EU Mulls Corporate Tax Revenue Sources to Cover Brexit Shortfall

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By Joe Kirwin

Corporate tax revenue from the EU’s pending legislation on a common corporate consolidated tax base (CCCTB) and changes to digital taxation policy should be considered as ways to fill an expected EU budget shortfall caused by Brexit, the European Commission says.

As the EU begins work on its next seven-year multi-annual budget running from 2021 to 2027,the commission targeted corporate tax revenue as well as increased funds from value-added tax and a possible contribution from a financial transactions tax, should one be approved. The U.K. will formally leave the EU in March 2019.

The upcoming EU budget negotiations, which will informally begin Feb. 23 when EU leaders meet in Brussels for a special summit, are expected to be especially difficult, as the bloc struggles to cover a Brexit-induced shortfall that could amount to as much as $100 billion, according to EU officials.

“We face a serious challenge and tough choices due to Brexit,” European Budget Commissioner Gunther Oettinger said at a Feb. 14 news conference. “We will have to find other sources of revenue.”

VAT Revenue

Currently, 0.3 percent of the VAT revenue each EU member state receives goes to finance the EU budget. The overwhelming majority of revenue comes from budget contributions from each EU member state. Overall, the EU annual budget for the years from 2014-20 amounted to 1 percent of the EU annual gross domestic product, according to the European Commission.

In its Feb. 14 communication paper that will serve as a guideline for a formal proposal in May, the European Commission estimated that a revision of the VAT revenue contribution could boost revenue from $131 billion to $174 billion over seven years. Corporate tax revenue from the CCCTB and a digital turnover tax could range from $26 billion to $174 billion, the commission said.

Revenue from corporate tax receipts to support the EU budget has the support of the Socialists and Democrats—the second-largest political group in the European Parliament.

“There is widespread agreement among our group that corporations should pay more to contribute to the EU budget because they benefit immensely from the single market,” Paul Tang, a Socialist and Democrat Party member from the Netherlands in the European Parliament, told Bloomberg Tax in a Feb. 14 interview. “This would reinforce the links of a harmonized corporate tax base and the benefits of the single market.”

Budget Skeptics

However, European Parliament political groups in favor of a reduction in the EU budget—led by the European Conservatives and Reformists group, the third largest in the EU institution—insist that more efficiency and budget reductions are the best way to cover for the Brexit revenue shortfall.

“We can not expect taxpayers to keep paying for current levels of spending without committing to meaningful reform of current spending programs,” said Polish ECR member Ryszard Legutko in a Feb. 14 statement.

Few Net Payers

Funding the EU budget in the past decade and a half has become increasingly difficult, especially after the 2004 expansion when countries from eastern and central Europe as well as the Baltic nations joined the bloc.

As all of the new 2004 entrants have GDPs significantly lower than countries from Western Europe, they receive much more in EU development and agriculture money from the EU budget than what they contribute. As a result, the number of net payers to the EU budget are limited and include Germany, France, the Netherlands, Denmark, Sweden, Austria, Italy, Finland, Belgium and the U.K.

Despite the obvious upcoming shortfall and an increased number of projects that need EU funding, especially those dealing with terrorism and migration, Fredrik Erixon, the director of the European Center for International Political Economy, a Brussels-based think tank, was skeptical that an agreement can be reached to allow corporate tax revenue or increased VAT money to be used to finance the EU budget.

“Far too many countries are opposed to it,” Erixon told Bloomberg Tax in a Feb. 14 email. “And even if there would be unanimous support, it always takes a long time to work tax policy into EU treaties.”

To contact the reporter on this story: Joe Kirwin in Brussels at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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