The European Parliament think tank in October published the study ‘Exploring the opportunities and challenges of new technologies for EU tax administration and policy‘. The protection of taxpayer’s rights is discussed in paragraph 4.2, including the consequences of cross-border information exchange (like FATCA with the US and CRS within the European Union). The authors say there may be exceptional circumstances, where a Member State manifestly acts contrary to a minimum fundamental rights standards. In such cases there is an “emergency brake” allowing other Member States to deny cooperation when it would put the fundamental rights of taxpayers in jeopardy.
When European citizens are protected by EU law in case of acts by Member States that are manifestly are contrary to European and international minimum fundamental rights standards, it is clear that European law also protects European residents against foreign laws that violate minimum fundamental rights standards, like Citizenship-Based Taxation / FATCA by the US.
When the EU and the Member States are going to protect European residents against the laws of the US?
The study by Jeffrey Owens, Ivan Lazarov and Nathalia Oliveira Costa for the subcommittee on Tax Matters (FISC) of the European Parliament.
Text of paragraph 4.2:
4.2. Protection of taxpayers’ rights
If the Union institutions enjoy a wide margin of discretion in balancing the internal market objective against social, economic or political interests, they enjoy much narrower discretion whenever the fundamental rights of private parties are concerned73. Thus, when designing secondary law, specific attention should be given on establishing a sufficient protection of fundamental rights. As far as digital tax processes and administrations are concerned, the following fundamental rights should be contemplated.
First, the right to privacy has a specific manifestation in EU context, entailing among others the right not to be subjected to automated decision-making, including profiling74. An exception to this right is permissible only as far as it is provided by law and such law includes “suitable measures to safeguard the data subject’s rights and freedoms and legitimate interests75”. In other words, the outcome of an automated system must not be definitive. For example, when applying smart contracts within a blockchain system, the system would need to be designed in a way that allows the results to be reviewed (upon request of the taxpayer within a reasonable time frame), including at a judicial level. In addition, the right to privacy requires that any data sharing must take place on a need-to-know basis and, therefore, excludes having personal data shared directly on a blockchain with multiple participants76. However, as per the proposal of a regulation harmonising rules on artificial intelligence, whenever employed by tax and customs authorities, AI systems should not be considered as high-risk in terms of the necessary safeguards for affected parties.77 It is questionable to what extent such distinction should be made since the findings of tax and customs authorities might lead to criminal charges are amount themselves to criminal charges (irrespective of their domestic law classification) under the autonomous Engel criteria.78
Second, although the cross-border information exchange within the EU takes place on the basis of mutual trust (i.e., all Member States are deemed to provide a sufficient minimum standard of fundamental rights protection), this trust is nevertheless based on a rebuttable presumption. Thus, in exceptional circumstances, where a Member State manifestly acts contrary to a minimum fundamental rights standard, there is an “emergency brake” allowing other Member States to deny cooperation when it would put the fundamental rights of taxpayers in jeopardy79.
Hence, any digital system for real time data sharing between tax authorities (and especially between private parties and foreign tax authorities) must have a tool allowing for continuous monitoring of the fundamental rights protection in the Member States in case of manifest inadequacies. This would allow for swift decisions on temporary suspension of the cooperation with some Member States.
71 Communication from the Commission to European Parliament and the Council – An action plan for fair and simple taxation supporting the recovery strategy, COM(2020) 312 final, p. 2.
72 See for an elaboration in this respect Englisch, Article 116 TFEU–The Nuclear Option for Qualified Majority Tax Harmonization?, EC tax review 29.2 (2020). See Nouwen’s reaction to Englisch’s article in M. F. Nouwen, The Market Distortion Provisions of Articles 116-117 TFEU: An Alternative Route to Qualified Majority Voting in Tax Matters?, (2021), 49, Intertax, Issue 1; M. Nouwen, Inside the EU Code of Conduct Group: 20 Years of Tackling Harmful Tax Competition, Doctoral Thesis submitted to the University of Amsterdam; I. Lazarov, Anti-Tax- Avoidance in Corporate Taxation under EU Law: The Internal Market Narrative, IBFD Doctoral Series, section 3.2.2. (forthcoming).
73 IR: CJEU, 8 April 2014, Case C-293/12, Digital Rights Ireland, EU:C:2014:238, para. 47-48.
74 Article 22 of Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (GDPR).
75 Article 22(3) of the GDPR.
There are potential solutions to this problem whereby all personal data is stored off-chain, while the system relies on Zero-Knowledge Proof for validating outcomes. See What happens when government, industry and investors seek common digital ground?, available at https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/tax/tax-pdfs/ey-withholding-tax-distributed-ledger-report.pdf p. 21.
77 Recital 38 to the Proposal for a Regulation of the European Parliament and of the Council laying down harmonised rules on Artificial Intelligence (Artificial Intelligence act) and amending certain union legislative acts com/2021/206 final77.
78 ECHR, Engel and others v the Netherlands, 8 June 1976 (Application no. 5100/71). 79 IR: CJEU, 26 April 2018, Case C-34/17, Donnellan, EU:C:2018:282.