Europe Needs Good Tax Policy, Not Buzzwords, to Grow Its Economy

With war continuing in Ukraine, political instability in France and Germany, and the return of Donald Trump to the White House, this could be a year of major realignment for Europe. The tax policy mindset in Brussels should shift accordingly.

The EU finds itself in a brave new world with “competitiveness” and “decluttering” as the new undefined buzzwords driving policy. Both the incoming European Commission and Polish presidency of the Council have hinted that streamlining tax files to be more efficient (decluttering) should be part of the competitiveness agenda.

Given that EU tax policy tends to be adopted unanimously, this consensus is good news for those who favor eliminating redundant red tape to accelerate economic growth. But success will require policymakers to embrace sound tax policy principles to achieve their long-term economic objectives.

One challenge in turning political consensus into actionable reform is that policymakers don’t know where to start. Case in point: Benjamin Angel, the commission’s director of direct taxation, recently said the group will begin “a systematic mapping of all tax direct legislation to identify duplication, nix some reporting, and determine if simplifications can be developed.” Unfortunately, this is a symptom of the EU’s modus operandi.

EU policymakers have spent more than a decade embracing “fairness” as the undisputed tax policy buzzword, rather than allowing simplicity, stability, neutrality, and transparency to serve as clearly defined guidelines. The quest for fairness has led policymakers to create a complicated web of inefficient and overlapping anti-avoidance rules.

For example, since 2015, the EU has adopted the anti-tax-avoidance directive, the directive on administrative cooperation, country by country reporting, public country by country reporting, and the EU directive on the 15% global minimum corporate tax known as Pillar Two. Additionally, the commission has proposed the debt-equity bias reduction allowance and the business in Europe framework for income taxation known as BEFIT, but these latter efforts so far have faced resistance from EU members.

All these policies aim to eliminate corporate profit-shifting to some degree and restore fairness to the tax system. The problem is that many of them have different reporting points and timelines and differing definitions for similar concepts.

For example, BEFIT attempts to harmonize the corporate tax base across the EU but uses a different base than the one used in Pillar Two, making the whole exercise duplicative or pointless (or both). To make matters worse, the EU has been less than transparent about how some of the data collected is even being used (if at all).

This piecemeal approach adds compliance costs for taxpayers without obvious benefits to society and arguably leaves many in smaller EU countries with traditionally simpler systems and less enforcement resources, wondering what “fairness” has been achieved.

Moving forward, leaders should aim to synchronize relevant EU-level reporting requirements and eliminate duplicative requirements or requirements not being used for enforcement.

The elephant in the room, however, is Pillar Two. The internationally negotiated agreement was sold to the European public as a policy to curb unfair profit shifting, generate revenue for governments with aging welfare states, and make anti-avoidance rules more efficient. In reality, governments are looking for ways to redistribute revenue to the same firms that contributed under Pillar Two.

If revenue is less than the Organization for Economic Cooperation and Development has calculated, and if the EU remains the only major economic bloc to adopt Pillar Two, European firms could face domestic compliance costs and retaliatory measures from other countries. This could cause European competitiveness to plummet.

Before decluttering other anti-avoidance policies or adding yet new rules, European policymakers should decide if Pillar Two is serving its purpose, and if not, look to reform it immediately.

To achieve a competitive tax system, European policymakers would be wise to replace vague buzzwords with concrete principles of sound tax policy when considering reforms that support private investment, hiring, and a more dynamic economy. Tax policy needn’t stand in the way of economic growth at such a critical time for the future of the continent.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Sean Bray is vice president of global projects at the Tax Foundation.

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