In September 2024, I had the chance to interview Dr. Jean-Philippe van West, Professor of Worldwide and European tax legislation at Vrije Universiteit Brussel, about the way forward for the EU tax combine. A evenly edited transcript from that interview is under. Jean-Philippe van West highlights the EU’s heavy reliance on private revenue tax and social safety contributions, whereas warning that mobility, digitalization, and demographic modifications problem the sustainability of this tax combine and should considerably affect home budgets, though correct knowledge to completely assess the issue is missing. He additional displays on the significance of flexibility within the legislative course of, and higher coordination on cross-border taxation of people inside the inside market. All views expressed by Dr. van West are made in his private capability and don’t essentially symbolize the views of his employers.

Sean Bray: How would you characterize the EU tax combine?

Jean-Philippe van West: What I all the time discover fascinating is to seek the advice of the OECD World Income Statistics Database and the EU Annual Report on Taxation. On the one hand, you might have private revenue tax and social safety contributions forming an enormous a part of the funds income in most EU Member States. On common, greater than 50 %, at the very least for 2022. However you see variations between the Member States. Some closely depend on private revenue tax, whereas different international locations rely extra on social safety contributions. So, you see variations.

Then again, what’s fascinating with regards to the company revenue taxA company revenue tax (CIT) is levied by federal and state governments on enterprise earnings. Many corporations aren’t topic to the CIT as a result of they’re taxed as pass-through companies, with revenue reportable beneath the person revenue tax. is that, though during the last two or three a long time there was a steep decline within the company revenue tax fee, the entire income stays mainly the identical proportion-wise. So, this race to the underside doesn’t result in a major lower within the share of company revenue tax. So, both that have to be as a result of taxes are decrease and thus stimulate extra enterprise exercise that leads to a rise of taxable earnings, or reducing the tax fee was mixed with broadening the tax baseThe tax base is the entire quantity of revenue, property, belongings, consumption, transactions, or different financial exercise topic to taxation by a tax authority. A slim tax base is non-neutral and inefficient. A broad tax base reduces tax administration prices and permits extra income to be raised at decrease charges..

In fact, consumption taxes like VAT are vital in Europe as effectively. After which you might have, for many international locations, a decrease share of environmental taxes and property taxes. I’m not going to say what this tax combine ought to seem like. I feel it’s extra for politicians to resolve. However what I feel wants consideration is that this heavy dependence on private revenue tax and social safety contributions, which, given the elevated mobility of people, the digitalization, tax competitors, ageing inhabitants, and so forth, poses dangers for the longer term.

Sean Bray: What are some enhancements that must be made for a steady and democratically respectable European tax system?

Jean-Philippe van West: One thing that I feel deserves consideration is definitely the legislative course of within the EU. I feel the present legislative course of is just not so environment friendly, and it’s not very versatile. For instance, in direct taxation, we want unanimity to undertake a directive akin to the worldwide minimal tax (Pillar Two). Nonetheless, resulting from altering megatrends like an ageing inhabitants, the inexperienced transition, digitalization, and the rise of AI, the world is altering quicker than the political course of. Due to this fact, having an rigid course of is a drawback to creating changes alongside the way in which. I feel that’s one thing the place an answer needs to be discovered, or Member States ought to actually take into consideration how you can change this. As a result of, for instance, if it now seems this international minimal tax is just not a very good choice, we’ll nonetheless have it, and different international locations is not going to. You would possibly put your self at a aggressive drawback there, simply to provide one instance. So, I do know in your query, you have been speaking about stability, however I feel perhaps, with this altering world, perhaps flexibility deserves extra consideration.

Sean Bray: Are you able to describe the established order within the EU for mobility of employees, and the way tax legislation treats these employees throughout borders?

Jean-Philippe van West: An vital place to begin is that inside the EU, the free motion of employees is likely one of the basic freedoms. So, it’s one of many key ideas on which the EU Member States agreed when creating the European Union, and the only market, which is the important thing objective of the EU. So that’s vital if you happen to then have a look at tax remedy. I feel, in fact, this cross-border mobility poses tax issues. What is commonly talked about within the literature is potential double taxationDouble taxation is when taxes are paid twice on the identical greenback of revenue, no matter whether or not that’s company or particular person revenue., even triple taxation. On the one hand, now we have double tax treaties. Virtually all EU Member States concluded double tax treaties with each other. So, there you might have a very good tax treaty community, which ought to mitigate most instances of double taxation. Then again, you might have as effectively the Dispute Decision Directive. In order that’s a very good enchancment, however in fact, for much less rich people, the query stays: how a lot do you actually get entry to it, whether or not you actually wish to go to court docket and so forth? What all the time comes again while you speak about obstacles is the executive burden points associated to social safety contributions. I’ve been residing overseas as effectively and have skilled in apply that there’s extra work to do.

If I carry your query again to my analysis, one of many key ideas of private revenue taxes is figuring out when you find yourself a tax resident. If you’re a tax resident and topic to full tax legal responsibility, you pay taxes in your worldwide revenue in most EU Member States. After I seemed on the idea of figuring out tax residency in Belgium, I discovered that really this idea dates again to the start of the nineteenth century and has its origin within the laws on inheritance taxation. At the moment, you possibly can say the place you personal a home, that’s in all probability the place you reside and the place you might have your tax residency. However since then, only a few modifications have been made to that idea, regardless of the completely different world we reside in two centuries later. You may assume that both the idea may be very stable and it’s match for function, or you may critically ask whether or not that’s actually the case? It’s actually a altering surroundings, particularly if you concentrate on elevated mobility, digitalization, ageing populations, and so forth. In the event you have a look at the analysis that has been performed with respect to companies and the place they’re a tax resident, you discover that there’s loads of literature on this matter. With respect to non-public revenue tax, at the very least in Belgium, there’s a lot much less analysis out there.

So, I began to take a look at different international locations. I’m not an skilled in these, however primarily based on out there supplies, my understanding is that every one international locations use related ideas. Nonetheless, in not one of the EU Member States are they precisely the identical. Some use a time threshold, for instance, however that’s not utilized in Belgium. In some international locations, they are saying, if you happen to personal a home, you then’re in all probability a resident. However different international locations don’t use that. As a substitute, they have a look at the place you might have your monetary pursuits or the place your loved ones lives. So related standards, however by no means similar. And I feel it could possibly be good to have some finest practices. Some international locations will need to have thought additional about whether or not their standards are actually match for function on this new world. I’m not saying that we essentially ought to have a directive to harmonize this, however additional exploring the concept and sharing some finest practices could possibly be useful.

Sean Bray: What results does elevated mobility of people have on home budgets, and are there some international locations which might be extra affected than others?

Jean-Philippe van West: I feel, particularly from a authorized standpoint, there are probably vital penalties. In the event you develop into a tax resident of one other nation and not a tax resident of the nation that you simply determined to depart, the latter nation will typically not tax the individual on its worldwide revenue. So, it positively has an affect on home budgets. About six months in the past, we organized an interdisciplinary convention centered on digital nomads. What we noticed was that there’s really no knowledge, or very restricted knowledge, to essentially assess the affect on home budgets. In the event you actually wish to assess the affect, you want the info. However even with out it, you may see traits and analyze the authorized penalties. Tax competitors is a vital ingredient right here. Nations outdoors the EU have been very efficient at attracting proficient folks and rich people who wish to make investments there. But additionally within the EU, some international locations now provide digital nomad visas. In the event you look deeper into the principles, they’re in all probability extra like a branding idea. They name it a digital nomad visa, however the underlying objective is to draw younger, proficient folks for an extended time period. If you take this along with the ageing inhabitants, you may see the issue. If loads of younger, proficient folks transfer to a different nation, or are attracted by these digital nomad schemes, this impacts home budgets. So, I feel international locations ought to take this into consideration when designing their tax coverage.

As well as, this elevated mobility of people, mixed with the digitalization of the financial system, makes it doable to work from anyplace. On prime of that, now we have the affect of AI. Very often, there are discussions about whether or not AI will end in extra jobs or remove jobs. Some jobs can be misplaced, and new ones can be created, however what’s the web end result? Even if you happen to assume that it will stability out, and AI wouldn’t end in a discount of the entire quantity of jobs, I feel the situation the place folks will work would possibly change. That may even have a severe affect on home budgets, particularly since for many international locations, greater than 50 % of their income is derived from private revenue tax. At each home ranges, as inside the EU, quite a bit has been performed inside the BEPS Venture on the company revenue tax. Possibly they need to look as effectively with the identical form of element at private revenue tax now. The main target ought to then not be as a lot on the abuse half, however reasonably on facilitating this cross-border mobility inside the inside market.

Sean Bray: Might you describe what the principles are within the EU for teleworkers who work some days of the week in a single nation and a few days in one other?

Jean-Philippe van West: Since there is no such thing as a harmonization on the EU degree from the tax perspective, you need to do a case-by-case evaluation relying on the Member States concerned. In a number of international locations, there are particular guidelines for frontier employees. There are specific areas inside the EU the place it is vitally frequent that individuals work two days in a single nation and three days overseas. Usually, international locations deal with this bilaterally with tailor-made agreements.

Sean Bray: What do you make of tax equity, and what would make the way forward for the EU tax combine fairer?

Jean-Philippe van West: I have to admit that this can be a arduous query to reply as a result of what’s truthful taxation? I feel it’s extra of a coverage query. For instance, the worldwide minimal tax units a flooring of 15 %. Is 15 % truthful or not truthful? private revenue tax, a number of international locations have the next tax on labor revenue versus revenue from capital. Is that truthful or not truthful? It’s extra of a coverage query. For me, as a authorized scholar, once I have a look at what makes a tax system truthful, it comes right down to the authorized rules underpinning the tax system. Respect for the rule of legislation and having a clear democratic course of are vital, for instance. Personally, I discover that an excessive amount of discretionary energy is problematic as it’s usually perceived as unfair. So, I consider most facets of tax guidelines needs to be decided by laws, not leaving an excessive amount of room for discretionary energy by tax authorities, or if there may be discretionary energy, the principles ought to make it clear. One other key ingredient is taxpayer rights. Tax authorities ought to have the means to gather taxes, however there also needs to be a very good stability between the rights of the tax authorities and the rights of taxpayers. For instance, having the likelihood to problem selections of tax authorities, gaining access to courts, and having selections inside an affordable interval all contribute to a good tax system.

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