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:
| Minister's letter of 14 April 2000
|
| Previous Committee Report:
| HC 23-viii (1999-2000), paragraph 17 (9 February 2000)
and HC 23-xii (1999-2000), paragraph 6 (15 March 2000
|
| To be 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 2000) but ask to
be kept informed of progress in the work of the Code of
Conduct Group
|
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. 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. 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).
6.2 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 a series of questions about the
Group's findings and its continuing rôle. We set out the
Minister's reply in our Report of 15 March 2000 and asked the
Minister a number of further questions about the work of the Group,
the implementation of the Code of Conduct in respect of tax measures
found to be harmful, including the treatment of those measures
in UK dependent and associated territories; and related matters.
The Minister's reply
6.3 In her letter of 14 April 2000, the
Paymaster General (Ms Dawn Primarolo) says:
"As part of its consideration
of the Third Progress Report on Reinforced Tax Policy Co-operation
(which has cleared scrutiny) your Committee has asked a number
of supplementary questions on the Code of Conduct further to my
letters of 29 February and 8 March.
"The Committee has asked about the Code of Conduct
Group's current work, whether it is giving further consideration
to the measures contained in the November report, and what rôle
the Group or ECOFIN has in monitoring how Member States honour
their rollback commitments.
"Member States are committed on an ongoing basis
to not introduce new harmful measures within the meaning of the
Code (standstill) and to amend their laws and practices as soon
as possible to remove measures that have been found harmful (rollback).
The December 1997 ECOFIN conclusions set out a timetable which
foresees that rollback will take place by 1 January 2003 although
a longer period may be justified in particular circumstances.
"The Group's continuing work remains confidential
as required by ECOFIN, but it is aimed at facilitating Member
States' fulfilment of these commitments. In the course of this
work the Group will consider a number of issues that affect the
practical implementation of the Code in relation to the measures
that were found harmful. However, as the Code clearly states,
it is for Member States to decide for themselves precisely how
they honour their rollback commitment. The assessments made in
the November report are not being reopened.
"In relation to holding companies, the November
report notes that measures were found harmful if they 'allow the
exemption of foreign source dividends in circumstances in which
the profits giving rise to the dividends have been taxed at a
significantly lower level in the source country than they would
have been if they had arisen in the Member State'. This addresses
the concern among Member States that such exemptions encourage
tax avoidance through the use of overseas tax havens and other
harmful régimes by allowing a conduit for income to be
received tax free into the EU and may, as a result, damage the
tax bases of Member States.
"This does not in any way set a precedent nor
does it introduce considerations of tax harmonisation into the
process. The purpose is to examine whether dividends received
into a Member State have borne tax at a rate which is broadly
equivalent to the treatment of domestic source profits in that
Member State. It thus has due regard for the different levels
of taxation in differing Member States.
"The Committee also raises the question of whether
the Code may need to be amended. Paragraph N of the Code states
that the Council and Member States will review the provisions
of the Code two years after its adoption. The Group's report and
the December 1997 ECOFIN conclusions also refer a number of issues
to the Taxation Policy Group. These issues are due to be discussed
further at a future meeting of the Taxation Policy Group.
"I should like to make one point of clarification
with regard to the Taxation Policy Group (TPG). The Committee's
report describes it in paragraph 1 as the 'new' high level group.
The TPG is not in fact new. It met for the first time in March
1997 and was formally established through the Dublin European
Council conclusions of December 1996. It is a consultative body
and has no power to make decisions.
"The Committee also asks about the measures
which were found to be harmful in the dependent or associated
territories of the UK. As I have explained previously, Member
States are committed 'within the framework of their constitutional
arrangements' to ensuring that the principles of the Code apply
in their territories and the Code is a voluntary non legally binding
agreement. We are however committed to encouraging our dependencies
to accept the principles of tackling harmful tax competition and
we intend to begin discussions with the UK dependencies that have
measures which were found harmful. I attach as requested [not
printed] the relevant extracts of the UK's report to the Code
of Conduct Group on its constitutional arrangements in relation
to these territories (the Channel Islands, Isle of Man and the
British Virgin Islands).
"I also enclose a note [not printed]
on the position of the Crown Dependencies in relation to the European
Community. The British Virgin Islands are not part of the European
Community. However the BVI are one of the Overseas Countries and
Territories (OCT) associated with the Community under Part Four
of the EC Treaty and the OCT Decision. These aim to promote economic,
cultural and social development. Their provisions include duty
free access to the Community market and a programme of development
assistance funded by the European Development Fund (EDF).
"Gibraltar is part of the EU as a European territory
for whose external relations a Member State is responsible under
Article 299.4 of the EC Treaty and the Code applies directly to
it.
"In my earlier letter I confirmed that the State
Aids provisions of the Treaty are separate and complementary to
the Code of Conduct and that the Commission may examine and rule
on measures considered by the Code Group if they qualify as possible
State Aids within the scope of the Treaty. I can also confirm
that the State Aid provisions apply to Member States and to territories
covered under Article 299.4 of the EC Treaty. But the State Aid
provisions do not apply to the UK's other dependent or
associated territories.
"The Committee's final point is about the implications
of the tax package on the start of any rollback procedures. The
Helsinki European Council confirmed that the Code of Conduct is
one of three elements of the package and progress on any one element
will depend on progress on the package as a whole."
Conclusion
6.4 We thank the Minister for her helpful
responses to our questions. We note in particular that the assessments
made of the tax measures found to be in breach of the Code in
the Group's report of November 1999 are not to be re-opened in
the continuing discussions of the Group or elsewhere, and that
the ECOFIN conclusions of December 1997 foresaw rollback of these
measures generally by 1 January 2003. We note that the Group's
continuing work aims to facilitate this, but also that rollback
may be delayed if other elements of the tax package, including
the savings directive, are held up.
6.5 We are grateful for the Minister's
explanation about the measures relating to holding companies.
We accept that the approach taken does not involve any consideration
of tax harmonisation between Member States.
6.6 We are also grateful for the Minister's
explanation of the position of the Crown dependencies and Gibraltar
vis à vis the Community generally and the State
Aid provisions in particular. We note that it would be unprecedented
for the UK Government to legislate on tax matters for the Dependencies.
It is, however, now clear to us that the Crown's reserve power
to make laws for the good government of the respective territories
would enable it to legislate on those matters, if it proved necessary
to do so, even if only as a last resort. As regards Gibraltar,
we note that both the Code of Conduct and the State Aid rules
apply directly to it.
6.7 We accept that the State Aid rules
do not apply directly to any of the other territories. If, on
the other hand, the combined effect of tax arrangements in one
of the territories and in the UK (for example the sourcing of
dividends in a subsidiary established in one of the territories
by a holding company established in the UK on which tax is payable
at the (reduced) rate applicable in the territory) were thought
to give the UK company an unfair competitive advantage in the
Single Market, then it seems to us that there might be a basis
for the Commission to take action against the UK under the State
Aid rules in respect of these arrangements taken as a whole. We
ask the Minister to comment on whether the Commission might be
entitled to take such action and whether she knows if any such
action is under consideration.
6.8 We were disappointed to see that
the work of the Group continues to be regarded as confidential,
notwithstanding publication of its last report. We ask the Paymaster
General, as Chairman of the Group, to use her best endeavours
to see that any further reports of the Group are published, in
whole or in part, and in any event to keep us in touch with its
progress. Meanwhile, we have the one further question in the paragraph
above.
| 
