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
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| Legal base | — |
| Documents originated | 19 December 2006
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| Deposited in Parliament | 4 January 2007
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| Department | HM Treasury |
| Basis of consideration | Three EMs of 16 January 2007
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| Previous Committee Report | None
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| To be discussed in Council | 27 March 2007
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| Committee's assessment | Politically important
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| Committee's decision | For debate in European Standing Committee
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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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