REINFORCED TAX POLICY CO-OPERATION
(20901)
13140/1/99
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Reinforced tax policy co-operation: Third Progress Report of the ECOFIN Council to the European Council.
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| Legal base: |
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| Document originated:
| 29 November 1999 |
| Deposited in Parliament:
| 27 January 2000 |
| Department: |
HM Treasury |
| Basis of consideration:
| EM of 17 January 2000 |
| Previous Committee Report:
| None |
| Discussed in Council:
| European Council, December 1999
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| Committee's assessment:
| Politically important |
| Committee's decision:
| Cleared, but further information requested
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Background
17.1 The ECOFIN meeting in December 1997
focussed on the need for co-ordinated action at European level
to tackle perceived harmful tax competition in order to reduce
distortion in the internal market and prevent loss of tax revenues.
That meeting led to the so-called 'tax package'. This includes:
- the draft Directive on the taxation of savings
(cross-border interest payments to individuals);
- the draft Directive on taxation of cross-border
interest and royalty payments between associated companies; and
- the Code of Conduct on business taxation.
17.2 In addition, proposals have been made
on the taxation of energy products.
17.3 ECOFIN made progress reports on each
of these measures to the European Councils in Vienna (December
1998) and Cologne (June 1999). We did not receive the first report,
but we reported on the second one on 20 October 1999[48].
We recommended a debate on the report and related documents and
this was held on 25 November 1999[49].
The Cologne Council called for agreement on key components of
the tax package to be reached by the time of the Helsinki Council
in December 1999.
The document
17.4 The document on which we now report
is the third report from ECOFIN on the tax package and taxation
of energy products, made to the Helsinki European Council in December
1999. It takes stock of the work done and reviews the situation
with regard to outstanding issues.
17.5 As regards the Savings Directive,
the agreement called for by the Cologne Council was not reached.
The ECOFIN report sets out at some length the outstanding issues
including:
- the treatment of euro-bonds — whether they
should be covered by the Directive and, if so, on what terms;
- whether investment funds and similar instruments
should be included;
- the administrative burden the Directive might
place on paying agents and how they might be minimised;
- geographic coverage — the application of
equivalent measures in dependent and associated territories, and
in third countries;
- revenue sharing — whether and, if so, how
to re-distribute tax revenues if the Savings Directive included
the option for Member States of either imposing the tax or providing
information to the Member State where the individual resided;
and
- what the level of tax should be.
17.6 The report notes that the UK set out
its position in a paper it submitted to ECOFIN on international
bonds. It refers also to the suggestion made by the Finnish Presidency
that progress must be made sequentially:
- agreement on the substantial content of the Savings
Directive;
- discussion with dependent territories and third
countries about the introduction of equivalent measures; and
- the Council to decide on enforcement of the Directive
once sufficient reassurances with regard to equivalent measures
had been obtained.
17.7 It concludes that:
"...the most obvious
pre-requisite for successful work on the Directive is a resolution
of the present deadlock due to the incompatibility between the
position of the UK delegation on bonds and the considerations
of other delegations ....... once a solution to this issue has
been found, it should be possible to resolve the other outstanding
issues".
17.8 On the Code of Conduct on business
taxation, the report recalls that, in their Council Resolution
on the Code, "Member States commit themselves to refrain
from new, and to roll back existing, harmful tax measures within
the meaning of the Code". It says that for "competition
to be efficient and fair, the location of business activity and
investment should not be unduly affected by such tax measures.
The purpose of the Code is to identify and curb the use of tax
measures which are considered harmful from this point of view".
17.9 The report summarises the outcome of
the Code of Conduct Group set up to identify and assess tax measures
that may fall within the Code. It says that a "comprehensive
report was submitted to the [ECOFIN] Council meeting on 29 November
1999". It notes that 66 of the tax measures considered by
the Group were considered to be harmful in that they could significantly
affect the location of business activity in the Community. It
says:
"...the measures
relate to, inter alia, financial services, group financing,
insurance, intra group services, holding companies, and offshore
companies, and there are measures identified for almost all Member
States and a number of associated and dependent territories".
17.10 It adds that "where unanimity
was not achieved, the report reflects the broad consensus and
alternative views are detailed in notes as appropriate. References
to 'the Group' should be construed in this way". It notes
also that "certain issues regarding the scope of the Code
should be considered further in the Taxation Policy Group".
17.11 On the draft Directive on interest
and royalty payments, the report notes that:
"...at its meeting on
25 May 1999 [the Council] already agreed on a number of key issues,
and since then the competent Working Party has agreed on the technical
details of the Directive. For some of these issues, it has so
far not been possible to bring the examination to a conclusion.
These issues include notably the non-application of the Directive
in certain specific cases and the transitional rules requested
by Greece, Spain and Portugal".
17.12 As regards taxation of energy products,
the report notes that the work done since the Cologne Council
indicates that:
"There still are a number
of problems to be solved. It has notably emerged that there is
an urgent need to resolve the problems of the relationship between
state aid rules and the proposed Directive. All Member States
are concerned notably about the consequences of Community state
aid rules for the treatment of tax refunds, reduced tax rates
or tax exemptions within the framework of the proposed Directive.
"The application of state aid rules is an issue
of Community competence. The Council considers that the Commission
should prepare clear guidelines concerning their application with
regard to tax exemptions or reductions as foreseen in the proposal.
Problems related to the interpretation of state aid rules should
be given top priority in subsequent work on the framework for
energy taxation."
The Government's view
17.13 In her Explanatory Memorandum of 17
January 2000, the Paymaster General (Dawn Primarolo) says that:
"This report is a fair
reflection of the progress made on the tax issues covered in the
report. In particular it confirms that discussions on the Savings
Directive have focussed largely on the UK's paper on international
bonds and acknowledges the UK's specific concerns. The report
also makes clear that the Commission will deliberate with third
countries and dependent or associated territories in parallel.
It will only decide on enforcement of the Directive once 'sufficient
reassurances with regard to equivalent measures have been obtained'.
This acknowledges the UK's argument that if the EU alone adopts
the Directive in its present form, EU financial markets will simply
move to non-EU states".
17.14 The Minister goes on to say that:
"The Government has
had substantial discussions with representatives of the financial
markets in the City of London and other business representatives
about the proposals on the taxation of savings and on interest
and royalty payments. It has also discussed elements of the tax
issues contained in the report with the governments of the Crown
Dependencies and our Overseas Territories";
and that:
"A high level group
will provide a report to the Council with possible solutions to
the issues raised by the tax package. The Council will then report
to the European Council in Oporto in June 2000".
17.15 She adds also that the Code of Conduct
Group found no UK measure harmful, and that the Government is
pressing for the Group's report to be published in full.
Conclusion
17.16 This report covers important issues
in respect of Community involvement in taxation. This is a subject
of particular sensitivity for Member States, and well exemplified
by the controversy surrounding the proposed Savings Directive.
We regret that it was not made available to us for scrutiny before
now, several weeks after it was considered by the Helsinki Council.
Whilst it contains no specific proposals, the House should be
kept as up-to-date as possible on matters as important as these.
17.17 As regards the draft Savings
Directive, we note that the Helsinki Council endorsed the
general principle that "all citizens resident in a Member
State should pay the tax due on all their savings income",
and agreed that a High Level Working Group should be established
to consider how that principle can be implemented more effectively.
The Group is due to report to the European Council in June 2000.
17.18 We note also the reference in the
conclusions of the Helsinki Council to the paper of 7 December
1999 put forward by the Finnish Presidency and the Commission.
We ask the Minister to deposit that document as it will be considered
by the High Level Working Group. Meanwhile, we note the suggestion
that the Council should, in effect, seek to agree the Savings
Directive and then put it on hold until such time as it considered
that it had receive "sufficient reassurances" that equivalent
measures would be adopted outside the Community. We do not press
the Government further on this issue at present, but we note the
self-evident risk in adopting (even though not implementing) the
measures ahead of receipt of such reassurances. We ask the Minister
to continue to keep us informed in a timely way about the further
consideration of this draft Directive.
17.19 As regards the Code of Conduct
and the report to ECOFIN of the Group chaired by the Minister,
we are glad to learn that no UK measure was identified by the
Group. We ask the Minister to tell us whether any measures in
the UK's dependent and associated territories were identified.
If so, does the Government agree with the judgment expressed by
the Group? More generally, we note that it seems from the ECOFIN
report that the Group was unable to reach unanimity on all the
measures it considered. Without seeing the Group's report, we
are not able to judge whether the Group was able to agree unanimously
that any measure was clearly in breach of the Code, or whether,
in all or most cases, the Member States in which the measure applied
expressed what the ECOFIN report called "alternative views".
We note that the Government is pressing for publication of the
report (which we understand has been leaked) and we ask to be
told as soon as possible whether or not it will be published.
Until then, we are unable to judge what value the work of this
Group may have had so far, or is likely to have, in terms of the
voluntary rolling back by Member States of tax measures judged
to be harmful. We have drawn attention in our Report of 20 October
19991 to the possibility that, under its State Aid
powers, the Commission might decide to rule against a measure
found in breach of the Code by the Group, should the Member States
concerned not act to roll-back the measure. We have not so far
received a clear answer on whether the Government agrees with
our view. In any event, we do not know what, if any, further rôle
the Group now has. We ask the Minister to comment on both these
points and the related broader question of what the Group has
achieved or may achieve.
17.20 We look forward to receiving the
Minister's responses shortly to the several questions we have
raised. Meanwhile, we clear the document as no useful purpose
would be served by keeping it under scrutiny.
48 (20306) 8484/1/99: see HC 34-xxviii (1998-99), paragraph
3 (20 October 1999). Back
49 Official
Report, European Standing
Committee B. Back
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