TAX CHANGES BE IMPOSED ON THE UNITED KINGDOM?
100. The Government believes that "EU taxation
should continue to be based on the principles of:
National competence, whereby policy is
wholly a matter for Member States if the Community does not have
competence under the Treaty;
action should only be taken at Community level where the objectives
cannot be sufficiently achieved by Member States and can be better
achieved by the Community;
Unanimity, whereby EU
wide taxation matters can only be adopted by a unanimous vote
of Member States" (p 37).
We considered whether there was a danger of these
principles being breached, and whether such a breach might ever
101. We were interested to note the approach adopted
by the Government on the draft Directive on the taxation of interest
and royalty payments between associated companies.
In her Explanatory Memorandum on this proposal, Dawn Primarolo
(then Financial Secretary to the Treasury) suggested that the
Directive did not breach the principle of subsidiarity, "because
it would eliminate withholding tax between companies in different
Member States and thereby benefit United Kingdom businesses".
The Minister reassured the House of Commons European Legislation
that accepting this proposal would not create a precedent, because
there had already been cases
where the United Kingdom had agreed to Community action in particular
areas of direct taxation "where such action would be beneficial
and the subsidiarity test is satisfied". This pragmatic approach
might fuel Graham Mather's fear that "the [Government's]
policy appears to be that some further moves on tax harmonisation
would be compatible with British interests, that some others (not
defined) would not be, but that there is no fundamental point
of principle so far adumbrated"
102. Commissioner Monti recognised the fear of some
Member States that efforts on tax co-ordination were "trying
to take sovereignty away from [national] parliaments" - in
effect, breaching the principle of subsidiarity. He claimed that
in fact the position was "quite to the contrary": the
Commission was trying to enable Member States to "avoid the
gradual increasing erosion of sovereignty in favour of the anonymous
market place and away from democratically elected decision-making
bodies that would occur as markets integrate, unless there were
to be some tax co-ordination" (Q 229).
103. As for the issue of unanimity, the Treaty
specifies that it shall apply to decisions on indirect tax matters.
But as Malcolm Gammie says: "There is no legal framework
for advancing Community measures on direct taxation. The EC Treaty
contains no requirement that Member States harmonise their corporate
taxes or other aspects of their direct tax systems" (p 140)
- and thus no provision as how such harmonisation might be achieved.
104. The Government's declared position is that unanimity
must be preserved for all decisions on all forms of taxation.
In his oral evidence, Colin Mowl of HM Treasury said that the
maintenance of unanimity was a Government commitment set out in
its election manifesto: that commitment was an absolute one. He
added: "Having said that, that is the formal position with
the Treaty at the moment, and you quite rightly suggest that other
people have different views and they may look for ways to encourage
us, force us, to change that situation" (Q 131). However,
for decisions on indirect taxation such a move would require a
Treaty change which itself would require unanimity, "and
the United Kingdom would not agree to such a change". The
Paymaster General emphasised that the Government would also apply
the same principle to direct taxation: "The Chancellor has
made it clear that the United Kingdom will not agree to qualified
majority voting in the area of direct tax and corporate tax"
105. Commissioner Monti confirmed that all tax decisions
required unanimity "as things presently stand", but
noted that "a few Member States have already pronounced in
favour of shifting
from the unanimity rule to the qualified
majority rule". He suggested that, "should the European
Union be unable to finally reach consensus and compromise on the
so-called withholding tax, this would considerably increase the
pressure on the part of several Member States to shift from the
unanimity requirement to the qualified majority requirement
If it were possible to adopt [the withholding tax proposal]
I believe a lot of the pressure will fade away" (Q 238).
The Paymaster General confirmed that "in the margins of the
ECOFIN meeting in December Germany made some comments in that
regard", but there had been no formal proposal (Q 429).
106. For the French Government, M le Floc'h-Louboutin
also envisaged the possibility of relaxing the need for unanimity.
In relation to VAT, he said: "For some fields we are beginning
to wonder, since that tax has now reached more or less full maturity,
whether we could not adopt qualified majority voting,
working within [the VAT] committee
would be a possibility". He contrasted this with direct taxation,
which he said was
"a field where
[the EC's] competence
is subsidiary but at the same time
an extremely important
the good operating mode of the internal market
But if the work that has been done by the Monti Committee
does not reach a successful end
because there is
opposition by one single state for instance, well then obviously
qualified majority voting would be totally legitimate or become
French Ministers are in favour of evolving
certain subjects yet to be determined and upon terms yet to be
determined, but that would move towards lifting this possibility
of irreducible opposition or a veto that would come from one single
state" (Q 245).
107. We noted that the requirement for unanimity
was not universally welcomed: for example, Peter Wilmott perceived
it as leading to "unwieldy compromises" by giving undue
weight to purely national concerns in negotiation, especially
as Community membership grew (p 143). But those who do support
unanimity fear that departures from the principle could occur
"through the back door". We explored how this might
108. First, we have noted an increasing number of
Commission proposals where, once a measure had been unanimously
agreed, decisions on its implementation would be made by qualified
majority voting. These include the decision to withdraw agreement
for a Member State to charge a reduced rate of VAT on labour-intensive
services, and the proposals for reform of the VAT committee.
The Government has taken the view in both these cases that unanimity
should be maintained; and if agreement were reached it could hardly
be described as being "through the back door" since
the provision for qualified majority voting is on the face of
109. Secondly, the Economist
has drawn attention to an European Court
of Justice judgment
that the taxation of life assurance in Sweden was illegal because
it discriminated against firms from other European countries,
and suggested that "the same principle - that the Court can
overrule national sovereignty in tax matters, where it clashes
with other aspects of European law - could theoretically be applied
to other taxes too". It is well-established that although,
as Community law presently stands, direct taxation does not as
such fall within the purview of the Community, Member States'
powers must be exercised consistently with Community law.
110. Thirdly, Lord Shore of Stepney has expressed
concern "about the possibility under the enhanced cooperation
procedures of the Amsterdam Treaty of the other European countries
[that is, the members of EMU] coming together to agree on tax
harmonisation and then making that a condition of Britain's further
move to entry into the single currency"
Since the requirements for entry to EMU are laid down by Treaty,
it would not be possible to impose any further conditions formally.
But of course, it is always possible that the Government might
- whether or not in the context of EMU - trade off an undesirable
tax proposal against something else.
Treasury officials conceded that there could be such pressure,
but maintained that the Government would not allow the national
interest to be compromised by linkages of this kind (Q 145).
111. Finally, we have concerns about the procedures
being used in relation to the Code of Conduct on harmful tax competition,
which we consider in our discussion of that proposal.
112. We note the commitment
of the Government to the principles of national competence, subsidiarity
and unanimity in tax matters. We also note that the Government
is inclined to adopt a pragmatic view on the issue of subsidiarity
when it judges measures to be in the interests of British business;
we welcome this.
113. We recognise that
the concept of national sovereignty in tax matters is subject
to market pressures. When tax bases are highly mobile, governments
may be unable to set tax rates that differ to any great extent
from the rates ruling elsewhere; because capital is so mobile,
this applies particularly to taxes on the income from savings.
The effect in practice is to reduce the fiscal sovereignty of
individual Member States. We recognise that international co-ordination
may be a way for Member States collectively to regain some of
the fiscal sovereignty which they have lost at a national level
as a result of market integration.
114. We consider that
there is no case for any departure from the principle of unanimity
unless and until such a departure has been openly and explicitly
made by a change to the Treaty; such a departure would itself
require unanimous approval. We note that this issue is likely
to arise at the next IGC. We agree that the principle of unanimity
should be maintained for major issues. But we are also agreed
that that principle need not necessarily be extended to cover
all minor administrative measures dealing with taxation, especially
as the number of Member States increases.
115. We note that, like
any other European Union measures, tax proposals are the subject
of negotiation. The outcome of such bargaining may involve the
pooling of sovereignty, which some may see as a reduction of sovereignty.
We do not believe that this possible outcome should influence
the Government's position on the present tax co-ordination proposals.