Brussels targets tax rules in EU recovery plans

Brussels is pushing some EU member states to clamp down on sweetheart corporate tax deals as part of economic reforms as European capitals draw up detailed plans to spend billions of euros of EU recovery fund cash. 

The European Commission is engaged in intensive talks with EU member states as an end-of-April target date looms for the submission of their so-called recovery and resilience plans, which will unlock a total €750bn of grants and loans on offer from Brussels. 

Among the many points of contention are longstanding demands from the commission that a subset of member states do more to tackle “aggressive tax planning” by companies. Six capitals are subject to such calls by Brussels under the commission’s regular economic surveillance — Cyprus, Ireland, Hungary, Luxembourg, Malta and the Netherlands. 

Officials said the tax issue had proven to be a significant sticking point in discussions with some capitals. The push by Brussels underscores the far-reaching nature of the reform demands being imposed by the commission, as it seeks to bolster member states’ growth prospects and ensure the recovery fund windfall is not frittered away. 

Capitals are being asked to an array of economic reforms as part of their plans, which, depending on the member state, include changes to pensions systems, labour markets, judicial processes, tax systems and public procurement processes. 

The reforms are meant to address a significant subset of relevant “country specific recommendations” previously set forth by the commission under its economic surveillance programme. “We are negotiating very actively with the member states what is the right balance, how much does it have to be to be a ‘significant subset’,” said one EU official. “We are trying to set the bar obviously quite high.” 

Tax avoidance by multinationals and high-net worth individuals has shot up the EU’s policy agenda as member states amass huge debts to pay for the Covid-19 recession and economies struggle to recover from the pandemic. Janet Yellen, US Treasury secretary, has sought to revive momentum towards a global deal on a minimum corporate tax rate, as some countries put the crackdown on tax avoidance at the heart of their agendas. 

Paolo Gentiloni, the EU’s economics commissioner, said last year he would be demanding that national recovery and resilience plans submitted to the commission under the recovery fund address national measures deemed to “facilitate aggressive tax planning”. Some member states are also being asked to commit to tougher anti-money laundering rules in the talks with the commission. 

Among the countries that are under pressure to reform their tax rules is Ireland. The finance ministry in Dublin said the balance between reforms and investments in recovery plans had proven to be “a major horizontal issue” for all member states. 

“Ireland will be seeking to respond positively to the country specific recommendations in its [Recovery and Resilience Facility] national plan,” the ministry said. “Of course, all elements of Ireland’s RRF plan will be in line with existing government policy.”

The tax changes are only one example of a broad range of economic reforms being demanded by the commission in its negotiations ahead of the April 30 target date for submission. 

Among the others are stronger public procurement rules, a particular issue in discussions with countries including Hungary, to ensure EU money is well-spent. Other countries such as Spain are vowing to implement pension and labour market reforms, while Italy has pledged to speed up its judicial system as well as overhauling its tax processes and public procurement system. 

The complexity of the negotiations means many member states are now unlikely to meet the previously targeted April 30 date for submitting their recovery plans. The economic reforms are being twinned with investment proposals that will require 37 per cent of spending to go on green goals — a requirement that is proving particularly troublesome for some central and eastern European member states. Some 20 per cent of the spending has to go on the digital transition. 

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Member states are also being required to prove they have submitted realistic project costings, and are teeing up solid audit and spending control systems, as the commission seeks to avoid the recovery effort being undermined by credibility-sapping waste or fraud. 

After formal submission the commission will have two months to analyse and approve the plans, following which its conclusion will need sign-off from the EU member states. 

One key question once regular payments of recovery fund tranches begin this year is how strict the commission will be in policing countries’ compliance with the highly detailed milestones and targets they have to set out in recovery plans. 

One senior EU official stressed that the commission was ready to freeze payments if a member state misses important deadlines to implement its plan. “In principle a milestone not met means no disbursement,” the official said. 

However a decision by the commission to suspend payments to a member state would be politically explosive, given the enormous weight the union has placed on the recovery plan in driving the EU out of the deepest economic crisis in its history.

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