Select Committee on European Scrutiny Ninth Report


2 Taxation

(a)

(28173)

17066/06

COM(06) 823

(b)

(28174)

17067/06

+ ADD1

COM(06) 824

(c)

(28175)

17068/06

COM(06) 825


Commission Communication: Coordinating Member States' direct tax systems in the internal market


Commission Communication: Tax treatment of losses in cross-border situations



Commission Communication: Exit taxation and the need for coordination of Member States' tax policies

Legal base
Documents originated19 December 2006
Deposited in Parliament4 January 2007
DepartmentHM Treasury
Basis of considerationThree EMs of 16 January 2007
Previous Committee ReportNone
To be discussed in Council27 March 2007
Committee's assessmentPolitically important
Committee's decisionFor debate in European Standing Committee

Background

2.1 Member States are free to impose whatever direct taxation regimes they choose, so long as they do not discriminate against persons, sole or corporate, of other Member States who are subject to the regime.

The documents

2.2 In the Communication at document (a) the Commission sets out in broad terms its views on the coordination of Member States' direct tax systems, whilst at the same time acknowledging that Member States remain largely free to design these. It explains that it considers that coordinating initiatives on direct taxation may take a variety 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 asserts the importance of the relationship of national tax systems to maintaining Member States' social models, to the success of the internal market and to the objectives of the Lisbon Strategy, making references to both its 2005 Communication on European values in the globalised world[7] and its Communication on the contribution of taxation and customs policies to the Lisbon Strategy.[8]

2.3 The Commission highlights what it sees as three key principles in the area of co-ordination:

  • removing discrimination and double taxation;
  • preventing inadvertent non-taxation and abuse; and
  • reducing compliance costs associated with being subject to more than one tax system.

The aim of coordination, for the Commission, would be to ensure that national direct tax systems can be "made to work seamlessly together", rather than to replace existing national direct tax systems.

2.4 In the area of company tax, the Commission recalls its 2001 Communication, in which it put forward its case for a consolidated corporate tax base and which was the subject of a follow-up Communication in 2003.[9] The Commission refers also to its ongoing technical work on a Common Consolidated Corporate Tax Base (CCCTB)[10] and reiterates its support for the concept, saying that a CCCTB is "one systematic way to address the underlying tax obstacles for corporate taxpayers operating in more than one Member State". Over and above that, the Commission opines that "there continues to be a need for more targeted measures to address the more urgent problems in the short to medium term".

2.5 Given its view of a need for coordinating measures on direct tax, the Commission says it proposes to present a number of initiatives. Two areas, exit taxes and cross-border loss relief, which are touched on in this Communication, are the subject of the separate Communications in documents (b) and (c). As for other possible initiatives which the Commission envisages, it indicates, that amongst other things, it:

  • sees a need for guidance on the principles flowing from Community case law;
  • proposes to examine with Member States issues relating to the prevention of non-taxation and abuse "in the near future depending on the progress of relevant [European Court of Justice] ECJ case law";
  • considers it desirable to explore ways to reduce cross-border compliance costs and procedures through improved administrative cooperation;
  • plans to issue a further Communication in 2007 on anti-abuse rules;
  • touches on the tax treatment of debt and equity;
  • touches on the use of hybrid entities (an entity which may be corporate, and so opaque, in one Member State and non-corporate, and so transparent in another);
  • says that it is in addition "actively considering the need for initiatives in other areas such as withholding taxes, taxation of branches and inheritance taxes; and
  • proposes to explore with Member States "the scope for an efficient and generalized binding dispute resolution mechanism to deal ... with problems of international double taxation within the EU".

2.6 In the Communication at document (b) the Commission suggests competitiveness of business in the EU is hampered by the absence of a cross-border loss relief. Recalling again its Communication on the contribution of taxation and customs policies to the Lisbon Strategy,[11] it proposes action to alleviate this by removing this cross-border tax barrier.

2.7 The Commission believes different cross-border treatments of losses by Member States have an impact on the functioning of the internal market, in that Member States generally have rules in their tax regimes for relieving domestic losses that do not apply to the same extent to cross-border losses. It suggests this lack or limited availability of cross-border loss relief favours domestic investment, investment in larger Member States and investment by larger companies and influences the choice of operating through a branch or a subsidiary company. In particular, the issue is said to be of relevance to small and medium sized enterprises with respect to start-up losses arising from new investments abroad. The Commission suggests these distortions reduce competition and lead to higher prices for both businesses and consumers.

2.8 The Commission seeks to illustrate its concerns by reference to some of the relevant ECJ case law, including a decision in a case involving Marks and Spencer, where the court found that the balance of taxing powers between Member States and the risk of tax avoidance could justify restricting freedom of establishment.

2.9 The Commission suggests measures to allow cross-border loss relief as an intermediate solution, pending adoption of a CCCTB. It says an interim measure would not require harmonization of tax systems or the tax base and that theoretically, unlike the CCCTB, such cross-border loss relief could be designed to operate unilaterally. The Commission gives a set of guiding principles for a cross-border loss relief and suggests three possible solutions:

  • definitive loss transfer (intra-group loss transfer) — where losses in one Member State are relieved in the same year in another Member State — akin to group relief that operates between group companies in the UK;
  • temporary loss transfer (deduction/reintegration method) —   as in the preceding solution, but the losses are recaptured when the loss-making company returns to profit; or
  • current taxation of the subsidiary's results (system of consolidated profits) — in effect, a subsidiary is treated as though it was a branch, and the net profits and losses of the group consolidated and taxed at the parent level.

2.10 In the document's conclusion the Commission reiterates its view that the absence of an effective system for cross-border losses is one of the most significant obstacles to cross-border business activity. It invites the European Parliament and the European Economic and Social Committee to examine its proposals with a view to urging Member States to:

  • review existing national systems so as to provide relief for losses within a company in cross-border situations;
  • rapidly implement one or more of the solutions presented in the Communication; and
  • consider how the suggestions in the Communication could be applied to both domestic and cross-border situations by improving loss relief schemes and by introducing new ones.

2.11 In the Communication at document (c) the Commission discusses exit taxes. It analyses the legal requirements in the EC Treaty as interpreted by the ECJ in the de Lasteyrie case (C-9/02), and confirmed and developed in the N case (C470/04) and considers how these affect exit taxes levied on individuals and on companies.

2.12 The judgement in the de Lasteyrie case held that French legislation taxing unrealised increases in value of securities, where individual taxpayers move their tax residence outside France, was likely to restrict the exercise of the freedom of establishment. In the judgement the court found that the UK legislation showed that solutions less restrictive of the freedom of establishment were possible. The judgement in the de Lasteyrie case was confirmed and developed in the N case, in which the Court recognised that preserving the allocation of the power to tax between Member States is a legitimate objective.

2.13 It implies that Member States' current exit tax rules are not compatible with the requirements of EU law and goes on to examine how, in the Commission's view, they might be made compatible. The Commission suggests that when a resident of a Member State transfers residence to another Member State, the first Member State may assess the amount of income it wishes to preserve its tax jurisdiction and then grant an unconditional deferral of collection of the tax due. In case of deferral a requirement that the taxpayer submits a declaration at the time of transfer of residence sufficient to assess the income would be proportionate, having regard to the need to allocate the taxing powers between the two Member States.

2.14 The Commission concludes that exit taxation is a prime example of an area where Member States could benefit from coordination at EU level, offers to help Member States in developing the coordinated solutions it suggests and says it intends to establish more detailed guidelines.

The Government's view

2.15 The Paymaster General (Dawn Primarolo) says, in relation to document (a), that the Government:

  • is clear that it is very important for national tax authorities, both within the EU and elsewhere, to continue to work together both bilaterally and multilaterally to ensure that their domestic direct tax systems work together properly ;
  • welcomes the Commission's recognition that "As Community law currently stands, Member States remain largely free to design their direct tax systems so as to meet their domestic policy objectives and requirements";
  • acknowledges the importance of removing discrimination and double taxation, preventing inadvertent non-taxation and abuse and reducing compliance costs as far as possible;
  • remains clear that — except where specifically within Community competence — the matters which are touched on in the Communication remain a national preserve;
  • remains clear that it is a matter for Member States to exercise their competence to ensure that their national tax systems are compatible with Community law, including the case-law of the ECJ; and
  • as made clear in response to the Commission's company tax Communications of 2001 and 2003,[12] thinks that targeted measures, when brought forward, need to be assessed pragmatically on their merits.

2.16 As for the Communication on cross-border taxation, document (b), the Minister first makes the important, but not unexpected, point that the Government has made clear that tax matters such as those discussed in this document concern issues which remain a national preserve. She then tells us that the Government welcomed the Marks and Spencer judgment by the ECJ, but comments that some of the proposed solutions in this Communication go well beyond the Marks and Spencer case, in particular by proposing that Member States should introduce cross-border loss relief on a quite general basis, noting that this would have revenue implications for the Member State concerned.

2.17 The Minister continues that:

  • the Communication pays little attention to these risks to Member States' tax revenues and from tax avoidance;
  • instead, it focuses on the proposition that the currently limited availability of cross-border loss relief is one of the most significant obstacles to cross-border activity;
  • it cites little evidence in support of this;
  • at first glance, the proposals for redress look complicated giving rise to concerns about practicalities, both technically and administratively as well as about the risks;
  • national tax systems should co-exist on a principle of preserving the effective allocation of the power to tax between Member States;
  • the Marks and Spencer case sets out the governing principles for cross-border loss relief within the EU;
  • the case highlights issues, such as which Member State should be obliged to give relief for cross-border losses in the narrowly defined circumstances in which the ECJ concluded that such relief should be available, in relation to cross-border loss relief that can usefully be discussed by Member States. The Communication does not give sufficient consideration to these issues;
  • the Government is not convinced of the case for action to deal with the issues that the Communication does address, not least given the impact on tax revenues and the practicalities of any suggested solutions to those issues; and
  • it is not convinced of the case for further cross-border loss relief given the impact on tax revenues and the practicalities of the options proposed in the Communication.

The Minister concludes therefore that the Government proposes to work with other Member States to ensure that all the responses to the Marks and Spencer judgment fit effectively together.

2.18 As for the Communication on exit taxation, document (c), the Minister first makes the important, but again not unexpected, point that the Government has made clear that tax matters such as those discussed in this document concern issues which remain a national preserve. She then says that, although the de Lasteyrie and N cases relate to exit taxes on individuals, there might (or might not, depending on future decisions of the ECJ) be a read across to exit taxes on companies. The Government takes the view that its corporate exit charge legislation is compatible with EU law.

2.19 The Minister then tells us that the Government is clear that there is a need for national tax systems to coexist and fit together effectively, both within the EU and beyond, based on the principle of preserving the effective allocation of the power to tax between Member States. This also promotes the objectives of simplification and minimisation of compliance costs to promote UK and EU competitiveness. Against this background, she says, exit taxation is an appropriate area to look at whether there is a need for greater coordination between Member States.

Conclusion

2.20 These documents concern important matters affecting cross-border taxation. We note the Government's commendable response — 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. We think Members would welcome the opportunity to discuss these matters further and therefore recommend the documents for debate in European Standing Committee.





7   (26950) 13175/05: see HC 34-xi (2005-06), para 21 (23 November 2005). Back

8   (26989) 14042/05: see HC 34-xii (2005-06), para 23 (30 November 2005). Back

9   (22808) 13365/01: see HC 152-xiv (2001-02), para 4 (23 January 2002) and HC 152-xxxvii (2001-02), para 21 (17 July 2002), and (25104) 15361/03: see HC 42-iv (2003-04), para 14 (7 January 2004). Back

10   (27425) 8231/06: see HC 34-xxix (2005-06), para 2 (17 May 2006) and HC 34-xxxiii (2005-06), para 17 (28 June 2006). Back

11   (26989) 14042/05: see HC 34-xii (2005-06), para 23 (30 November 2005). Back

12   (22808) 13365/01: see HC 152-xiv (2001-02), para 4 (23 January 2002) and HC 152-xxxvii (2001-02), para 21 (17 July 2002), and (25104) 15361/03: see HC 42-iv (2003-04), para 14 (7 January 2004). Back


 
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