European Standing Committee B
Wednesday 26 November 1997
[Mr. Bowen Wells in the Chair]
Harmful Tax Competition
10.30 am
The Financial Secretary to the Treasury (Dawn Primarolo): The Committee has chosen an important subject for debate. The two papers recommended for debate are the Commission's communications that set out a proposed package of measures for tackling harmful tax competition in the European Union. That package has not been finalised and is the subject of further discussion by the Council. However, it is the presidency's intention to reach political agreement on the package at the Economic and Finance Council on 1 December 1997.
The package comprises three elements: first, a code of conduct on business taxation; secondly, an agreement to take action on the taxation of savings by non-residents; and thirdly, a proposal to eliminate the withholding of taxes on interest and royalty payments between companies.
The Commission communication of 1 October contained a fourth element in the form of various indirect tax proposals. The Commission chose not to include those indirect measures in its later communication because of a lack of consensus between member states.
The Committee's recommendation for debate focused particularly on the indirect tax measures which did not make it into the Commission's second communication. However, those measures will be pursued separately. Each of the indirect tax measures is, of course, subject to scrutiny in the ordinary way, as and when the Commission produces a considered proposal. Indeed, in a number of cases, proposals have already been made, and in each of those cases an explanatory memorandum has been submitted to the Committee.
I return to the elements of the package in the Commission's second communication, which is still on the table for agreement on 1 December. The code of conduct will be a useful step in tackling the problem of harmful tax competition, which creates significant economic distortions, both in Europe and globally.
In negotiations over the code, the Government have been concerned to protect member states' competence in tax. We insisted that the code should be voluntary and without sanction and that it should include an explicit statement that it is without prejudice to national competence. The Government do not believe that the code concedes any increase in Community competence over tax.
The Government believe that tax competition is generally a good thing and have secured recognition in the code for the valuable role of fair tax competition. We also recognise the damaging role of harmful tax competition.
Fair tax competition exists when countries seek to become a generally low tax environment that attracts investment. Fair competition plays a very positive role in the European Union, as it helps to preserve the Union's external competitiveness.
Unfair competition is quite different. Countries engage in unfair competition when they adopt zero or near-zero tax rates for special niche areas--often in which their economies do not currently engage--specifically to draw investment from elsewhere.
The Government believe that the code draws the line between fair and unfair tax competition in the right place. We believe that our own domestic tax system is fully consistent with the principles of the code.
The presidency will also be asked to reach agreement on the taxation of savings, with the aim of tackling tax evasion on interest from savings by non-residents. The aim is to agree a set of principles on 1 December and to use those principles as the basis for a future directive. The United Kingdom believes that such tax evasion continues to constitute a significant problem and agrees that action at Community level is justified.
The Government are committed to protecting the competitiveness of the United Kingdom's financial service industry. The principles of the taxation of savings explicitly recognise the need to protect the competitiveness of European financial services. In particular, we have said that any future directive on the taxation of savings must exclude the Eurobond market.
The taxation of savings principle envisages member states being obliged either to withhold tax on interest paid to non-residents or to provide information about non-residents' bank accounts to their home countries. The United Kingdom has made it clear that it would not accept a solution that obliged it to withhold tax, although we would be attracted to action based on the principles of exchange of information.
The final element of the package is a proposal to abolish source country taxation on cross-border interest and royalty payments between companies in different member states. That is in line with what we aim to achieve in our bilateral tax treaties and what we continue to pursue through our double taxation treaties.
I am now ready to answer questions as outlined in my statement and in the memorandum.
The Chairman: We have until 11.30 am at the latest for questions to the Minister. I remind hon. Members that their questions should be brief and should be asked one at a time. There is likely to be ample opportunity for all hon. Members to ask several questions.
Mr. Heathcoat-Amory: The Minister has indicated that she favours the code of conduct for business taxation and, to use the phrase in the explanatory memorandum, if she agrees it next week, she intends to honour it. In other words, the Government will be bound by it. Does she agree with all the provisions listed and described in the document before us. If not, what amendments will she propose?
Dawn Primarolo: The Government have made it clear in their negotiations that the code of conduct must be voluntary, that it is a political agreement, that it should be without sanctions, and that it should contain the explicit statement that it is without prejudice to national competence. The Government believe that the code does not concede an increase in Community competence over our tax issues. We also believe that our domestic system is fully consistent with those principles. That is how we intend to proceed in our negotiations on the code. We shall represent the best interests of the United Kingdom, and we will agree it only on that basis.
Dr. Palmer: Paragraph N on page 14 of the draft code is headed ``Geographical extension''. It states:
``To this end it encourages Member States to stimulate their adoption''--
of the code--
``at international level, and in particular to give active support to their adoption in their dependent or associated territories.''
What is the position of the Channel Islands? Can we hope that they, too, come under that heading?
Dawn Primarolo: The Government made clear in discussions the need to recognise the limit of our jurisdiction on the tax regimes of our dependent territories. Any agreement would therefore be made under existing constitutional arrangements. The Government feel strongly that unfair tax competition should be dealt with internationally but it must be dealt with within our constitutional conventions.
Mr. Wilkinson: Paragraph A of the draft code cites as a criterion
``the effective operation of the Single Market''.
May we assume that qualified majority voting would apply in the implementation of the code and in the decision-making process of the Council?
Dawn Primarolo: The code is a voluntary agreement without legal basis; it is a political agreement. It has no sanctions. I repeat that it makes clear that the Government's national competence over tax issues is paramount. It makes no proposals for qualified majority voting on any matter.
Mr. Hopkins: I am sure that the Committee would unite behind the Minister's position in protecting British interests.
Mr. Wilkinson: The hon. Gentleman must be joking.
Mr. Hopkins: I am perfectly serious. I am relieved that the communication is not legally binding in any sense, but is a voluntary political agreement.
Some questions arise. Can the Minister assure us that there is no long-term threat to our British VAT regime or to our position on corporation taxation? I ask this because there have been two recent reductions in corporate taxation to encourage investment in Britain, and we would be interested to know whether there has been any reaction from the Commission and whether it has any view on Britain's distinctive VAT regime.
Dawn Primarolo: The Government have made it clear in negotiations that direct taxation and fair tax competition--a broadly based low-tax regime--is good for competition, and, as a result of our negotiations, the code specifically reflects that commitment. My hon. Friend has my absolute assurance that the code cannot call into question our corporation tax rate.
It might be helpful if I explained what happened to the indirect package of measures which covers the VAT committee.
The original package had five indirect measures. The first related to the proposal to change the VAT committee and introduce qualified majority voting. The Government made it clear that we are determined to maintain unanimity on tax issues. I submitted an explanatory memorandum to that committee on 29 July setting out why we would oppose qualified majority voting.
The second element was VAT on passenger transport. The Government opposed it on the basis that we do not accept indirect tax as a pledge to maintain the zero rating. That has not re-emerged.
The third item was the energy products directive. The Government made it clear that we would not accept new taxes on domestic consumption of electricity and gas, and that there were other elements of the minimum rate with which we were unhappy. Again, I submitted an explanatory memorandum to the committee on 21 May.
On the fifth measure, the Fiscalis programme-- co-operation, and enhancement of co-operation between member states on the European Community dimensions of VAT and excise duties-- I submitted an explanatory memorandum on 16 June and co-operation has been agreed.
The fifth and final proposal related to VAT on gold--a fraught subject that has been negotiated for some considerable time, and is still being negotiated. As soon as there are any proposals, the Committee will be fully informed by memorandum. The Committee can be reassured that, on direct and indirect tax, the Government have fought to maintain unanimity in voting and national competence. There is no question of Brussels being involved in setting tax rates in the United Kingdom.
As to alcohol and tobacco taxation, we were keen that minimum rates should be discussed. That is not being pursued except at a high official level.
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