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Lord Taverne: My Lords, I thank the noble Lord for giving way. It is perfectly true that the City did not give a great many details. But is there not the rather uncomfortable and worrying precedent of the American interest equalisation tax, which again dealt with evasion by very rich people but whose final result was very damaging to the United States?

Lord Desai: My Lords, I think America has survived. It did not suffer too much. Some industries have gone down but other industries have grown up. I would have bought the City's argument if someone had produced for me a calculation of the size of the market. What is the size of the market in which very small eurobond buyers have an involvement relative to the whole eurobond market? A withholding tax will affect only personal taxpayers.

I just wish that the technical level of the response to us of people who fear a withholding tax had been better. Having said that, I agree that the committee's conclusions are the correct ones. Therefore, for the time being, it is not persuaded of the arguments and would prefer information co-ordination to a withholding tax regime. However, if I were sitting in judgment I would not be very impressed by the scaremongering stories. I was certainly not impressed by them.

I also felt the same about the code of conduct. I quite agree that transparency is required and that it should not happen in secret. However, when listening to the Paymaster General, I felt that what she was describing was more like an idle seminar than a serious administrative arrangement. We are talking about various taxes across various countries. As soon as people start talking about taxes, they feel that they have to be secretive about it. Since the conclusions of the code are not to be binding and since no conclusions have been come to so far as I can see--people are discussing only various tax concessions which they could or could not find distortionary--I am not worried except that it is a PR disaster of first order. This Government, of all governments, should have tried to do something better.

I shall stop at this point because other noble Lords have said what I could have said. But I want to add my sentiment to that expressed by other noble Lords. I shall miss the noble Lord, Lord Grenfell.

7.5 p.m.

Lord Shaw of Northstead: My Lords, I should like to add my congratulations to the noble Lord, Lord Grenfell, on his chairmanship of the committee. Under his gentle and wise leadership, he never disguised his knowledge and experience of this whole subject. That was of tremendous help to us. He had working with him, in the shape of Dr Elizabeth Hopkins and her colleagues, a team that seemed to me never to work in less than overdrive. The speed with which the results

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were produced was impressive and incredibly helpful. Her work was added to by the work of Professor Stephen Smith.

The subject of our debate today has to be of the utmost importance considering the future development of the European Union. That there should be some co-ordination is generally agreed. But how much? That is very much open to argument. Behind all the discussions that are taking place lie several fundamental questions: how far should the "same for all" principle apply; how far should centralisation in Brussels be taken; what value should be placed on subsidiarity; and how far should the discipline of competition be allowed to bring about a natural process of co-ordination? And over all there rests the basic question as to whether the future of the EU lies in movements towards a single federal state or whether we are to aim at a developing community of European nations. Noble Lords will hardly be surprised that I approach this subject firmly from the latter point of view. I hope that our report will help to open up and stimulate a better informed debate.

At the outset I welcome the clear statement by the Treasury official, Mr Colin Mowl. On voting, he said that,

    "the maintenance of unanimity on tax matters is a Government commitment set out in its election manifesto ... To change that would require a Treaty change which itself would require unanimity and the United Kingdom would not agree to such a change".

The reaffirmation of the Government's position is particularly reassuring, in view of the warning words of Commissioner Monti that,

    "a few Member States have already pronounced in favour of shifting ... from the unanimity rule to the qualified majority rule".

One has heard that kind of view put by others as well.

So far as concerns tax co-ordination, we believe that some may be necessary. But we believe also that tax decisions must primarily belong to individual member states. It is clear that the membership of the single market itself will in any case bring about a measure of convergence, although we must also remember that tax competition can help to keep down rates of taxation, which in itself is always a desirable objective.

It has been suggested that joining EMU will make tax co-ordination inevitable, since, it is said, the successful management of monetary and tax policies can be achieved only if both are under the same political control. Personally, I strongly support the contrary argument; namely, that,

    "since national governments can no longer have recourse to monetary policy they have an even greater need to use tax policy to manage their economies in pursuit of legitimate national objectives".

In any case, I firmly believe that all authorities, national or local, which have responsibility for spending money should also have responsibility for raising that money. Otherwise, the old maxim will apply: "He who pays the piper calls the tune". For that reason, we must maintain firm control of our own taxes.

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I should like to say one final word on the argued need for co-ordination of taxation to help reduce unemployment. It is argued that there has been a shift from taxation of capital to taxation of labour, with a consequent increase in unemployment. We found no firm evidence for that view. Indeed, we found significant instances where it just was not true. So we state in the report that,

    "we do not agree with the Commission that employment promotion is an argument which can be used to support the proposed tax co-ordination measures".

Perhaps I may add my comments to those that have already been made on the code of conduct. One of our principal subjects of concern has been the code of conduct group--or perhaps I should say the code of conduct of the code of conduct group. Our concern has been that there are consequences that will flow from the decision taken by the group.

The Paymaster General has told us that the code of conduct is not legally binding on member states. Yet Colin Mowl, the UK representative on the group, has said,

    "Although [the Code] is not legally binding, the Government has entered into an international commitment which it expects to honour and expects other people to honour".

Incidentally, since our own representative chairs that committee, our commitment must be the greater.

Were we wise to agree to join such a group under such conditions of secrecy, since while we accept that its decisions are not legally binding, on the other hand Ulrich Wolff of the German Ministry of Finance tells us that,

    "there is no big difference between legally binding instruments and politically binding instruments in the area of international conventions".

The suspicion voiced by witnesses is surely justified; namely, that this device could be used to side-step the unanimity rule.

It is, therefore, even more important that the secrecy that surrounds the group's proceedings should be lifted. This Government are pledged to "open government". Yet they are now engaged in discussions which, on the one hand, could be on matters of minor importance yet on the other could be of major concern to business and the taxpayer alike. The facts should be known. Harmful rumours arising out of ignorance should be squashed.

In their reply, the Government state--completely inadequately--that they,

    "will make available to Parliament any reports from the Group to the Council which the Council agrees should be published".

No great deal is being promised; the information will be with us in any case.

I now turn to mutual assistance in debt recovery, which is taken up in paragraph 210. We were told by HM Customs and Excise that it placed a great of emphasis on mutual assistance by revenue authorities. The report states that,

    "Existing Directives provide for limited mutual assistance between Member States in the recovery of tax debts. There is a proposal currently on the table, which would modernise and extend the provisions in relation to both indirect and direct taxes".

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We have expressed surprise that the Government have felt obliged to block that proposal. In their response, the Government, in turn, express their surprise at our surprise. Whereas it seemed to us a useful administrative measure, the Government point out that,

    "As well as having a direct impact on taxpayers, this would affect the levels of tax recovered and thus the revenues of member states".

While I do not want to question that opinion--indeed, I confess that I think it is right--I believe that this important matter should not be left undecided. Therefore, will the Government confirm that they are in favour of the proposal in principle, and that the only objection is that it should be passed under Article 94, and not Article 95EC? If so, and as everyone is then in favour of the proposals, one's instinctive reaction is to say, "Splendid. Let's get on with it, no matter which article may be involved". But, alas, we all know that that is not possible.

But it would also be wrong not to pass this unanimously approved proposal. Common sense tells us that it must be enacted. If agreement cannot be reached on the use of Article 94, is it too much to hope that common sense can find a procedure for its acceptance without the creation of an unacceptable precedent for the future?

7.26 p.m.

Lord Shore of Stepney: My Lords, there are a number of fundamental questions, raised by the noble Lord, Lord Shaw, that need answering. They arise to some extent within the context of the report, careful as it is. Indeed, it includes above all the question of questions: are we en route for the creation of a state in Europe; or are we still somehow clutching onto the remnants of our national sovereignty and our democracy here at Westminster? I fear that the matter is already largely decided in favour of the former rather than the latter. The report has some bearing on the matter, which I shall touch upon shortly.

First, I should like to thank my noble friend Lord Grenfell for presiding over the report. I know his feelings on these matters. He belongs to what may be described as the Europhile camp. Because of his own feelings, and those of a substantial number of members of the committee--a clear majority--it is all the more creditable that my noble friend feels the necessity to probe and to come up with honest questions, to make sure that people do not get away with the kind of general statements that are designed, frankly, to confuse rather than enlighten. I genuinely congratulate my noble friend on his role in this.

I should like also to congratulate my noble friend Lord Lea on his maiden speech. It was an extraordinarily good one. I hope that we shall hear more from the noble Lord in the future. He speaks with considerable authority and experience, not least in the questions that we are now deciding. What he has not learnt, as a serious Europhile, is how unwise it is to be too open in an assembly such as this. It is quite clear to me--and my noble friend hardly restrained himself from saying it--that he would like harmonisation.

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He gave a good example of where it might be to our benefit. It is very healthy for those who hold that view to be a little more forthcoming and not quite so constrained as regards their genuine ambitions in that area. Therefore, we welcome my noble friend Lord Lea and hope to hear from him again.

There is no question of the importance of tax harmonisation or tax co-ordination--whatever the difference may be--for several reasons. Incidentally, the reason that it is particularly sensitive to us should be plain to everyone. In terms of a number of direct and indirect taxes we have a considerable advantage compared with the generality of our colleagues in the European Union. They have a very good reason for saying that it is good to have co-ordination and harmonisation of taxes even if exactly the same rates cannot be achieved across Europe, including Britain. But if they can get rid of at least some of our advantages in terms of tax allowances and other matters, what a benefit that would be. Yes, they would benefit and we would lose.

Although Luxembourg has an interest in the proposed withholding tax, that is almost uniquely a British asset. What could be better, frankly, than to see that asset shared--if it could be--more generally with the other countries in the Union? Naturally, they have brought to bear strong pressures and want the withholding tax to be the subject of a directive which would seriously disadvantage us. Those seem to me to be two obvious reasons why we should take tax matters very seriously.

There is a third reason. In December 1997 the Commission put onto the agenda of European Union discussions not just one tax but a battery of them, including the establishment of a code of conduct committee with a vast remit--to which I shall turn in a moment--including a withholding tax, which I have just mentioned, and a tax that would affect the tax arrangements of companies with subsidiaries in different parts of the European Union, which I do not believe is particularly worrying. A good number of other members also have reasons for wanting harmonisation on VAT. There was also an energy tax. That is a formidable agenda.

How do my noble friends respond to it when people like myself bring it to their attention? They say that we are being hysterical, as though we have imagined that this agenda comprising tax measures exists. They say that we are paranoid about it. They also say that we have nothing to worry about because of the various safeguards to which they point and which they believe give us a strong defensive position against any possible attack.

As to the study on the code of conduct, according to the Commission it is about,

    "those harmful tax measures that may affect in a significant way the location of business activity in the Community".

That is a very serious matter. If tax differences--or lack of tax harmonisation--can allow one state to enjoy a significant advantage in attracting investment to its territory, we should be concerned as good

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Europeans and seek a code of conduct, or harmonisation, that removes this obvious British advantage. However, that is not on the face of the report, although it may be in the hearts and minds of one or two of those who helped to write it. I put that on one side and turn to the attitude of the Government and the assurances that they have given.

At a fairly early stage the Paymaster General, Dawn Primarolo, told the other place:

    "All EC proposals on tax require unanimity before they can be adopted. We will not accept any proposals which are not in the national interest".--[Official Report, Commons, 22/6/99; col. WA 325.]

My noble friend, who is to reply this evening--I informed him that I would raise this matter--gave assurances in the most extravagant terms. He said it was inconceivable that we were under threat. On 20th January he quoted, with approval, Mr Kenneth Clarke, whose opinion was that,

    "'In reality there is at present no serious or credible euro threat to Britain'".

My noble friend continued:

    "If we think it is unfair we shall veto it and it will not happen. It is as simple as that. The failsafe position is on my side of the argument and not on my noble friend's side".--[Official Report, 20/1/99; col. 662.]

He was referring to me at that time. That is an important guarantee.

On 28th January, again in reply to me, my noble friend said that the difference between harmful and non-harmful matters could be well explained and properly discussed, and finished with the following splendid quotation:

    "We shall engage constructively with our European partners but shall not accept a proposal if it is not in the national interest. We shall ensure that tax decisions continue to be taken unanimously".--[Official Report, 28/1/99; col. 1209.]

I do not believe that he could have been stronger and more affirmative.

We then had a farce. I am sorry that my noble friend should have been ambushed in this way. One of the five measures in the Chancellor's 1998-99 Budget was the Northern Ireland 100 per cent capital allowances for small and medium size firms. That was mentioned by both my noble friend here and his ministerial colleague in the other place when those guarantees were given. That was suddenly struck down on 9th July when the wretched Minister in the Commons had to move a new clause to delete the old one which had given 100 per cent capital allowances and put in its place something of far more modest proportions.

I raised this matter with my noble friend, as I was almost bound to do, when we last debated these matters just before the Summer Recess. He said that it was all quite clear, that there was no real problem and it simply fell under the heading of state aids. State aids are not just direct payments, subsidies and the like; they are also tax allowances. Incredibly, without a protest or challenge my honourable friends in the other place and my noble friends here swallowed that.

That leads on to some interesting fundamental questions which relate mainly to the code of conduct. The first one follows naturally from what I have just

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said. How many other tax allowances and measures--we know of four others: shipbuilding, films and so on--can also be considered under the heading of state aids rather than taxation? As to state aids, there is no question of a veto; it is for the Commission to decide. The Commission has decided the matter--and against our interest. So all those promises of, "We will not allow anyone to affect our interests if we judge it not to be acceptable" fall. They are exposed at once to a major gap in their credibility.

That is the first question that I want to put. What other of our tax measures are to be judged as state aids and therefore totally unprotected by our British law? Secondly, I want to ask the question that the noble Lord before me also raised, which is the very important question: is the code of conduct binding or is it voluntary and can it be rejected if we do not like it or do not like the effect? On this, like others, I am baffled indeed. We have had the junior Minister in the Commons before the committee and before that House affirming strongly that it is entirely up to the Government to accept whether recommendations made in the code of conduct are implemented. There is no legislative compulsion, as it were.

I have here an agreed document, the progress report of the ECOFIN Council to the European Council at the end of last year. The code has already been adopted, although what measures are to be covered by the code are still at large though they hope to finish this by November this year. This is their first report in which they 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...".

That is from Brussels, the great source of authority, not just from the lips of a junior Minister in the House of Commons. I think we are entitled to be worried because of that as well.

I finish with the last point that worries me, and no doubt my noble friend will say that I invented all these things or he will give me some promise and repeat what he has said on other occasions. However, the question of whether the next IGC will come up with a proposal to institute qualified majority voting in the area of taxation will arise. When, as my right honourable friend in the Commons, Robin Cook, says, as he did yesterday when asked whether we would veto anything, "Yes, no question; we would not allow that", I have a very serious doubt and I will tell noble Lords why. First, they do not like to be isolated as they could well be in Europe; secondly because the Commission and the major partners, France and Germany, have already indicated that they would be in favour; and, thirdly--and let us grow up and be sensible--it is a bargain and, if we do not accept a majority view and qualified majority voting over taxation, we will have in effect to veto the extension of the European Union to embrace the countries of eastern Europe. That IGC is about clearing the way for them to join and making institutional changes that are deemed to be necessary. When the British Foreign Minister and Prime Minister are faced with the

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bargain, either accept QMV or be seen to be the nation that stopped the expansion of the European Union into eastern and central Europe, I could not be at all sure what the Government will do.

7.45 p.m.

Lord Hussey of North Bradley: My Lords, the control of taxation is at the heart of every country's economic and political governance. It is also at the heart of most of us unfortunates who have to pay the taxes. Any proposal therefore that might appear to give the European Community the right or the potential right to adjudicate on the justice, injustice, relevance or legality of any tax proposal is likely to invite considerable hostility. This is accepted by the Community in the unanimity rule under which any Community decision must be unanimous. This gives the opportunity for any country to exercise the veto on tax measures which would affects its citizens.

The point is properly and clearly made in our report:

    "So long as the Government maintains its insistence on the unanimity rule in decision making and on the principle shared by all member states that national taxes raising revenue from domestic taxpayers are a strictly national matter, current proposals pose little or no threats to the interests of the United Kingdom".

Adding, for good measure, that the Government must remain permanently vigilant to ensure that undesirable tax measures are not smuggled in through the back door.

That said, clearly in an association of 15 countries, shortly perhaps 20 or 21 countries, with more to follow, there has to be a certain give and take on these issues, a certain freedom of action for member states--what is described as subsidiarity. This report on whether co-ordination and competition on taxes can co-exist is an extremely complicated one, raising several vital principles of importance to every state and its electorate.

As our discussion developed, I felt we were sailing through iceberg-infested waters, catching sight of the peaks jutting above the waves but realising the dangers lurking beneath them. For instance, should taxes be either co-ordinated or harmonised? Would either lead to higher or lower taxes? Could taxes be imposed on the United Kingdom? Should all tax proposals remain subject to veto or should some of them be decided by QMV? What about the taxation of royalties or withholding tax, about which feelings run so strongly?

On our voyage, we were lucky to have an excellent and experienced captain in the noble Lord, Lord Grenfell, and a skilled and equally experienced pilot in our clerk, Dr Elizabeth Hopkins. With their advice, we were able to circumvent most of these icebergs and not hit any of them, gliding elegantly past two noticeably dangerous and controversial ones: excise duty and energy taxation.

If I may add a personal interest, as someone with a house in Somerset and a disability, energy taxation is certainly worth looking at, but not in this context. For that reason, I welcome the excellent speech by the noble Lord, Lord Lea of Crondall.

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So what conclusions did we reach? Most important of all, we have to face the fact that as members of the fast-expanding European union, it is no longer possible, practical or wise for member states to carry out their own tax regimes without reference to their fellow members. Tax competition can have advantages if an individual country like Eire, for instance, knows how to work the system and does so with enthusiasm. Equally, there are occasions on which tax competition could be harmful. It is not an open and shut case.

There is very little about these issues which could possibly be described as open and shut. Individual states must have the right to run their own economies to achieve their national objectives. Equally, they cannot totally disregard the other members of the club. We came to the conclusion that tax co-ordination was preferable to harmonisation.

It is a somewhat esoteric point but, to us at least, harmonisation carried an unsavoury whiff of compulsion and seemed likely, or possibly likely, to lead to higher taxation as tax reliefs or low rates are queried and perhaps removed under the excuse of unfair tax competition.

Co-ordination, on the other hand, carries a cosier feeling of mutual discussion and agreement. Although decisions on taxation can be a direct matter for individual states, they cannot always be taken in isolation and can lead to some degree of convergence: the trade-off of limitations of national freedom against the potential gains from co-ordination. For instance, there is some sense in the argument for the convergence of corporation tax throughout the Community.

That is where qualified majority voting comes in. Within a relatively restricted context, it is clearly a valuable principle, but only on the less important issues. The business of raising funds for the Community must go on, so there has to be a certain give and take. I do not doubt that there will be both when these issues are judged by QMV.

It reminds me of my newspaper days when I chaired the Newspaper Publishers Association, a motley collection of highly competitive and tough newspaper barons. We had to seek compromises, which were usually weak and invariably broken. But of course I accept that, happily, there is no similarity between the negotiations among the newspaper proprietors and those of the European Council. However, I did learn one thing of importance which I have never forgotten--the larger the group, the longer it takes to reach a decision and the less likely it is to be strictly effected.

The issue that has produced the most steam is the withholding tax. We found it difficult to reach any final conclusion about this. The evidence is conflicting and anyway hypothetical, except that Germany introduced it and shortly afterwards abandoned it. The German problem was not the same as ours. London is the centre of the eurobond market, so we have considerable financial and employment risks at stake. We were told that Switzerland would welcome

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with open arms a European Union withholding tax and the capital it might receive as a result. There might be a drift of capital also to the United States. A severe loss of jobs is possible. Unfortunately, the figures were unquantifiable.

The Government promised a paper several months ago, but did not produce it until last month. So we did not have enough evidence to reach a view. It is for the Government, and the Government only, to decide whether a veto is appropriate.

There was one issue which our report did not hesitate to condemn, and I hesitate to raise it in front of your Lordships. It is the manner in which the group devising the code of conduct for business taxation is going about its business without any reference to Parliament. It has pledged not to accept new taxes that are harmful. But who judges what taxes are harmful?

Ever since I had the privilege to serve on the committee--and it is a great privilege to serve on the committee--the senior members of the Commission, from Herr Duisenberg to Signor Monti and Monsieur Trichet, have emphasised the need for absolute transparency in the European Community's conduct of affairs.

As someone who has spent many years in the media, I am, of course, strongly in favour of absolute transparency, although I have to confess that these days what some would regard as reasonable transparency others might regard as a gross infringement of privacy--but not our code of conduct committee, which at the moment appears to answer to nobody.

Our report makes plain that we are left in total ignorance about the way the group is operating. We do not know whether it could turn out to be an obnoxious method of inflicting secret taxation or an innocuous discussion group. I very much hope that the Minister will be able to clarify that.

For my part, the greatest concern I have about the relationship between tax co-ordination and competition--each in its own way conceivably meaning different things to different countries--is that in the end, although my colleagues do not entirely agree, I do not see how it can work effectively without some central political and monetary control, probably exercised by a non-elected body; the European Commission.

That brings me back to where I started: each member state must have the right to exercise control over its own domestic taxation, achieving its own national goals, but must equally accept that we live in a global economy and in an expanding club which must accept a flexible fiscal regime to allow for the stress involved in satisfactorily and profitably aligning different economies.

Above all--and it is the most important aspect--the citizens of the European Union must have total confidence that the decisions about their taxes will be fairly and honourably reached. Our report underwrites this. It is, I believe, a highly important one on a highly important issue. I wholeheartedly commend it to your Lordships.

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7.55 p.m.

Lord Inglewood: My Lords, like every other speaker in the debate, I begin by congratulating the committee of the noble Lord, Lord Grenfell, on its report on taxation in the European Union. The topic goes to the heart of the very nature of Europe.

On previous occasions, I have explained to your Lordships that I believed that the political arrangements known as the European Union are not an alternative to the traditional nation state. Rather, they are the framework within which the member states are evolving and the system through which they work with each other.

One of my reasons for that belief is that the EU is not a revenue raising entity to any significant extent and I do not believe that it should become such. That is significant because, contrary to much popular perception, the EU is not and should not principally be concerned about raising and spending money.

Of course, there are provisions in the treaty which relate to tax and there has been a great deal of discussion about them tonight. However, they are also tied to the unanimity rule, which is important, as a member state cannot participate without actively agreeing to do so. Indeed, it has the legal freedom of manoeuvre, which is no different from that which it enjoys in an intergovernmental context.

Taxation is not merely a question of raising and spending money. I believe that whether it is appropriate for the European Union to lay down a legal framework within which member states should exercise their own revenue raising and spending powers is an important question to pose.

As a Conservative, I am an advocate for lower rather than high taxation. Within the single market, tax competition is not merely acceptable; it is desirable. In a world where tax competition is good, can there be unfair and hence unjust tax competition within it? At the beginning of the debate, the noble Baroness, Lady Sharp, asked: what exactly is unfair tax competition?

As a number of your Lordships have said tonight, the Government have signed a non-legally binding code of conduct in respect of business tax to which they have appended their political authority. But as we have all heard tonight, it is surrounded by a penumbra of uncertainty and vagueness. I join other speakers in the belief that the Government should explain and define that concept and tell us what are the exact parameters to the project to which they have signed up.

On a number of occasions, Commissioner Monti, who was the commissioner with responsibility for tax matters until earlier this year, has explained his view. In his evidence to the committee he said:

    "Member States, for example, should not set up special schemes which significantly influence the location of business activity within the Union, particularly where they involve lower levels of taxation than the one generally applied in the Member States in question".

But how wide is that proposition? Does it cover all forms of taxation, and, if not, which and why? I suspect that Commissioner Monti would say that his

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definition covered merely business taxation. But is it really possible in economic terms satisfactorily to distinguish between classes of taxation in this way? After all, it seems to me that what really matters is the purpose and the effect of taxation. That point was made rather well by my noble friend Lord Saatchi when he quoted Theo Waigel's comment that Britain was becoming a tax haven on account of the low levels of income tax.

We have at European Union level--we all know it, and it is a policy which I support--a policy about state aids which relates to financial inducements to encourage businesses to locate in particular places. Equally, as the noble Lord, Lord Shore, pointed out, that policy specifically includes--again it is spelt out in the treaty--a provision for tax provisions intended to achieve the same purpose within its scope.

If the extent of European state aid policy stretches that wide, do the Government believe that possible Community rules of unfair tax competition would go further than state aid rules, or is it merely duplicating the rules which already exist in relation to state aids? If so, then is the whole matter not something of a paper tiger? I should be interested to know the Government's views.

It slightly surprises me that no reference has yet been made to a recently published document from the Commission dated 28th September, entitled Communication from the Commission to the European Parliament and the Council--The Strategy for Europe's Internal Market, which, as chance has it, is being debated I believe at this very moment in the European Parliament in Brussels. Under the heading of the section concerned with what it calls improving the business environment, there is a subsection concerned with eliminating tax barriers to the internal market and unfair tax competition.

Perhaps your Lordships will allow me to quote from the document. Of course, one must remember that it is written in that form of English prevalent in Brussels, which is spoken nowhere in the world by someone whose first language it might be. The document states:

    "The impact of different forms of taxation on the operation of the Internal Market is one of the main determinants of Community taxation policy. Some degree of tax harmonisation is indispensable to the proper functioning of the Internal Market. Harmonisation is not required in all areas and where it is required, the extent of harmonisation will vary".

It continues:

    "Indirect taxes are a more conspicuous impediment to intra-Community trade than direct taxes".

It then goes on to say:

    "There are however aspects of the tax systems of Member States which will not require any co-ordination or harmonisation. Personal income tax requires no action other than the elimination of double taxation which may impede citizens exercising their rights of free movement. There is, however, an intermediate zone of direct taxation on highly mobile tax bases, in particular the taxation of companies and the taxation of capital. Here Member States agree that a certain degree of co-ordination is required to prevent both the erosion of tax bases and double taxation".

I should be interested to know whether the Government agree with that point of view expressed by the Commission, and if not, what their view on these matters is.

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I believe that there is a tendency to view some of these issues as abstractions, or perhaps intellectual conundra, somehow set apart from the day to day issues of daily political life. However, it was only last week that I read in a newspaper that England's nine development agencies had put proposals to the Government to help "rebalance" our country's local economies. One of the key proposals is to shift away from down payments of regional aid from central government to a system of rewarding companies through the corporate tax system.

Even though the code of conduct recognises the appropriateness of incentives for regional development so long as they are proportional to the end target, it very much seems to me that this approach looks a prime candidate to fall foul of either state aids policy, or possible rules on unfair tax competition, or both. I conclude by asking for the Government's views on that comment.

8.4 p.m.

Lord Randall of St Budeaux: My Lords, it gives me great pleasure to tell the House that I was on the committee which produced this report. It is an excellent piece of work--it is extraordinary really. Like others, I, too, thank my noble friend Lord Grenfell for the tremendous leadership that he showed. I regret very much that he will be leaving the House. That is a tragedy in my view. I repeat also what a number of other noble Lords have said about Dr Elizabeth Hopkins, our clerk, who has worked at a great pace, producing a good deal of high quality work.

I should also like to take this opportunity to congratulate my noble friend Lord Lea of Crondall. I wish him the very best for the future and I know that he will make an enormous contribution to the working of this House.

Taxation can be extremely boring for some people. Therefore, in my short contribution I should like to limit myself to discussing those parts of the report which bear directly on the globalisation process taking place in the world and, in particular, the impact that it will have inside the European Union. This relates to e-commerce, or, more significantly at this point in time, to e-business, where the rates of change are so phenomenal that I believe we need to take into account the speed with which we develop and sort out our taxation in the European Union so that there will not be distortions or a loss of opportunity in exploiting e-commerce.

Furthermore, I believe that if Britain maintains its present stance--it is doing extremely well in the areas of e-commerce and e-business--it will become a much richer place. I emphasise that the timescales we are discussing here are incredibly short. I should like to illustrate that point. The opportunity is here and the question is: how do we respond? First, there is the obvious point that SMEs (small and medium-sized enterprises) and big companies need to become involved in education and in training people so that

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they understand what e-commerce and e-business are all about. As I said, e-business is business-to-business on-line. The key area in which they are currently involved--there is a revolution taking place--relates to procurement around the world.

Secondly, we must ensure that our tax structures do not distort and weaken the markets. We do not want to have a bottleneck in the way of developing and improving the European single market. The market at present in the European Union is substantial and the majority of our trade is done there. Therefore, it is in Britain's interest to ensure that there is a full commitment to developing that market.

Perhaps I may give one or two facts and figures relating to e-commerce. Two years ago, in the United States, business-to-business sales were 19 billion dollars. In three years, that figure has gone up to 251 billion dollars, and will grow to 1.4 trillion dollars in a further three years' time. To take the comparable European figures, two years ago the amount of e-commerce was negligible. It is now up to 17 billion euros, which is about £11 billion, and will grow to 340 billion euros in three years' time. We are talking about incredible timescales. I can think of nothing as revolutionary in our lives.

A new EU directive is coming from the European Union. We must ensure that British SMEs can compete and do well. Government plans in the Queen's Speech will have a theme of enterprise and fairness. There will also be an e-commerce Bill to help IT businesses. Later this month in his pre-Budget report the Chancellor of the Exchequer will emphasise productivity and enterprise. We must decide how we are going to increase productivity. The Government are spending £600 million on 1,000 new IT centres. How shall we exploit that for e-commerce education? Internet traffic in general--we all know that it is fantastically large--is doubling every 100 days. In all of these matters, we are talking about extraordinary change.

In addition to the exploitation of e-commerce that I have just touched on, what other tax matters need to be considered in order to open up this single market in an optimal fashion? First, as regards tax policy, I believe it is important to recognise that in the single market there is inevitably interdependence between member states. I believe it is absurd to argue that certain member states would or could create their tax regimes in complete isolation from other member states. It is not possible to return to the situation which we had in 1986 when we voted for the single market. We cannot return to those days; it has all gone far too far. Therefore, we need efficient exploitation of the European single market. That means that there is a need for co-ordination of tax regimes in a way that eliminates distortions in the markets.

It does not make sense--I give a specific example--that a trading company in one member state should win a contract at the expense of a company in another member state entirely because its prices are lower because it is favoured by its own domestic tax regime. That is the kind of distortion that we need to eliminate. It is absurd and crazy.

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It can be argued--and this point has been raised this evening--that we can let tax competition prevail instead of co-ordinating tax regimes across the EU. The problem with that argument is that we can never be sure when competition will create distortions which will give one member state advantages over another in a way that will be harmful. There are times when competition is desirable. However, in this case the committee stated that it believed 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".

The Government's response to that part of the report was that the European Council in Vienna last December concluded that tax policy co-operation was not inconsistent with fair tax competition.

An important question arises; that is, to what extent should there be more co-ordination of taxes in order that the single market works effectively? The committee felt that that was difficult to answer because the powers to make tax decisions exist at individual member state level. Nevertheless, co-ordination may be necessary to prevent selective tax inducements by certain member states.

Reference has been made to the decision of ECOFIN in December 1997 to adopt a code of conduct as part of a package to tackle harmful tax competition. That code of conduct is aimed particularly at dealing with potentially harmful tax measures which could result in companies relocating to another EU member state. My own view is that in principle the code of conduct technique has many advantages. I know that so far everyone has criticised this, but I believe that if we could do something to reduce the number of treaty changes, that would be very helpful. However, I admit that there are problems of enforcement because of the nature of the agreement between member states.

Another question that arose in the committee was the extent to which tax co-ordination should be limited to within the EU. Unquestionably, with the growth of e-business throughout the world to which I have referred, the pattern and extent of trade is bound to change in the short term. The OECD is attempting to introduce measures that will encourage third world countries to trade with the EU. So far, it has been unsuccessful. I feel that it will only be a matter of time before the forces of globalisation change that.

I end by saying that the committee pointed out--I believe, quite rightly--that in introducing tax co-ordination measures, careful consideration should be given by the EU to the possible impact which such measures might have on future trading opportunities with countries outside the EU. In the end, it is in the interests of the EU that third countries follow the EU steps of preventing harmful tax competition.

8.16 p.m.

Lord Birdwood: My Lords, I have tried, I have really tried, to squeeze out of this magisterial Select Committee report a conclusion simple enough for me to absorb and articulate. Yet it asks such a simple

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question in its title. Can co-ordination and competition co-exist? Under interrogation, how would I answer, based on the recommendations in the report? "Yes, easily"? "No, absolutely not"? "Yes, but"? "No, sort of"? "Don't know"? "Don't want to know"? After struggling through some of the evidence, I know that years ago I was right to put a life of service in the Inland Revenue very low on my list of career choices.

As I skimmed the pages, I started to feel an increasing separation from the real world. The intellectual density of the evidence is overwhelming. The quality of the questioning from the committee members was of the highest calibre. One would expect nothing else. Although the temptation to stray must have always been there, the committee admirably stayed within its brief. However, an irreverent observation from years back kept intruding: you could make a duck into an economist by teaching it the meaning of the words "supply" and "demand".

There seemed to me a detachment from the lives of ordinary human beings which brought a dream-like quality to those deliberations. I suppose that it is up to the social engineers in the nation, rather than its financial managers, to reconcile those arid concepts with the lives of its citizens.

Tax touches everyone. On page 56 of the report, leading into the concluding comments, we read the words:

    "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".

Boy, you can say that again. Tax is not just a game for clever folk to play. It is in the fabric of the idea of citizenship, defining relationships one with another. It defines the relationship of the individual to the state. It is the stuff of defining even ourselves to ourselves--fear and greed, honour and virtue, sacrifice and self-reliance. Of course, those were way outside the remit of the committee yet were the ghosts which hovered just at the edge of all the committee's fine conclusions.

Since the Treaty of Rome, three strands of understanding have been followed, pretty much unbroken. The first is that indirect taxes have always been candidates for harmonisation. The second is that it has always been quite off the agenda for other taxes to be harmonised. The third is that the European Union strategists have always been hoping to encroach on the second.

So the sense of relief in recent weeks has been almost tangible at the offerings from the incoming Commissioner, Mr Frits Bolkestein. At his confirmation hearing he said:

    "It is difficult to see how even in the long term you could harmonise income taxes; nor do I see any pressing need for that, since different rates of income tax do not distort the market".

So that is all right then. However, I wish to make a point to your Lordships about our own reaction to those emollient words. Thinking clearly about it, I do not know which I find more distasteful: the programme of naked intervention on tax sovereignty which was ascribed to Mr Mario Monti, the previous

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Commissioner; or the new, soothing tones of Mr Bolkestein. I mean, we are talking a classic hard-cop/soft-cop routine here. In either case, individuals of awesome power are making pronouncements which remove money from British citizens.

It is like apologies from two different kinds of pickpocket: one, charming and consensual; the other rather more explicit. In either case, the victim did not exactly exercise much choice. And one notices that reassurances about income tax were comfortably aired but other categories received a more guarded treatment.

It is appropriate to touch on our own Government's less than transparent programme of tax reconciliation with our European neighbours. Earlier, my noble friend exposed that superbly.

I make a point in passing. When comparing one country's taxes with another, the only form of impartial tax is zero. Once there is tax at source, it is automatically partial. Let us consider this. The overall tax burden in the UK hovers at about 40 per cent while in the rest of Europe it is about 50 per cent. Do we seriously believe that harmonisation will bring down the percentage of the others? The real-life outcome must be that our tax burden will drift upwards and by a number not far short of 25 per cent.

At rock bottom, governments must always tax things which do not move. Largely, the citizens of a particular country fall into that category, as do assets based on property. In the United States, a model has evolved where certain taxes are perceived as the costs of citizenship. It may be if the European ideal of psychological unity drew close--and I do not wish that it should do so--then that acceptable entry ticket feeling could spread.

At this time, I believe that we are in a socially dynamic model with no predestined outcome to its development. There is the potential for increasing resentment of a tax regime with not so much as a democratic deficit but rather a democratic total vacuum. And we have the reality of an economic landscape on a world scale in which Europe looks increasingly like a city under siege. So far, political stability has been highly appealing to the inward flow and retention of capital. Long may it be so.

But two things are happening from which there is no turning back. The first is that capital is loose upon the world in quantities and with an emotional volatility which gives it the characteristics of a life form--predatory, wary and utterly unaware of man-made boundaries. Capital is feral and trying to tame it with the whip of tax will not have predictable outcomes.

The second is that the very foundations of economics have shifted to give dominance to information-based paradigms. A country can tax its loyal people some but not very much more. It has a much more difficult job pursuing the labours of those same people into cyberspace. And it has a near impossible job if it wants to couple up those people to tax regimes imposed from the ambitions and whims of our own fractious version of Olympus in Brussels.

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My fear is that even with stability and a competent regulatory framework, there will come a time when Europe will be increasingly toxic to development capital. The world owes Europe no financial favours; neither do our European neighbours feel they owe us. I am trying to put myself into the mind of a Treasury official in the present day. Do we have a catalogue of tax categories in other European countries which we should wish to "harmonise" with our own--categories which we should wish to see being matched by being brought down? If there is such a list, I should be extremely interested to see it. It may be an illusion but it feels as though everyone else is free to suggest to us that we should introduce this or that tax but we are constrained to keep our own suggestions secret. Why? I thought that the EU was one big family now with a culture of unity and no financial secrets between member nations. I suppose that the real world intrudes again.

This is neither the place nor hour to blunder around in the detail of the Select Committee report. It is sufficient to say that I share the expert anxieties about the withholding tax. That is as nasty a bit of precedent that one could fear to see. I hope that this Government will honour pledge after pledge to use what treaty instruments they can to protect the interests of their own countrymen and enterprises. But, I suppose, if we cave in on this, as so much else, we shall see our old friend, the strategic communications unit, being wheeled out to present our pusillanimous acquiescence as another triumph of negotiation.

8.28 p.m.

Lord Ashburton: My Lords, I add my thanks to those which have already been expressed to our chairman. He made our work a pleasure and ensured that the ground was covered without unduly fettering the members of the committee in the way they asked questions of witnesses. I add my thanks also to Dr Hopkins. She did not do miracles; she very nearly moved mountains in getting some of the work done and to us.

I am very sorry to hear reports about our chairman's political demise, which I hope are exaggerated. I feel that if I went out to Ladbroke's to try to get a price, I should find that he had not yet been written out of this House.

I also much enjoyed being present for the maiden speech of the noble Lord, Lord Lea of Crondall, to whose trenchant style I became accustomed during the years when I was chairman of the NEDO committee on finance for industry. I have little doubt that he will not be totally silent.

At this low place in the batting order, which I asked for but never attained before, I feel no inclination to dwell on the detail of the debate or the report which has been commented on already by a number of speakers. Therefore, I hope to be relatively brief.

Despite its undoubted importance and the fact that it provides considerable dissatisfaction, taxation is not a subject that appeals to a large number of people. The technical details can be difficult for a lay person to get

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their mind around, and indeed it would not be unfair to say that many people's reactions are of the, "I know what sort of tax system I want; don't bother me with the detail", kind. Unfortunately, in an area where avoidance, not to say evasion, is attractive, the detail is absolutely vital. Loopholes are immediately exploited.

The committee took a considerable amount of evidence on the more detailed side of taxation issues, but in many ways I believe that the most important conclusions to come out of the committee's work were of a more general nature. I shall return to that at the end of my remarks.

The evidence that we gathered usually pointed to there being at least two sides to most of the arguments, sometimes to the extent that we found, as in the case of ideas for a fundamental reform of the VAT system, that it was difficult to be convinced that the case for the advantages of change had been convincingly made out. There are few changes that can be made to fiscal arrangements that do not entail heavy costs which have to be weighed against gains.

However, the committee concluded pretty clearly that we could not agree with the Commission's contention that employment promotion is an argument that can be used to support proposed tax co-ordination measures. There was little solid evidence that lower taxation on income from capital had led so far to higher taxation on labour, nor that rises in the former would lead to reductions in the latter, and even if it did, that that would lead to a reduction in unemployment. Nor were we convinced that a Community-wide withholding tax on savings income was necessary to deal with what appeared to be, at least in the first place, an acute attack of tax evasion by German nationals.

It cannot be denied that the single market, which I personally regard, as do many noble Lords, as extremely precious, will lead to a degree of co-ordination, although not necessarily to complete harmonisation of tax rates. At first sight those would appear to be more in the area of indirect taxation. But it has to be recognised that there is no impenetrable screen between indirect and direct taxation. Low effective rates of direct tax, for example, must have some influence on the location of new enterprise. Direct tax is certainly one of the areas where the reservation of competence to individual states and the maintenance of unanimity are most necessary if a tendency towards centrally imposed taxation is to be avoided.

I conclude by saying that, although at present there are more obviously large issues concerning the European Union, including notably enlargement, the CAP and the attempt to make realistic progress on defence and foreign policy issues, I believe that taxation issues are vitally important. This area is not easily susceptible to popular debate or understanding. I heartily endorse the remarks of the noble Lord, Lord Desai, about the educational potential of reports such as this. They deserve the maximum exposure so that relevant public opinion is better informed.

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I commend to your Lordships the concluding comments in paragraphs 250 and 261 of the report. It could be all too easy, as the noble Lord, Lord Shore of Stepney, has pointed out, to sacrifice the UK's interests and the unanimity principle as part of a bargaining process over other issues, and we have to be aware constantly that by no means all the arguments put forward by other members of the European Union are inspired purely by high-minded, communautaire altruism. National interest is alive and well in the European Union and no one who has had the good fortune to serve on Sub-Committee A can fail to be aware of how often that became obvious during the collecting of evidence.

I count myself a europhile and do not find myself totally aligned with the noble Lord, Lord Shore of Stepney. Nevertheless, from time to time I find myself wishing that some of my europhile friends did not appear to have put their critical faculties in mothballs. I look forward to hearing the response of the noble Lord, Lord McIntosh.

8.35 p.m.

Lord Phillips of Sudbury: My Lords, I am grateful for the opportunity to speak in the four-minute slot. I have one point to make, but, first, I commend the reference made by the noble Lords, Lord Desai, Lord Birdwood and Lord Ashburton, to the importance of public education on this matter. I do not understand why reports of this nature should not have, as a compulsory component, an abbreviated, plain English form capable of being understood and read by any ordinary mortal. That would do wonders for the public awareness of the work of this House; it would do justice to reports of the eminence and utility of this one; and, above all, it would start to narrow the widening gap that I believe exists between this place, Parliament, and the people at large.

I want to speak about charities in relation to European taxation. It is easy to forget that the charity sector in this country is bigger than the automobile sector and bigger than the agriculture sector. It is easy to forget that Jacques Delors decided, for reasons that there is no time to delve into, to bring the voluntary sectors of Europe into the EU competence through the Maastricht Treaty.

It is also easy to be too complacent about the prospect of making tendencies uniform, vis-a-vis charity or voluntary sector taxation. Already there are moves in that direction. Although the noble Lord, Lord Currie, said earlier that one should not worry about such matters, I am not so sure. I have been in the charity sector for 25 years. Wherever there is a cross-national organisation it will tend, necessarily, inevitably, and without any malice, to start thinking up reasons for building on its own power-base and extending its own competence and influence. I see those tendencies evident in the charity sector now.

The charity sector in this country is enormous; it is vital; it has its own legal structure and its own regulatory structure. It is quite different from the rest of the European sector. In addition, the tax

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concessions for our charities are vastly more generous than those of any other member state of the European Union. In this country charities and those who give to them have total exemption from income taxes, corporation taxes, capital taxes and inheritance taxes. I am afraid that there is competition even within the wonderful world of the voluntary sector--a competition that can exist between governments and between charities. There are already charities champing at the bit to have a uniform structure of charity taxation so that they can make appeals across the frontiers of Europe without any let or hindrance.

My point is simple. In my view the voluntary sector should be absolutely free of any attempt at uniformity or harmonisation, or whatever euphemism one wants to use. If one likes, the voluntary sector is the cottage garden of our country where individuality, diversity, eccentricity, indeed anarchy, flourish and should flourish. God bless it. Please, Minister, assure us that temptations or tendencies that work in the direction of harmonisation, vis-a-vis the voluntary sector, will be utterly resisted.

8.40 p.m.

Lord Taverne: My Lords, what struck me most about this report was the obvious common sense and the hard-headedness of it. As everyone has agreed, it is an excellent report. Indeed, one would not expect anything less from a report whose author was the noble Lord. He is, on all sides of the House, one of its most highly regarded Members.

Unfortunately, as many noble Lords have said, it is not likely to have much of an impact in the United Kingdom. It is not likely to lead to headlines in the Daily Mail stating, "We were wrong". On the other hand, it is likely to have a considerable impact in Brussels, as the noble Lord, Lord Lea of Crondall, pointed out. May I say what a pleasure it is to find him now a member of this House. We first met a long time ago, during the first Wilson government. With no disrespect to his colleagues in the TUC, I always regarded him as one of the most likeable and sensible members of the TUC in the days when he worked there.

I would like to make a few detailed points and one general one. I shall try not to repeat points already made. First, I refer to the thesis which Signor Monti produced. Signor Monti is someone for whom I have always had a very high regard. He has been very helpful to this country in general. However, I believe that there is a fundamental fallacy, as a number of noble Lords have pointed out, in his thesis that lower capital and corporation taxes have been the cause of higher taxes on labour.

It is quite clear why taxes on labour in the European Union have risen. It is because of the demands of social security, and in particular because of the European pension system. The fact that their pensions are pay-as-you-go pensions has meant that a smaller workforce has had to support, with the demographic changes, a higher number of pensioners, and social

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security costs have, of course, inexorably risen. That is why the German Government, at the cost of considerable unpopularity, are now trying to reverse the process and limit the cost to the state pensions. It has nothing to do with taxation on capital or taxation on companies.

With regard to taxation on companies, I agree with what the noble Lord, Lord Currie, said. It would make sense to have a greater degree of co-ordination of corporate taxation. However, I am very pessimistic. I believe that there is not a cat in hell's chance that we shall see it in the near future. One has only to look at the attempts that were made by the Ruding Committee to arrive at some sort of basis of harmonisation of corporate taxes. The Ruding Committee report has sunk without trace. The problem is that the bases for taxation are very different.

It was mentioned that there is no point in harmonising rates. I refer to a small contribution that I made to this question in Tax and the Euro, in which I drew up a table of taxation as a percentage of GDP. One then found that, despite the fact that German taxes are much higher in terms of rates than our corporate taxes, the yield as a percentage of GDP of German corporate taxes was 1.7 per cent, and the yield of UK corporate taxes, with much higher rates, was 3.6 per cent--twice as high. Those figures are not be taken at complete face value, because certain German corporate taxes are paid as income tax. But there is no doubt that we have a much higher yield from corporate taxes despite much lower rates.

Let me say something about the code of conduct. I agree with the remarks that have been made on all sides of the House about transparency. I agree very much with what the noble Lord, Lord Saatchi, said about transparency. However, I do not agree with his view that we cannot have other people interfering with our taxes at all--of course, there is a measure of independence--and particularly in some of the issues which are part of the inquiry under the code of conduct committee. It is true that one cannot regard state aid as exactly equivalent to tax concessions, but sometimes they have an absolutely identical effect. You can help a company by lowering its taxes or you can help a company by giving it money. We have a very strong national interest in ensuring that the competition in giving different forms of state subsidies is controlled by the Commission. We have a similar interest in ensuring that there are no unfair ways of helping particular companies which could be exactly similar to a form of state aid. We are inter-dependent.

On the question of the withholding tax, with respect, I do not agree entirely with the noble Lord, Lord Lea of Crondall, that there is a case for a minimum withholding tax. In principle, a withholding tax seems quite sensible. However, there are several objections. First, there are the objections, formidably put in the Government's paper on international bonds and the draft directives on the taxation of savings; I say no more about that. However, I would go further and say that, in my opinion, the whole idea of a withholding

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tax is a mistake. If it was entirely a question of greater disclosure of information, that would do no harm at all.

The case against the withholding tax is not just that it would lead to the taxation of international bonds. The history of it is very unfortunate. When the Germans introduced it for the first time, they lost billions because savings were moved to Luxembourg. They tried it again, because of the ruling of the Frankfurt court, their Karlsruhe court, and again they lost a great deal of money, which is why they are very keen to see it on a European scale. But why should it work on a European scale?

In fact, the most effective criticism of the withholding tax was made by a French institute, the highly regarded French think tank, the Promethee Institute, which gave a number of reasons why, in its view, the withholding tax would be a mistake. First, there would be formidable complexities and bureaucracy. Paying agents, having to keep elaborate records, may not always find it easy to identify the place of residence of beneficiaries. Life would be much easier for paying agents outside the European Union and many of them would go out. Secondly, the tax only applies to interest payments, a valid point that others have made. But what interest payments? Interest-paying unit trusts may escape the withholding tax because they can amalgamate with non-interest paying unit trusts. In addition, what would be the position about zero coupons? There are a lot of complexities.

The biggest problem about the withholding tax is that, just as German savings went to Luxembourg when it was imposed in Germany only, so European savings will go outside the European Union if it is imposed in the European Union only. They can go to Switzerland and a number of other places.

The problem is that those in the Commission have looked at the matter very much as an internal problem. I do not believe that they have taken a broad enough view of the future of the euro as a global currency. If they had looked at it as a global currency and considered its future as such, they would not be concerned with rather narrow questions of tax avoidance. The United States was very much concerned about the narrow question of tax avoidance when in 1963 it imposed the interest equalisation tax. The result was that an enormous new development was entirely lost to the United States and came to Britain--very favourable to us, very bad for them.

Finally, I make one general point. The report disproves the scare stories. It will not, of course, stop Mr Portillo saying that the euro is going to bring much higher taxes in the United Kingdom and it will not stop those who say that tax is yet another example of the inevitable drive towards a European super state. The belief that the European Union is hell-bent on creating a European super state is almost an article of religious faith which cannot be contradicted by any evidence.

When the noble Lord, Lord Shore, speaks on the subject, he speaks with the passion of an Old Testament prophet. I greatly admire his eloquence. He

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is a pleasure to listen to, although I sometimes wish that he did not speak at least twice as long as anyone else. In fact, this report, and the tax experience more generally, proves the opposite. You cannot have a European super state unless you have substantial central resources. Many speeches are made about the European super state. But what do the countries actually do? They have all agreed that they are not going to give any more resources to the centre. You cannot have a European super state if the central tax resources are limited to 1.27 per cent of the GDP of the European Union.

Germany, whose leaders often make federal speeches, is in the lead in opposing any further sums to the centre. When one looks at trends in the European Union, they contradict the drive towards a federal super state. The European Union has both federal and "confederal" characteristics. The federal characteristics tend to be concerned with the areas in which the Commission is involved--the matters of the single market; competition policy--where certain executive decisions can be taken by the central body, the Commission. But in the past decades power has been moving towards the more "confederal" body, the Council of Ministers. That is where the two new pillars were created after Maastricht.

One finds, therefore, that the whole trend is not towards this federal super state; it is much more to something which is a mixture of the two with a strong confederal element. Indeed, one of the matters which is preventing the creation of a single super state is the limit on the central resources; and tax is the proof that that is in fact not going to be increased.

8.50 p.m.

Lord Kingsland: My Lords, first, from the Benches of Her Majesty's Loyal Opposition, I want to say how much we all enjoyed the maiden speech of the noble Lord, Lord Lea of Crondall. Not for the noble Lord the niche topic. Both in his choice of subject and mode of exposition, the noble Lord was bold. I think we would all agree that, both from the sincerity of the message and the directness of the exposition, we not only derived great pleasure from his speech but also experienced a great sense of anticipation. We look forward to the next instalment. I thank the noble Lord for his contribution this afternoon.

I should also like to congratulate the noble Lord, Lord Grenfell, on his report. As a skilful exponent of the art of popular fiction, the noble Lord must have found the subject matter of the report somewhat intractable. But his unique blend of intelligence and lightness of touch produced an end product which I know your Lordships will agree is both readable and perspicacious. I have known the noble Lord, Lord Grenfell, for more years than I care to admit, and I would have expected nothing less.

One of the most interesting themes of the report concerns the contrast between harmonisation and co-ordination. It is quite clear what we all mean by "harmonisation" in the European Community. The Commission makes a proposal; the Parliament is

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consulted; the Council deliberates and a directive or a regulation is made which is justiciable in the European Court. We should make no bones about it: this is, in effect, a judicial federation. And in circumstances where the laws are made by qualified majority rather than unanimity, it also has the character of a legislative federation. These are arrangements into which successive British governments have entered over a number of decades.

By contrast, "co-ordination" can mean a number of things. For example, it can mean what the noble Lord, Lord Hussey of North Bradley, referred to when he discussed the arrangements entered into by the press barons--arrangements which he said were painfully reached and almost invariably broken. Equally, at the other end of the scale, co-ordination can involve contractual arrangements which are regarded by those who participate in them as legally binding.

As I understand it, the position of the Government on the Code of Conduct Group, to which most notably the noble Lords, Lord Shore and Lord Boardman, spoke, is that it does not breach the principle of unanimity and its decisions are not legally binding. I have been looking at a section of the report which deals with the evidence of Mr. Colin Mowl, one of the United Kingdom's representatives on the group. At paragraph 124 of the report we find Mr. Mowl quoted as saying:

    "Although [the Code] is not legally binding the Government has entered into an international commitment which it expects to honour and expects other people to honour".

The report continues:

    "Asked what might happen in relation to particular United Kingdom measures being examined by the Group, he said that if they were found to be harmful 'the terms of the Code would come into effect. There is a commitment in there that Member States will roll back according to certain timescales... any actually harmful measures'".

If that is not, in contractual terms, legally binding, I do not know what is. The only thing which distinguishes its legal quality from that of the harmonised system, which I sought to explain to your Lordships earlier, is that in the harmonised situation there is a recognised way of drawing in the Court of Justice when there is a dispute about what a regulation, directive or other measure means. In this case, there is no system for dispute resolution; but that does not mean that this undertaking is not legally binding.

I turn now to the question of unanimity. Somewhat further down in paragraph 124 we find Mr. Mowl quoted again. He says:

    "If some Member State disagrees with some aspects of the conclusions then its view is put forward in the report of the Group. To some extent this is unchartered territory, but there will then be a collective discussion in ECOFIN no doubt, but because this process reflects national competence any action taken is for individual Member States to take. It is not as though you need unanimity formally".

Again the report continued:

    "The Paymaster General confirmed that the Code of Conduct Group itself did not take votes, but was 'charged to reflect the views expressed in the discussion of the subject'".

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It is quite clear that once the Code of Conduct Group has come to a certain view collectively, the individual member state that is the subject of that discussion is obliged to act, if necessary by rolling back, in conformity with a specific timescale, the criticised tax. In my submission that is a clear breach of the principle of unanimity.

I wish to draw attention to two other matters concerning the group. The first is that, as many noble Lords have said, the activities of this group are carried out entirely in secret--your Lordships are not allowed to see the agendas; your Lordships are not allowed to see the minutes; your Lordships are not allowed to see the progress reports.

Many people in the United Kingdom believe that a viable alternative to the classical harmonisation approach is the approach of intergovernmentalism. They believe that because intergovernmentalism, in principle, allows national parliaments to retain control of political debate and decision-making. We have here a very important intergovernmental mechanism to control a matter which a vital part of this nation's sovereignty. What role does our national Parliament have in that intergovernmental mechanism? The answer is none. If we are to manage the decision-making processes of the European Community in future on an intergovernmental basis, we simply cannot allow deliberations of this importance to take place in secrecy.

The second point, which arises out of my suggestion to your Lordships that the work of this Code of Conduct Group is both legally binding and not unanimous, concerns the relationship of the Code of Conduct Group to the state aid rules in the treaty. Those rules are directly binding on the government of each member state and, in circumstances where a member state breaches one of them, that member state is open to infraction proceedings by the European Commission. There is a clear procedure laid down transparently in the treaty.

As I understand it, every single item on the agenda of the Code of Conduct Group qualifies as a potential illegal state aid. Why has the Community chosen not to deal with these issues by the mechanisms laid down in the treaty? Why has it chosen to invent instead a completely new mechanism which duplicates exactly an existing mechanism? I leave it to your Lordships to speculate. Could it have something to do with the wider issue of transparency, or is there some other motive of which we know nothing?

Indeed, in the light of the fact that the Code of Conduct Group is exactly mirroring a procedure which is already set out in the treaty, I would go as far as to ask: is it legal? Is what is being done by the Code of the Conduct Group contrary to the treaty on the grounds that the latter already has a mechanism to deal with these matters and the group is seeking to evade it? I simply pose the question and wait with interest to hear what the Government will have to say in response.

I have just two final reflections to make on the report. The first concerns the desirability of tax harmonisation in a continent where 11 member states

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are already part of European monetary union. Becoming a member of the European monetary union and embracing the single currency means that one of the two major instruments of economic policy is now lost to the nation state, leaving only fiscal policy. Far from those member states who are members of economic and monetary union harmonising taxes, I have always believed that their interests were in exactly the opposite direction. If you no longer have the capacity to adjust your interest rates and your money supply, it is even more desirable to have complete freedom of manoeuvre when you are dealing with fiscal policy.

Over the past 20 years, the Dutch and the Germans have had, in effect, a single currency. The reason why they have been able to keep their rates of exchange exactly fixed between each other is that they have followed widely divergent fiscal policies. If they had had to follow a uniform fiscal policy, I think it highly unlikely that their currency policy would have been as successful as they believe it has been.

For many centuries now there has been a debate about the extent to which politics should interfere with monetary policy. In the late 19th century not only was the Bank of England completely independent of political control, but our currency was also attached to the gold standard. Therefore, in a sense, not only did Parliament lose control of issues concerned with money supply but the nation also lost control for a period of 40 years.

I believe that the debate about the desirability or the degree of political interference in monetary matters is genuinely still out to the jury. But there can be no debate about the crucial importance of national parliamentary control of fiscal matters. In my submission, that is absolutely central to the notion of democracy in a modern nation state.

In the area of VAT and in the area of excise duty the United Kingdom Government have, by unanimous decision, decided to cede certain powers to the European Community, rightly or wrongly. However, what we are seeing here is the Parliament of a nation state attempting to cede further taxation powers to the European Community by majority voting, uncontrolled by the national Parliament. That must be unacceptable to the United Kingdom.

9.5 p.m.

Lord McIntosh of Haringey: My Lords, I share the tributes that have been paid by all noble Lords who have taken part in this debate to the work of the committee and its staff and, in particular, to my noble friend Lord Grenfell. I am gutted by any suggestion that he might choose to be no longer with us. The noble Lord, Lord Shaw of Northstead, said that the tribute to this report was that it would stimulate better, informed debate. Indeed, it has. If I may say so, it has stimulated a very much better informed debate both this afternoon and this evening than we had on 18th June when we discussed the Private Member's Bill introduced by the noble Lord, Lord Waddington.

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It is because we have had the detailed and careful considerations and analysis of the committee's report before us, together with the benefit of the very expert evidence that witnesses gave, that we have been able to have a debate of such excellence. I believe I can reveal--at least, I think I can because no one has told me that I cannot--that Commissioner Monti remarked privately to the Government on the outstanding quality of the report. He is not someone who is known for paying excessive tributes.

As well as considering current issues, the committee commented on some ideas on the future of European Union taxation. I very much enjoyed that part of the report and it makes some interesting points. Despite my noble friend Lord Grenfell saying that he wished that we would comment on it, I think he will understand that we do not want to commit the Government in public on those points today. I think that it is best for me to restrict myself to the current issues in this report which are of great importance.

Let me say straight away that the Government welcome the report and the conclusions of the committee. The noble Lord, Lord Grenfell, said that it is very much in line with the Government's position and we agree with that. The report confirms what I have said to this House time and time again; namely, that the United Kingdom has nothing to lose and everything to gain from engaging in constructive dialogue with our European partners on tax issues.

As the report states--and as we agree--

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

That has been confirmed by a number of noble Lords who have spoken today, notably my noble friend Lord Currie. This statement entirely reflects the opinion of the present Government. I take the opportunity to respond to the points raised by noble Lords during the course of the debate and to expand on the Government's response to the committee's report.

In the past, British businesses, operating in a relatively neutral tax system, may have had to compete in Europe with companies which enjoyed the benefits of a tax system weighted in their favour. As Europe moves towards a single market, this is recognised as being no longer acceptable. Now the Government are working with other member states to create a more level playing field for business across Europe. I recognise the force of what the noble Lord, Lord Rathcavan, said about our only land border with another member state being in the island of Ireland. I am always careful to try to avoid politically incorrect descriptions as regards Ireland, but I know that I shall get it wrong. The island of Ireland has a land border within it and it is quite clear that that causes great problems. I am sure that the Treasury will pay great attention to what the noble Lord has said.

But do not misunderstand me. The measures under consideration do not purport to create a unified tax system. This is not the way forward for Europe. For the benefit of those who have not fully understood that, I shall happily repeat what I have said before. My

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noble friend Lord Shore says that I do so in extravagant terms, but as I have to do it so often I must be forgiven for a little bit of "embroidery" each time, although fundamentally I am saying the same thing. The priority for Europe is the promotion of employment, economic reforms and competitive markets, not tax harmonisation.

As we have been talking about the difference between tax harmonisation and tax policy co-operation, I think that it is better if we define our terms, certainly as regards tax co-ordination. Tax policy co-ordination in the progress reports from ECOFIN to the European Council is defined on the principles of national competence: that is, policies wholly a matter for individual member states if the Community does not have competence under the treaty; subsidiarity: that is, action at Community level only where accepted objectives cannot be achieved by countries acting alone; and unanimity--each member state has a veto. That is its definition of tax policy co-operation and the Government believe that that is the way it should stay.

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