APPENDIX 3
Explanatory Memorandum
"Commission Communication: A Package
to Tackle Harmful Tax Competition"
SUBJECT
MATTER
1. The communication sets out a possible
package of tax proposals which have emerged in response to Strategic
Target 2 of the Commission's communication of 4 June 1997 to the
European Council called "Action Plan for the Single Market"
(CSE (97)1 final). Explanatory Memoranda (9000/97) of 10 and 26
June 1997 on the Action Plan were considered by the House of Commons
Select Committee on European Legislation on 22 July 1997.
2. The package of proposals has not
yet been finalised and is the subject of further discussion in
the Council. The Presidency's intention is to reach political
agreement at ECOFIN on 1 December 1997. A package comprises
three elements:
- a Code of Conduct for business taxation,
in which Member States undertake not to engage in harmful tax
competition, and in parallel a Commission communication on the
application of the state aids rules to fiscal measures that clarifies
and refines its policy;
- an agreement to take action in relation
to the taxation of cross-border interest on savings on
the basis of either a withholding tax or provision of information;
- a proposal to eliminate withholding taxes
on interest and royalty payments between companies.
3. The package originally also included
various indirect tax proposals. The Commission has now said it
plans to pursue these elements separately.
MINISTERIAL
RESPONSIBILITY
4. The Chancellor of the Exchequer
is responsible for policy on taxation.
Legal Basis
5. This is a Communication and has
no legal basis.
6. The Code of Conduct, if agreed,
will be a political agreement which is not legally binding.
7. On taxation of savings, it is intended
that political agreement be reached on the key principles which
would form the basis for new legislative proposals to be drawn
up, under Article 100 of the EC Treaty, at a later date.
8. The agreement sought on interest
and royalties is to work towards early adoption of a Directive,
the legal basis for which would also be Article 100.
EUROPEAN
PARLIAMENT
PROCEDURE
9. Not applicable.
VOTING
PROCEDURE
10. The package will only be adopted
if there is unanimous support.
IMPACT
ON
UK LAW
11. As the Code of Conduct would not
be legally binding, it would have no direct impact on UK law.
However, the Government is clear that it would only agree to the
Code of Conduct if it intended to honour it.
12. In the area of taxation of savings
and interest and royalties, the political agreement would have
no direct impact on UK law but any subsequent Directive would
require implementation in national law.
APPLICATION
TO
THE
EUROPEAN
ECONOMIC
AREA
(EEA)
13. None of these proposals apply to
the EEA.
SUBSIDIARITY
14. Direct taxation is primarily a
matter for Member States at national level.
15. The Code of Conduct is not a piece
of Community legislation and would not be legally binding. It
explicitly states that it fully respects the principle of subsidiarity
and does not affect the respective competences of the Member States
and the Commission.
16. Limited Community action, on the
right terms, on the taxation of savings would be consistent with
the principle of subsidiarity because it would help the UK and
other Member States to tackle cross-border evasion of taxes. Similarly,
Community action on interest and royalties would be justified
because it would eliminate withholding taxes between companies
in different Member States and thereby benefit UK businesses.
POLICY
IMPLICATIONS
17. The Government is pleased that
the draft Code of Conduct recognises the positive effects of
fair tax competition. This means that the UK's rates of corporation
tax could not be questioned under the Code. The Government agrees
that harmful competition creates economic distortions both in
Europe and globally. An EC Code of Conduct would be a useful first
step in tackling the problem.
18. The draft of the Code is still
under discussion. The Government has said that the Code should:
not affect the respective competences
of the Member States and the Commission;
be agreed in parallel with the
Commission's statement on state aids;
be voluntary and without sanctions.
19. The Government has also emphasised
that the peer review process, through which Member States will
meet to discuss tax measures which could be defined as harmful
tax competition under the Code, must e consistent with the voluntary
nature of the Code. The Government has made it clear that there
is no question of its notifying other Member States of new tax
proposals before the Budget statement to its own national parliament.
20. On the taxation of savings,
the proposals are designed to tackle tax evasion by residents
in one Member State investing in another Member State. The proposals
would do this by requiring Member States to take action on tax
evasion. They would have the option either to provide information
or to withhold tax on interest payments. Given this choice, the
UK would take the first option.
21. The Government would welcome efforts
to tackle tax evasion through the exchange of information. This
would enable the right amount of tax to be provided to the right
taxing authority. In contrast, a withholding tax would not get
the right amount of tax and would not go to the country of residence
of the investor.
22. The Government is mindful of the
possible impact of the taxation of savings proposals on the City
of London. It therefore welcomes recognition in the communication
of the need to preserve the competitiveness of European financial
markets.
23. The Government supports the principle
behind eliminating source country taxation on interest and
royalties paid between companies. This is in line with existing
UK bilateral arrangements.
CONSULTATION
24. The Government has been in contact
with representatives of the banking sector about taxation of cross-border
income on savings.
FINANCIAL
IMPLICATIONS
25. Although impossible to quantify,
effective action against unfair tax competition and tax evasion
should have a positive effect on direct tax revenues in the long
term. The financial implications of the interest and royalties
proposals are not like to be significant, given overlap with existing
double taxation agreements.
COMPLIANCE
COST
ASSESSMENT
26. A compliance cost assessment on
the elements of the package is not appropriate at this stage.
Compliance cost assessments will be undertaken on the taxation
of savings and the elimination of interest and royalties between
companies across borders if detailed proposals are put forward.
TIMETABLE
27. The Luxembourg Presidency has invited
the ECOFIN Council to reach a political agreement on this package
on 1 December 1997. The timetable for the Directives on interest
on savings and interest and royalties proposals is as yet uncertain.
Dawn Primarolo MP
Financial Secretary
HM Treasury
17 November 1997
COM(97) 564 Final: Communication from
the Commission to the Council and the European Parliament: A package
to tackle harmful tax competition in the European Union
TOWARDS
TAX
CO-ORDINATION
IN
THE
EUROPEAN
UNION
1. On the basis of the Commission's
Communication of 1 October 1997[6],
the ECOFIN Council held an orientation debate on taxation at its
meeting of 13 October. The Commission was invited to present refined
proposals for a package to combat harmful tax competition as a
basis for a political agreement at the 1 December ECOFIN meeting.
2. The global approach to taxation
policy was launched at the informal ECOFIN meeting in Verona in
April 1996. This approach recognises that co-ordinated action
at the European level is needed in order to reduce distortions
to the Single Market; to prevent significant losses of tax revenue;
and to help tax structures to develop in a more employment-friendly
way, notably by reversing the trend of an increasing tax burden
on labour as compared with more mobile tax bases. This is in line
with the Action Plan for the Single Market[7],
which seeks to remove market distortions, to create a common system
for VAT and to restructure the Community framework for the taxation
of energy products. In Verona, Finance Ministers endorsed this
global approach and asked a High Level Group of their personal
representatives, chaired by the Commission, to take forward the
analysis.
3. The High Level Group met between
June and October 1996, and greatly assisted the Commission in
the preparation of its Communication of 22 October 1996[8].
That Communication underlined the need for a permanent group to
co-ordinate tax policies within the European Union—the Taxation
Policy Group (TPG)—and drew attention to the need for further
work, notably on harmful tax competition. This approach was endorsed
by the Dublin European Council[9].
4. The TPG, which brings together personal
representatives of Finance Ministers under Commission chairmanship,
began its work in March 1997. Within the context of the global
approach and in view of better co-ordination of tax policies within
the Union, the Group has concentrated on developing a package
of measures targeted primarily at tackling the issues of harmful
tax competition. The approach was first debated at the informal
meeting of Finance Ministers in Mondorf-les-Bains on 13 September
and subsequently, on the basis of the Commission's Communication
of 1 October, at the 13 October ECOFIN Council.
5. The adoption and implementation
of a balanced tax package could increase the room for manoeuvre
in rendering taxation systems more conducive to employment. For
this reason, the Commission intends to include this aspect in
its submission to the special European Council on employment on
21-21 November.
A PACKAGE
TO
TACKLE
HARMFUL
TAX
COMPETITION
6. Since Verona, the progress towards
achieving a more co-ordinated approach to taxation policy within
the Union has been considerable. The Commission, recognising the
need to avoid any suggestion that the respective competences should
be disturbed, has sought to co-operate extensively with Member
States in this process. The package outlined below is therefore
proposed solely on the authority of the Commission but has drawn
extensively on this co-operation. Some Member States have made
it clear that they looked for a more ambitious package, but extensive
debate within the Council and the TPG has shown that, at present,
this is not attainable given the initial reluctance of others
to consider any move towards tax co-ordination. Against this background,
the Commission considers that the package now proposed would be
a major step forward towards greater co-ordination and in the
effort to combat harmful tax competition in the Union. Moreover,
the Commission believes that the package offers the real prospect
of agreement between Member States, provided that the spirit of
compromise witnessed over the past eighteen months is maintained.
7. The package offers a better prospect
of agreement than is possible if each policy issue is tackled
separately. Nevertheless, the balancing of a wide range of differing
interests will involve compromise on all sides. However, that
there is a political engagement to make such progress is undeniable.
It was confirmed by the Amsterdam European Council. The Council
is now invited to grasp the present opportunity to make progress
in this area and to signal that it is willing to act decisively
in areas where Community action can reduce the burden of taxation
on labour.
8. The Commission has reviewed the
elements which it put forward on 1 October and proposes a package
with the following three components:
- a Code of Conduct for business
taxation;
- measures to eliminate distortions
to the taxation of capital income;
- measures to eliminate withholding
taxes on cross-border interest and royalty payments between companies.
The Commission invites the Council to give a political
commitment to this package on 1 December, and to keep its implementation
under periodic review thereafter.
9. On the Code of Conduct for business
taxation (for which a draft is attached in Annex 1), the Commission
invites the Member States to commit themselves at a political
level to respect principles of fair competition and to refrain
from tax measures that cause harmful competition. In order to
ensure its effectiveness, it will be implemented through a "follow-up"
mechanism and will be subjected to a review after two years of
operation. Although this text is put forward on its own authority,
the Commission would again like to acknowledge the considerable
debt that it owes to the co-operative efforts of the Member States
in the Council and in successive meetings of the Taxation Policy
Group. The Commission invites the Council to adopt a resolution
incorporating the Code of Conduct.
10. There is a widely-shared desire
on the part of Member States to make significant progress in the
area of the taxation of capital income from savings. Although
there are signs of positive movement in this area, discussions
have revealed that some substantial difficulties which have hampered
progress in the past persist. The Commission fully recognises
the problem that such concerns present. Nevertheless, the Commission
considers that Member States would contribute significantly towards
progress by agreeing certain elements on which a subsequent Commission
proposal for a minimum solution would be based. To this end, the
Commission proposes in Annex 2 to this Communication five elements
on which a Directive might be based. Member States are also invited
to agree to work actively to allow the early adoption of the Commission
proposal based on these elements.
11. On interest and royalty payments
between companies, withholding taxes create difficulties for
economic operators engaged in cross-border business. They can
involve time-consuming formalities, result in cash flow losses,
and sometimes lead to double taxation. As part of the package,
the Commission invites the Member States to make a political commitment
to work towards the early adoption of a directive for which the
Commission will make a new proposal by February 1998.
12. The Commission stresses that the
package put forward above is to be seen in the broader context,
as noted in the Action Plan for the Single Market, and as further
developed by the TPG. It notes, in particular, the support that
exists for making progress within the TPG on many of the indirect
taxation elements identified in its Communication of 1 October,
and recognises in particular that the issue of VAT on cross-border
leasing merits action that is no less urgent than the package.
13. The Commission appreciates the
wish expressed by Member States for a commitment by the Commission
in relation to fiscal state aids to accompany the endorsement
of the package and the Code of Conduct in particular. Member States
will be aware that the Commission has already begun its review
of certain cases and is continuing to reflect on these issues
in order to come forward with an indication of its position following
a discussion in the College on 19 November. This will serve as
a basis for the normal consultations with Member States on guidelines
in this area, which will be conducted in parallel with the implementation
of the package outlined above.
CONCLUSION
14. The Council is requested:
- to endorse the package set out
in this Communication, with a commitment to keep its implementation
under periodic review;
- o adopt the Code of Conduct
for which a draft Council resolution is contained in Annex 1;
- to endorse the elements for
a minimum Community solution on the taxation of income from savings
as outlined in Annex 2;
- to make a political commitment
to work towards early adoption of a Directive on interest and
royalty payments between companies on the basis of a forthcoming
Commission proposal;
- to take note of the Commission's
commitment on fiscal state aids; and
- to give its support to the work
on the other issues mentioned in paragraph 12.
6 "Towards Tax Co-ordination in the European Union",
COM(97) 495. Back
7
CSE(97) 1 of 4 June 1997. Back
8
"Taxation in the European Union, Report on the Development
of Tax Systems", COM(96) 546. Back
9
Presidency Conclusions, SN 401/96. Back
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