House of Commons - European Scrutiny

Select Committee on European Scrutiny Twelfth Report

REINFORCED TAX POLICY CO-OPERATION

(20901)
13140/1/99

Reinforced tax policy co-operation:
Third Progress Report of the ECOFIN Council to the European
Council.

Legal base:	—

Department:	HM Treasury
Basis of consideration:	Letters of 29 February 2000 and 8 March 2000
Previous Committee Report:	HC 23-viii (1999-2000), paragraph 17 (9 February 2000)
Discussed in Council:	ECOFIN and Helsinki European Council in December 1999
Committee's assessment:	Politically important
Committee's decision:	Cleared (decision reported on 9 February), but further information requested

Background

6.1 In our Report of 9 February 2000, we draw attention to the third progress report on reinforced tax co-operation, submitted by ECOFIN to the European Council in December 1999.

6.2 The progress report related to the so-called "tax package", including the Code of Conduct on Business Taxation. The Code was agreed by ECOFIN on 1 December 1997.

6.3 On 9 March 1998, ECOFIN set up the Code of Conduct Group to examine tax measures which might infringe the Code and to report its findings to ECOFIN. The Group is chaired by the Paymaster General (Dawn Primarolo). In June 1999, the Cologne European Council called for the discussions of the Group to be brought to a conclusion before the Helsinki Council in December of that year.

6.4 In our Report of 9 February, we noted that the Code of Conduct Group had identified some 66 tax measures (out of 271) as harmful but these did not include any in the UK. We asked the Paymaster General to tell us:

whether any measures in the UK's dependent and associated territories were found to be harmful;

whether she agreed with the view we expressed in our Report of 20 October 1999[26] that, under its State aid powers, the Commission could rule against any tax measure found in breach of the Code where the Member State concerned did not honour its commitment under the Code to roll-back the measure;

what further rôle the Group might have; and

whether the Code of Conduct Group report would be published (the Minister had already told us that she was in favour of publication but that the decision was for ECOFIN).

The Minister's replies

6.5 In her letter of 29 February 2000, the Paymaster General informs us that on 28 February ECOFIN decided to publish the Code of Conduct Group's report. Copies have been placed in the Libraries of both Houses. In her letter she says:

"I have made clear that we consider fair tax competition to be an important matter and are committed to encouraging our dependencies to accept the principles of tackling unfair tax competition. However, as I have explained previously the Code is a voluntary, non-legally binding agreement. Under its terms Member States are committed 'within the framework of their constitutional arrangements' to ensuring that its principles are applied in their dependencies. We have made our constitutional position clear in a report to the Code Group which has also been placed in the Libraries of both Houses. I can confirm again that legislation on taxation in our dependent territories has always taken the form of laws enacted by their own legislatures and it would be unprecedented for the UK to legislate for tax."

6.6 In her further letter of 8 March, the Paymaster General provides more details and responds to our questions. She says that while:

"The Committee notes that the report includes alternative views of members of the Group. This fulfills the remit set out in the ECOFIN conclusions of 9 March 1998 'that the reports of the Group forwarded to Council will reflect either the unanimous opinion of its members or the various opinions expressed in the course of the discussion'. In fact I can confirm that for the majority of measures the Group's view was unanimous.

"The State aid procedures are separate and complementary to the provisions of the Code. The Code is a voluntary non legally binding agreement as you note whereas the longstanding State aid provisions of the Treaty have legal force. I can confirm that, as noted in paragraph J of the Code itself, there may be measures covered by the Code of Conduct which fall within the scope of the State aid provisions. The Commission may therefore examine and rule on measures considered by the Group if they qualify as possible State aids within the scope of the Treaty.

"Neither the Code nor the Code Group is time limited and the work of the Group is continuing. Member States are committed to amend their laws and practices as necessary in relation to any of their own measures which are harmful (rollback); and they are committed not to introduce any new harmful measures (standstill).

"The Group has already achieved a great deal in a short space of time. It has identified and considered 271 tax practices in Member States and their dependencies. It has found that 66 of these measures are harmful within the meaning of the Code. Member States are also committed to the standstill and rollback provisions mentioned earlier. The Code of Conduct in this way represents an important contribution to tackling unfair tax practices.

"The Government fully supports action at international level — in the OECD and G7 as well as EU — which promotes fair tax competition. Harmful tax practices can distort competition by artificially attracting investment and jobs away from countries such as the UK which have more neutral tax systems. So fair tax competition helps British businesses to compete on more even terms, protects UK employment and encourages investment into the UK."

Conclusions

6.7 We thank the Minister for her response. We are particularly glad that the report of the Code of Conduct Group has now been published. Both we and our sister Committee in the Lords have been seeking that outcome for some months so that this important and sensitive activity can be made more transparent and accountable.



6.8 We note the Minister's comment that the majority of the 66 measures were unanimously regarded as harmful under the Code. In respect of these measures, as we see it, there should be no reason in principle why the Member States concerned should not take action to begin the rollback process, where it is within their legal powers to do so.



6.9 However, there appears to be no agreed timetable within which Member States are expected to act. It is also evident from the report that, for a significant minority of measures, the responsible Member States have taken issue with the majority findings of the report. We are unclear what, if any, further action will be taken in respect of these measures, notwithstanding that, as the Minister says, Member States are committed (but not required) to rollback measures found harmful by the Group. In that connection, we note that, when the Group reached its findings on tax measures relating to holding companies it appears to have done so by reference in part to the level of tax in other countries (in this context, non-EU countries) and that the Irish representation on the Group considered that this judgment went outside the terms of the Code (which provide that the only benchmark should be the level of tax generally applicable within the Member State in question).



6.10 As regards overseas and dependent territories, it appears from the report that of the 26 measures found to be in breach of the Code, 19 related to UK dependent or associated territories — the Virgin Islands[27], Guernsey, Jersey, the Isle of Man[28] and Gibraltar (to which the EC Treaty applies as being a European territory for whose external relations the UK is responsible). The Minister says that the Government accepts that these measures do contain harmful features within the meaning of the Code, though it successfully argued that other measures in these and other UK territories should be excluded. We note the Minister's statement that enactment of legislation on taxation is a matter for the dependent territories and that it would be unprecedented for the UK Parliament to legislate for them. We are unclear what actions short of legislation the UK can and will now take to ensure that the principles of the Code are applied in those territories in respect of measures found harmful by the Group.



6.11 We note what the Minister says about the application of the State aid rules. This accords with our own understanding of the position — that the Commission may examine and rule on measures considered by the Group if it considers that they qualify as State aid. We note also that the European Commissioner for Competition, Mario Monti, was recently reported[29] to have instructed the Commission's competition department to examine all relevant cases of fiscal state aids in business taxation, taking into account the work of the Code of Conduct Group.



6.12 As regards the future of the Code of Conduct Group, the Minister says that the Group, like the Code itself, is not time limited and that its work is continuing. But she does not tell us what it is now doing. We see also from the report itself that some issues about the scope of the Code have been referred to the new high level Taxation Policy Group and that, pending its advice, the Code Group would not consider some matters (assessment of collective investment vehicles and tax arrangements for employees).



6.13 So, while we thank the Minister for her responses to our questions, there still remain some substantive points which we need to pursue further. We ask the Minister:

what work the Code of Conduct Group is now undertaking and with what objectives and time frame;

whether that work includes any further consideration of the measures on which the Group reached findings in its November report to ECOFIN;

what rôle, if any, does the Group or ECOFIN have in respect of monitoring how Member States honour their commitments to rollback measures judged harmful, especially those where the Member States in question did not agree with the majority view in the Group;

to comment on why the Group thought it right to take into account tax régimes in other than the Member States in question when considering tax measures relating to holding companies, and whether this approach could in practice set a precedent for the way other tax measures might be considered in future (which would arguably introduce considerations of tax harmonisation into the process);

whether, in the light of concerns within the Group that it was interpreting the Code too flexibly in some respects, and the possible response of the Taxation Policy Group to the questions referred to it, the Minister considers that the Code may need to be amended; and if so, whether the Group would have any part in that process;

what are the Government's intentions in respect of those measures relating to UK dependent or associated territories which the Group unanimously found to be in breach of the Code; and how far will its approach need to reflect differences in the constitutional status of the territories and dependencies concerned;

in responding to the previous question, to provide us with a note about the constitutional arrangements between each of the territories and the UK; and the constitutional and legal implications for those territories vis à vis the European Community arising from the UK's membership (so that we can see, broadly, what Community benefits they may enjoy and what obligations apply to them);

whether the Minister can confirm that the Competition Commissioner is now considering possible action under the State aid rules against any of the measures found by the Group to be in breach of the Code; and that such action could be taken against the tax measures enacted in the relevant dependent or associated territories; and

what effect, if any, might the continuing lack of progress on the "savings directive/withholding tax" have on the start of any rollback procedures, bearing in mind that the proposed directive and the Code of Conduct are both parts of the "tax package" and some Member States are stressing that the package can only be implemented as a whole.

26 (20306) 8484/1/99: see HC34-xxviii (1998-99), paragraph 3. Back

27 Which is an overseas territory associated with the Community under Part Four of the EC Treaty. Back

28 To which the EC Treaty applies to the extent necessary to ensure the implementation of the arrangements made for those islands on UK accession. Back

29 Agence Europe, 26 February 2000. Back



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