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Baroness Hayman: My Lords, I shall respond to the noble Viscount by saying what a sadness it will be for all of us not to have him participating in debates. His contributions to debates on the Bill have ranged from the emollient to the sharp, but they have always been constructive, as has been his contribution in the House generally. We shall all miss him as a contributor.

I should not like to destroy the consensus of opinion in the contributions just made. Our debates have been positive and from those who have sought to improve the Bill we have seen a balance of tenacity and flexibility. I much prefer to conduct business in such a pleasant atmosphere when we get results. It is an important piece of legislation, but it is better for its passage through this House.

I thank not only those noble Lords who have contributed to and enlivened the debates in your Lordships' House and in Grand Committee, but the officials who have worked on the Bill. They have been most helpful to me and, as has been stated, to everyone throughout the House. That has appeared in the quality of the scrutiny and so my final thanks go to them.

On Question, Bill passed, and returned to the Commons with amendments.

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Taxes in the EU: ECC Report

5.25 p.m.

Lord Grenfell rose to move, That this House take note of the Report of the European Communities Committee on Taxes in the EU: can co-ordination and competition co-exist? (15th Report, HL Paper 92).

The noble Lord said: My Lords, in rising to move the Motion standing in my name, perhaps I may say how delighted I am that my noble friend Lord Lea of Crondall has chosen this debate in which to make his maiden speech. We very much look forward to hearing it.

With the leave of the House, I begin by paying some well earned tributes. I want to thank, first and very warmly, my fellow members of Sub-Committee A whose names are listed in Appendix 1 of the report before the House. They worked very hard from mid-March to early July of this year in order to produce what the Paymaster General has been generous enough to describe in the Government's official response as:

    "one of the most comprehensive examinations of taxation in the EU so far undertaken".

I thank her for that recognition of our efforts. If your Lordships agree that we have dealt with the important and complex subject in a clear and instructive way, much of the credit must go to our clerk, Dr Elizabeth Hopkins, who worked tirelessly to draw together into readable and persuasive drafts the mass of testimony gathered from witnesses and the fruits of our own extensive deliberations. She did a truly splendid job. I am also very grateful to Professor Stephen Smith, our specialist adviser, who drew on his considerable knowledge of the issues to point us in the right direction and to keep us on track during the long weeks of our work.

Let me say a word about the genesis of the report. In the summer of 1997, the committee conducted an inquiry into tax and competition policy in the single market, based on a recent Commission communication on harmful tax competition and an action plan for the Single Market. That inquiry yielded some valuable evidence from witnesses, but was shortly thereafter overtaken by events when the Commission produced a number of specific proposals in the field of taxation.

By early 1999, there was a widespread concern, much fuelled by certain sections of the media, that the European Union was planning some sort of a tax takeover. The committee decided that this called for a major new inquiry into both the formal proposals already on the table for co-ordination of direct and indirect taxes and some broader informal ideas which had been floated for the future. Sub-Committee A began its work in March this year.

We took evidence from a wide range of interested parties, including the European Commission in the person of Mario Monti, major business organisations such as the CBI and the Institute of Directors, the Bank of England, the private banking community, the

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financial markets, the City of London, the Treasuries of France, Germany and Ireland as well as our own in the persons of the Paymaster General and senior Treasury and Inland Revenue officials, and from individual experts from academia and the legal profession. We really covered the field.

The resulting report, which is prefaced with a summary of the committee's opinion, considers first some of the fundamental underlying questions on EU taxation. It then looks at the detailed proposals which have now been brought forward by the Commission, and next considers the ideas for further tax co-ordination which have been floated within the European Union, but which are not yet the subject of firm proposals. This is followed by our concluding comments.

I confess that I am somewhat disappointed that Her Majesty's Government, in their response to the report, decline to comment on our quite lengthy discussion in Part 5 of these informal ideas for further tax co-ordination in the future, but I must assume that that is because they have either not yet formulated views on them, or that they have but prefer at this juncture to keep them to themselves since the ideas are not yet formal proposals. But we hope that the Government will in due course consider seriously the points we have made in the report.

Some of your Lordships may find it surprising that this report is unanimous. I assure your Lordships that there was no dodging of divisive issues. In a few areas members expressed differing views, which are given due place in the text. We were nonetheless able to reach agreement on the recording of the committee's opinion and conclusions, as there was a strong shared interest in shedding light on the often complex issues and the arguments surrounding them, and a strong collective will to demythologise the whole question of EU taxation, which those with a less objective agenda had sought to invest with truly nightmarish characteristics.

As we recorded in our concluding comments at paragraph 249, we were persuaded that,

    "recent scare headlines about a European Union tax takeover were unjustified, and ill served a British public insufficiently informed of the facts to judge the validity of the reporting".

The three principal conclusions that we reached are set out in paragraph 49 and repeated in paragraph 250. They are summed up in a final single sentence:

    "Within these parameters we believe that pragmatic tax co-ordination and fair competition can not only co-exist but complement each other, to the greater benefit of taxpayers within the European Union".

We found it rather disappointing that the Government, in their written response to us, confined their comments on paragraph 49 to a mere 85 words. I feel somehow that we have not been engaged in as profound an exchange of views on our conclusions as we should have wished. We note at the outset of the report that there are of course many more pressing issues facing the EU at this time, such as enlargement

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and the reform of its institutions. Nevertheless, EU taxation proposals are still a major issue and will become more so in the years ahead.

It is not easy to summarise our findings in a short speech, but I shall do my best. The first and crucial point is that it is no longer practicable for the member states of the European Union to establish some elements of their tax regimes in isolation without recognising their interdependence with other member states. To accept this is to accept an approach which we believe is more accurately termed "co-ordination" than "harmonisation". Since tax co-ordination does not by definition exclude tax competition, we were faced with the question: when is tax competition fair, and when is it harmful? Most of our witnesses found "harmful tax competition" quite difficult to define precisely, but on the evidence we concluded that while tax competition can be healthy, there were measures that were preferential or discriminatory, which we termed "predatory tax measures", which were plainly harmful. That question is discussed at some length in paragraphs 57 to 61.

We further wondered whether progress in the single market for financial services would call for more tax co-ordination, and we concluded in paragraph 73 that, while it would tend to lead towards some convergence of tax rates, there could also be pressures to introduce selective tax inducements, which might call for some positive co-ordination between member states. In paragraphs 78 to 83, we asked the same question about EMU and came up with two views. One was that monetary union increased the pressure for tax co-ordination, since monetary and tax policies can be properly managed only if both are under the same political control.

The other view, which seemed to be rather more broadly held, was that the Eurozone made it more, rather than less necessary for individual states to be able to adjust their own tax rates, since they could no longer manage their economies through monetary adjustments.

We looked at the interesting question of whether, in an era of increasing globalisation and electronic commerce, tax co-ordination limited to the EU member states made any sense at all. We concluded, after exchanges with Commissioner Monti, the CBI, the OECD and others, that co-ordination measures could be genuinely effective only if they applied in third countries as well as in the EU member states. But we could not see what incentive there was for third countries to fall in line quickly with EU measures against harmful tax competition.

We insist, however, that that should not be used as an excuse for doing nothing within the EU in the meantime. With others playing by different rules, we have to watch very carefully the effect on the EU's competitive position on the global playing field.

Commissioner Monti was adamant that one of the fundamental principles of tax co-ordination was that it must not lead to higher taxes. The German Treasury witness and the OECD, among others, shared with the

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commissioner the view that, to the extent that co-ordination implied a broader tax base through the elimination of tax breaks, it would lead to reduced tax rates. Others, like the CBI, were not so sure, and Graham Mather of the European Policy Forum was convinced that harmonisation, as he put it, would remove the competitive stimulus, leaving governments with a free hand to raise taxes.

As we saw it, much would depend on the effect of the actual measures adopted on tax rates and bases. We found reasonable Commissioner Monti's argument that the elimination of tax breaks opened the way to lower tax rates. But, as we record in paragraph 92, the stronger argument was for us that as long as tax rate decisions remained with the member states, as they should, the wish of politicians to be re-elected would act as a mighty restraint. Only if tax decisions were handed over to a supranational body unaccountable to electorates would there be a real danger of unchecked upward alignments.

We then considered the view of the Commission that increasing taxes on capital income could help to reduce unemployment. The theory is that harmful tax competition has been steadily reducing the tax burden on capital, and that in order to generate the required amount of revenue, member states have had to raise tax levels elsewhere, in particular on labour, thus causing unemployment levels to rise. We heard many witnesses on that subject, and we came to share the view of, among others, the Treasury, the Corporation of London, and the Bank of England, that there was insufficient firm evidence to support a causal connection between an increase in taxes on capital income and a fall in unemployment. Indeed, when the German Government blame their high rate of unemployment on high labour taxes, we suspect that the real causes might rather be restrictive labour legislation and lack of labour market flexibility.

The last of the fundamental issues on EU taxes which we tackled was whether tax changes could be imposed on the United Kingdom. Of course, with tax bases as highly mobile as they are today, the concept of national sovereignty in tax matters feels pressure from the markets, and governments may be unable to set tax rates, particularly on the income from savings, that differ much from rates ruling elsewhere. In practice, that is a reduction in fiscal sovereignty, but we suggest that international co-ordination may be the way for EU states to regain collectively some of that fiscal sovereignty surrendered as a result of market integration.

Although some of our witnesses saw the unanimity principle leading to unwieldy compromises giving undue weight to purely national concerns, we saw, as recorded in paragraph 114, no case for a departure from it unless openly and explicitly made through a treaty change which would itself require unanimous approval. That could arise at the next inter-governmental conference, and we assume that the Government will stick to unanimity for major issues. But--and it is a big but--as the EU enlarges, we see it

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as neither necessary nor practical to apply unanimity to all minor administrative measures merely because they relate to taxes.

Our report then turns, in Part 4, to the package of direct taxation proposals currently on the table on harmful tax competition, which received political approval at ECOFIN on December 1st 1997. We examined each of the package's three elements in turn. The first is the code of conduct on business taxation concerning those measures which affect, or may affect, in a significant way, the location of business activity in the European Union. Measures are regarded as "potentially harmful" if they provide for a significantly lower effective level of taxation than that which generally applies in the member state in question.

Under the code, member states commit themselves not to introduce such potentially harmful measures and to eliminate them quickly where they exist. The code of conduct group, which is chaired by our own Paymaster General, Dawn Primarolo, is charged with selecting and reviewing the tax measures under assessment and forwarding its findings to ECOFIN, which may or may not publish them.

We have a number of concerns about the code of conduct and about the proceedings of the group. However often the Government repeat that the code of conduct is not legally binding, it seems to us that agreeing to it has created at least a moral obligation to roll back tax measures ultimately deemed harmful, and not to introduce any similar new ones. That could oblige us, in practice if not in law, to adopt tax measures damaging to our legitimate interests. That would matter less if all other member states took the same view as to how binding the code was, but, although they have all signed up to it, we doubt that that is the case. So, can such a code work, and work equitably in such a diverse union of states?

We believe that Parliament deserves a clearer explanation of how the system is supposed to work than it has so far received. Perhaps the Minister will give us an assurance on that point this evening. Furthermore, we are unhappy that we simply do not know how the code of conduct group goes about its business. We cannot directly blame the group's chair, Dawn Primarolo, for the serious lack of transparency imposed by ECOFIN, but the Government must bear shared responsibility for that. No wonder that the code of conduct is left open to charges of being some kind of obnoxious Star Chamber inflicting secret taxation when that is not in reality the case. It is difficult to change the rules of a game already in progress. But if this perceived stigma is to be lifted, the Government must urge other member states to agree to publish the group's reports to ECOFIN and make them subject to parliamentary scrutiny in the normal way.

The second item in the direct tax package is the draft directive on the taxation of interest and royalty payments between associated companies of different member states. It does not solve the problems of large multinational corporations operating in a number of member states. However, it is a step in the right

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direction and we believe that the Government are right not to stand on the letter of subsidiarity when Britain's business interests can be furthered by it, as the Government readily acknowledge.

It is the third and last element of the package--the so-called withholding tax proposal for a minimum effective taxation of savings income within the Community--which, not surprisingly, caused us the most difficulty. In view of the strength of the opposition to the proposal, we looked very carefully at why it had caused so much controversy, taking extensive written and oral evidence from City representatives and others.

The new draft directive, which relates only to the taxation of interest paid in one member state to individuals who are resident in another, was clearly introduced as a measure to combat tax evasion. It was not a new tax, insisted Commissioner Monti; it was simply a mechanism to ensure that a tax which in principle has to be paid will be paid in practice.

We agree that payments of this kind, which are not reported to tax authorities, obviously offer scope for tax avoidance or evasion. When this happens between EU member states, it affects the pattern of capital flows, not to mention the fact that it puts a higher tax burden on those who are unable or unwilling to place their savings abroad.

However, the withholding tax proposed is perceived as posing particular problems for the Eurobond market. Maybe as few as 10 per cent of such bonds are held by individuals who would be liable to the tax. But because of "grossing up" technicalities, described in paragraph 170 of our report, the imposition of the tax could result in some investors suffering capital losses. More seriously, it is claimed that the introduction of the tax in its present form would be likely to give a major incentive to the Eurobond market to move out of the European Union so that investors could continue to receive interest payments gross. As the City of London is recognised as the main Eurobond market and a major source of income for the UK, both City and Government would be expected to object, and indeed they have.

The directive proposes a so-called "co-existence model" whereby member states can choose either to impose a 20 per cent withholding tax at source or provide the member state, where the recipient is resident for tax purposes, with enough information to ensure that the payments are duly taxed in that state. We doubt that that co-existence model can work well, with some countries choosing the tax option and others the reporting option, as long as the practice of banking secrecy is maintained in some EU countries, thus forcing the withholding option on states which may prefer the reporting option. We agree with the Government that a properly adjusted reporting option on an EU-wide basis would provide the better solution. But that, of course, depends on an agreement to abandon banking secrecy, not only in EU countries but also in important third countries. That may well prove an insurmountable hurdle.

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We looked at possible compromises. The case for exempting Eurobonds altogether was championed by City witnesses, as we would have expected, as a second best to what we call the "nuclear option" of vetoing the entire directive. A less radical option was the short-term exemption of Eurobonds; in other words, "grandfathering"--allowing interest on existing bonds to continue to be paid gross. Grandfathering had a certain appeal for us, but even that would not solve the perceived longer-term problems of business moving outside the EU.

The problem for your Lordships' committee was that, despite claims and counterclaims, we were left with no firm evidence about the likely effect of a withholding tax on the City of London. The Corporation of London told us that if the whole bond market moved out of the EU to, say, the US or Switzerland, the loss could be of the order of 3 trillion dollars in capital and more than 100,000 jobs. Deutsche Bank told us that it doubted that the impact would be as significant as claimed. They referred us to a study by the Centre for European Policy Studies which states bluntly that there is no basis for the assumption that the London market would be severely damaged. Of course, we accept that there would be damage as a result of any outflow of business, but such figures as were presented to us were insufficiently substantiated and too disparate to be convincing. Thus we could not reach a conclusion on the likely scale of the effect. We hoped that the long-awaited paper which the Government were producing in conjunction with the City would shed further light on the matter while our inquiry was in progress. However, to our frustration, the report was much overdue and did not appear until September.

That paper proposes--and I am sure that the Minister will expand on this--two possible approaches, the details of which I shall not go into now because of the shortage of time. The question is: what are the chances now of an agreement being reached by the deadline of Helsinki's December summit? Precious few, I should guess. Grandfathering seems to have support, but it would seem that the rest of the package has had a decidedly mixed reception, and there was little progress towards agreement at the informal ECOFIN meeting held on 29th October. Therefore, we are far from the end of the story of the withholding tax directive. I can only wish the Government well at the next ECOFIN meeting.

Lastly, I say a brief word on proposals on indirect taxation currently on the table. In 1996 the Commission announced that it would bring forward plans for a new and simplified VAT system. However, no radical proposals have so far been made. Some minor ones on the rates and scope of VAT and on administrative simplification have appeared. We examine those in our report in paragraphs 202 to 212. We have no objections to proposals for tidying up VAT arrangements provided that there are no significant new burdens. Nor would we be concerned if proposals relating purely to the administration of

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VAT were adopted by qualified majority voting or provided for subsequent decisions to be taken by that system.

As I mentioned at the outset, we are disappointed that, in their written response, the Government declined to comment on our quite extensive review of ideas for the long term, mooted in the Commission and elsewhere, in particular on corporate taxation. In view of the increasing integration of business within the EU and increasing globalisation, there are attractions for both companies and tax authorities in the idea of some kind of a co-ordinated framework for corporate taxation. Several witnesses told us how the current diversity of corporate tax systems is an obstacle to cross-border integration, and that the cost to business of complying with 15 different tax regimes was escalating. The Commission has been asked to bring forward a mandate for a study on this issue. I hope that the Government will play a constructive role in the discussions. Failing a comprehensive solution, we see a case for considering an optional single European corporation tax along the lines suggested by the CBI.

I commend this report to your Lordships' House. The committee and the Government do not see eye to eye on a number of matters. But that is evidence that we have raised some real issues. On the whole, there is much more in the report on which we do agree. Therefore, I hope that this report will be an encouragement to Her Majesty's Government to pursue European tax issues with vigour and imagination in the European Council and ECOFIN.

Personally, my fondest hope is that the committee's efforts have gone some way to demystifying and demythologising the issue of European Union taxation proposals. If we all want Britain to play a competitive role in a globally competitive European Union, as we surely do, we must encourage a pragmatic, not dogmatic, approach to European tax issues. We believe that this report supports and justifies that approach. I beg to move.

Moved, That this House take note of the Report of the European Communities Committee on Taxes in the EU: can co-ordination and competition co-exist? (15th Report, HL Paper 92).--(Lord Grenfell.)

5.47 p.m.

Lord Saatchi: My Lords, we welcome this report, not only because of the importance and topicality of its subject matter, but also because the noble Lord, Lord Grenfell, and his whole committee have earned the gratitude of the House for producing such an illuminating and informative document.

I hope that I do not exaggerate, nor in any way embarrass, when I say that, on these Benches, the noble Lord is held in admiration and affection. Indeed, I should like to place on record our very great regret that, at the end of this Session at the insistence of the Government, his talent and expertise will no longer be available to your Lordships' House.

There are three vexed issues upon which the report concentrates. They are, first, the slender nuances between harmonisation and co-ordination; secondly,

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the work of the code of conduct group on business taxation; and, thirdly, as the noble Lord has just said, the on-going saga of the withholding tax, which the Government refrain from vetoing.

First, none of us should be misled into assuming that the distinction between co-ordination and harmonisation is merely a matter of semantics. The report rightly states that the term "co-ordination" implies,

    "fewer connotations of compulsion and imposition from above",


    "leaves more room for variations as between member states".

In all logic that must mean that co-ordination includes some elements of compulsion and imposition but that those elements are less visible than they would be if the process were called "harmonisation". If any of your Lordships doubt this analysis, they need look no further than the furore which erupted following the former German Finance Minister's pronouncements on tax harmonisation. As he expressed so bluntly:

    "It is necessary to harmonise tax policy. The unified currency area needs a fair and equal tax framework".

That is the perspective from which to view the German Government's position, as quoted in the report.

Germany's government say:

    "Direct taxes should be co-ordinated, but in no circumstances harmonised".

They say they want,

    "to concentrate on how best to avoid ruinous tax competition in the field of business taxation",

yet they are quick to assert that there is no proposal for a uniform European corporate tax system.

The German Government explain that a,

    "totally different social security system in Germany ... makes a need for a higher tax burden".

It emerges that the German Government appear to be opposed to harmonisation because it might mean the harmonisation of European taxes at a level lower than their own. But they are in favour of co-ordination because that offers the delightful prospect of raising the burden of European countries' tax to their own level.

We heard much the same from our Government only last week in a European committee of another place in a debate on energy tax harmonisation. The Financial Secretary to the Treasury asserted:

    "We see no case for general harmonisation of direct taxes, and no such formal proposals are on the table",

but a few moments later he extolled the virtue of tax harmonisation saying:

    "If there were to be progress on raising the levels of duty on road fuels across Europe ... it would be a welcome development".

Is not the use of the word "co-ordination" just a presentational attempt to pour oil on potentially very troubled waters because there is a wide consensus of opinion in Europe, both at academic and political levels, that the single currency, which this Government intend to join, inevitably requires tax harmonisation?

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Let us take, for example, an article in the EC Tax Review by the respected former Finance Minister, the Dutchman Onno Ruding. In answer to his question, which forms the title of his article,

    "After the Euro, corporation tax harmonisation?",

he argues:

    "A successful EMU requires a high degree of policy co-ordination, on economic as well as political matters, and will unavoidably reduce remaining national autonomy, including on tax policies".

Because the British public are deeply opposed to the higher taxes harmonisation would bring, the Government, who have the unenviable task of somehow selling the single currency to the British people, have decided to use soothing words to airbrush out the less appealing aspects of economic and monetary union.

An article in the Sunday Times earlier this year reinforced such concerns. It stated--and I am sure that the Minister will wish to comment on this--that the Government had sent out a list of forbidden terms which should not be used in the context of discussions on the European issue. Lo and behold, one of them is "harmonisation". Surely, as long as the difference in the tax burden between the UK and our European partners remains as great as it is today, the issue will continue to generate deep anxiety which no amount of carefully chosen words from Ministers will dispel.

Secondly, I turn to the code of conduct group. I do not know how familiar your Lordships are with that body. The Minister is certainly about to tell your Lordships that there is nothing to worry about in the work of the code of conduct group; that the decisions at which it arrives are not legally binding; and that there is no treaty obligation on us to accept greater EU control of our direct taxes. Yesterday, I had the pleasure of being at lunch with one of our most senior judges, who said that when a man comes before him who says that there is nothing to worry about, "I always have a good look at him." Well, my Lords, we shall want to have a good look at the Minister when he says, as he is going to, "Don't worry".

Until the Government drop the secrecy in which that code of conduct group operates, it will continue to worry people because they cannot understand what the group is doing. What is its agenda? What is the Government's position on the work of a body which is chaired by one of their own Ministers? Perhaps the Minister will take the opportunity to explain to the House how it was that while our Government refused to divulge the working of the code of conduct group, the proposals it had made were easily to be found on the Dutch Finance Ministry's website.

Why is there that need for secrecy from a Government pledged in their manifesto to ensure,

    "greater openness and democracy in EU institutions with open voting in the Council of Ministers and more effective scrutiny of the Commission by the European Parliament"?

I am sure that the Minister recognises, as the report certainly does, that the reason the issue of tax harmonisation causes such angst is precisely because of the cloak-and-dagger approach which the

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Government have adopted. If there is nothing to hide, why do not the Government tell us what is going on in that group? There are many who find it difficult to understand why conventional channels were not sufficient to deal with harmful tax competition which that code of conduct group is understood to be addressing. This may provide the answer:

    "If the rule of unanimity should block progress on tax decisions in the EU for many years to come, the question arises as to whether member states might prefer to take steps towards tax harmonisation among a smaller group of members only, either the participants in the EMU or members who agree on a specific measure. This approach can only be accomplished outside the EU treaties".

In other words, the code of conduct group provides a fast-track route to the type of harmonisation which it would be impossible to push through under the unanimity required in the Council of Ministers. The Minister will, of course, again remind the House that EU treaties contain no requirement for direct tax harmonisation. However, it is precisely because the code of conduct group works in the grey area outside the remit of the treaties, but under the auspices of the Council of Finance Ministers, that it is able to press on with an agenda not contained in the treaty.

Let us look at the precise wording of the rubric introducing the code. It says that it is the,

    "resolution of the Council and the representatives of the governments of the member states, meeting within the Council".

"Within" is the crucial word. That half-in, half-out position allows the Paymaster General to say that the work of the group is "not legally binding" on the one hand when it is quite clear that the code of conduct group has the political momentum generated by its small but high-level membership to drive forward the harmonisation programme.

It allows any member state to call an investigation into another's system on the grounds that it is harmful. Under that understanding of avoidance, tax revenue paid to one country is essentially tax lost to another EU member. I suppose that is what prompted the former German Finance Minister, Theo Waigel, to describe London as a tax haven because he observed German bankers coming to work in Britain to avoid higher German rates of personal tax. That is an extraordinary observation.

We can perhaps see why the British Government are so anxious to remain silent about the group. Why else, in answer to repeated requests by the shadow Chancellor in another place for the Government to publish the agenda, minutes and conclusions of EU tax Ministers, do we repeatedly hear the opaque reply that the Council,

    "agrees that the work of the code of conduct group shall be confidential"?

The reason is that the work of the code of conduct group reveals the extent to which the Government are involving other countries in our own tax decisions. After all, when we briefly caught a fleeting glimpse of the work of the group, we discovered that it dealt with UK measures to help the film and shipping industries, designed to enhance UK business and create UK jobs

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to which the other countries had taken exception. Therefore, I ask the Minister to update the House on the future of those incentives so that companies which may wish to invest in UK films or shipping know exactly where they stand.

Is it surprising that the Select Committee states:

    "We remain unclear about the implications for the United Kingdom of having agreed to this code"?

Will the Minister tell us whether the group will be disbanded when it has dealt with its current agenda, whatever that might be, or will it find further work? And will he tell us whether the UK Government will accede to legislative proposals from that group in the future?

Finally, I turn to a crucial matter in the report, mentioned by the noble Lord, Lord Grenfell, which is deeply significant for the future of the City of London; namely, the withholding tax on interest. That is no stranger to this side of the House. When it was introduced in 1988, the Conservative government vetoed it without any fuss or bother. Nor was there any lasting ill will. I am told that that swift action saved the City much concern and prevented investors from becoming alarmed. Let us compare that with the painfully lethargic manoeuvring of the Government today, which does such damage to the confidence of business and investors in the City. The impression created is that the Government are unwilling to defend Britain's flourishing financial services industry. Meanwhile, I am told that competitors are licking their lips at the thought of what that piece of legislation can do for them. Perhaps the Minister will tell us the latest instalment of an epic battle which the Government have created for themselves. I believe that his answer will reveal the huge gulf in philosophy between his side of the House and ours.

Our approach is to cut taxes to stimulate growth and investment and to allow European countries to compete with us to find a natural convergence at a lower level, an attitude totally at odds with the concept of tax harmonisation. This week William Hague told the CBI:

    "In the next millennium, nations will fight each other not for territory but for business and their weapons will not be guns but tax rates".

So our view is to look at these matters in the context of a highly competitive global economy, not to hope that huddling together through legislation will insulate us from countries which are hungry for our business. We believe ours is a realistic view of the world and we believe that the Government's view is profoundly backward looking. I have yet to hear of a single government in the world beyond the EU that is signing up to a text which promises to erode its competitiveness rather than enhance it.

We greatly welcome publication of this report and the scrutiny of it by your Lordships' House because the report reflects the widespread concerns about this Government's attitude to an area of policy that is fundamental to the wealth and prosperity of our country.

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6.1 p.m.

Baroness Sharp of Guildford: My Lords, as a member of the EC Committee, I pay tribute to our chairman, the noble Lord, Lord Grenfell, to our specialist adviser, Professor Stephen Smith, and to our Clerk, Dr Elizabeth Hopkins, for helping us to produce a coherent and lucid report on such a complex and detailed subject. I look forward to the maiden speech of the noble Lord, Lord Lea, whom I knew 20 years ago when I worked in the National Economic Development Council--Neddy as it was known.

Our chairman has given the House an excellent summary of the report. I shall not spend time going over the details but shall concentrate my remarks on three areas: first, the general issue of the European Union and tax harmonisation; secondly, the question of tax competition and what is and what is not harmful in terms of tax competition; and, thirdly, the longer run issues in relation to corporate taxation.

I shall not discuss the issue of the withholding tax other than to say that I fully concur with the conclusion that we reached in the report. Surely the best solution all round is one based on an exchange of information. It is absurd that we should have imposed upon us an unsatisfactory, second-best solution just because some member states are faced by bank secrecy laws that they feel they cannot challenge.

I turn to the more general issue of the European Union and tax harmonisation. When discussions began in the spring of 1999 we were faced by alarmist newspaper headlines suggesting that the European Union agenda was a wholesale take-over of our tax system, with Oscar Lafontaine held up as the bogey-man who would take our money away from us. When the committee looked at that matter the actual proposals on the table were only three: first, the withholding tax issue--a big issue for the City but pretty irrelevant to the average man or woman on the street, or even to the Deputy Prime Minister, if I may say so; secondly, proposals for a common system of taxation for interest and royalties paid between branches of a multi-national company with branches located in different European Union countries, a proposal that, while it had its downsides, was generally endorsed by all concerned; and, finally, the code of conduct on business taxation in which negotiations were led by a British Minister.

In addition to those three clear proposals, there were vaguer proposals being discussed about the possibility of a maximum as well as a minimum level range of VAT and about closer co-ordination of excise taxes and earlier there had been proposals on energy taxation. There were even vaguer discussions going on about the longer-term development of both VAT and corporation tax. Only one of that range of proposals--the withholding tax--was really contentious. As we made clear in the report, as long as the Government maintain their insistence on the unanimity rule in relation to taxation, that can pose little or no threat to UK interests.

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As to other issues, let me reiterate the conclusions of our report:

    "there are certain areas where some sensible, well-justified co-ordination--in particular to reduce fraudulent tax evasion and to help create conditions in which tax competition can be pursued harmlessly--could serve both United Kingdom and EU-wide interests, and ought therefore to be pursued in a spirit of pragmatism rather than being dismissed out of hand on purely dogmatic grounds".

In other words, the fuss about the EU's tax plans has been grossly exaggerated.

I turn now to the issue of tax competition and the concept of harmful tax competition. I suspect like many noble Lords, I have spent some time living in the United States. I lived in Washington DC. I discovered in that country that there is considerable variation in tax rates between the states and the localities which leads to some cross-border trafficking. Those from Maryland and Virginia came into Washington DC to buy wine and spirits and those from Washington DC crossed into Maryland and Virginia to buy clothes and consumer durables because sales taxes were lower in those states. Movements were relatively marginal. How far will one drive to get something 10 dollars cheaper?

That situation is important because it creates pressures for convergence. As we know from the problems we are now experiencing in relation to beer, wine, spirits and tobacco trafficking across the Channel, where rates of tax--mostly excise taxes--are vastly different from one country to another, such cross-border trades can become substantial, with both traders and the Exchequer feeling the pinch. The pressures are now on the Chancellor to bring down British excise taxes closer to levels on the Continent. In other words, competition in tax rates has brought about a natural process of convergence.

Within the next 10 years two developments will add considerably to these pressures. First, e-commerce will make cross-border trading much easier, especially in areas like financial services where there are no postal or delivery charges. Variations in VAT and other sales taxes will become more significant. Secondly, those variations will become even more apparent once we begin to use the euro. Even if Britain remains outside the euro, we shall find many prices in this country quoted in euros, and price differentials, at present obscured by the different currencies, will become all too transparent. All that suggests that in the next decade competition will bring increasing pressures for a natural convergence of tax rates within the EU.

What is harmful tax competition? I quote from Jeffrey Owens, Head of Fiscal Affairs at OECD, with whom the committee spoke during our discussions. He was at pains to set the issue within its global context and argued that:

    "Increased liberalisation of financial markets has improved the international allocation of savings and capital and reduced the cost of capital to enterprises. But it has also:

    widened the scope for international tax planning;

    increased opportunities for tax evasion and avoidance by making tax havens more accessible to taxpayers;

    reduced the feasibility of taxing capital income; and

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    contributed to the erosion of the tax base in many countries.

    ... Harmful tax competition is triggered as governments, in an attempt to outbid their neighbours, seek to develop increasingly advantageous tax niches".

The great danger, of course, is that in seeking to meet this competition from these increasingly advantageous tax niches--tax havens, as we call them--we find ourselves dragged into a race to the bottom, each country seeking to outbid the other in an attempt to attract mobile financial capital. One possibility is that we just accept as a fact of life that capital and savings are mobile and that we should give up trying to tax them. But this has implications for the taxpayers. It means shifting the burden of tax increasingly on to the immobile factors of production, especially labour, and it has implications for equity. Is it right that those whose incomes are largely unearned should go untaxed?

Jeffrey Owen said that he had pointed us in the right direction. He said:

    "Governments do have a choice other than letting the erosion process dictate their tax and spend decisions: greater international co-operation".

This is what the OECD is now trying to put in place--an accepted network of bilateral tax treaties which not only avoids double taxation but also contains provisions to counter international tax evasion.

By working internationally to identify the harmful regimes and to put pressure on them to reform their ways or face international ostracism, some progress is being made. However, as a committee, we were wary as to how far this route could eliminate the problem. Nevertheless, what is clear is that only by working with others at the international level do we stand a chance of cracking it.

It is within the context of co-operation that we should see the EU's own committee working on the code of conduct for business taxation which was established after the ECOFIN summit of December 1997. It is being run in close conjunction with the OECD initiative and, as far as we can tell, because its proceedings are confidential, it is going well. What is clear is that many of the issues being discussed there relate to specific tax breaks for specific industries or sectors--for example, preferential treatment for small firms--and that its agenda is being driven as much by the single market initiative, the need to create a level playing field for business, as by considerations of tax structure or tax equity.

I turn now to my final point about the long run issue of corporate tax. At present, any company that has dealings with the EU faces having to cope with up to 15 different tax regimes. Two interesting features emerged from our investigations. First, although nominal corporate tax rates vary a great deal from country to country, "effective" tax rates--that is, the actual tax paid after all allowances are taken into account--vary very little from one country to another. Most, including the UK's, are in the region of about 10 per cent. Secondly, we also learned that many multi-nationals, having to deal with all these different tax regimes and different sets of paperwork, would prefer

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to pay what in effect would be a very similar rate of tax and were in favour of moving towards a single tax regime.

Michael Gammie, one of the experts who gave evidence to us and who had spent some time investigating company views on this issue, told us that what businesses wanted was,

    "a coherent proposal that resolves these issues".

By contrast, the Paymaster General, Dawn Primarola, made it clear that the Government were firmly set against any such proposal. She said:

    "We argue actively against the harmonisation of corporate tax rates. We do not believe that this is the way forward".

She was joined in this not only by many of our own witnesses from industry, but also by the views we heard from Germany and France. In other words, there is presently very little enthusiasm anywhere in the EU for the idea of a single, corporate rate of tax.

Nevertheless, the CBI, while opposing the idea, pointed out that the majority of its members did not do business in more than one or two member states and that many small companies did not export at all. They suggested that there could be trials of an optional, parallel system for companies doing business in several states which could choose to be taxed at a Community level on a single consolidated result. I suggest that there is a precedent for such a trial.

In the pharmaceutical field, in which companies were similarly faced a decade ago with having to run the gamut of many different national regulations in relation to launching a new drug, a fast track procedure was established at Community level which was introduced only for the new, biotechnology-based drugs. Companies could, if they wished, opt for this fast-track procedure. As more drugs came on to the market, companies gradually switched over to the new procedures. Indeed, in due course they provided the core procedures for a new and highly successful European Medicines Evaluation Agency, which is located here in London. This example shows that it is possible to have two regimes, one run by member states and the other by the Community, working side by side and effectively. I therefore agree with the committee's conclusion that the CBI's suggestion is worth exploring. I hope that we may hear further on this from the Minister.

The concepts of competition and co-operation lie at the heart of Liberal democracy. I have been at pains to suggest that on many occasions competition between countries, states or even regions in the taxes that they charge may indeed be good for us, and that this competition will in itself bring about a natural process of convergence. There are, however, times when competition does not work, when it destroys itself in the race to the bottom. It is on these occasions that co-operation is required.

The final conclusion of our report is,

    "that pragmatic tax co-ordination and fair competition can not only co-exist but complement each other, to the greater benefit of taxpayers within the European Union".

I wholly endorse that conclusion and commend the report to the House.

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6.16 p.m.

Lord Lea of Crondall: My Lords, perhaps I may first say how much I have appreciated the courtesy which has been shown to me on all sides of the House and by the Officers of the House since my introduction.

I feel very privileged to be the fifth member of the TUC secretariat to come here, following in the distinguished footsteps of Walter Citrine, Victor Feather, my noble friend Lord Murray of Epping Forest--for whom I worked for 20 years and who I am very glad to see in the Chamber this evening--and my noble friend Lord Whitty, who, before becoming General Secretary of the Labour Party, worked for me in the early 1970s and not only survived the experience but seems now to have comfortably inherited the mantle of "Lord High Everything Else". For one moment the other day, I thought that he was running for Lord Mayor of London!

My submission today, I trust without being at all controversial, is that in some fields we need more tax co-ordination in Europe rather than less. I have taken some interest in this area in my work at the TUC, but I have been particularly involved through the European TUC, in the 1980s as Chair of their Economic Committee and subsequently as its Vice-President.

I can confirm that the House of Lords Select Committee on the European Communities has a very high reputation in Brussels. It was Jacques Delors himself who said that the work of this committee was outstanding among all the national parliaments. I have often given evidence to the Select Committee, and I look forward to following its work closely in the future. One of the reasons for the committee's reputation is its pragmatism. This properly underpins the very timely report that we are considering today.

I thank the noble Baroness, Lady Sharp of Guildford, for her kind remarks. I congratulate my noble friend Lord Grenfell on his excellent exposition, and I extend to him every good wish for the future.

Pragmatism has also been the watchword of the European Commission and the Council of Ministers, and they are inching the debate forward. For example, something akin to a minimum withholding tax must be right at some stage if we are to protect an equitable tax base in Europe, albeit safeguarding the legitimate interests of London and, indeed, Luxembourg.

I want to take as my main illustration a rather different area of fiscal policy--the question of energy taxation--which the sub-committee recognised as important but decided not to consider at this stage in any detail. I wish to refer in particular to the announcement by the Chancellor in this year's Budget that, arising from our European and international commitments agreed at Kyoto two years ago on greenhouse gases, he will introduce into next year's Budget and operate from the year 2001 a climate change levy to raise of the order of £1.75 billion per annum, offset by reductions in employers' national insurance contributions across business generally. Side by side with that there are currently negotiations

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led by the DETR on rebates based on energy-saving schemes. No doubt we will hear more of that in the Chancellor's Green Budget next week.

It has been clear since the Rio Summit in 1992, when I had the honour to be a member of the British Government delegation, that the OECD countries had to give a lead if the Rio aspirations were to be seriously addressed. Since then, very important work has been done both by the previous government, but most notably by the present Government and by the Deputy Prime Minister in particular.

As the House will be aware, the EU group negotiates as a team, and it was and is as an EU group that the commitments to the necessary fiscal changes were entered into. The UK levy is a major step towards closing the gap in delivering the deal done in Kyoto, our part of the EU commitment being to reduce our output of greenhouse gases by 12.5 per cent by 2010 as compared with 1990.

So far so good. But then we meet the difficulty. There are now growls of dismay coming from many of our industries and trade unions precisely because, although there is a common goal in Europe, we have at present no common fiscal method of implementing the agreement. And this is no academic debating point. The tax in Britain will be charged per unit of energy, and the cost of energy is a factor which of course varies enormously, as a share of value-added, between industries.

As currently designed, the levy will potentially have a major impact on costs and jobs in such industries as chemicals, steel, cement, paper making, glass and aluminium. But given that, there is no intention to impose any discriminatory impact on our industry relative to that of our EU partners. Then industry naturally looks at the on-costs and compares them with what is happening in Germany, France, Italy, Holland and so on, all of which in different ways seem to be applying the policy differently--and, it would appear, less onerously in relation to their heavy industries.

The question I want to put, therefore, is as follows. Would it not have been far better if the European level agreement had gone on to specify some degree of co-ordination of methods of implementation? I know how I would answer that question, but can anyone in this Chamber challenge the affirmative conclusion?

Throughout British industry it is being said--we saw it at the CBI Conference in Birmingham only this week--that we want a level European playing field. Indeed, the point is obvious and self-evident. But what is a "level European playing field"? First and foremost it begins with a recognition that if the EU has entered into an international obligation we should all be in the same boat and do the job together according to the same rules. That means that the fiscal regime--the framework conditions as they are sometimes called--should apply across the EU (I would say QED).

Before concluding, perhaps I may dispose of one red herring which is often dragged across this trail. In a perfect world we would get the Americans on board as

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well. But on the whole matter of global warming and the international protocols arising from that, the Americans unfortunately have had to be dragged kicking and screaming into the 21st century. The US has operated for many years on an energy price which is less than half ours, and Europe has had to give a lead to the world. Notwithstanding that, if people raise the spectre of Kyoto losing us in European competitiveness, let us keep some sense of perspective. Who is it that has a 200 billion dollar balance of payments deficit? It is the Americans. And who has the substantial surplus? It is the Europeans.

In any event, though there is a global market and a global benchmark price, geography and transport costs are two of the several reasons why Europe must have its own common fiscal regime in responding to Kyoto.

In conclusion, I suggest that Sub-Committee A might like to turn its attention in the coming Session to precisely this common framework. It is certainly an issue which will not go away and I believe that, just as we in Britain took the lead in the climate change negotiations, we could give a lead as to what that common fiscal regime should be.

6.25 p.m.

Lord St John of Bletso: My Lords, it gives me great pleasure to congratulate the noble Lord, Lord Lea of Crondall, on his outstanding maiden speech. The noble Lord comes to this House with an extremely distinguished background and will be a classic all-rounder. Not only was the noble Lord assistant General Secretary to the TUC from 1977, but he has also been secretary to the TUC Committee on European Strategy since 1989 and a member of the EU Steering Committee on Social Dialogue since 1992. He is therefore ideally qualified to speak in this debate and is also an ideal choice for the noble Lord, Lord Grenfell--who I hope will continue to be the chairman of the sub-committee--to be a member of Sub-Committee A. Not only does the noble Lord come here with his distinguished background but also, with his enormous experience in environmental issues, he will be a perfect candidate for Sub-Committee E.

While some of the noble Lord's remarks on energy taxation were somewhat wide of the core inquiry of this report, they certainly raised the spectre of whether there ought to be a level playing field on taxation in Europe. I hope that we shall hear a lot more from the noble Lord in years to come, whether or not I survive the "cull".

I have been enormously privileged to have been a member of this sub-committee for the past four years, and particularly to have been part of this intensive inquiry, ably chaired by the noble Lord, Lord Grenfell, into the controversial issue of proposed future tax co-ordination within the European Union. Like all other members of the sub-committee, I extend my thanks to our clerk, Dr. Elizabeth Hopkins, for her tremendous help and support, as well as to our specialist adviser, Professor Stephen Smith.

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Paragraph 48 of the report aptly sets the scene when it says:

    "Taxation, whether direct or indirect, is a highly sensitive issue, and there is a clear need to ensure that proposals on tax matters emanating from the institutions of the European Union are properly publicised and accurately reported".

Other speakers touched on that. Without regurgitating the many recommendations of our report, my basic premise is that tax competition between European countries should not be impeded. Obviously, however, there needs to be some level of co-ordination so as to prevent harmful tax competition. But I entirely concur with the sentiments of the outgoing German Bundesbank president, Hans Tietmeyer, that tax competition is essential to creating strong economies and a strong monetary union.

I was going to draw a parallel between tax competition on alcohol in the European Union and what happens in the United States, but I am delighted that the noble Baroness, Lady Sharp of Guildford, touched on that issue. I sincerely hope that the Chancellor takes cognisance of her recommendation that duties do not rise in the future but hopefully fall--not that I have an excessive amount of alcohol.

I must declare an interest as a consultant to Merrill Lynch, as well as being a consultant to Overseas Companies Registration Agents, even though I have no involvement with the fixed income market. Like all those who have spoken on the issue, I am obviously alarmed about the potential consequences for the eurobond market, particularly for the City of London, should the proposed savings directives be introduced without a carve- out provision.

I was encouraged to read in the Treasury's recent report on international bonds that the Government are of the firm view that the approach of the current draft savings directive will not effectively tackle tax evasion but will have the unintended side effect of seriously damaging EU financial markets. Its conclusion was that this would, in turn, jeopardise the EU's programme of economic reform. I obviously hope that the Government wil be successful through the options set out in this report in securing an exemption from the directive for eurobonds and other similar instruments, so as to preserve the competitiveness of EU financial markets.

I agree with the Treasury's view that the single most effective means of tackling tax evasion is through an exchange of information on as wide an international basis as possible. Obviously, this touches on the thorny issue of banking secrecy, which the British Government believe should be addressed more widely both within the European Union and the OECD. It was encouraging to hear in the evidence we received from the Paymaster General, Dawn Primarolo, that the German Government, who have for many years maintained bank secrecy, now accept that the exchange of information is the best way forward.

I share the vision of the Cardiff European Council that one of the priorities in the European Union is to promote growth, prosperity, jobs and social inclusion. However, I reiterate my concern that this should in no way stifle fair competition within the EU. With the free

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movement of capital flows, should the savings directive as currently drafted be introduced, there is no doubt that this would in all likelihood result in the relocation of the eurobond market from the City of London and the European Union to non-EU centres, which do not have these directives. That would obviously have totally the converse effect of impeding growth with the possible loss of many thousands of jobs.

Although the noble Lord, Lord Saatchi, has already covered this point extensively, I also want to touch briefly on the issue of the code of conduct. One of the justified concerns in our report was the lack of transparency--or I could almost refer to it as the lack of accountability--in the agreement between the Council of Ministers and Her Majesty's Government on the code of conduct. While I accept that the code of conduct is not legally binding, the secrecy with which it was negotiated can only heighten public suspicion of secret, undesirable tax measures being introduced through the back-door.

I entirely endorse the recommendation in paragraph 20 of the report that the Government should seek agreement from other member states that the progress reports which the code of conduct group makes to ECOFIN should be published and subject to parliamentary scrutiny in the normal way. Certainly--and here I refer to paragraph 128 of the report--Parliament deserves a much clearer explanation of how the system is supposed to work than the Government have so far provided. I am baffled as to why ECOFIN decided that the work of the code of conduct group should be confidential.

I am pleased that the Government have reiterated their commitment to retaining the unanimity rule for decisions on taxation. Can the Minister give us assurances that this will not be watered down in the future?

In conclusion, whether the reference be made to tax co-ordination or tax harmonisation, there is a strong case in certain areas for sensible, well-justified co-ordination, particularly to reduce tax evasion. However, the key question will be how much co-ordination is necessary to allow the EU's single market to function at an acceptably high level of efficiency. Clearly, the politics of Europe suggest that tax systems mean different things to different people.

Although I can see no compelling argument for broad tax harmonisation in the EU, I agree that a moderate level of co-ordination and fair competition can co-exist to the greater benefit of taxpayers within the European Union. To that end, I recommend the report to your Lordships' House.

6.34 p.m.

Lord Currie of Marylebone: My Lords, perhaps I may join other noble Lords in congratulating my noble friend Lord Grenfell and his committee on an excellent report. Indeed, I should also like to congratulate my noble friend on his very insightful introductory speech to today's debate. I believe that the report sheds a great

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deal of light on an issue which is often exaggerated or demonised, and where the discussion is over-simplified and misleading.

The report comes to some pragmatic and commonsense conclusions; for example, that tax competition is not always harmful, nor is it never so. I think the last point that tax competition can be harmful was amply dealt with in the excellent maiden speech of my noble friend Lord Lea of Crondall. There is also the conclusion that some taxes do require co-ordination, while others do not, and that therefore tax co-ordination and competition can co-exist, and that where co-ordination is required it does not require greater centralisation in Europe. It is something that can happen through co-operation between national governments agreeing between themselves. I believe that those conclusions need to be broadcast much more widely because the debate on this question in the country is wildly misleading.

It is worth recalling that the setting up of the European Community was based on a very fundamental act of tax convergence; namely, the agreement to replace the widely different sales tax systems across Europe with a single value added tax system. Without that act of tax convergence, the single market, which I am sure almost all of your Lordships would support--there may be one or two who dissent--could not have happened. It is possible that we may need to go further in similar convergence in the corporate tax area to deal with some of the issues which arise from disparities there.

I believe that this illustrates the nature of what we are talking about--co-operation on tax, agreed by member states on a unanimous basis and allowing some disparity in tax rates and in the precise definition of the tax base for VAT. Yet without that fundamental act of bringing in VAT as a common system which we, as a country, also bought in when we acceded to the common market, the single market would not have been possible and European consumers and companies would have been the losers.

It is an example of a more general point that has already been made; namely, that the impetus for tax convergence and tax co-operation comes from the process of integration in the single market itself. A number of commentators relate it to the euro but this is somewhat misleading. The relationship to the euro--the need for tax harmonisation as a consequence of the euro--is, to a large extent, incidental. The euro is only relevant in so far as it accelerates the process of economic integration in the European market by introducing price transparency, by eliminating exchange risk and by introducing a much more effective market for corporate control. Those changes will accelerate integration and, as a consequence, may require a further move towards tax convergence.

However, it is the consequence of integration rather than the introduction of the euro that is the key point. If the UK were to stand aside, with a view to avoiding that tax convergence, we would be the losers because

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we would be missing the efficiency gains and the benefits that come from the introduction of the euro because of those developments.

There are two broad arguments for tax convergence of this kind, one at the macro-economic level and one at the micro-economic level. At the macro-economic level, there is a case for a degree of fiscal co-ordination, largely of deficits and debt policies, with a view to maintaining an appropriate balance in monetary and fiscal policy in the eurozone and concerning the value of the euro against the dollar or the yen.

It seems to me that there is a case for some co-ordination in that area but, again, it does not require a European-wide tax system; rather, simply co-operation between nation states. The European budget is far too small to be used for those macro-economic purposes. The developed national governments have large budgets which, in an integrated Europe, need to be co-ordinated in a sensible way.

However, I think that the real pressures for convergence, where they come, will be more at the micro-economic level. The case for a European corporate tax system--although not necessarily a common tax rate--is strong. Comparisons of corporate tax rates across Europe are often rather misleading. Tax rates vary widely, but if one looks at tax revenues--the tax take--one finds that they vary much less. High corporate tax rates go together with a narrow corporate tax base. We in the UK have a wide tax base and a low corporation tax. It is not the case that the burden of corporation tax is significantly lower here than elsewhere. It is somewhat lower but not much lower, but is not reflected in the differences in tax rates.

The consequence of those differences is not only that it is inconvenient for companies operating across Europe, which it is, but it is also an opportunity for them--almost all problems for businesses also create opportunities--in that it creates a real opportunity for companies operating across Europe to manipulate their books to minimise tax take to the detriment of the taxpayer in Europe. There is therefore a good case for co-ordinating the corporate tax system in Europe to avoid both the costs that the differences impose on companies, but also to remove those tax avoidance elements.

Similarly in other areas, predatory tax policies and excessive tax competition are surely self-defeating. The widespread practice of undue tax holidays in Europe is a game that all countries can play--and all countries do to some extent play that game--but it is essentially self-defeating when all countries play it. There is a great deal to be said for all countries in Europe agreeing unanimously to a self-denying ordinance on such practices. The argument that my noble friend Lord Lea of Crondall has put forward for co-operation in the area of environmental taxes is similarly strong. One cannot introduce environmental taxes to deal with the problems of global warming and the like through tax competition, which simply does not work in this area. There are major benefits for

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Europe and the international economy in moving in that direction. One requires co-operation and a common approach to such taxes to secure the environmental benefits we need.

Finally, there may be some areas where factors are so mobile--capital is one of them--that increasingly we shall find the need to eliminate tax disparities. Again that is an area where I believe that what is called for is co-operation between national governments rather than the central laying down of policy. But the areas of tax this applies to are really not that large. We are talking about a relatively small proportion of the taxes of national governments.

None of these forms of co-operation on tax policy represents anything like a move towards a form of federalism that many people fear. They rely on the traditional mechanisms of the European Union; those of intergovernmental co-operation motivated by enlightened self-interest. They do not entail the creation of a pan-European system of taxation but rather the gradual and co-operative evolution of national tax systems. They do not involve the move to wholesale decision making on the basis of qualified majority voting; co-operation is feasible without the abandonment of the principle of unanimity.

There will be those in Europe who will not be satisfied by this gradualist approach to tax co-operation. There will always be those who argue for much greater tax centralisation and they will indeed be quoted by those who wish to demonise Europe on this issue. I think that we have heard one or two examples of that already in this debate. Those voices will be heard but they will not, I believe, prevail, for there will be equally strong opposition to centralisation from a number of member states in Europe, not just the UK. The UK will not be isolated in its opposition unless we play our negotiating hand lamentably, and of that I think there is little sign.

6.45 p.m.

Lord Boardman: My Lords, as the first speaker on this side of the House after the excellent maiden speech of the noble Lord, Lord Lea of Crondall, I congratulate him and I look forward to hearing him speak on many occasions in future. I recall that he gave evidence once to a Select Committee of which I was a member. He did that with skill and conciseness, although not necessarily with my wholehearted agreement! I hope that we may look forward to that pattern often in the future.

I also congratulate our chairman, the noble Lord, Lord Grenfell, whose wide experience and ability and wide international knowledge were a tremendous asset to all the members of the committee, to whom he showed such considerate leadership. We were most fortunate to be served by the noble Lord and the clerk of the committee, Dr Elizabeth Hopkins, in getting this long and complex report put together. That was done to remarkably good effect.

It is inevitably difficult to judge the effect of any change in taxation on various parts of the country. In a limited area such as the UK a change in the Budget

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can have a quite different effect in the north of England as compared with the south of England, and so on. Those effects are multiplied as regards the 15 member states in Europe. Let us imagine the complexities that would arise in trying to apply any form of unitary taxation or in centralising taxes in many respects with regard to those different countries. To some changes in taxation may constitute friendly competition--perhaps I should have said friendly co-operation; to others they will constitute hostile competition.

I refer to those nation states which are members of EMU. I believe that ceding control of their taxes to some central European body would result in their losing both fiscal and monetary control. I believe that that must inevitably lead to surrender or ceding of political control. It must be a step towards a federal Europe that some of us--myself in particular--dread. On listening to the comments of the noble Baroness, Lady Sharp of Guildford, and indeed those of the noble Lord, Lord Currie, I had the impression--perhaps I did not understand the speeches sufficiently--that the harmonisation of taxation, together with the harmonisation of monetary control, was a useful and positive lead towards the kind of state that I am worried about. Fortunately that question does not arise at this stage. As our report makes clear, the Government have firmly stated that they have no intention of ceding control of taxes without treaty changes. However, the report refers to the real dangers that could arise should the Government weaken at all in this area.

My noble friend Lord Saatchi has told us not to worry. Perhaps I ought not to worry yet, but I am just a little nervous, and the report makes it clear why there is that anxiety. There is obviously a feeling of frustration where co-ordination which is agreed among member states cannot be effected on those outside that immediate net--the European Union--who understandably wish to go their own way and secure the advantages that follow from that.

It is absolutely ridiculous to imagine that we can secure co-ordination of what we might like to have in Europe among all the OECD countries, the United States of America, Switzerland, the Cayman Islands, and so on. Apparently it is the ambition of the OECD to try to persuade us that, if we will agree to certain things, it is confident that it can get all these other nations to agree. I doubt that is possible. It is most unlikely to be achievable.

The noble Baroness, Lady Sharp of Guildford, was more optimistic about this than I can possibly be. For example, I refer to the withholding tax. I will say more about it in a moment but, quite clearly, what might be quite acceptable to some nations will be competitively and in every other way hostile to others.

Let me turn now to the withholding tax. The purpose of the withholding tax is to enable those member states which are unable to collect tax to collect tax revenue from their own citizens. Germany is perhaps one of the principal complainants because it cannot collect the tax from its own citizens. The effect of the draft directive is that we should suffer the

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disasters to which the noble Lord, Lord Grenfell, referred--in London, on employees and on businesses--in order that Germany and the like can collect tax from their citizens who are defrauding them of tax. Although the numbers are somewhat speculative at the moment, very serious losses will be suffered. I find it very difficult to get enthusiastic about this situation.

One of the consequences would concern the issue of bonds. The issuer of the bonds--which normally stand at a substantial premium because interest rates have fallen--would be able under the terms of the issue to redeem those bonds at par. That would represent an enormous bonus to the issuer of the bonds and an enormous loss to the holders of the bonds, many of which are large insurance companies. That would be one of the consequences of the directive.

This is all because the Germans and others do not pay their taxes; or because they have banking secrecy laws which help them to cover up so much of the revenue that should be disclosed and taxed. I find it difficult to understand why we should impose upon ourselves serious penalties in order to help them out of their problems.

If we must do something--I do not see why we should--perhaps the reporting option to which the noble Lord, Lord Grenfell, referred may be the preferable choice. "Grandfathering" is suggested by the Government. That is a possibility but, at the end of the day, it is for each country to collect its revenue and taxes from its own citizens.

The Government's response to the report was rather disappointing. It did not cover many of the rather important points which are raised in the report. They agreed with the report's conclusion about the scare headlines and the public not being sufficiently informed. The scare headlines and the rumours which were spread around as regards what was happening were caused largely by the code of conduct. The code of conduct was kept confidential and rumours were spreading far and wide around London that the code of conduct was arranging taxing of this, that and the other in a way which was extremely damaging. The code of conduct has been the cause of much complaint. When the Paymaster General gave evidence it was stressed of course that whatever happened was confidential.

The members of the committee received a report as at 11th December 1998. So it is hardly up to date. We were not sent annexes setting out the recommendations in regard to tax. Perhaps I may quote from the annex sent by the Paymaster General of the first progress report presented on 11th December 1998. It states:

    "It was also emphasised that the Code is a political commitment and does not affect the Member States' rights and obligations".

It goes on to say:

    "In the Code Member States commit themselves not to introduce new tax measures which are harmful within the meaning of the Code. Also Member States commit themselves to amend existing laws and established practices as necessary".

I emphasise "Member states commit themselves". It is true that the covering letter stated that the conditions of the code of conduct have no legal effect,

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but what would happen if a Minister, on behalf of the Government, committed them to a certain course; and then the Government find that they do not like it and rat on it? I find this issue extremely difficult. I hope that the Minister will be able to answer that question.

Further on in the report it states:

    "Also, Member States with dependent or associated territories or territories in respect of which they have special responsibilities or taxation prerogatives committed themselves, within the framework of their constitutional arrangements, to ensuring that the principle of the Code are applied in those territories. The Group will examine the tax measures in Member States' territories to assess whether they are consistent with the principles of the Code".

Did the dependencies or associated territories give their approval to this combing over of their accounts and taxing? Did they agree to be pressurised to alter their taxing to conform with whatever the Paymaster General believed was necessary in order that she could enter wholeheartedly into the code of conduct? I hope that the Minister will be able to reply to those questions.

The report covers a wide field. The noble Lord, Lord Grenfell, explained it very fully and very well in his opening speech. It raises very important questions which I hope the Government will consider. I hope that they will answer them more fully than they have done so far. I hope that they will digest the points made. The report makes clear the Government's attitude that no taxation is to be imposed at the request of Europe; that that will not be acceded to; that the Government will not agree to that. Anything which is not acceptable to the Houses of Parliament will not be accepted unless there are treaty changes.

The report was excellent. We had a lot of assistance and lot of good evidence. I hope that the Government will read it carefully and pursue it to the right end.

6.58 p.m.

Lord Rathcavan: My Lords, the noble Lord, Lord Grenfell, introduced this debate with his usual ability and clarity. I am sure that the House will miss him when he goes off to pursue his next career of writing novels in Paris. I do not think the report will provide him with much of a plot, but one never knows.

I was rather fearful when I found myself on the list between the formidable economic brains and reputations of the noble Lords, Lord Boardman and Lord Desai. I will confine my remarks to the simple issue of corporate tax competition across the European land border in Ireland.

As noble Lords may know, the nominal rate of corporation tax in the Republic of Ireland is shown as 30 per cent. However, in practice, the majority of companies pay a rate of 10 per cent, allowed for all manufacturing and for the international financial services industry, which has been such a success, largely because of this profit-related concession. In their written evidence to the committee's report I noted that the Irish authorities were quick to record their agreement with the Commission under the code of conduct to phase out the 10 per cent rate between

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2003 and 2010, to be replaced by a new rate of only 12.5 per cent, which will apply to all businesses. That still leaves a huge margin on corporation tax between the Republic of Ireland, Northern Ireland and the UK, even allowing for the tax concessions on capital allowances unique to Northern Ireland within the UK. Like other noble Lords, I wonder what the code of conduct is all about.

The land border highlights this disparity, which is also an obstacle to cross-border co-operation. There are many Northern Ireland companies which, quite legally, have been able to organise their affairs to maximise their corporate tax liability at the lower rate across the land border. Even more significant is the fact that the Republic of Ireland--the Celtic Tiger economy--has been the most successful of any region in these islands, and probably in the European Union, in terms of attracting inward investment. It is a formidable competitor in that field of inward investment because of the incentives of a uniquely low rate of corporation tax which is a key driver on the choice of location.

As Northern Ireland emerges from a long period of political instability which has seriously constrained its economic development, it must seek every opportunity to attract inward investment and new employment, which is so important to the peace process. This cross-border inequity in corporate tax is uncoordinated and unfair competition which cannot co-exist, to misquote the title of this report. Now that the Republic of Ireland has the blessing of the code of conduct for its low rates of corporation tax, we will have to look to our own side for some kind of convergence.

The existing concessions on capital allowances have reflected the willingness of our Government to consider special tax arrangements for corporate sectors in less favoured regions. I am greatly encouraged by the recent economic report, Strategy 2010, facilitated by the Department of Economic Development as one of the commitments in the Good Friday agreement. The report urges the new Economy Minister in a new devolved assembly--which, pray God, we will have before long in some form--to seek other profit-related, even if time-limited, corporate tax concessions, at least for new inward investment. That would level the competition and stimulate economic growth and employment in the deprived border areas.

I know that the Minister will not give me much of a response, but I am taking the opportunity to mark up this issue again. I hope that he will refer it to his Treasury colleagues with the passion it deserves.

I wish to make one other brief observation on the report. I know that its remit was constrained to taxation in the European Union, but I am surprised that it did not make more reference to examples of the American tax culture and tax structure.

It is said that in the US 15 per cent of all Americans with jobs are working in businesses which did not exist five years ago. Why have we failed to support to the same extent innovative industries that have become such big employers and wealth creators in America,

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despite the fact that in Cambridge we now have one of the world's greatest centres of brains, research and innovation?

One problem may be that the investment capital to support innovation and start up companies is controlled by a small number of huge institutions. I have seen an estimate that only 20 institutions now control 85 per cent of pension funds. Noble Lords will know that big fund managers like to invest in big stocks and big amounts, not start-ups and small innovative companies, even if managers in their personal capacity do just that.

I have seen another estimate that only 15 per cent of quoted UK shares are now owned by individuals, compared to 40 per cent in America. The reason for that is the tax culture. American tax breaks are more available directly to individuals who have greater choice and control over their savings and pension funds. They like to support smaller, innovative companies, maybe with only an average 5 per cent of their funds, but it aggregates to very large amounts.

There was a lot of talk and debate this week at the CBI conference about a new enterprise and innovative investment culture, not only by business but also by the Government. In Europe, let alone the UK, to achieve that culture we need more of the personal tax breaks that have encouraged the American economy to remain so strong and successful. This report gives us a good background and I found it of great interest. However, I hope that a further report by the committee will look at comparisons and lessons to be learnt between the American and European tax systems.

7.6 p.m.

Lord Desai: My Lords, I join other noble Lords in congratulating my noble friend Lord Grenfell, and our clerk, Dr Hopkins, on their excellent steering and quick production of this rather complex report. One of the tasks that perhaps we should perform more than we do is that of education. It is a great pity that many of the reports of House of Lords committees are not more widely available. The European reports should be published in paperback form. I have had the privilege of taking part in the production of a number of reports--on enlargement, on financing the EU and on tax co-ordination. If such reports were to be published in a more attractive way, I believe that we would contribute a good deal to education. I wish to concentrate on educating the public and the media on problems of taxation.

First, I should like to congratulate my noble friend Lord Lea of Crondall on his excellent maiden speech. He solved an outstanding problem for those who have to make their maiden speeches. What should one speak on? Most noble Lords cast around for a suitable subject. My noble friend has been most innovative by stating that, whatever the subject, he would make his speech. That is an example that all noble Lords should follow. My noble friend made an excellent speech on energy taxation and I look forward to hearing more from him.

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The noble Lord, Lord Saatchi, recently gave a lecture in which he said something along the lines of, "Happiness cannot buy you money". All I can say in reply to that is that the promise of tax cuts cannot buy you votes either. The noble Lord tried to raise the spectres of tax harmonisation, federalism and so forth. However, what emerges from the report is the surprising fact that despite differences in corporation tax rates, as several other noble Lords have pointed out, when we examine tax take, which is the effective tax rate, there is a remarkable uniformity in corporation tax rates. Clearly there is a process of response by the private sector to the different and somewhat complex regimes that operate. By some form of competition and response, the outcome is that of ex post convergence, although ex ante the rates are different.

For that reason, one of the most important points that we should bear in mind is that when tax is debated at the political and economic level, we must be careful to identify exactly what it is that we are worried about. Even with the mainly large cross-border ex ante tax rate differences--the noble Lord, Lord Rathcavan, gave us an illustration of that fact--that does not mean that businessmen move from one end of the continent to another because businesses have many other factors to take into consideration.

The effects of tax rate calculations are important. When NAFTA was being debated, I recall Ross Perot saying, "If we sign this, all American jobs will go 'whoosh' across the border". Nothing of the kind happened. The number of Americans in employment is now higher than it was before NAFTA. It is rather paradoxical. Economists teach in textbooks that for small price differences there will be large responses. Only politicians take it seriously. Economists do not take it seriously. We know that it may be good for textbooks, but there are other considerations which we hold constant when we know that they are not constant at all.

That is what brings me to the complex problem of withholding tax. As the noble Baroness, Lady Sharp, pointed out in an excellent speech, in this area one has to rely on co-operation. In a global economy, if one wants to have some fiscal autonomy left--one needs some fiscal autonomy--one cannot go on taxing the immobile factors of production all the time. One needs some kind of co-ordination. I have problems with a withholding tax. It is tax evasion by the German taxpayers. They happen to be rather rich people and I do not have much sympathy for the tax problems of rich people. To what extent should we connive in tax evasion by rich people? While I am quite willing not to work too hard on behalf of the German Government, or any other government, I am worried that if we begin to build industries which are tax evasion-related industries that will be a fragile basis for prosperity.

The City argued this Ross Perot "whoosh" theorem--if anyone touched the tiniest withholding tax, entire industries would disappear. I was shocked and rather sad that the City did not come up with a

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better argument. It was basically scaremongering. As we remarked in the report, there was no real detailed calculation of--

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