After Brexit, the EU countries will pay more tax to the EU

In a few months, the United Kingdom (UK) will not only leave the European Union (EU), but will also stop paying contributions to the EU budget. This will put the EU in a difficult position as the UK is one of the most important “sponsors” of the EU. More specifically, as a result of Brexit, the EU will need to deal with 12-13 billion shortfalls in its funds.

The EU bureaucrats, however, are not happy with their reduced budget as they need to act on important political priorities, such as, in the words of the president of the European Parliament Antonio Tajani, putting “the African continent on top of the EU’s political agenda”. To address the financial implications of Brexit, the EU will require its member states to pay more tax. In this regard, EU Commissioner Günther Oettinger stated:

 When the British leave the EU budget must shrink. But not by the full 100% of their contribution. Mark Rutte

[the Dutch prime minister] is on the brakes: he doesn’t want the other countries to take on the full amount that the British are paying. But we in Brussels want fifty-fifty: six to seven billion in cuts and just as much new money added.”

The increased contributions which the EU countries will need to pay may lead to an increase of the taxes on companies and individuals in the EU which, with the exception of the tax rates of a few countries, are currently very high. In many EU countries, the total tax burden on taxpayers is about 50%. The high tax rates make such countries noncompetitive not only with regard to small low tax jurisdictions but also with regard to the economically powerful the United States where President Trump has recently reduced the personal and corporate taxes.

It is worth mentioning that the high tax rates are not the only obstacle to EU competitiveness. Another problem is that the income which the EU collects from taxes goes to projects that increase the regulatory burden on EU businesses. To illustrate, at present, a person willing to open a simple e-commerce shop in Belgium will need to pay for drafting: (i) a cookie policy (cookies are small files which are stored on users’ computers) and a cookie pop-up script; (ii) a complex privacy policy compliant with an EU law called the General Data Protection Regulation (GDPR); (iii) a terms and conditions statement complying with various laws, including, but not limited to, EU laws on online dispute resolution and e-commerce; (iv) and statutory warranty documents adhering to the EU warranty laws. Depending on the business activities of the company, the EU law may require the e-commerce business to translate these documents in all of the 24 EU languages. Needless to say, the compliance cost may reach five digits. Furthermore, if the e-commerce business would like to protect its trademark in the EU, it will need to pay at least EUR 850 (assuming that no lawyer is used). After investing a significant amount in bureaucratic services, the Belgian e-commerce start-up may end up paying taxes exceeding 50% which will make it uncompetitive with regard to most other countries. For instance, the same e-commerce business in the United States may legally start operating without obtaining any of the documents mentioned above, pay much less tax, and get a U.S. federal trademark for just USD 225.

Interestingly, despite its non-competitive position, the EU intends to collect more money from its member states, thus further enhancing its disadvantaged position. In comparison, President Trump speaks about a second tax cut which will decrease the U.S. taxes even more. In 2018, at an event in Missouri, he said: “We’re actually going for a phase two, which will help in addition to the middle class, will help companies, and it’s going to be something I think very special”.

Due to the unattractive business environment in many of the Western EU countries, some EU entrepreneurs from those countries have decided to relocate to low tax EU countries which offer not only reasonable taxation rates, but also affordable prices of labour, property, and administrative services. At present, the EU countries with lowest personal income tax rates are Bulgaria (10%), the Czech Republic (19%), Hungary (9 + 2%), and Romania (16%)….

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