Select Committee on European Union Thirteenth Report


Letter from Dawn Primarolo, Paymaster General to Lord Grenfell, Chairman of Sub-Committee A

  I enclose a memorandum setting out the Government's formal response to your excellent report, which was published on 28 July. I am very sorry not to have responded sooner.

  I note that a debate will be held on this report during the spill-over. The Government looks forward to participating in this.

27 October 1999

Government Response


  1.  The Select Committee on the European Communities of the House of Lords published its report on taxes in the EU (HL Paper 92) on 28 July 1999. The Committee held an intensive enquiry into EU taxation between March and June 1999.

  2.  Although the enquiry did not cover taxes on energy or excise duties, in other respects it was one of the most comprehensive examinations of taxation in the EU so far undertaken. The Report reflects evidence taken from a wide range of key individuals and organisations, including representatives of the City of London, UK business, the European Commission and the French, German and Irish Finance Ministries, as well as the Government.

  3.  The Report for the most part sets out the opinion of the Committee and does not make formal recommendations. It first considers some of the fundamental underlying questions on EU taxation; it then considers the proposals now brought forward by the Commission; finally, it looks at some ideas for the future which have been floated within the EU. This Government response is mainly confined to the Committee's concluding comments and its comments on the current Commission proposals.


  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. We conclude that recent scare headlines about a European Union tax take-over were unjustified, and ill served a British public insufficiently informed of the facts to judge the validity of the reporting. (paragraph 249)

  4.   The Government Welcomes the Committee's Remarks.

  There are certain areas where some sensible, well-justified co-ordination—in particular to reduce fraudulent tax evasion and to help create conditions in which tax competition can be pursued harmlessly—could serve both United Kingdom and EU-wide interests, and ought therefore to be pursued in a spirit of pragmatism rather than being dismissed out of hand on purely dogmatic grounds. (paragraph 250, first bullet)

  5.   The Government believes these comments are consistent with its own approach.

  As long as the Government maintains its insistence on the unanimity rule in decision-making (except for purely administrative matters) and on the principle, shared by all Member States, that national taxes raising revenue from domestic taxpayers are a strictly national matter, such proposals as are already on the table can pose little or no threat to the interests of the United Kingdom. (paragraph 250, second bullet)

  6.   The Government is committed to retaining unanimity for decisions on taxation, and believes that tax policy is wholly a matter for Member States if the European Community does not have competence under the Treaty.

  The Government must nonetheless remain permanently vigilant to ensure that undesirable tax measures are not smuggled through the back door. (paragraph 250, third bullet)

  7.   The Government agrees, and is vigilant on this point.

  Within these paragraphmeters we believe that pragmatic tax co-ordination and fair competition can not only co-exist but complement each other, to the greater benefit of taxpayers within the European Union. (paragraph 251)

  8.   The European Council in Vienna last December concluded that tax policy co-operation was not inconsistent with fair tax competition. The Government welcomes the Committee's conclusions.


  The Code of Conduct for business taxation

  The resolution on a Code of Conduct for business taxation was unanimously adopted at ECOFIN. We remain unclear about the implications for the United Kingdom of having agreed to this Code, in particular in relation to national sovereignty and to the principle of unanimity in tax matters. However often the Government repeats that the Code is not legally binding, it seems to us that agreeing to it has obviously created a moral if not a legal obligation on the Government to "roll-back" tax measures which are ultimately deemed to be "harmful", and not to introduce new measures of the same kind. The actual impact on the United Kingdom will of course depend on which (if any) of our tax measures are deemed harmful. But there remains the risk that the process could lead to the United Kingdom being obliged—in practice if not in law—to adopt tax measures damaging to the interests of the economy or of citizens. This would matter less if all other Member States took the same view as to how binding the Code was, but we are not convinced that they do. This raises the fundamental question of whether a Code of Conduct approach can work, and work equitably, in a body with such diverse styles of government as the European Union. We think that Parliament deserves a much clearer explanation of how the system is supposed to work than the Government has so far provided. (paragraph 128)

  9.  Every Member State has signed up to the Code of Conduct for business taxation—as the Committee's Report makes clear. The UK for its part is fully committed to tackling harmful tax competition. Harmful tax practices of the sort addressed by the Code can distort competition and artificially attract investment and jobs away from Member States, such as the United Kingdom, which have more neutral tax systems.

  10.  The Government does not agree, however, that its commitment to the Code has implications for either national sovereignty or the unanimity principle. The Code clearly states that it applies "without prejudice to the respective spheres of competence of the Member States and the Community" (paragraph A). Moreover, the Code is not about adopting tax measures of any kind. Member States are committed only not to introduce new tax measures which are harmful within the meaning of the Code, to re-examine existing laws and practices and to amend these as necessary with a view to eliminating any harmful measures.

  11.  One of the UK measures listed as potentially harmful was abolished with effect from 6 April 1999 as part of the Government's corporation tax reforms. The Government has made it clear that it is confident that none of the other UK measures listed as potentially harmful and being assessed by the Code of Conduct Group is actually harmful within the meaning of the Code.

  We are left in as much ignorance as anyone else about the way in which the Code of Conduct Group is going about its business. We think that the lack of transparency in the handling of this matter shows both the Council of Ministers and the Government in a very poor light. It leaves the Code of Conduct open to being described as an obnoxious method of inflicting secret taxation, when in fact it may be little more than an innocuous discussion group. We note that the Government has now had some contact with United Kingdom industry about the proposals. We are not aware of the content of these discussions, but they have clearly been insufficient either to elicit a useful response or to calm fears. And contact with industry does nothing to remedy the deplorable lack of accountability to Parliament. We recognise the difficulty of changing the rules of a game which is already in progress, but we consider that given the extent of the leaks which have already occurred (and are likely to continue) there can be no justification for refusing to reveal the facts. We call upon the Government to seek agreement from other Member States that the progress reports which the Code of Conduct Group makes to ECOFIN should be published, and should be subject to Parliamentary scrutiny in the normal way. (paragraph 136)

  12.  The Government notes the Committee's recommendation. The UK will consider press for the final report of the Code of Conduct Group to be published in full.

  13.  As the Government explained in its evidence to the Committee, the ECOFIN Council decided that the work of the Code of Conduct Group shall be confidential. The Government will make available to Parliament any reports from the Group to the Council which the Council agrees should be published, and inter-institutional Communications on the Code and harmful tax competition in general will be subject to parliamentary scrutiny in the normal way. The need for scrutiny will continue to be respected but subject to the requirement for confidentiality which will apply until ECOFIN says otherwise.


  We recognise that this proposal does not solve the fundamental problems of multinational corporations which operate in a number of Member States, but we consider that it would be a useful step in the right direction. We accept the Government's position that it is not sensible to stand on the letter of subsidiarity when the interests of British business could be furthered by the proposal. Subject to the results of the regulatory impact assessment being satisfactory and to any necessary amendments of detail being made, we therefore urge the Government to press for this proposal to be adopted as soon as possible. (paragraph 150)

  14.  The ECOFIN conclusions of 25 May 1999 state that this Directive is part of the tax package adopted by Member States on 1 December 1997 and only in that context will final adoption of the Directive take place. For its part, the UK Government is happy to see the Directive adopted as soon as possible; we believe it is in the interests of UK business for this to happen. There are a few remaining points of detail on the Directive to be resolved; and the UK will play its part to ensure that the discussions on the Directive can be brought to a close, as recommended by ECOFIN.


  Despite claims and counter-claims, we are left with no firm evidence about the likely scale of the effect of a withholding tax on the City of London. There is a genuine fear, reasonably based, that its introduction would damage the City by making Eurobonds issued from a tax haven relatively more attractive to EU investors. We accept that there would be damage as a result of an outflow of business. . . . We expect the long-awaited paper which the Government is producing in conjunction with the City to shed further light on this matter. . . . (paragraph 175)

  We have not therefore been able to reach agreement on the best way forward. It is argued in some quarters that there are no feasible amendments to the proposal which might make it acceptable, and that unless the proposal is withdrawn the United Kingdom should use its veto even though this could mean paying a price in negotiating terms. Another view is that it may be possible to find an acceptable version of the proposal, either by making appropriate exemptions from the withholding tax (to limit damage to the Eurobond market, and hence to the City of London), or by ensuring that Member States choosing the reporting option do not thereby lose revenue. Without access to the evidence about the likely scale of impact on the City which the Government has been collecting for the past year, we have no basis on which to reach a conclusion on this proposal. (paragraph 199)

  15.  The Government notes the Committee's comments. It is a matter of record that the Government will not agree to this Directive if it considers it is not in Britain's interests to do so. Since the Committee's Report was published, the UK has submitted its paper on "International Bonds and the draft Directive on taxation of savings". This paper sets out two approaches for securing an exemption from the Directive for eurobonds and other similar instruments in order to preserve the competitiveness of EU financial markets. The UK paper has been made available to the public on HM Treasury's website. A copy has also been placed in the House of Commons library.

  16.  The UK paper also makes clear that even if we secure the UK's primary goal of an exemption for international bonds, it will still be necessary to resolve a large number of other outstanding issues on this Directive. These are largely technical but could have a serious impact on the burdens which this Directive could place on banks and other paying agents.


  We hope that the Government will not feel obliged to continue to block the proposal for improved mutual assistance for the recovery of cross-border tax debts on the grounds that it should be subject to unanimity not qualified majority voting. It seems to us a useful administrative measure, which could significantly improve recovery rates for indirect and direct taxes, and it is a pity to lose the potential gains because of a point of dogma. We could not understand how the proposal could have an adverse effect on the revenue of the United Kingdom—and if, as HM Customs and Excise suggest, "it would have a direct impact on the taxpayer who is pursued for their debt in another Member State", the Government is surely in favour of its residents paying the taxes due from them wherever they occur. (paragraph 212)

  17.  At paragraph 112 of the Report (paragraph 14 of the Executive Summary), the Committee notes the Government's commitment to the principles of national competence, subsidiary and unanimity in tax matters, which we understand from the Report generally that the Committee supports. We are therefore surprised that the Committee believes that the application of those principles to the Directive is a point of dogma.

  18.  The Government is keen that all taxpayers should pay the tax that is due from them, but this Directive would change the arrangements which currently apply to some unpaid taxes and extend them to others. As well as having a direct impact on taxpayers, this would affect the levels of tax recovered and thus the revenues of Member States. Given the importance of the principle of national competence in taxation, the Government considers that these arrangements must be determined on the basis of unanimity and not Qualified Majority Voting.


  When we first considered this proposal, we were concerned that differences in interpretation and implementation of the VAT legislation were leading to uncertainty for businesses and governments and to the risk of double taxation or non-taxation. We took the view that if businesses supported the proposal, the Government's opposition to it would not be in the best interests of the full and equitable operation of the Single Market. We remain of that view, particularly if a "safety stage" can be incorporated in the procedure to allow Member States to veto proposals which would have serious budgetary implications for them. But we also commend the Government's pragmatic approach to making the procedures of the VAT committee more effective. (paragraph 209)

  19.  The Government notes the Committee's comments on the proposal for reform of the VAT Committee and welcomes its commendation of the steps which have been taken to make its procedures more effective. However, mindful of the Committee's exhortation that the Government must remain permanently vigilant to ensure that undesirable tax measures are not smuggled through the back door (paragraph 250, third bullet), the Government does not see how it can safely support the current reform proposal.

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