Documents considered by the Committee on 12 September 2018 Contents

17Cooperation between EU countries on taxation: Fiscalis 2021–27

Committee’s assessment

Politically important

Committee’s decision

Not cleared from scrutiny; further information requested

Document details

Proposal for a Regulation establishing the ‘Fiscalis’ programme for cooperation in the field of taxation

Legal base

Articles 114 and 179 TFEU; ordinary legislative procedure; QMV

Department

Revenue and Customs

Document Number

(39874), 9932/18 ADDs 1–3, COM(18) 443

Summary and Committee’s conclusions

17.1The EU operates a technical programme for cooperation on tax matters between its Member States, called ‘Fiscalis’, funded from the EU budget. Its purpose is to support the EU’s national tax authorities to enhance the formulation of policy, increase cross-border cooperation and reinforce administrative capacity in the areas of VAT, excise duty and other taxes “in so far as they are relevant for the internal market”. Like the related Customs Programme for customs authorities, it provides support in two ways: training and networking opportunities for tax officials, and improving the Member States’ IT systems that underpin their tax collection capacities (with the majority of financial support available under the Programme going towards the latter).172

17.2The Programme does not impose any substantive requirements on EU countries in terms of their approach to tax, which remains a national competence. In May 2018, as part of its wider package of proposals for the EU’s next long-term budget (the so-called Multiannual Financial Framework or MFF, due to run from 2021 to 2027), the European Commission also published its proposal for the Fiscalis programme during that period. Overall, the next version of Fiscalis would cover only a fraction of EU expenditure over the lifetime of the 2021–2027 MFF: it has a provisional budget of €270 million (£238 million), which represents 0.02 per cent of the proposed €1.134 trillion total EU budget over that seven-year period.173 The funding would be allocated by the Commission each year on the basis of annual Work Programmes, which would need to be approved by a qualified majority of Member States.174

17.3The objectives of Fiscalis would remain largely unchanged from the Programme’s current iteration, but the Commission has proposed a significant change in relation to funding the technical adaptations necessary to allow non-EU countries to use the EU’s centralised IT systems related to taxation, such as the VAT Information Exchange System (VIES) or the Excise Movement & Control System (EMCS). The current Fiscalis Regulation requires that any access to the EU’s electronic systems for tax by a third country requires a formal agreement between the EU and that country to be in place on the basis of Article 218 TFEU.175 This, the Commission argues, slows down the EU’s options to “position itself as a major partner in the implementation of electronic systems with a worldwide impact” and could lead to Member States having to duplicate systems to meet new international requirements. Under the 2021–2027 Programme, funding could therefore be used to finance changes to EU-level IT systems for taxation to allow them to be used by non-EU parties, without the need for a formal agreement to be in place beforehand.176

17.4As with the current Fiscalis programme (of which the UK is automatically a participant by virtue of its EU membership), the 2021–2027 iteration would also provide for non-EU countries to participate. This ‘association’ mechanism is currently geared primarily towards less-economically developed countries in southern and eastern Europe,177 but would also theoretically allow continued UK participation after it ceases to be a Member State. Under the Commission proposal, such participation would require a financial contribution towards the Programme’s expenditure and prohibit the Government from having any “decisional power” within Fiscalis (a provision the Commission is proposing to insert into almost all EU spending programmes under the next MFF, apparently to set legal limits on the level of influence the UK can exert if it participates in specific EU activities as a ‘third country’).178

17.5The Financial Secretary to the Treasury (Mel Stride) submitted an Explanatory Memorandum on the Fiscalis 2021–2027 proposal on 5 July 2018. It reiterates the Government’s support for the objectives of the Programme, which it says has increased “coordination and collaboration” as well as improving exchange of information, but does not indicate whether it is the UK’s intention to seek participation once it is a ‘third country’ outside the European Union.

17.6The Minister’s Memorandum also referred to the Government’s purported use of the UK’s Justice & Home Affairs (JHA) opt-in under Protocol 21 to the EU Treaties in relation to the 2014–2020 Fiscalis Programme. Although the current Programme does not have a Title V (JHA) legal base, the Government argued then that the opt-in applied because its objectives included “the fight against tax fraud, tax evasion, tax avoidance and aggressive tax planning”.179 The use of the opt-in in this way is not generally accepted outside the UK Government (including by Ireland, which has the same opt-in rights). The Minister contended in his Memorandum that “the same approach”—that is to say, purporting to use the opt-in Protocol—“may be appropriate” for the Fiscalis 2021–2027 proposal. We have since been informed by officials that the Government has decided that the UK’s JHA opt-in is not engaged in this case.

UK participation in Fiscalis 2021–27 after Brexit

17.7The Fiscalis Programme is focussed primarily on supporting national tax authorities administering VAT and excise duty systems. As these are two types of tax which directly affect cross-border trade, they are therefore the subject of detailed EU legislation (which Fiscalis helps Member State apply in practice). They are also, by extension, two areas where the UK, having decided to leave the Customs Union and Single Market, will need to engage in negotiations with the EU to ensure a smooth trade in goods after Brexit.

17.8While VAT and excise on goods entering a tax jurisdiction are normally subject to customs checks to ensure either the tax is paid (or a financial guarantee provided until the goods reach their recipient), those checks are—uniquely—absent on intra-EU trade. Instead, the Member States and the European Commission operate the VAT Information Exchange System (VIES) and the Excise Movement & Control System (EMCS). These electronic systems allow national tax authorities to track movements of goods as they are traded between EU Member States, enabling them to check movements in and out of their jurisdiction and enforce tax claims against businesses accordingly. They also require Member States to apply supplementary EU harmonising legislation, for example relating to minimum VAT and duty rates.

17.9The Government has repeatedly articulated its ambition of implementing a post-Brexit system that continues the current situation, where there are no fiscal controls on goods moving between the UK and the EU-27, while still leaving the Customs Union and the Single Market. It did so most recently in its July 2018 White Paper on the future UK-EU relationship, where it suggested, without providing further detail, “common cross-border processes and procedures for VAT and excise, as well as some administrative cooperation and information exchange”. The level of cooperation that continued abolition of VAT and excise controls will require is evident from the efforts the EU Member States, including the UK, have expended since the creation of the Single Market to make their abolition a reality. This required years of negotiations and the creation of elaborate IT systems, underpinned by a common legislative framework overseen by the Commission and the Court of Justice. For the UK to replicate its effects as a ‘third country’ would, at the very least, require the UK to continue to send and receive information on movement of goods submitted by domestic and EU-based businesses on cross-border supplies. Without it, incoming goods could remain untaxed and refunds for input VAT might be paid out on goods that were never actually exported.180

17.10There is no precedent for limited participation by a non-EU country in the EU’s VAT and excise regimes in this way.181 The Committee has repeatedly expressed concern that the Government’s proposals to keep the UK-EU border free of fiscal controls could in practice require the UK to continue applying EU law in those areas, even though the UK will no longer have a veto over any future amendments when it ceases to be a Member State. We have recently asked the Financial Secretary to the Treasury to urgently clarify the detail of the Government’s proposals for ‘common processes and procedures’ on VAT and excise in light of those concerns. However, the potential implications for the UK’s fiscal sovereignty notwithstanding, post-Brexit participation in Fiscalis 2021–2027 might be a useful way of ensuring that alignment of HMRC’s IT systems with their EU counterparts where necessary under a bilateral agreement on cooperation in tax matters is achieved in the most efficient and cost-effective way possible.

Our conclusions

17.11We thank the Minister for his Explanatory Memorandum on the proposal to extend the Fiscals Programme until 2027. The value of the Programme for the UK after Brexit will depend to a large extent on the substance of any new agreement with the EU on taxation, in particular VAT and excise duty which affect trade in goods.

17.12As we have noted in various previous Reports, the Government is highly ambitious in seeking an unprecedented new arrangement which obviates the need for physical fiscal controls on goods moving between the UK and the EU (as is the case now). It would likely require the continued application in the UK of significant parts of the EU’s VAT and Excise Directives. By contrast, the Government has only said it recognises the need for ‘common ….. processes and procedures’, without specifying what those would be. If the UK were to stay part of the EU’s shared systems on taxation, in particular the VAT Information Exchange System and the Excise Movement & Control System, there might be added value in seeking formal participation in the Fiscalis Programme. This would provide a way for HMRC officials to remain engaged with their counterparts from the EU-27, as well as lending support to the UK’s alignment with the relevant IT systems that underpin the EU’s VAT and excise regimes. The Commission proposal to allow Fiscalis funding to be used more flexibly when adapting the EU’s centralised systems and databases for tax matters for use by third countries may be especially relevant for the UK in this context.

17.13As we have noted in our separate Report on the Customs Programme (which has the same function as Fiscalis, except for customs authorities), the most beneficial outcome—if the UK were to remain part of elements of the EU’s VAT and excise systems—is for agreement to be reached on that point well before the end of the post-Brexit transitional period. Otherwise, the UK and EU might both invest public resources in disentangling the UK from those systems, only to have to (partially) reverse that process at a later stage. Formal UK participation in the Fiscalis Programme after 2020 would also require a financial contribution, which—based on the existing mechanisms for ‘third country’ participation in EU programmes—would most likely be relatively small (in the region of €6.2 million or £5.5 million per year).182 However, once the UK is no longer a Member State the Government would have very limited influence over the annual Fiscalis Work Programme.

17.14Given the uncertainty around the UK’s potential participation in Fiscalis 2021–27 after Brexit (with its attendant financial costs and in the context of the broader question about post-Brexit cooperation with the VAT on matters of taxation), and in light of the lack of information from the Government about whether it is exercising the purported ‘opt-in’, we retain the proposal under scrutiny.

Full details of the documents

Proposal for a Regulation establishing the ‘Fiscalis’ programme for cooperation in the field of taxation: (39874), 9932/18 + ADDs 1–3, COM(18) 443.

Previous Committee Reports

None.


172 For example, the 2018 Fiscalis Work Programme contains funding for a programme to make national tax IT systems more interoperable with those of other countries; the development of the TNA tool to detect missing trader VAT fraud on cross-border sales; and creating mobile access to the Excise Movement & Control System.

173 See for more information on the EU’s next Multiannual Financial Framework our Report of 4 July 2018.

174 The Work Programme would take the form of an Implementing Act, which requires the support of a qualified majority of Member States.

175 Article 9(3) of Regulation 2013/1286.

176 With respect to the costs of removing UK access from the EU’s tax systems after it leaves the Single Market and Customs Union, the Commission’s Impact Assessment states that “the implications and costs, however, cannot be precisely estimated and are therefore not covered in this paper as they are still largely unknown at this stage of the ongoing negotiations between the EU and the UK”.

177 Under the 2014–2020 Fiscalis Programme, participating third countries are Turkey, Serbia, Montenegro, Albania, Bosnia & Herzegovina and North Macedonia.

178 See for example our Report on Creative Europe 2021–2027 (27 June 2018).

179 See for more information on the use of the JHA opt-in in relation to Fiscalis 2014–2020 the Government’s Explanatory Memorandum of September 2012.

180 VAT is ultimate payable only in the country of consumption. Therefore, when a business exports a good subject to VAT, it is entitled to a refund of the VAT it has paid on its inputs in the country of export. That requires verification that the goods have actually been exported, to avoid refunds being claimed fraudulently (and potentially repeatedly on the same batch of goods).

181 Monaco, which is a sovereign country, is treated as being part of the territory of France for customs, VAT and excise purposes.

182 The EU’s typical approach to calculate a country’s financial contribution for participation in a programme is to take its GDP as a proportion of the GDP of the EU and that country combined (which in the UK’s case is 16 per cent) and multiply by it the EU budget for the programme in question for any given year. Fiscalis 2021–2027 is due to have an average annual budget of €43 million, which yields a potential UK contribution of €6.17 million.




Published: 18 September 2018