European Lawmakers Threaten To Block Historic EU Budget

By Matt Thompson
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Law360 (July 24, 2020, 1:45 PM EDT) -- The European Parliament has threatened to withhold its consent for a historic €750 billion ($872 billion) package of pandemic relief unless the bloc gets new powers to raise its own money.

In a motion issued Thursday, the Parliament accused the heads of state and government of the European Union, known as the European Council, of failing to properly tackle how the money is to be repaid.

In a deal agreed upon Tuesday as part of a multiyear €1.074 trillion budget, money would be disbursed across Europe to aid in the economic recovery from the ongoing coronavirus pandemic, with the European Commission, the bloc's executive branch, borrowing money on international markets for the first time. The budget requires European Parliament approval to take effect, but the Parliament has never declined to approve one. 

The parliamentary motion said there are only three options for repaying the money: further cuts to EU programs, increasing the budget contributions of the bloc's members or creating new "own resources" — funds raised independently from countries' membership fees. Only the third is acceptable to the Parliament, the motion said.

Own resources would include, for example, money raised from the fixed percentage of member countries' value-added taxes, and they are seen as a more stable and predictable revenue stream.

The European Parliament said the European Council meeting didn't resolve the question of repaying the debt. That burden must not fall on citizens, the Parliament said

"A robust system of new own resources including a digital tax or levies on carbon for the repayment must be guaranteed" and must have a fixed date for enactment, the Parliament said in a separate news release.

Benjamin Angel, director of direct taxation at the commission, said Tuesday on social media that the digital tax proposal will be considered by the end of the first half of 2021. The commission is known for pushing back the completion date for projects, and the Parliament wants assurances that this won't happen with the new proposals on own resources.

The proposed digital tax levy announced this week will feed into the wider EU budget, according to Angel.

Angel said the task set by the European Council is delicate in light of the ongoing global talks about overhauling the international tax system. The Organization for Economic Cooperation and Development is leading the effort to change the system to better enable taxation of digital business models.

The OECD's negotiations among 137 jurisdictions are split into two parts, referred to as Pillar One and Pillar Two. Pillar One would reallocate taxing rights to countries where companies' customers are based, in contrast with the current system whereby allocation of taxing rights is based on the location of management functions.

Pillar Two is a proposal for a global minimum tax rate, designed to put a floor under tax competition among countries and prevent a race to the bottom.

A plan for a European digital services tax has been made at the EU level before, but in March 2019 it ultimately failed to win the unanimous support necessary for tax proposals to be adopted. Failure to adopt the levy led some European countries, notably France, Italy and the U.K., to adopt their own versions of the tax based on the EU proposal.  

In a parliamentary democracy, it is normal for proposals to be changed by the process of being scrutinized by a parliament — and the European Parliament is no different, Manfred Weber, the leader of the broadly center-right European People's Party, said during the debate on the budget.

Addressing criticism that the Parliament is delaying the ratification of the budget during a crisis, Weber pointed out that the first version of the budget was on the table in 2018.

"Don't tell us about delaying things. There was a lot of time," he said.

Scrutiny is a normal procedure of parliaments, Weber said.

"We are not ready to swallow the bitter pill," Weber said, adding that the proposed budget "is not giving proper answers to the challenges of the next seven years."

The European Parliament didn't immediately respond to a request for comment.

--Editing by Robert Rudinger.

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