Corporation nTax - Northern Ireland Affairs Committee Contents

Examination of Witnesses (Questions 343-377)

Q343  Chair: Can I welcome our witness to the Committee? Thanks very much for coming today. You're aware of our inquiry; we're looking into the different rates of corporation tax that exist between the Republic of Ireland and the UK, and the impact that has on Northern Ireland. Obviously there are a number of options that as a Committee we're considering, but we did want to talk about the legal aspects of the whole issue, so we're very grateful to you for joining us today. I wonder if I could perhaps start; it might be useful if you'd like to make a very brief opening statement, just to introduce yourself; tell us a little bit about your work, please.

Professor Rosa Greaves: Thank you very much for inviting me to come to the Committee. My name is Rosa Greaves. I'm a Professor of European Commercial Law at the University of Glasgow. Within that broad term, the areas in which I have particular research interests and teaching are competition law, intellectual property law and the internal market—the movement of goods and services within the internal market. I'm also Head of the Law School, at least for the moment.

Q344  Chair: Thank you very much. When we talk about the legal aspects, they're often referred to as the Azores Judgment. Perhaps you could give us your view of why the European Court ruled the way it did in terms of Azores.

Professor Rosa Greaves: To understand the situation, you have a situation where a tax measure in a Member State can be caught by the state aid rules—may be caught. In testing those rules, there are very strict criteria and one of them that always causes problems is geographic selectivity. Over the years, right back from the 1970s onwards, particularly in the case of Germany with the Länder, the court has been consistent, and the Commission consistently has always considered such a tax measure to be a state aid, not that it's incompatible with the rules, but has classified it as a state aid because of that geographic selectivity—that it only applied to a little bit of the state. The state in terms of EU law is always the United Kingdom. Wherever there was a tax that would affect businesses in one section, one geographic part of the country, that would automatically fall into being classified as a state aid, and then there is a very detailed procedure to decide whether it's compatible or incompatible with the rules.

The importance of the Azores case was that, for the first time, the full European Court of Justice—because it was heard by the full court—accepted that you could apply internal national constitutional realities, constitutional rules, to accept that there is now devolution in geographical areas of some of the Member States, but they then also set out three very strict conditions, which I think you're familiar with. The problem is that, even in the Azores case, the Portuguese Government and the Azores did not meet these conditions. It was really a case where, as I keep saying to my students, the gate was opened but we don't know how wide it is. Following that, there has been a confirmation of those criteria, for example in the Gibraltar case. The Gibraltar case, in my view, is at one extreme of the spectrum because there's so much independence of Gibraltar. That decision was taken, i.e. reaffirming the criteria of the Azores case, but in the Lower Court, the General Court not the European Court of Justice itself. There is now an appeal going to the European Court of Justice, and the European Court of Justice will decide on the Gibraltar case. I personally expect it just to confirm what the Lower Court has stated.

For our purposes really, it's to decide whether the geographical area—be it Northern Ireland, Scotland, Wales or wherever it is—meets the conditions of the Azores Judgment. Is it institutionally independent? Is it procedurally autonomous? Is it financially and economically autonomous? The first one I think is very easy; it has shown to be quite easy to show the institutional one, because that basically means that you have your administration quite separate from central government. The difficulty comes with procedural autonomy and also economic and financial autonomy. I don't know whether you want me to elaborate further on those two.

Chair: We'll probably come to a number of the detailed questions as we go through.

Q345  Lady Hermon: Yes, I'm nodding my head enthusiastically. It's very, very nice indeed to see you here this afternoon. I wonder if you would kindly elaborate. I think it's actually very helpful. We've heard other witnesses before us refer to the Azores Judgment. To non­lawyers, it would be very helpful if you spelt out the three conditions, and if you would give us from the benefit of your knowledge and experience, and I mean that most respectfully, whether in fact you think Northern Ireland actually qualifies and does meet the conditions outlined by the ECJ in the Azores Judgment.

Professor Rosa Greaves: I will go through the various conditions. I'm not sure I can answer your last question, because I'm not familiar with the Northern Irish statute and act. Institutional autonomy, what does that mean? That means they must be politically and administratively separate from central government. When it comes to procedural autonomy, let me give you an example of the sorts of arguments that have been raised to say that, for example in the Basque country, they were not procedurally autonomous. There was an argument put, for example, that the fact that the Basque country government had to have a dialogue with the central government in Spain, as to fixing the taxes, would indicate that they did not have procedural autonomy. The European Court of Justice said no, that does not mean that, because you are part of a state, and therefore it would be natural that you would have to take the interests of the whole in your consideration. What procedural independence means is that the final decision is made purely by the regional authority. The regional authority decides whether they are going to carry that decision to reduce the corporation tax.

The more difficult one is the one about the economic and financial autonomy. What we see emerging from the discussions on the other cases, the Basque country cases and also Gibraltar, is what we're looking at to have this economic and financial independence is there must be no possibility of the central government in some manner offsetting or compensating for the loss of the revenue from a lower corporation tax. That's what they're looking at. The court's judgment talks about causal links. The difficulty of course is to establish how that arises. Let me just give you a little example, again in argument. In the Gibraltar case, the argument was being put that, because the British Government still has financial obligations, in terms of defence and other areas, that was already an economic assistance. Again, that was not accepted by the General Court, by the Lower Court. They said that's not true; that financial imposition on the UK Government is in fact part of international law and international obligations to protect Gibraltar. That's why I keep saying the gate is open but we don't know how wide it is. That is a crucial point. In the Portuguese situation, there was a constitutional clause of solidarity. Again the court has said solidarity as a principle in the constitution is fine, but in the Portuguese case was connected to financial compensation to the Azorean Government if they actually got it wrong and they were short of money to deliver the services.

Q346  Lady Hermon: If I were then to explain to you in very basic terms that, if the UK Government decided to give the power to the devolved assembly in Northern Ireland—the power to set corporation tax at whatever level they wanted and they had complete autonomy over that—and if the Northern Ireland Assembly decided to do that, the British Government would in fact reduce by the equivalent amount of loss of corporation tax the block grant to Northern Ireland—it would be reduced by the identical amount or thereabouts—would that satisfy? Would that go through the gate? Would it satisfy condition three?

Professor Rosa Greaves: I can't see why the reduction or reducing the amount—that's exactly the opposite of what I'm talking about. I'm talking about compensation; i.e. in a situation where the region has a rate of corporation tax that is lower than anywhere else. That has financial consequences, because there's less revenue, and the central government does the opposite—it compensates.

Q347  Lady Hermon: It would be additionality. I know that's a technical term in European Union speak. So the position of Northern Ireland losing its block grant to the equivalent amount of corporation tax actually may well be compatible with the Azores Judgment.

Professor Rosa Greaves: I can't say that without having the detail of everything, because there are so many conditions, and do please remember that, even if we get to that stage, you still have the material selectivity; i.e. is what the Northern Irish decide to do, in cutting the tax, an action incompatible with the state aid rules? It will depend very much. For example, let's say that they would reduce the corporation tax only for companies that produce textiles. Then you have selectivity again. The Azores Judgment is very much on geography. There are many other issues as to whether a particular tax measure is a state aid and an incompatible state aid.

Q348  Lady Hermon: If I could just follow up, then I'll allow my colleagues to come in. Would you expect, if in fact the UK Government were to do this for Northern Ireland, is there precedent for other Member States being terribly aggrieved by this and would they challenge it? Would they encourage the Commission to challenge such a decision by the UK Government?

Professor Rosa Greaves: It's interesting to see that in the Gibraltar case Spain supports the condition, but in the Azores case they supported the Portuguese Government. You can argue both.

Q349  Chair: How would they judge the financial compensation though because, as you know, we have a very complicated Barnett Formula?

Professor Rosa Greaves: That's a question that I'm totally incompetent to answer. I can only guide you as to what they will be looking at. From a legal point of view, it's this causal link. The court has said there must be a direct link between the compensation element and the loss. What they're after is for the regional authority to carry the financial risk.

Q350  Naomi Long: On that point, obviously if the UK Government decided to allow the Northern Ireland Assembly to vary the rate of corporation tax, it would still be collected by the UK Government centrally. That would then be redistributed throughout the UK with the rest of taxation, through Barnett. The argument that I think Sylvia was putting forward was that Northern Ireland would get a reduction under the Barnett Formula to allow for the fact that they had a lower level of corporation tax. The question I had really was: is that link direct enough to satisfy the judgment? In your view, do you feel that that would be sufficient to satisfy that we were carrying the risk or would the fact that it comes into a central pot and is then redistributed be seen as some dilution of the causal link?

Professor Rosa Greaves: That's a very interesting question, which I haven't thought about: the collection, who collects it? Logically, it shouldn't matter who collects it because we're looking at market effect. I'm just trying to remember, and I'm not sure I'm absolutely right, but I think in the Basque situation there was something in reverse: that the Basque authority collected money and then paid it to the central government, but that was for services that were offered by the central government to the Basque. I would like to think about that. I'm not confident at all and it would be very unwise to be confident about saying what would be absolutely safe or not. I think there is an element here of we don't have enough concrete cases to be able to be sure what the limits are, and how much is that causal link you are talking about.

Q351  Mel Stride: You used the expression "possible causal link" between changes in taxation and compensation found in Azores, etc. That word "possible", would that mean that the fact that, at its own discretion, the United Kingdom might decide at some future stage to make a transfer to Northern Ireland, because of consequences that followed from the tax reduction, might potentially cause a problem here?

Professor Rosa Greaves: I don't think so. I wasn't thinking of the word "possible" in that sense. I can't think now, but there may be many reasons why a central government may wish to transfer money to a region. Let's say all of a sudden there is a huge increase of immigration to Northern Ireland, by millions and millions, and you want to give more hospitals or something else. Also, there's the burden of proof and who's got the burden of proof here to try to demonstrate that, on this particular occasion, transfer of the money was directly because there had been a reduction, a loss of revenue, from the autonomous region? I'm sorry I've used the word "possible"; I didn't mean the word "possible" with the intention with which you've taken it.

Q352  Oliver Colvile: We were in southern Ireland, in Dublin, before Christmas, and we had a very interesting debate there with a number of the Treasury and the Foreign Office and all of that, in southern Ireland. One of the things that certainly became apparent to me was that southern Ireland has been very successful at putting together clusters and activity taking place to encourage investment of multinationals coming in, in a specific set of clusters. I have suggested, and there are others on this Committee who don't necessarily totally agree with me, that this is something that potentially Northern Ireland might end up doing too. Would you perceive that going down that route of trying to encourage greater growth in places where Northern Ireland has got a strength would be seen to be against the Azores Treaty?

Professor Rosa Greaves: I don't think it's against the Azores Judgment. You also have to remember there are whole schemes to assist investment. State aid is permissible for environment protection, regional aid. There's a whole scheme there to assist the clusters, as you call them. The issue here is not one of whether the Azores Judgment applies; it's whether it should need to be notified to the Commission, and it should be asked to say that for these reasons and under the Treaty they are compatible with the provisions. I have no idea whether southern Ireland's schemes and clusters have been notified to the Commission or whether they are selective.

Q353  Oliver Colvile: We're in a different world now and most certainly have been for the last year or so, and there is not a great deal of public money around. Most certainly the EU hasn't got vast sums of money to put through in the way of Objective 1 funding and all of those kinds of things. One of the reasons why I'm moderately attracted by what's being proposed here is, if you are going to create an environment where you've got low taxation, then that is going to encourage people to invest in their businesses. If you can get the private sector to do it, should you give them a carrot? My personal view is that I think that's probably quite a good idea to do. I'd be interested in your comments on this.

Professor Rosa Greaves: I'm not going to comment on that, because I don't think that that's a legal question. What I would say to you is remember that state aid exists and we have the EU rules because, when you create—in the terms of the Treaty—a state aid in one geographical area of the EU, you may be causing a problem in another geographical area of the EU. From the EU law point of view, the rules are there not to stop development and not to stop aid, but ensure that it doesn't simply shift the problem in the market. From the EU point of view you haven't resolved anything. From a national point of view you have, but not from the EU point of view.

Oliver Colvile: Funnily enough, I'm quite interested in making sure we look after our national interest rather than our European one, but that's another matter.

Professor Rosa Greaves: I don't blame you at all.

Chair: We had enough on that yesterday.

Q354  Mr Benton: Welcome. Can I just go back to something Lady Hermon was asking you before? I apologise in advance if I misinterpreted or misunderstood, but it's not quite clear in my mind when we're talking about the European legal dimension of this. Can I just ask you, if the British Government were so minded to consider a reduction in corporation tax, and then the ECJ were to—and I think this is the right phrase—call that decision in to examine it, would they be doing it purely on the basis that the Government has taken this action with a devolved government or would there be other reasons to call it in? Would it just be initially on the basis of the fact that it's a devolved government? It might sound a trite question but it's not clear in my mind. I think it's important to know why the ECJ would call it in.

I wanted to ask you that as a follow­up, but then I wanted to move on as quickly as I can. Going back to the Azores case, before that judgment was announced, the UK Government felt it appropriate to intervene or to make comment on it. It's quite significant. I would presume it made that request or intervened because somehow, the way things were going, there would be a danger to its own interests. I'm making that assumption. I wanted to ask you, on what grounds do you think, legally, the UK Government would have intervened on that. Could you perhaps explain any raison d'être behind that?

Professor Rosa Greaves: If I take your first question, I think your first question really is about competences. What you've got to remember is that there's very limited competence at EU level on taxation. That's the starting point. Then what we do have though, and sometimes it's difficult to grasp, is that although there is little or limited competence, there are other areas of the Treaty where there is a lot more competence at EU level, which may interfere or may have to be applied to a tax measure. We have to find a way through it. The focus is on what they call "harmful tax competition", and that's where the competition rules come into play, which include the state aid rules. It's not the European Court of Justice; the European Court of Justice comes at the end of a long story. It starts at the beginning and, because this is hugely politically sensitive, the Council of Ministers has together come up with—for example—a code dealing with direct business transactions. That is a non­binding process, where they hope politically they can resolve any tax measures that are being planned by a Member State that they think might be harmful tax competition for the market. Really, when a Member State is going to propose a different taxation for corporations for example, they would normally meet together in Brussels, look at it and get a view from their partners of whether that kind of tax measure is really harmful competition.

  Portugal did that and the Council of Ministers was happy with it. The group was happy with it, because it's not a legal issue; there it's more of a political one. The consequences then after that are that the Commission has an obligation to make sure the rules of the Treaty are applied. Because this so­called aid from Portugal had not been notified to the Commission, the Commission used Treaty powers to investigate it. Then, after a long process testing whether the Portuguese aid within the Azores was actually a state aid according to the rules, they came to a decision that it was and they issued a decision, which is a binding act addressed to the Portuguese Government. In our case, it would be addressed to the UK Government. It's that decision that triggers an appeal. You have two months to appeal. The Portuguese Government would appeal or the UK Government would appeal.

In the Portuguese setup we have the Commission against Portugal, because actually the Commission brought an action against Portugal for failure to notify. At that point, Member States have a right to intervene. Why did the United Kingdom intervene? The United Kingdom intervened because I'm pretty sure they knew that they have a similar constitutional devolution in the regions. In the same way, Spain intervened in Portugal's case as well, because they know they have the Basque countries and the other countries, and so they want to influence the decision of the court.

I did have something on the United Kingdom's arguments. The United Kingdom's argument in the Azores case was that "regard should be made to the degree of autonomy of the regional or local authority before classifying the regional tax rate as a state aid." That I think answers that question as to why the United Kingdom went in.

Q355  Mr Benton: Just on the point of the comparison between the Azorean agreement, am I right in thinking that Azores then would constitute a devolved assembly in the same sense? The comparisons are all there, are they?

Professor Rosa Greaves: The Azores is very similar to Scotland. It has its own parliament, its own ministers, etc. It's only in three areas—I think it's education, defence and some other third area—that the exclusivity is in the hands of the Lisbon Government. It's very similar.

Q356  Chair: It's interesting that you raise Scotland though, because Scotland does have tax­varying powers. It does not use them, but they do have those powers.

Professor Rosa Greaves: It's in income tax. Remember that we're really more focused from the competition point of view on undertakings. That's why the Code and everything else is named "direct business transactions".

Q357  David Simpson: My question is not as complicated as the rest of them, but apart from the Azores, the Basque country and Gibraltar, are you aware of any other country that has had discussions with the Commission in relation to tax powers or whatever?

Professor Rosa Greaves: I'm not 100% sure about tax, but certainly where we had similar things is Germany, with the Länder. The case of the Commission v Italy (1973) actually enabled the European Court of Justice to agree with the Commission that a tax measure could be classified as an aid, because initially one would have said there's very limited competence in taxation, hands off; but the competence on tax has to be separated in your minds from other areas of the Treaty dealing with trade or with competition, which may have an impact on how the tax is formulated.

Q358  David Simpson: Chair, just to supplement: how far did those discussions go with Germany? Have you any more fine detail on it?

Professor Rosa Greaves: With the German case, I really don't know. With the Basque country what has happened is that—this is a different procedure—in the latest Basque case, under a ruling in 2008, there was litigation in Spain itself, because the trade unions were unhappy with some of the tax reductions and brought an action in Spain. One of the pleadings was that the reduction in corporation tax was an illegal state aid, and so the court has a right and an obligation under the Treaty to ask the European Court of Justice to interpret Community law, not Spanish law.

This case came to the European Court of Justice in exactly the same way as the Azores case, but it was a different procedure—not a direct action when you have to say yes/no, but an interpretation, like a court of appeal interpretation of the law. They repeated the Azorean mantra and made it very clear that, in this particular case, where there was a procedural autonomy or an economic and financial autonomy or an institutional autonomy, it was a matter for the trial judge to decide on the facts. When it went back to Spain, it was the Supreme Court of the Basque country that then applied the ruling to the dispute, and they ruled that the Basque country had sufficient institutional, procedural and financial independence. We have an example of where a region was established to have that kind of independence. For me, the problem is that it was decided by a national court. I would love to settle many of these issues that you are raising about what exactly would deny the third condition, the financial and economic one, in particular. It needs a European Court of Justice decision to be final, but that doesn't mean that we can't speculate and can't argue how far the gate is open.

David Simpson: There's really nothing simple about this.

Professor Rosa Greaves: Never. There's nothing simple in the law.

David Simpson: That's very clear.

Q359  Lady Hermon: Would you mind if I just follow up on one point? For the sake of clarity here, am I right in thinking that, if the British Government were to decide that the rate of corporation tax were to be devolved to the Assembly, the procedure is they would have to have that agreed within the Council of Ministers at a political level.

Professor Rosa Greaves: It's not binding, but it would be wise.[1]

Q360  Lady Hermon: Yes, so it would be open to, for example, the Irish Government, our nearest neighbour, which has a very reduced corporation tax, to object, but that would not be binding. Correct, right? If the power was devolved to the Assembly, am I also right in thinking, from what you've just said, that that decision could then be open to challenge in the local courts in Northern Ireland—it is a preliminary ruling procedure—by someone or some group that was most unhappy about the reduced rate of corporation tax?

Professor Rosa Greaves: If within the legal rules they had an interest that gives them locus standi, yes.

Q361  Lady Hermon: It could go to the ECJ through that route.

Professor Rosa Greaves: The national court, the national judge, may wish to have the interpretation and has a right to refer to the European Court of Justice.

Q362  Lady Hermon: Am I right in thinking that you think that it might actually be a safe course of action to have a definitive ruling from the European Court of Justice?

Professor Rosa Greaves: I would think that is yes, but how do you get it—you can't go to the court and ask about an imaginary case. The court will not hear it. This is one of the problems with European law: that the European Court of Justice is so dependent on which cases are actually referred to it, and that's why sometimes we have to wait 20 years to have a principle.

Q363  Lady Hermon: So there is a realistic possibility that someone who was negatively affected by the reduction in corporation tax, who didn't benefit, would have sufficient interest to go to the local high court in Belfast and challenge this.

Professor Rosa Greaves: I think if they have locus standi, this is what happened in the Basque country.

Lady Hermon: Thank you. That's really interesting; that's very helpful. For all of those Members of the Assembly who may take on board this decision, it's always wise to know that you may be generating a legal challenge down the line.

Professor Rosa Greaves: You have to demonstrate locus standi first, and it's not that easy.

Q364  Gavin Williamson: You very briefly touched on how tax revenues were raised in the Basque country. I'm not expecting you to be an expert in this, but I wonder if you could explain a little bit further as to how it is raised. It sounds as if it's the total reverse of the Barnett Formula. Are there any similarities between Barnett, Spain and the Basque country?

Professor Rosa Greaves: I'm really very much out of my depth here. The Barnett Formula, I think I understand it.

Chair: None of us do.

Professor Rosa Greaves: Please correct me if I've got it wrong. My understanding of the Barnett Formula is that whatever the UK Government spends, a certain amount goes to Northern Ireland, a certain amount goes to Scotland.

Chair: That's the best explanation I've had in the seven months I've been here.

Professor Rosa Greaves: It's totally irrelevant to population and anything else.

Ian Paisley: It's weighted.

Chair: It is weighted; there are certain adjustments made to it.

Professor Rosa Greaves: Now, the Basque country is really quite difficult because they have many different levels of agreements. First of all, they have their historical baggage with it, they have a particular economic agreement, and they also have a particular "federal system" in Spain under the 1978 Spanish constitution. What I have gathered so far is that there seems to be almost a transfer of money both ways, because there are certain services that are central services, which the Basque authority reimburses as central, but there are also some other things. You talked about the collection of taxes. General taxation, like the collection perhaps of customs duties or something like that, can be done by the Basque country in their geographical area and then transferred up to the central administration. I really wouldn't like what I've just said to be taken as gospel, because I don't know enough about the Basque structures.

Q365  Gavin Williamson: This is probably a little bit of an unfair question, but do you think, because of the fact that that's the way it's structured, it's an argument that the Basque region is more autonomous than, let's say, Northern Ireland? Therefore, there's a stronger legal argument to say they can have their—

Professor Rosa Greaves: It may be that what you're saying is true, but I don't think it has any relevance to the tests, because of the way it's done. What is important is that we've got the tests. Now everybody has a different situation and they ask, "Is my situation within this test? Can I justify it?" That's the stage I think we are at.

Q366  Mr Hepburn: Just one very quick question to follow up an answer you gave to Sylvia: let's suppose that the British Government has, in its terms, decided that it has met the conditions of Azores, has gone to the Council of Ministers and has had this informal stamp of approval, etc. As we've established, it is still open to legal challenge. What consequences might follow a successful legal challenge? If we assume that this had been running for six months, a year or so, what range of outcomes might be possible?

Professor Rosa Greaves: In theory, the Commission, if convinced, would start initiating an investigation, because this state aid has not been notified. If they think it's a state aid, they would go through all of that. They would decide it has not been notified as a state aid, and they probably would issue a decision stating that the UK Government is in breach of its Treaty obligations. It wouldn't be the Northern Irish Government or the Scottish Government; it's always the UK Government. It would be in breach of its Treaty obligations, and the consequence normally in every single case—there's nothing special about the tax measure—is that you have to pay back the money.

Normally what happens is that the state gives money out in state aids. What is very strange about the tax measure is that a government refrains from receiving money. There would have to be some sort of—I'm trying to decide what they would do. They would be looking at whether there is any element there that needs to be paid out or paid in, compensated, for whatever benefit has accrued. I'm thinking on my feet now, but there's no way, I would have thought, that you could ever impose an obligation on a government to go and collect tax. Basically you would have to stop it. The obligation on the United Kingdom would be to adopt the necessary legal measures to stop that reduction in tax.

Q367  Mel Stride: If they were to quantify the effective compensation that had been involved hitherto, your suggestion is that it would be very tricky to reclaim that.

Professor Rosa Greaves: I think it would be very tricky. It's my personal view. I haven't come across a case where that has happened. In the normal way, and the way it should be, is that the state notifies first. If there's an advice you want, you notify because, by notifying, you are protecting yourself, and you are able to debate and argue through the process of the investigation.

Q368  Oliver Colvile: What do you think the UK Government should have to do to ensure devolving power to Northern Ireland is not classified as a state aid?

Professor Rosa Greaves: The general comment I would make, which won't help you, is to just say exactly what we've been discussing; i.e. it's to make sure that the Northern Irish Government is institutionally autonomous and procedurally autonomous, and that it carries the risk of that financial loss on reducing the taxation, because we're talking about reducing taxation. Why I say it doesn't help you is because there are so many "ifs" when you have a scheme where there is a block transfer or a transfer of money from a central government to the regions. You then have to examine in detail whether the formula or whatever happens is totally objective and not linked in any way—that nobody can put up an argument that it's actually linked to the loss. I would test that—if I were a government, I would probably send that to the Commission to ask, "Does this meet the Azores test and the Gibraltar test?"

Q369  Dr McDonnell: Two very quick questions: we will lose the power in Northern Ireland to offer state aid in the form of grants in foreign direct investment in two to three years' time. Since we're generally agreed here that a corporation tax reduction would be regarded as state aid, what do you think of our chances of getting that through the Commission, taking all things into consideration?

Professor Rosa Greaves: I'm not very familiar at the moment with the current programmes that the Commission operates under state aid rules. What I can tell you is that there are a number of programmes like regional aid. There are programmes very much focused on aids that improve the environment, in the sense of reduction of pollution and all those sorts of areas.

Dr McDonnell: We're familiar with those, yes.

Professor Rosa Greaves: There's that kind of range and then it's trying to see whether whatever the project is can be fitted into that programme and getting the clearance from the Commission on that.

Q370  Dr McDonnell: We'd like to think our recent difficult history could be used in some of those contexts to perhaps lever or persuade—

Professor Rosa Greaves: I don't even know at the moment what the map is, but I know that there is a regional map of the whole of the European Union, where certain areas are specified and identified as requiring more assistance. There is another programme, for example, for peripheral places that are so far away that they need extra assistance.

Dr McDonnell: Northern Ireland qualifies there.

Ian Paisley: It used to be an Objective 1 region, but it was taken out.

Dr McDonnell: And is there not part of the west of the Bann that qualifies at all?

Ian Paisley: It lost that status in 2001, I think.

Professor Rosa Greaves: Some state aids do meet because, in the Treaty article that prohibits the aids, there's also a section allowing for aids to be operated for a short time. You don't want to carry on for ever and ever. For example ferries are often state­aided in their services, because you want them from islands where small populations live. Unless you help them, they wouldn't run the service commercially.

Q371  Dr McDonnell: If we were to be successful and receive these powers, do you feel it will be possible to focus them on some business sectors and not on others? In other words, do you think it would be possible to focus on foreign direct investment but not, for instance, on the existing banks and utilities?

Professor Rosa Greaves: What you have to be very careful on with the state aid issue is that it's both geographic and material selectivity. If you bring a measure of any sort that favours particular undertakings or particular industries, you are going into selectivity and then you've got problems, because what you're doing is precisely what state aid rules are trying to stop, which is to assist one particular group in a geographical area of the whole EU, which may have repercussions in another area of the EU. I don't know whether you would have a chance or not, but I do know that the correct way to avoid legal difficulties later is to notify that kind of project and put the arguments forward.

Dr McDonnell: Negotiate your way forward.

Professor Rosa Greaves: Put the arguments forward according to the law, according to not only the Treaty but the secondary legislation that's been adopted and get the Commission to do it. This will have to be done through the UK Government, because it's still the UK Government that is the Member State that the Commission recognises.

Chair: We're running quite short on time now.

Q372  Lady Hermon: Thank you very much indeed. I have to keep this short. In its evidence to the Committee, the European Commission made reference to the fact that there is a code of conduct on business taxation. I'm quoting what they said so I'm sorry to take up this little bit of time. "Any proposal to reduce the general corporate tax rate of a Member State for a region like Northern Ireland, probably linked with specific conditions or requirements, needs to satisfy the delegations of the other Member States when they apply the Code principles." Would you just kindly explain to the Committee if this is binding? How binding is this Code of Conduct and what would be the ramifications if, in fact, we didn't meet all of the requirements within that Code?

Professor Rosa Greaves: This is a Commission notice. The word itself, "notice", the modern version of the word "notice" nowadays is called "guidelines"—i.e. it's not binding. At the end of the day though, if politically that is how they operate, then the law doesn't come into it. Interestingly enough, if it does come into it, it's in a strange way, because the Code is also not binding, and they politically have agreed that the Azores tax measure was fine; it was not harmful tax competition. Yet because the Commission took a different view and it went to the Court, the Court's interpretation of the rules is binding.

Q373  Lady Hermon: Off the top of your head could you recall whether in fact the ECJ actually made reference to the Code of Conduct? Did they pay attention to it in their judgment? Sorry, I'm putting you on the spot.

Professor Rosa Greaves: In all these things, the Court will not say, "I'm not going to hear it. It's not evidence." They will, but I don't think it will deter them from knowing their responsibilities to interpret the law, the Treaty and the secondary legislation. In state aid, for example, there is secondary legislation like helping the shipping industry, for example, for many years. That is actually a regulation. Now the Court will apply, unless you challenge that it didn't have any competence in adopting it. That will be absolutely. Sometimes you find that in the text of the judgment the Court will refer—another example not relevant here is a charter on human rights and things like that—they will mention it, but it doesn't come into the reasoning.

Q374  Lady Hermon: If you were to offer advice to the UK Government in terms of the procedure to be undertaken if they decided to devolve, and if in fact the Assembly wanted the powers—that's the point, if the Northern Assembly wanted the powers to vary the corporation tax—what is the proper procedure for the UK Government to avoid legal challenge down the line?

Professor Rosa Greaves: The devolution issue is not a matter for European law. It is the second stage, when the Northern Irish Assembly comes out and says, "This is what we want to do," my advice would be that that should be notified to the Commission.

Q375  Lady Hermon: By the First and Deputy First Ministers within the Assembly?

Professor Rosa Greaves: No, by the United Kingdom Government.

Lady Hermon: That's very, very interesting.

Professor Rosa Greaves: That's my opinion.

Q376  Chair: Very interesting, thank you. Just to finish off; we're out of time for the session. In general terms though, just looking at article 87 of the Treaty, Northern Ireland certainly on two counts where there's underdevelopment and secondly where, to use their words, there's been a "serious disturbance"—Northern Ireland obviously has gone through problems that few other countries in Europe have gone through—plus there is a geographical remoteness; is it a special case?

Professor Rosa Greaves: Is it a special case? I'm not so sure about the special case, but I think behind those articles, those exemptions or exceptions, there is already a lot of experience at EU level. There are a lot of cases that have gone through and been accepted; others that haven't. I would have to look at all of that on a specific measure, which you have already decided. It's got to be fixed. I don't think hypothetically it helps us to go any further, and then we go back through all the countries that have been helped and see what have been the criteria, the arguments and what has been taken into consideration. That is how, if I was a government, I would have formulated my application to the Commission to explain why I'm relying on those provisions.

Chair: Based on the precedents basically.

Professor Rosa Greaves: Yes, I would base it on the Treaty, which is the higher norm. It does allow those derogations. I have to demonstrate why Northern Ireland fits into one of them, and then I would use the ammunition of whatever has happened in the past to back up my case, but I'm not in a position to tell you right now.

Q377  Chair: We understand it's a very, very difficult, complicated area of law.

Professor Rosa Greaves: It is and it's evolving.

Chair: You've explained it, as far as it is explainable, very well indeed, so thank you very much indeed.

Professor Rosa Greaves: Thank you very much.

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