remain more “vocally opposed to further integration” and fear loss of “legitimacy and democratic control.”).

[20] See Maja Kluger Rasmussen & Caterina Sorenson, Denmark A Pragmatic Euroscepticism, 2 (Institute Francais des Relations Internationals, Building Bridges Paper Series Mar. 2016), https://www.ifri.org/sites/default/files/atoms/files/denmark_-_pragmatic_euroscepticism_0.pdf.