The Treaty on the Functioning of the EU (TFEU), under Article 113, specifically provides for the Council, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, to adopt provisions for the harmonisation of Member States' rules in the area of indirect taxation (principally Value Added Tax and Excise Duties) because indirect taxes may create an immediate obstacle to the free movement of goods and the free supply of services within an Internal Market. They may also create distortions of competition. A large number of Directives and Regulations (i.e. "secondary legislation") have already been agreed in this area on the basis of that Article. The Commission's legislative strategy, particularly in respect of VAT as well as environmental and energy taxation, has been clearly established.
As far as other taxes are concerned, Article 115 TFEU provides for the Council, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, to issue directives for the approximation of such laws, regulations or administrative provisions of the Member States as directly affect the establishment or functioning of the internal market. Some recommendations and legislation have been adopted in the personal tax, company tax and capital duty areas.
Member States have also adopted EU-wide legislation in the field of mutual assistance and co-operation in tax matters, under Articles 113, 114 or 115 of the TFEU.
European legislation on taxation has also been adopted under wider provisions of the Treaty:
- Article 352 TFEU requires the Council, acting unanimously on a proposal from the Commission and after obtaining the consent of the European Parliament, to take appropriate measures to attain one of the objectives set out in the Treaties if those Treaties have not provided the necessary powers. The European Economic Interest Grouping, a legal entity created in 1985 to facilitate and encourage cross-border cooperation, that was adopted under Article 352 TFEU involves specific tax arrangements. The legislation providing for the European Company which was adopted under the same article does not contain tax elements.
- Article 293 TEC (repealed by the Treaty of Lisbon) was requiring Member States to enter into negotiations with each other with a view to the abolition of double taxation within the Community. This was the basis on which Member States adopted the Arbitration Convention. This article has not been reproduced in the EU/FEU Treaties. However the general provisions of Article 4 (3) TEU prescribe that the Member States shall facilitate the achievement of the Union's tasks and refrain from any measure which could jeopardise the attainment of the Union's objectives.
But whether or not secondary EU legislation such as Directives and Regulations exists, Member States' tax systems and tax treaties must in any event respect the fundamental Treaty principles on the free movement of workers, services and capital and the freedom of establishment (Articles 45, 49, 56 and 63 TFEU ) and the principle of non-discrimination. Moreover, in more general terms, Article 21 TFEU provides that every citizen of the Union has the right to move and reside freely within the territory of the Member States. The Agreement on the European Economic Area extends to individuals and enterprises of EEA States (Iceland, Liechtenstein and Norway) the principles of free movement of goods, persons, services and capital, as well as of equal conditions of competition and non-discrimination. However, secondary EU legislation does not apply in these EEA States.