1. We have prepared this note in response to the Treasury's Call for Evidence on Taxation, published in November 2012. References are to that document.
2. We appreciate that the immediate purpose of the Review of Competences is to gather evidence, rather than to come up with a list of demands for repatriation.However, in the field of taxation, we have had plenty of negotiation, legislation and litigation over the years, making clear the ways in which the EU's institutions can help British business, and the ways in which they can hinder it by constraining the power of the UK government to bring in, or to maintain, tax measures that would benefit British business. (if, for example, the benefit of a relief would have to be extended to businesses in all EU member states, that may make the relief unaffordable. If the decision in C446/03 Narks & Spencer v Halsey had been different, group relief might have become unaffordable.) We have therefore moved straight to what needs to be done, in order to improve the position for the UK.
The importance of unanimity
3. Tax matters should be decided at the national level, with any EU action strictly subject to unanimity. There are two reasons for this. The first is that taxing and public spending are central to people's voting decisions, and decisions on taxing and spending therefore need to be made by the primary entities that people directly elect: their own national legislatures and executives. The second is that each country's taxpayers have to fund their own country's public spending. So long as there is no fiscal union on the spending side, there should be no fiscal union on the tax-raising side, not even an union of policies that then allows for different tax rates in different countries.
4. In relation to paragraphs 3.50 to 3.54, it is absolutely wrong to slide from unanimity to qualified majority, when a tax measure is incidental to a non-tax measure. Unanimity on tax must be universal.
5. Unanimity is particulary important because there is a choice between harmonisation and competition. If a majority of member states see benefits in harmonisation, but a few see an opportunity to compete effectively by offering moer business-friendly tax regimes, the few must be allowed to do so. That keeps the pressure on the majority, not to over-tax business. Any form of majority voting would allow the majority to block this competitive pressure, rather than face up to it by improving their own tax regimes.
Action by bodies other than the Court
6. On paragraph 3.14, Article 115's final words, "as directly affect the establishment of functioning of the internal market", are potentially very broad. While the article requires animity, it is also a standing invitation to the Council to interfere in all aspects of member states' tax policies, when it would often be better for the Council to stay out of that area. Relatedly, the Commission's right of initative should perhaps be curtailed. The simple facts that the Commissionn has that right, and that it wants to be seen to be doing things, are likely to lead to unnecessary interference.7. On box 3.A, the enhanced cooperation rewuirement to "respect the competences, rights and obligations of those Member States which do not participate in it" needs to be strengthened to give any non-participating state a right to block an enhanced cooperation measure if it would have any but the most trivial effect on its interests. All member states are entitled to preserve for themselves the benefits of being in the single market, and of having a level playing field. Their interests may be harmed by a cartel if member states, under the banner of enhanced cooperation, just as they may be harmed by state aid. The proposal to apply a financial transactions tax to transactions in securities that originate in the participating member states, even when the parties to the transaction ar all outside those states, is a clear example of this danger.
8. The directives listed in paragraph 3.41 do indeed require a close look. In particular, while the parent-subsidiary directive has been very useful in reducing tax burdens, it can significantly handicap a country that wants to introduce a tax on distributions by the companies within its tax base (perhaps instead of a tax on all profits made within its territory are taxed in its territory.
9. Paragraph 3.22 touches on Court of Justice decisions, and fears of possible litigation in relation to current or prospective tax policies, have been a massive constaint on UK tax policy-making in recent years. In particular, the Court has not been interested in the UK's concern to ensure that UK profits get taxed in the UK. It has at best been interested in ensuring that they get taxed somewhere or other. If our right to set our own tax policies is to mean anything, we need something in place to ensure that the Court does not interfere, where the animity requirement would prevent the Council from legislating with the UK's consent.
10. One particularly troubling aspect of the Court's decisions has been their long retrospection, sometimes for six years, sometimes back to when the member state joined (1973 for the UK). The UK would no doubt find life a good deal easier if retrospection were more limited, perhaps to the time when action was commenced in a UK court or tribunal.