In September 2024, I had the opportunity to interview Dr. Jean-Philippe van West, Professor of International and European tax law at Vrije Universiteit Brussel, about the future of the EU tax mix. A lightly edited transcript from that interview is below. Jean-Philippe van West highlights the EU’s heavy reliance on personal income tax and social security contributions, while warning that mobility, digitalization, and demographic changes challenge the sustainability of this tax mix and may significantly impact domestic budgets, even though accurate data to fully assess the problem is lacking. He further reflects on the importance of flexibility in the legislative process, and better coordination on cross-border taxation of individuals within the internal market. All views expressed by Dr. van West are made in his personal capacity and do not necessarily represent the views of his employers.
Sean Bray: How would you characterize the EU tax mix?
Jean-Philippe van West: What I always find interesting is to consult the OECD Global Revenue Statistics Database and the EU Annual Report on Taxation. On the one hand, you have personal income tax and social security contributions forming a big part of the budget revenue in most EU Member States. On average, more than 50 percent, at least for 2022. But you see differences between the Member States. Some heavily rely on personal income tax, whereas other countries rely more on social security contributions. So, you see variations.
On the other hand, what is interesting when it comes to the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. is that, although over the last two or three decades there has been a steep decline in the corporate income tax rate, the total revenue remains basically the same proportion-wise. So, this race to the bottom does not lead to a significant decrease in the share of corporate income tax. So, either that must be because taxes are lower and thus stimulate more business activity that results in an increase of taxable profits, or lowering the tax rate was combined with broadening the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates..
Of course, consumption taxes like VAT are important in Europe as well. And then you have, for most countries, a lower share of environmental taxes and property taxes. I’m not going to say what this tax mix should look like. I think it’s more for politicians to decide. But what I think needs attention is this heavy dependence on personal income tax and social security contributions, which, given the increased mobility of individuals, the digitalization, tax competition, aging population, and so on, poses risks for the future.
Sean Bray: What are some improvements that need to be made for a stable and democratically legitimate European tax system?
Jean-Philippe van West: Something that I think deserves attention is actually the legislative process in the EU. I think the current legislative process is not so efficient, and it’s not very flexible. For example, in direct taxation, we need unanimity to adopt a directive such as the global minimum tax (Pillar Two). However, due to changing megatrends like an aging population, the green transition, digitalization, and the rise of AI, the world is changing faster than the political process. Therefore, having an inflexible process is a disadvantage to making adjustments along the way. I think that’s something where a solution should be found, or Member States should really think about how to change this. Because, for example, if it now turns out this global minimum tax is not a good decision, we will still have it, and other countries will not. You might put yourself at a competitive disadvantage there, just to give one example. So, I know in your question, you were talking about stability, but I think maybe, with this changing world, maybe flexibility deserves more attention.
Sean Bray: Can you describe the status quo in the EU for mobility of workers, and how tax law treats these workers across borders?
Jean-Philippe van West: An important starting point is that within the EU, the free movement of workers is one of the fundamental freedoms. So, it’s one of the key concepts on which the EU Member States agreed when creating the European Union, and the single market, which is the key goal of the EU. So that is important if you then look at tax treatment. I think, of course, this cross-border mobility poses tax problems. What is often mentioned in the literature is potential double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income., even triple taxation. On the one hand, we have double tax treaties. Almost all EU Member States concluded double tax treaties with one another. So, there you have a good tax treaty network, which should mitigate most cases of double taxation. On the other hand, you have as well the Dispute Resolution Directive. So that’s a good improvement, but of course, for less wealthy individuals, the question remains: how much do you really get access to it, whether you really want to go to court and so on? What always comes back when you talk about obstacles is the administrative burden issues related to social security contributions. I’ve been living abroad as well and have experienced in practice that there is more work to do.
If I bring your question back to my research, one of the key concepts of personal income taxes is determining when you are a tax resident. When you’re a tax resident and subject to full tax liability, you pay taxes on your worldwide income in most EU Member States. When I looked at the concept of determining tax residency in Belgium, I found that actually this concept dates back to the beginning of the 19th century and has its origin in the legislation on inheritance taxation. At that time, you could say where you own a house, that’s probably where you live and where you have your tax residency. But since then, very few changes have been made to that concept, despite the different world we live in two centuries later. You can think that either the concept is very solid and it’s fit for purpose, or you can critically ask whether that is really the case? It’s really a changing environment, especially if you think about increased mobility, digitalization, aging populations, and so on. If you look at the research that has been done with respect to corporations and where they are a tax resident, you notice that there’s a lot of literature on this topic. With respect to personal income tax, at least in Belgium, there’s much less research available.
So, I started to look at other countries. I am not an expert in those, but based on available materials, my understanding is that all countries use similar concepts. However, in none of the EU Member States are they exactly the same. Some use a time threshold, for example, but that is not used in Belgium. In some countries, they say, if you own a house, then you’re probably a resident. But other countries don’t use that. Instead, they look at where you have your financial interests or where your family lives. So similar criteria, but never identical. And I think it could be good to have some best practices. Some countries must have thought further about whether their criteria are really fit for purpose in this new world. I am not saying that we necessarily should have a directive to harmonize this, but further exploring the idea and sharing some best practices could be valuable.
Sean Bray: What effects does increased mobility of individuals have on domestic budgets, and are there some countries that are more affected than others?
Jean-Philippe van West: I think, especially from a legal point of view, there are potentially important consequences. If you become a tax resident of another country and no longer a tax resident of the country that you decided to leave, the latter country will generally no longer tax the person on its worldwide income. So, it definitely has an impact on domestic budgets. About six months ago, we organized an interdisciplinary conference focused on digital nomads. What we saw was that there’s actually no data, or very limited data, to really assess the impact on domestic budgets. If you really want to assess the impact, you need the data. But even without it, you can see trends and analyze the legal consequences. Tax competition is an important element here. Countries outside the EU have been very effective at attracting talented people and wealthy individuals who want to make investments there. But also in the EU, some countries now offer digital nomad visas. If you look deeper into the rules, they are probably more like a branding concept. They call it a digital nomad visa, but the underlying goal is to attract young, talented people for a longer period of time. When you take this together with the aging population, you can see the problem. If a lot of young, talented people move to another country, or are attracted by these digital nomad schemes, this impacts domestic budgets. So, I think countries should take this into account when designing their tax policy.
In addition, this increased mobility of individuals, combined with the digitalization of the economy, makes it possible to work from anywhere. On top of that, we have the impact of AI. Quite often, there are discussions about whether AI will result in more jobs or eliminate jobs. Some jobs will be lost, and new ones will be created, but what is the net result? Even if you assume that it would balance out, and AI would not result in a reduction of the total amount of jobs, I think the location where people will work might change. That can also have a serious impact on domestic budgets, especially since for most countries, more than 50 percent of their revenue is derived from personal income tax. At both domestic levels, as within the EU, a lot has been done within the BEPS Project on the corporate income tax. Maybe they should look as well with the same kind of detail at personal income tax now. The focus should then not be as much on the abuse part, but rather on facilitating this cross-border mobility within the internal market.
Sean Bray: Could you describe what the rules are in the EU for teleworkers who work some days of the week in one country and some days in another?
Jean-Philippe van West: Since there is no harmonization at the EU level from the tax perspective, you have to do a case-by-case analysis depending on the Member States involved. In several countries, there are special rules for frontier workers. There are certain areas within the EU where it is very common that people work two days in one country and three days in another country. Often, countries handle this bilaterally with tailored agreements.
Sean Bray: What do you make of tax fairness, and what would make the future of the EU tax mix fairer?
Jean-Philippe van West: I must admit that this is a hard question to answer because what is fair taxation? I think it’s more of a policy question. For example, the global minimum tax sets a floor of 15 percent. Is 15 percent fair or not fair? Looking at personal income tax, several countries have a higher tax on labor income as opposed to income from capital. Is that fair or not fair? It’s more of a policy question. For me, as a legal scholar, when I look at what makes a tax system fair, it comes down to the legal principles underpinning the tax system. Respect for the rule of law and having a transparent democratic process are important, for example. Personally, I find that too much discretionary power is problematic as it is often perceived as unfair. So, I believe most aspects of tax rules should be determined by legislation, not leaving too much room for discretionary power by tax authorities, or if there is discretionary power, the rules should make it transparent. Another key element is taxpayer rights. Tax authorities should have the means to collect taxes, but there should also be a good balance between the rights of the tax authorities and the rights of taxpayers. For example, having the possibility to challenge decisions of tax authorities, having access to courts, and having decisions within a reasonable period all contribute to a fair tax system.
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