The EU strengthens control over taxation
Earlier this year, more than 145 countries agreed to amend the 2021 global minimum tax agreement for companies to align it with the legal framework of the United States, which decided to no longer participate in this agreement under the presidency of Donald Trump. The latter has threatened to impose retaliatory taxes on any country that taxes US companies under the 2021 agreement.
Last spring, EU governments approved the implementation of a 15% global minimum corporate tax rate in the EU, even though this represents a competitive disadvantage for European companies now that the US is no longer participating. This is rather worrying, as it reduces tax competition within the bloc, resulting in less pressure on governments for fiscal discipline, as they no longer have to fear losing as much.
Even more questionable is the fact that the entire policy is locked in at the EU level, meaning that EU member states cannot follow Trump’s lead and abandon the agreement. This is because the global minimum tax agreement was implemented in the EU through an EU directive, number 2022/2523.
EU regulations on taxation
Although corporate taxation is still largely the responsibility of member states, there are numerous EU regulations that affect tax policy. The Anti-Tax Avoidance Directive (ATAD, 2016/1164/EU), dating back to 2016, contains all kinds of opaque provisions that lend themselves to arbitrary interpretations, such as a “general anti-abuse rule” and even an “exit tax.” In a 2024 assessment, the European business federation BusinessEurope complained that the directive “lacks clear interpretative guidelines, creating legal uncertainty for taxpayers and increasing the risk of inconsistent application across Member States.”
The European Commission has a long tradition of attempting to gain greater control over corporate taxation. Typically, legislative proposals have been marked with acronyms, such as the Soviet-sounding term “common consolidated corporate tax base (CCCTB),” launched in 2011, or the 2021 “Business in Europe: Framework for Income Taxation (BEFIT), which aimed at a single EU tax regulation for companies that would redistribute profits among Member States.
Tobacco taxation
Setting minimum and maximum rates for taxation is a power that the EU has acquired over many years. This is the case for value-added tax (VAT) and excise duty rates, which are set at EU level. There is currently a heated debate among Member States on the revision of the Tobacco Excise Duty Directive (TED), which governs the regulatory framework for the taxation of tobacco and nicotine in the EU. In January, the Cypriot Presidency of the EU Council drew up a new draft compromise to increase the minimum excise duty rate and extend the scope of EU-wide minimum excise duties to new nicotine products, such as e-cigarettes, heated tobacco products, and nicotine pouches, for the first time.
This proposal is a marked improvement on the one presented by the European Commission, slightly mitigating the increase in some areas and allowing for a transitional period.
However, making tobacco and nicotine products drastically more expensive would obviously have a negative impact on consumers’ purchasing power, particularly in the poorer EU member states, so it should come as no surprise that opposition is coming mainly from the latter. At the same time, it would fuel the illegal tobacco trade. The experience of France, which has some of the highest tobacco excise taxes in the EU, is significant. A few years ago, it decided to increase these taxes considerably in an attempt to reduce the smoking rate. Unsurprisingly, France also has the largest illegal tobacco market in the EU. A 2024 KPMG report highlights that around 43% of all cigarettes consumed in France are untaxed. Belgium has had similar experiences, with a decline in revenue following tax increases by the government.
Equally problematic is the European Commission’s approach of treating less harmful or non-harmful alternatives to cigarettes in the same way. For example, according to the UK government’s Department of Health, “the most reliable estimates indicate that e-cigarettes are 95% less harmful to health than regular cigarettes.” The proposed update to EU legislation completely ignores the Swedish approach, whereby non-harmful or less harmful tobacco products, such as snus, are available and regulated, which has led to a significant reduction in the number of smokers and, consequently, a significant reduction in smoking-related diseases.
Several EU member states have reportedly welcomed Cyprus’s more realistic approach, arguing that too sharp an increase risks fueling illegal trade, eroding tax revenues, and overwhelming national law enforcement authorities. These governments consider a more gradual and flexible framework essential to maintaining control over legal markets while avoiding the undesirable effects on national budgets that tend to accompany drastic tax changes.
Targeting the digital sector
A more recent popular target for EU taxation is the digital sector. Last year, European Commission President Ursula von der Leyen floated the idea of taxing digital advertising revenues—the so-called “Amazon tax”—as a possible countermeasure to US tariffs, but the EU ultimately did not pursue this initiative. However, through its antitrust competition policy, the EU has collected large sums of money from US “big tech” companies, and, at least for the US, this situation cannot continue. On his social media, US President Donald Trump shared a chart showing that in 2024, the European Union (EU) collected more revenue from fines imposed on US tech companies than from taxing all European public tech companies combined.
While this comparison may be disputed, the arguments of EU officials for imposing huge fines based on EU competition rules should be called opaque at best. Even the EU’s new “Digital Services Act” (DSA), used to impose a $120 million fine on Twitter/X, is accompanied by arbitrary interpretation. In this case, Elon Musk’s company was fined for allowing anyone to receive a blue verification checkmark on their profile for a fee. In doing so, according to EU bureaucrats, the platform “misled users” because Twitter did not “meaningfully verify” who was behind the account, even though it was obvious to every user that they could simply receive the checkmark by paying for it.
In any case, just like taxes on digital services, these types of costs tend to be passed on to local consumers through higher prices.
Breaking the law
To push its agenda forward, the European Commission did not hesitate to go beyond the limits of the law. In 2020, it proposed using a previously unused provision of the EU treaty in an attempt to circumvent national vetoes on taxation. At the time, it argued that Article 116 of the EU treaty allows decisions to be taken by majority vote if the absence of the measure would cause a distortion in the single market. According to diplomats, the Commission had been “dancing around” the use of Article 116 for some time. The institution admitted that it would not be possible to use it to push through a digital services tax (DST) directive or to implement its “common consolidated tax base” plan. In that case, it could be useful for its many other tax initiatives, often presented as means to make taxation simpler and fairer.
The national veto on tax policy, which the European Commission is trying to circumvent, is no small matter. If the harmonization of the tax base at EU level were to be approved, for example, it is estimated that smaller Member States would be particularly affected. According to some simulations, this would result in a transfer of tax revenue from the small open economies of EU Member States to the large closed ones. Ireland, for example, would lose 7.7% of its tax revenue, while companies across the EU would see their effective tax burden increase. Ultimately, this would be passed on to consumers in the form of higher prices.
