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House of Commons
Session 2006 - 07
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European Standing Committee Debates


The Committee consisted of the following Members:

Chairman: Mr. David Marshall
Atkins, Charlotte (Staffordshire, Moorlands) (Lab)
Cable, Dr. Vincent (Twickenham) (LD)
Cunningham, Tony (Workington) (Lab)
Evennett, Mr. David (Bexleyheath and Crayford) (Con)
Goldsworthy, Julia (Falmouth and Camborne) (LD)
Gray, Mr. James (North Wiltshire) (Con)
Havard, Mr. Dai (Merthyr Tydfil and Rhymney) (Lab)
Hurd, Mr. Nick (Ruislip-Northwood) (Con)
Primarolo, Dawn (Paymaster General)
Reed, Mr. Andy (Loughborough) (Lab/Co-op)
Stewart, Ian (Eccles) (Lab)
Villiers, Mrs. Theresa (Chipping Barnet) (Con)
Williams, Mrs. Betty (Conwy) (Lab)
Hannah Weston, Committee Clerk
† attended the Committee

European Standing Committee

Tuesday 6 March 2007

[Mr. David Marshall in the Chair]


4.30 pm
The Paymaster General (Dawn Primarolo): Good afternoon, Mr. Marshall. I am pleased to have the opportunity under your chairmanship to discuss the European Commission communications on co-ordinating member states’ direct tax systems in the internal market. I propose to say a few words about each communication.
First, the co-ordination communication is an umbrella communication in which the Commission sets out its ideas for work on the co-ordination of member states’ direct tax systems. There is explicit acknowledgement that, subject to compliance with Community law, the issues touched on remain a national preserve. In the Commission’s own words:
“Member States remain largely free to design their tax systems so as to meet their domestic policy objectives and requirements”.
The focus is on co-ordination, aimed at potentially improving the performance of national tax systems. The Commission’s view—not the Government’s; I shall come to that—is that co-ordination initiatives can take a number of forms,
“ranging from concerted unilateral action by Member States, at one end of the spectrum, to collective action in the form of a Community instrument at the other”.
The Commission says that as a result of those initiatives, member states will be better placed to attain their tax policy goals and protect their tax bases. That view is outside the Commission’s competence and the issue remains a matter of national preserve. None the less, the Commission seems to have in mind a series of co-ordinating initiatives, two of which are the subject of communications that we are discussing today.
As far as other possible co-ordination initiatives are concerned, the communication has failed to provide any detail and has not gone beyond a few broad headings. For instance, the Commission indicates that it perceives the need for initiatives to improve administrative co-operation between member states and to look at the principles flowing from Community case law and at the prevention of non-taxation and the abuse of taxation.
Other topics also get a brief mention; for instance, treatment of debt and equity and the taxation of branches. The communication provides no substantial analysis of the rationale for co-ordination initiatives in the areas mentioned. The Government will, of course, submit further explanatory memorandums to the European Scrutiny Committee when the Commission proposals for the initiatives emerge.
Let me say clearly that the Government’s perspective on the Commission’s co-ordination initiatives overall is as follows. The Government are clear that national tax systems need to co-exist, but on the principles of preserving the right of member states to determine unilaterally their own tax systems. The Government note the Commission’s recognition of the primacy of member states’ competence on direct tax.
Of course, the idea of working more closely together is not novel for national tax authorities. The UK has always recognised the potential for such activities to be helpful and practical in making suggestions for improvement. The Committee will see that the Commission puts a different emphasis on co-operation, and I want to be absolutely clear about the UK’s approach. The Government have always believed that greater co-operation is necessary and that closer working produces benefits, for example in the Organisation for Economic Co-operation and Development and bilaterally in double taxation agreements.
The UK does not see co-operation as a continuum that leads to European directives. In other words, there should be absolutely no presumption that co-ordination will lead to Europe-wide action or the use of Community instruments. Obviously, the UK actively and constantly participates in work among member states in the European Union; for example, in the field of VAT. Some will be aware that the UK recently hosted a Europe-wide conference in London that considered issues of VAT fraud and the steps that could be taken to strengthen joint working on dealing with European criminality and civil cases.
The communication on the tax treatment of losses in cross-border situations concerns the giving of relief on losses for corporation tax purposes. The law in a number of member states, including the UK, provides for companies that are part of the group to set losses against profits in certain circumstances. The precise mechanisms for giving relief vary between states, and the UK mechanism is called group relief. Marks and Spencer challenged its provisions at the European Court of Justice, arguing that UK rules were not compatible with the European treaty because they did not give loss relief on losses that companies incurred outside the UK corporate tax net. The ECJ accepted that group relief was, in principle, compatible with European Community law, but said that relief must be available in some limited circumstances. As some members of the Committee will be aware, the Government gave effect to that ECJ ruling in the Finance Act 2006.
The present communication potentially takes member states well beyond that ECJ ruling, and that is perplexing and without policy clarity. The Commission argues that member states should introduce or free up rules to allow wider cross-border relief. We disagree with the specific suggestions in the communication, which goes too far, and we remain to be convinced that it strikes the right balance between enhancing the single market for enterprise and protecting the ordinary taxpayer from the fiscal costs of granting additional generous cross-border relief. The UK, along with other member states, believes that there is no preconception about the outcome. We shall continue to discuss the issue with other member states and to look at their responses to the ECJ rulings to ensure that there is an effective fit between the tax systems. However, we shall go no further.
The Government are clear that there is a need for national tax systems to co-exist and fit together effectively in the EU and beyond, based on the principle of preserving the effective allocation between member states of powers to tax. That would also promote the objectives of simplification and of minimising compliance costs, which would promote UK and EU competitiveness. Obviously, the issues that the Commission identified under this heading should be looked at on their merits, and we are open to discussions with other member states and to working with them with no assumption as to the outcome. It is also appropriate for member states to continue to work with the Commission to establish where there may be potential benefits from greater co-ordination, as mentioned in the Commission’s submissions.
The Chairman: We now have until half-past five for questions to the Paymaster General. I remind hon. Members that these should be brief and asked one at a time. There is likely to be sufficient time for all hon. Members to ask several questions if they wish to do so.
Mrs. Theresa Villiers (Chipping Barnet) (Con): It is a pleasure to serve under your chairmanship, Mr. Marshall. The Paymaster General rightly highlighted the connection between the Commission documents that we are considering and the European Court of Justice cases that prompted them. Does she share my concern that ECJ judicial activism means that the EU has an ever-increasing impact on, and ever-increasing power over, our tax system?
Dawn Primarolo: It is for taxpayers to decide whether they use the ECJ in pursuing what they believe to be their rights under the treaty. It would be entirely inappropriate for any Minister in any country to make derogatory remarks about the ECJ’s role.
Julia Goldsworthy (Falmouth and Camborne) (LD): My question also relates to the increasing amount of litigation going before the ECJ. We have seen in some cases how that has resulted in changes being made to UK tax legislation through a Finance Bill. My concern is more that by taking such an approach and having to make the changes incrementally, we are adding to the complication that is already in our tax legislation.
Dawn Primarolo: The hon. Lady will be aware of, for instance, the Marks and Spencer judgment with regard to group relief, which I mentioned in my opening remarks. Once there is an ECJ ruling, all member states, regardless of where the case originated, have to ensure that their tax systems comply with the ruling. In the example that I gave, group relief was accepted by the ECJ.
Let us consider where discussion on co-ordination may come in. This touches on the hon. Lady’s point. If member states are all adjusting their legislation, how they do that could increase compliance costs, so there is no harm—this is one of the proposals and would, I think, be of benefit—in member states participating in discussions and understanding how they are making adjustments to be in line with the ECJ. In that way, we can see the possible reduction in compliance costs and certainly in regulations. We are talking about the difference between having one tax system and having 27 tax systems that must co-exist. I hope that that covers the point.
Mrs. Villiers: Is not the Paymaster General just a little concerned about the degree to which the ECJ is driving forward significant instant tax harmonisation? Are the changes to our tax system receiving sufficient democratic scrutiny when the outcome is decided in the ECJ?
Dawn Primarolo: Perhaps the hon. Lady would like to tell the Committee whether she wants to strike out the ECJ from having any presence in the European Union. That is one of the things that her party might go for in a fundamental treaty renegotiation. If we consider some of the recent cases, we see that the ECJ has the difficult job of balancing fundamental freedoms and ensuring that the treaty obligations are upheld, and understanding how individual tax systems operate. Again, in the Marks and Spencer case, which was the subject of considerable speculation in the press, the ECJ ruled in favour of group relief, but pointed out that certain procedures needed to be changed. As the hon. Lady served on the Standing Committee that considered the Finance Bill in 2006, she is well aware of what is in the Finance Act 2006.
Julia Goldsworthy: I want to follow up the answer that the Minister gave me. According to one of the documents before us, the Commission sees the need for guidance on the principles flowing from case law emerging from the ECJ and how those apply to the main areas of direct taxation, and believes that such guidance will provide greater certainty for the benefit of taxpayers, tax authorities and national courts. Does the Minister believe that such guidance would be of benefit in respect of the response of different nations and the resulting compliance costs?
Dawn Primarolo: I believe that every tax authority is perfectly capable of understanding precisely the results of an ECJ ruling and what it is required to do as a result of the judgment. Therefore, it is difficult to see how guidance would say anything except, “You have to comply with an ECJ ruling.” What may be of some assistance, as I said to the hon. Lady, is discussions among member states. As they approach the issue of complying with judgments, discussions among them about how they are doing that and whether it will facilitate a reduction in compliance costs, for instance, constitute a perfectly reasonable way to proceed. However, I do not think that it is a matter for any member state, having signed the treaty, then to question the authority and direction of the ECJ. If hon. Members look at subsequent rulings, they will see that harmonisation is not the way that things are heading.
Mrs. Villiers: Will the Paymaster General expand on her comments about the implications for exit taxes of the N and de Lasteyrie cases? If I understood her correctly, she does not believe that they have any significance in respect of company taxation and the UK’s company tax regime. However, the Commission does not seem to share her views. Does she think that there is any danger that the Government could find themselves forced to amend section 185 of the Taxation of Chargeable Gains Act 1992 or section 130 of the Finance Act 1998?
Dawn Primarolo: I will try to say this again but in a different way, and I hope that the hon. Lady catches it this time. The ECJ’s judgment on the de Lasteyrie case, which was about French legislation, included positive comments about the UK. The UK does provide for claw-backed relief in some circumstances. The judgment recognised that preserving the allocation of the power to tax among member states is a legitimate objective. Therefore, that puts to bed the hon. Lady’s suggestion that the ECJ is interested only in taking forward harmonisation. It specifically recognised the legitimate objectives of member states. As I said in my opening remarks, the UK’s legislation, which is for the UK to decide, not the Commission, is compliant with European Union legislation.
Julia Goldsworthy: The Commission’s communication points to concerns that there are difficulties in the internal market in respect of competitive business and corporation tax. Have the Government made any assessment of whether problems may exist in respect of things such as tax avoidance, double taxation or compliance costs?
Dawn Primarolo: As the hon. Lady will know—I believe that she has sat in quite a few Committees on double taxation, let alone Finance Bills—the Government deal with double taxation through treaties. She will also know that the Government have an active policy of pursuing any plans or propositions for avoiding paying any tax at all, to which the Commission referred. Members of the Committee may have seen the document published by the Treasury and the Department of Trade and Industry in January 2007 entitled, “The Single Market: A vision for the21st century”. In it, the Government made it clear that there are many areas, particularly in respect of employment, social and tax policy, on which member states will wish to implement policies that reflect their particular national institutions. In the field of taxation, for example, the European Union has already agreed and implemented the necessary measures to help create an effective and robust single market.
In direct answer to the hon. Lady’s question, we have seen no substantive analysis that says that further work needs to be done, and that is why we are prepared to engage in discussions about co-ordination and exchange of information, but we do not accept the Commission’s analysis of many areas that are covered in the various communications.
Mrs. Villiers: I want to bring the Paymaster General back to exit taxes for a moment. I certainly hope that she is right in her assertion that there is no difficulty with the ECJ on the matter. I would like to ask her about two aspects of our regime: the requirement of advance notice for a company ceasing to be resident in the UK, and the requirement of security for unpaid tax. Am I right in thinking that similar provisions were struck down in de Lasteyrie and N? Is she confident that the provisions will be retained in UK law?
Dawn Primarolo: I repeat that the UK takes the view that the corporate exit charge legislation is compatible with European law. That is the UK’s view; other member states have similar attitudes with regard to their own systems. There is absolutely no point in discussing hypothetical situations in this Committee. What we have is a series of propositions from the Commission that are outside its direct competence and which raise issues that are not relevant. The issue within member states’ competence is whether, when ensuring that our tax system works effectively and delivers our objectives, we should engage in discussions and co-operation with either other member states or other countries.
We have engaged in the work of the OECD for a great number of years. We base our double taxation treaties on the model from the OECD. There is nothing wrong with co-operation, which is precisely what we are engaged in. However, let us not have anybody running away with the idea that there will be a series of directives that the UK will be bounced into—there will not—or that the ECJ is delivering the same objective.
Julia Goldsworthy: With regard to the tax treatment of losses in cross-border situations, the Government’s response to the communication again mentions the Marks and Spencer case and the suggestion that cross-border relief should be introduced generally. Has the Treasury undertaken any assessment of the revenue implications that such a policy would have on the UK tax take?
Dawn Primarolo: We have not undertaken such an assessment because, as I explained in my opening remarks—and as the hon. Lady will know from Committees on Finance Bills—the changes necessary were made following the ECJ ruling. The fundamental challenge was that group relief was not compatible with European Community law, but the ruling did not actually suggest that. There is no analysis because no case has been made to indicate that there is a problem. Why would we conduct an analysis of the costs of taking actions that were simply not necessary? At the moment there is no detailed analysis. The problem is that once cross-border losses and reliefs were more widely felt—and there is no reason for member states to go down that route—there would be a slippery slope towards a broader extension to group relief. If that happened, it could be very costly indeed to the UK. We are resting on an ECJ judgment, and rightly so. That gives us the confidence to say that we need to go no further and that we do not understand why the Commission wants to explore the issue further. The ECJ has ruled and there is no need.
Mrs. Villiers: On exit taxes, is the Paymaster General aware of the Cartesia case and might she be prepared to comment on that? Does she believe that there is any danger that the Daily Mail and General Trust case might in future be bypassed by the ECJ?
Dawn Primarolo: With your permission, Mr. Marshall, I will confine myself to answering questions about the details in the European Commission’s communication to the Committee. I will not go down the dangerous path of speculating on current or future cases, or current or future legislation. That is not my role.
Julia Goldsworthy: Just to confirm, the Treasury would not undertake any assessment of the cost of the Commission’s proposal that cross-border loss relief could be introduced generally.
The Treasury says in paragraph 20 of its response that it intends
“to work with other Member States to ensure that all the responses to the Marks & Spencer judgment fit effectively together”
across the Union. What work does the Treasury plan to do to fulfil that?
Dawn Primarolo: That work is in progress. Member states will be at various stages of implementing the judgment. I do not have the relevant information now, but I am happy to write a precise answer to the hon. Lady and the Committee about how we expect the situation to pan out. Having that co-operation as an objective does not necessarily mean that it will happen. It has been proposed as a way forward, and the idea is certainly worth exploring, but it depends on other member states seeing the value of such co-operation.
Mrs. Villiers: I am very much aware of concerns that some of the Commission’s proposed changes on cross-border relief could have a significant impact on revenue to the UK Exchequer. That is one of my major concerns about them. This illustrates the approach to political integration that has been taken in the past—there is a European Court of Justice decision and the Commission follows it up by trying to broaden its remit. Is not that a concern that we should take into account? Does not it illustrate that co-ordination can, step by step, lead to harmonisation? Is not that a reason to oppose the Commission’s proposals?
Dawn Primarolo: No, I do not agree. The hon. Lady knows full well that a draft directive would require unanimity. She also knows that the majority of the limited ones on direct taxation were agreed by a Conservative Government, with updating under the present Government. One exception to that is the major directive on the taxation of savings, which was followed in great detail here and involved huge negotiation on the UK’s behalf to achieve the final outcome.
It is sensible for the competitiveness of both the UK and the EU to have co-ordination and co-operation. They have absolutely no connection with harmonisation through directives, nor need they lead to that. Those are two specific and different procedures. The Commission may see such things as being part of a continuum, but the UK and several other member states do not. There are separate mechanisms to deal with that.
There is co-operation on matters such as double taxation treaties, combating problems such as carousel fraud, and improving the VAT system. There were extensive discussions at the OECD about harmful tax competition and removing niche regimes. Increasingly, such co-operation involves discussions and the exchange of ideas and information, after which the tax authorities of relevant member states are left to decide whether to change their tax systems. That is the correct way to proceed.
Mrs. Villiers: The Paymaster General is right to admit that the Commission sees those projects as a continuum and sees co-ordination as a step along the road to harmonisation. That is why I find the proposals so worrying. Is she concerned that in this case and in another proposal in the documents—that on the common consolidated corporate tax base, or CCCTB—there might be a push to adopt the use of the enhanced co-operation mechanism?
Dawn Primarolo: First, I remind the hon. Lady again of what I said in my opening remarks—that was the Commission’s view, not the UK’s. Just because the Commission holds that view does not mean that it is capable of delivering such a process, especially given that direct tax is outside its area of competence. It was the Commission’s view that co-ordination could range from concerted unilateral action by member states at one end of the spectrum, through to action in the form of a Community instrument at the other. I was at pains to point out in my opening remarks that that was not the case.
With regard to the CCCTB, the Commission has expressed a view, but it has not elaborated further on it. I do not propose to speculate in this Committee on what might be on the mind of the Commission in relation to why it believes that there needs to be interaction that is addressed. The Government have made it absolutely clear that they are not prepared to accept co-operation or co-ordination as a means of facilitating the CCCTB. We are absolutely clear about that and it has been submitted over and over again at ECOFIN and in reports to the House.
Mrs. Villiers: My point was that if the Commission sees co-ordination as a step on the road to harmonisation, that is a reason to be very careful about co-ordination proposals—because of the place to which they could lead in the end. That is why we are so greatly concerned about things that often look like technical matters of co-ordination.
With regard to the possibility of tax measures being imposed by the enhanced co-operation procedure, was it appropriate for the UK to agree that only eight member states were needed to initiate the procedure? Would it not have been better to require at least half the member states to agree before it could go ahead?
Such speculation is unhelpful. The UK is firm in its approach to the matter, but I do not see the dangers that the hon. Lady suggests. I do not believe that they are there. What she is saying is beginning to border a bit on scaremongering, which perhaps does more to tell us about her party’s attitude to Europe, than to give an understanding of how it actually operates.
Mrs. Villiers: This is a significant matter relating to our tax system, so I make no apology for raising it. Would the Paymaster General seek to build a blocking minority if the Commission did choose to go ahead and advocate use of the enhanced co-operation procedure?
Dawn Primarolo: If and when the Commission introduces any proposals, through scrutiny, the Government will inform this Committee and the House how it intends to take them forward. We have enough challenges in dealing with what is on the table; there is no point in speculating about what might be there in the future.
Mrs. Villiers: Are the Government doing any research into what the impact of CCCTB under the enhanced co-operation procedure will be on UK-based businesses who have subsidiaries or group companies in other member states?
Dawn Primarolo: The Government spend their time, rightly, considering how to ensure that our tax system enhances the UK’s competitiveness, and how we continue to ensure that the tax system feeds into economic stability and growth in the UK—low inflation and growth in jobs. We do not spend our precious resources investigating something that is not on the table for consideration.
Mrs. Villiers: I would say that it is on the table for consideration. It certainly is in Brussels.
This is my last specific question on CCCTB. If it were introduced as an elective system, is there not a danger that there would be pressure for it to become compulsory? The plan at the moment is that it would be a 28-company tax system for the EU, but the Danish Government have already indicated that they would seek to harmonise their own domestic company tax to the CCCTB. If CCCTB goes ahead on a voluntary basis, would it not quite soon become compulsory?
Mrs. Villiers: I have some questions that I hope will elicit some common ground between the two Front Benches. In its various communications, the Commission tends to emphasise that it is looking at the tax base and the tax system, and that it will leave member states the right to set tax rates. Does the Paymaster General agree that allowing the European Union significant extra powers over tax systems and the tax base could have significant implications for tax revenues and our competitiveness, to which our tax system is so important? In short, would not harmonisation of our tax system and tax base involve a significant loss of the power of the Ministers we elect in this country to determine what tax is paid by British taxpayers and how the burden is shared out?
Dawn Primarolo: In its communications, the Commission explicitly acknowledges the right of member states to determine the preferences within their direct tax systems. The Commission acknowledges that that is up to member states, not the Commission. Furthermore, the Commission knows full well that it has no competence in direct tax. The Armageddon scenario that the hon. Lady has presented to the Committee is only a fear in her mind, not a direct proposition that is on the table at the present time. Nor could it be on the table unless the Commission was given competence in direct tax, and the UK and many other member states are not about to agree that.
The Chairman: Order. I remind hon. Members that questions should be brief.
Mrs. Villiers: I am surprised that the Paymaster General will not answer a question that I thought had an obvious answer and which gave her an obvious opportunity to display her credentials as an opponent of tax harmonisation. For one thing, there is indeed a proposal on the table to harmonise the company tax base. We have just been discussing it—it is called CCCTB. Does she not agree that we should not give the European Union powers over our tax system or our tax base?
Dawn Primarolo: I have answered that question; I do not need to debate harmonisation with the hon. Lady. Nothing in the communications takes that forward. I have made clear the Government’s position, which we have held with some success since 1997.
Mrs. Villiers: Briefly, my last question is about the Primarolo group, which has obviously played an important role in tax matters in the EU. How often has it met in the past year, and what taxes is it considering at the moment?
Dawn Primarolo: It is actually called the code of conduct group. It was set up as the result of a resolution, agreed under a previous Conservative Government, to consider niche regimes and harmful taxation and ensure that that does not take place within the European Union. Its reports are the subject of ECOFIN decisions. and although I think that the hon. Lady will have them, I will be more than happy to give her references on the Commission’s site so that she can see the group’s work for herself.
Julia Goldsworthy: The Minister will know that UK officials are participating in the technical work on the CCCTB working group on a without-prejudice basis, having made their opinions very clear. Can she say which other member states are participating on a similar basis?
Dawn Primarolo: I could not immediately give the hon. Lady the member states by name. However, I understand that all member states take the same view as the UK: that it is important to be involved in discussions and able to put one’s point of view. However, that should not be read as a commitment to the outcome—in this case, of the CCCTB. I understand that a large number of member states take that view.
The Chairman: If no more Members wish to ask questions, we shall proceed to the debate on the motion.
Motion made, and Question proposed,
That the Committee takes note of European Union Documents No. 17066/06, Commission Communication on Coordinating Member States’ direct tax systems in the internal market, 17067/06 and Addendum 1, Commission Communication on Tax treatment of losses in cross-border situations, and 17068/06, Commission Communication on Exit taxation and the need for coordination of Member States’ tax policies; and supports the Government’s intention of combining a robust defence of the right of Member States to determine their own direct taxation policies in compliance with Community law, with a recognition that national tax authorities, within the EU and elsewhere, will continue to work together both bilaterally and multilaterally to ensure that their direct tax systems work together properly.—[Dawn Primarolo.]
5.12 pm
Mrs. Villiers: One way or another, whatever the Paymaster General might say, these papers from the Commission are all about tax harmonisation. That is their eventual goal. The Commission may call it “co-ordination” at this stage, but, as the Paymaster General has admitted, it sees the papers as a step on the road to harmonisation, as part of a continuum that starts with co-ordination and ends with harmonisation. That is why the documents are of considerable concern to the Opposition.
We strongly believe that it is vital for the UK to retain its power to set its own taxes—its tax rates, its tax base and its tax system. Certain taxes such as VAT are already determined in large part at EU level, but I call on the Government strongly to resist any attempts to enlarge the EU’s power over other tax matters. It is essential for the health of our democracy that we do not lose further power over taxation to the European Union.
The right to tax citizens is one of the key hallmarks of statehood. Since the earliest stirrings of parliamentary democracy in the middle ages, through to the final victory of Parliament over the Crown in 1688 and the fuel tax protests of September 2000, tax has been at the heart of the political debate. That is why we say that decisions on tax should be taken in this building and not in Brussels.
The more the public see that the right to tax them is being transferred from people whom they elect, can influence and can remove at a general election, to people whom they do not elect, cannot easily influence and cannot remove at a general election, the more damage we do our democracy. If we gave the EU more power over taxes, we would be taking risks with not only our democracy, but the tax burden. That was highlighted by the House of Lords European Union Committee a few years ago, when it said that
“while tax decisions remain with Member States, the wish of politicians to be re-elected acts as a restraint. We consider that there would be a danger of upward alignment continuing unchecked if tax decisions were handed over to a supranational body which was not accountable to an electorate.”
Furthermore, once a tax was harmonised, it is highly unlikely that it would ever be possible to reduce it thereafter, as other member states could block such a reduction. The Paymaster General knows the difficulties of securing changes in existing EU tax law, given her difficulty in securing the reverse charge mechanism to help to deal with missing trader intra-community fraud.
Nor is it any answer to suggest that these proposals are harmless because they concern only tax systems, not headline rates. The tax system and the tax base are crucial to determining how much tax we pay in this country. A tax rate is meaningless unless we know on what it is levied. If we lost the power to determine the tax base and system, we would lose significant power to determine how much tax people pay in Britain and how that burden is shared among them.
The tax system is also crucial for our competitiveness. Ceding further control over it to the EU could have a hugely damaging effect on our competitiveness. I do not particularly like the Government’s continual changes to the tax system. I would like more stability and less complexity, but we need some flexibility, and the thought that we might need to secure the permission of 26 member states to amend our corporation tax base is frightening.
It is not only decisions relating to the tax system that are important. Agreement on more technical areas of tax can be used to drive forward harmonisation by stealth, using an incremental approach. These proposals are all about moving towards a goal of more harmonisation. On that type of approach, I always find it useful to quote the Italian Prime Minister, Mr. Prodi, who, when he was President of the European Commission, let the cat out of the bag. He said:
“The genius of the founding fathers”—
of the EU—
“lay in translating extremely high political ambitions, which were present from the beginning, into a series of more specific, almost technical decisions. This indirect approach made further action possible.”
That salami slice approach has been used to take forward political integration without proper democratic scrutiny and it is being used in the tax sphere. For example, if the CCCTB project goes ahead, there is every danger that it could start out as a voluntary system and end up as a compulsory one. If it gathers momentum through being adopted in a few member states using the enhanced co-operation procedure, there will obviously be pressure to expand it outside that group of member states. That is why it is right for the House to give the closest scrutiny to any EU proposals relating to tax, even if they look fairly dull and harmless.
In the proposals under consideration today, the Commission tends to argue that harmonisation is necessary to deal with problems that businesses face with the tax system. It tends to assert that variations in corporation tax regimes might increase costs for business and make cross-border trade more difficult. The Paymaster General is right to have pointed out explicitly that in the documents before the Committee today the Commission just does not produce any evidence of that.
Let us assume, however, that the diversity of tax systems does involve additional compliance costs and does create a degree of friction to hinder the smooth operation of the single market. I am not conceding that that is the case at all, but let us assume for the purposes of argument that it might be. I would have thought that tax harmonisation was an entirely disproportionate response to such problems. The negative effects of tax harmonisation would far outweigh any possible savings to be made as a result of greater consistency among tax systems. I hope that the Paymaster General agrees. In a sense, I am saying it for the sake of anyone who might read Hansard and be tempted to go down the road of harmonisation of company tax bases.
Costs for business are likely to go up if moves are made towards company tax harmonisation. Businesses are much more likely to end up being worse off in a harmonised company tax system than with a diverse range of systems in different member states. With tax harmonisation, the risks are greater than any potential benefits that I can see. That is because experience tells us that the process of negotiating EU laws tends to yield a sub-optimal result in a number of cases, with high costs for business as a result.
There would also be the upward pressure on taxes, which I mentioned in relation to the House of Lords conclusion, and of course once an EU-wide system was agreed, it would be virtually impossible to change it. Extra reliefs would probably never be allowed, because they would never get the consent of all member states. There will be very real dangers if attempts are made to move to further harmonisation of the company tax system and base.
The papers before us on exit taxes and cross-border losses were both triggered in no small part by decisions in the European Court of Justice. The proposals on exit taxes follow the decisions in the de Lasteyrie and N cases, and those on cross-border losses seek to address the consequences of the Marks and Spencer decision.
Back in 1998, tax expert Ian Stitt warned of the potential dangers surrounding the ECJ’s role in relation to tax:
“The Court’s interpretation of broadly worded provisions of the Treaty...could lead to significant ‘instant tax harmonisation’...the ECJ can often stretch their analysis of the relevant provisions to achieve an extremely broad interpretation of the Treaty...If the ECJ is allowed to take the lead in direct tax harmonisation, there will be no proper scrutiny of the principles that are being developed by those law-making power.”
How right his prophecy has proved to be.
The European Scrutiny Committee generously described the Government’s response on EU tax proposals as robust, yet the Government are largely powerless in the face of the ECJ’s power. There is a real danger that the provisions of the Taxation of Chargeable Gains Act 1992 and the Finance Act 1988 on corporate taxation and exit losses will fall foul of the ECJ. I hope that the Paymaster General’s confidence is borne out by events, but there is a serious danger that the hard-won victory in the Daily Mail and General Trust case could be swept aside.
Numerous ECJ cases have had a direct and significant impact on our tax system, including Metalgesellschaft, Lankhorst-Hohorst, British American Tobacco, Deutsche Morgan Grenfell and Cadbury Schweppes to name but a few. The Lankhorst-Hohorst case on thin capitalisation rules imposed significant extra costs on business with extra administration. The Paymaster General admitted in an answer to a parliamentary question that the Deutsche Morgan Grenfell case on reclaiming advance corporation tax will cost the Exchequer at least £300 million. Many think that the cost will be considerably more.
Yet again, we can see the ECJ forcing the Government to introduce proposals to amend taxation. We saw that frequently in last year’s Finance Bill, and I fear that that might well be the case in the forthcoming Finance Bill. The Committee might feel that the Minister is taking a robust approach, and I certainly encourage her to do so, but it is difficult to see what she could do in the face of judicial activism from an ECJ that seems bent on driving through tax harmonisation.
5.22 pm
Julia Goldsworthy: I am not sure that I recognise the apocalyptic vision foreseen by the hon. Member for Chipping Barnet as a result of these communications. Neither do I see the close alignment of the Government’s position with that of the communication that she implied. I note that she did not put forward any proposals to avoid the doomsday that is upon us.
In the motion before the Committee, the Government clearly state their recognition of the
“right of Member States to determine their own direct taxation policies”.
They also state that they
“will continue to work together both bilaterally and multilaterally to ensure that their direct tax systems work together properly.”
The Government are right to take that robust approach. Member states should be free to determine their own taxation policies, particularly in setting rates, because they will be key to competition.
The Government have made it clear that fair tax competition is the way forward for Europe. We must consider whether the current system achieves that. There are problems with the complexity of the system and with the scope for evasion and the exploitation of loopholes. There is also a problem with increased litigation, which has had an impact on Finance Bills by incrementally building complexity into our tax system. How should we deal with that? It is sensible to look at these issues and co-operate with the working group in respect of whether a common tax base, rather than wide-scale harmonisation, may resolve some of those difficulties. It is right to approach that sceptically, but it is also right to co-operate. I see no reason why that should not sit alongside continuing to work with bilateral and multilateral measures to try to overcome the difficulties that we undoubtedly have.
Having said that, however, I share the widespread scepticism of the alternative intermediate measures put forward in the communications from the Commission in respect of cross-border reliefs and exit taxation. Again, it is recognised that there are issues to be dealt with, but there is not nearly enough detail on the full impact that such intermediate measures would have.
I do not intend to detain the Committee for long. We need to continue this robust analysis and absolutely need to defend the right of Governments to pursue their own national taxation policies. However, that does not need to contradict the idea of exploring some of the measures that have been put forward, given the potential of a common corporation tax base to provide greater transparency and clarity of competition. The worst of all worlds would be to have complexity that resulted in unintended unfair competition. On that basis, it is important to work productively rather than describe a doomsday scenario that is not painted by, and not inevitable as a result of, the communications.
5.26 pm
Dawn Primarolo: The comments of the hon. Member for Chipping Barnet speak volumes about the attitudes of her party and its antagonism to Europe, and throw very little light on what the hon. Member for Falmouth and Camborne referred to: what that party would do to take the discussion forward. I say two things to the hon. Member for Chipping Barnet. Her contention about salami slicing is not a fair assessment of the UK’s success in making the European Union more open, competitive and flexible—exactly the points to which the hon. Member for Falmouth and Camborne rightly returned time and again in her questions. The UK keeps the veto to avoid unwelcome integration in respect of tax.
I say as clearly as possible to the hon. Member for Chipping Barnet that this debate is not about tax harmonisation. I have made it very clear on behalf of the United Kingdom Government that we do not consider co-ordination to mean harmonisation. I could not have been clearer on that, for all the reasons given by the hon. Member for Falmouth and Camborne on the need to have those discussions.
For the record, Deutsche Morgan Grenfell was not an ECJ case but a House of Lords case. I do not know where that fits in the hon. Lady’s doomsday scenario.
Mrs. Villiers: Will the right hon. Lady give way?
Dawn Primarolo: No, I am concluding now. The hon. Lady has had quite enough to say this afternoon.
I draw the Committee’s attention to the remarks made by the European Scrutiny Committee. I quote one of its conclusions:
“A combination of a robust defence of the right of Member States to determine their own direct taxation policies with an acceptance of national tax authorities, within the EU and elsewhere, continuing to work together both bilaterally and multilaterally to ensure that their domestic, direct tax systems work together properly.”
That is a commendable response. I commend the motion to Committee members, who I hope have found this an interesting and helpful discussion.
Question put and agreed to.
That the Committee takes note of European Union Documents No. 17066/06, Commission Communication on Coordinating Member States’ direct tax systems in the internal market, 17067/06 and Addendum 1, Commission Communication on Tax treatment of losses in cross-border situations, and 17068/06, Commission Communication on Exit taxation and the need for coordination of Member States’ tax policies; and supports the Government’s intention of combining a robust defence of the right of Member States to determine their own direct taxation policies in compliance with Community law, with a recognition that national tax authorities, within the EU and elsewhere, will continue to work together both bilaterally and multilaterally to ensure that their direct tax systems work together properly.
Committee rose at half-past Five o’clock.

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