Brussels faces battle on new pan-EU revenue sources

European Commission aims to raise at least €13bn a year to service post-pandemic borrowing

Ireland would be disproportionately impacted by the digital levy, whereas Poland would be far more heavily affected by the reform of the ETS.

Ireland would be disproportionately impacted by the digital levy, whereas Poland would be far more heavily affected by the reform of the ETS.

 

Brussels is grappling with deep divisions among member states over ways of raising fresh revenue to repay the unprecedented debts the EU is taking on via its recovery fund, in a new challenge to the EU’s coronavirus-fighting plan.

The European Commission is working on a three-pronged approach to raise €13 billion-€15 billion of revenue a year to service the borrowing that it will start to issue this year under the €750 billion recovery plan.

This will be based on an expansion of the EU’s emissions trading scheme, which would account for about half the revenue raised for the commission, along with a new carbon border adjustment mechanism and a levy on digital companies, according to a draft summary .

Support

However diplomats said the commission will find it difficult to win member state support for the proposals, not only because of the complexity of designing the taxes and levies, but also because of reluctance in many capitals to share revenues with the EU.

This is despite agreement among EU leaders last year that the commission would need “own resources” to repay the debt that they agreed to allow it to issue as part of the groundbreaking deal on the recovery plan.

“The only thing we agreed in July last year was there would be a proposal by the commission, and the commission has every right to come up with proposals,” said one senior EU diplomat. “But it is quite clear that many member states do not want new own resources. . .There are all kinds of difficulties. This is not going to be solved soon.”

“We will battle again,” said another EU diplomat, in reference to the disputes over own resources that dogged last year’s negotiations on the bloc’s recovery fund. “We are thinking about it very much.”

Own resources are in effect revenue streams directly allocated to the EU’s central budget – they currently include a share of customs duties and value added tax.

While France championed the creation of new revenue streams during last year’s negotiations, such moves were viewed with suspicion by other governments, with fiscally conservative countries such as Denmark and the Netherlands among those most staunchly opposed.

Battles

Diplomats said that one of the toughest battles to come would be over plans for a digital levy that are now intertwined with rejuvenated international talks. Brussels is planning, as instructed by leaders last year, to come forward with a proposal by the end of June, so that the levy could be introduced by 2023.

But many governments are growing increasingly cautious. Diplomats said EU finance ministers from numerous countries, including Germany, warned Brussels at a meeting last month that any plans for the digital levy should not interfere with work under way at global level within the OECD.

The OECD efforts were galvanised this week by new proposals from Joe Biden’s administration aimed at forging global consensus on taxing multinationals.

EU diplomats said that Brussels’ digital levy plans would target a wider array of companies than the measures under discussion at the OECD, which focus on large multinationals. Governments have received assurances from Paolo Gentiloni, the EU economy and taxation commissioner, that he will make sure the plans fully respect the OECD work.

Diplomats underscored that other proposals will face political pushback too. Any extension of the emissions trading scheme, which requires polluters to buy tradable allowances, will encounter heavy opposition from the affected industries and within member states that are less advanced in the transition towards a low-carbon economy.

The carbon border adjustment mechanism, meanwhile, would mean that the carbon emissions of some imports into the EU are charged the same cost as their European equivalents, but it is difficult to design and hard to ensure compliance with World Trade Organisation rules. It also risks an adverse response from other economic powers, including the US.

Levies

All three levies would have sharply varying impacts depending on the individual member state. For example Ireland would be disproportionately impacted by the digital levy, whereas Poland would be far more heavily affected by the reform of the ETS.

This has given rise to discussion about a compensation mechanism to ensure fairer burden sharing. But any new tax proposals are going to be hard to sell politically within member states given the economic fallout from the crisis.

In contrast to the wariness among many governments, the European Parliament is fiercely supportive of new revenue sources.

Paul Tang, the head of the parliament’s subcommittee on tax, said: “Rather than getting bogged down in the usual divisions and discussions, European countries should keep an eye on the broader aim of increasing public investment and ways to pay for them.” – Copyright The Financial Times Limited 2021