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]
Taxation
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 final
communication, which deals with the co-ordination of member
states’ policies on exit taxation, is also presented within the
framework of the
communication on co-ordination. The exit taxation communication analyses
the legal requirements laid down in a number of ECJ cases and considers
how they affect the exit tax levied on individuals and companies. The
Commission implies that member states’ current exit tax rules
are not compatible with EC law and concludes that exit taxation is a
prime example of an area in which member states could benefit from
co-ordination at European level. The UK disagrees with the Commission
and takes the view that our corporate exit charge legislation is
compatible with European law. Other member states also dispute the
Commission’s view that their corporate exit taxes are
incompatible with the fundamental freedoms.
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?
Dawn
Primarolo:
No, I do not agree with the hon. Lady at all.
The understanding is that the Commission considers that an appropriate
time to consider proceedings through enhanced co-operation is a good
way off, and there is no sense whatever from member states that work is
at a stage where they should be considering that. However, if some
member states wish to agree to such a basis of operation between them
at an appropriate time, that is a matter for them. It is essential, of
course, that all the treaty conditions on enhanced co-operation are
met, including the requirement not to undermine the internal market,
and that such action should be a last resort.
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?
Dawn
Primarolo:
The hon. Lady insists on trying to speculate
about proposals that are not for this Committee. I return to the point
that I made in answer to the hon. Member for Falmouth and Camborne.
Co-operation in looking at different cases and exchanging views, for
instance, would help with compliance costs—and we know that
business wants the reduction in compliance costs—but the
business community is increasingly realising the complexity of the
Commission’s exercise on the CCCTB and has doubts that it will
result in compliance savings. That is entirely different from the
suggestion by the hon. Member for Chipping Barnet that the proposal is
on the verge of being agreed and that the UK will be isolated or forced
down a route that it does not wish to go down. The discussions would
have to come forward as proposals and all member states would formally
respond. There would be discussion at ECOFIN and if that happened, the
House would be informed through explanatory memorandums how the UK
intended to respond. We have made it clear that we are not attracted to
those proposals and that we do not see that they would provide the
gains that some have suggested, without evidence, that they
would.
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 elected...to 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.
Resolved,
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.
