If a country is part of the European Union BUT not a member of the OECD – does this affect any treaties being entered into?

FULL QUESTION

If a country is part of the European Union BUT not a member of the OECD – does this affect any treaties being entered into?

ADDITIONAL WRITTEN ANSWER

Yes, a country’s membership in the European Union (EU) but not in the OECD can affect the treaties it enters into, particularly in areas such as tax, trade, investment, and regulatory alignment. The main impact stems from the EU’s supranational legal framework, which often overrides or influences the country’s ability to negotiate and enforce treaties independently.

1. Impact on Tax Treaties (Double Taxation Agreements – DTAs)

(a) EU Directives Take Precedence Over Bilateral Tax Treaties

• EU Member States must comply with EU tax directives, which override national tax treaties where applicable.
• Key directives include:
• Parent-Subsidiary Directive (PSD) – Eliminates withholding taxes on dividends between EU parent and subsidiary companies.
• Interest and Royalties Directive (IRD) – Prevents withholding taxes on interest and royalties between associated EU companies.
• Anti-Tax Avoidance Directive (ATAD) – Introduces EU-wide measures to prevent tax base erosion.
• Even if the country is not in the OECD, these EU laws must be followed.

(b) Access to the OECD Model vs. UN Model Tax Treaties

• The OECD Model Tax Convention (MTC) is widely used for tax treaty negotiations, but non-OECD EU countries may:
• Rely more on the UN Model for developing-country treaties.
• Have less influence in OECD-led global tax initiatives (e.g., BEPS).
• Example: Bulgaria, Romania, and Croatia are in the EU but not OECD members. Their DTAs often reflect a mix of OECD and UN Model provisions.

(c) Limited Role in OECD’s Multilateral Tax Instruments

• The OECD Multilateral Instrument (MLI) modifies existing tax treaties to align with BEPS recommendations.
• Non-OECD EU countries must voluntarily sign the MLI but do not influence its formulation.

2. Trade Agreements and EU Competence

(a) EU Exclusive Competence in Trade

• Trade policy is an exclusive EU competence under the Common Commercial Policy (CCP).
• The European Commission negotiates all trade agreements (e.g., Free Trade Agreements – FTAs) on behalf of Member States.
• Implication: A non-OECD EU country cannot enter into independent trade agreements.

(b) WTO Membership

• Even if not an OECD member, an EU country is bound by WTO rules as part of the EU’s trade commitments.

(c) Impact on Bilateral Investment Treaties (BITs)

• The EU has exclusive authority over foreign direct investment (FDI) since the Lisbon Treaty (2009).
• Existing intra-EU BITs must comply with EU law and may be overridden (e.g., the termination of intra-EU BITs post Achmea case).

3. Regulatory and Competition Law Influence

(a) EU State Aid Rules

• EU state aid rules prevent countries from giving selective tax benefits that distort competition.
• Example: The EU overruled tax rulings granted to Apple (Ireland) and Fiat (Luxembourg), despite national tax treaty provisions.
• Non-OECD EU countries must comply with EU competition law, even if their national policies differ.

(b) Alignment with EU Financial Regulations

• Membership in the EU means following EU banking, finance, and digital economy regulations, even without OECD participation.
• Example: The EU’s Pillar 2 global minimum tax (15%) implementation affects all EU states, even non-OECD members.

4. Political & Diplomatic Impact on Treaty Negotiations

(a) Reduced Influence in Global Tax & Trade Discussions

• Non-OECD EU countries do not participate in OECD negotiations, limiting their direct influence over global tax standards.
• However, they benefit from EU lobbying in OECD-led discussions (e.g., BEPS, global tax reforms).

(b) Interaction with Developing Countries

• The EU promotes tax transparency initiatives (e.g., exchange of information, country-by-country reporting).
• Non-OECD EU members must align with EU tax policies, which may affect treaties with developing nations.

Summary

• EU membership dominates treaty negotiations, even for non-OECD EU countries.
• Tax treaties must align with EU directives, overriding bilateral agreements where conflicts arise.
• Trade treaties are controlled by the EU, meaning individual countries cannot negotiate separately.
• OECD tax standards apply indirectly, but non-OECD EU members have no direct say in their development.
• Regulatory compliance (e.g., state aid, tax rulings) is enforced by the EU, sometimes invalidating national tax treaties.