Forced exit from the joint-decision trap: US power and the harmonisation of company taxation in the EU

Abstract

EU member states have traditionally opposed the harmonisation of company taxation to preserve national sovereignty over a core state power. Accordingly, legislation and case law were marked by negative integration enforcing the free circulation of capital. Tax avoidance and competition intensified, entrenching interest heterogeneity among small low-tax and large normal-tax member states. In December 2022, however, the Council of the EU introduced an effective minimum tax and harmonised the calculation of taxable corporate profits. Why did member states exit the joint-decision trap in company taxation? I show that external pressure from the US government was decisive. Whereas previous proposals for harmonisation failed in the Council despite impeccable orchestration by the Commission and historically high levels of politicisation, the Directive on effective minimum taxation passed despite declining politicisation and little Commission involvement. Instead, the Biden administration clinched a deal on global minimum taxation with large member states and helped enforce it at EU level through bilateral pressure on opponents. By facilitating EU implementation of global minimum taxation, the Biden administration hoped to foster Congressional adoption of corresponding reforms. Hence, exits from the joint-decision trap can result from external pressure, whereas governments may enforce international agreements to exploit policy feedback.