THE GREAT TAX TAKEOVER

These are the famous words, attributed to Sir Christopher Wren's son, which greet the visitor to St Paul's Cathedral. They can be loosely translated as "if you are looking for his monument, you'll find it all around you", and they combine that sense of great modesty and grandeur which is so characteristic both of the building and its architect.

They would also form the perfect epigraph to the Treaty on European Union, albeit that its chief object is to impress upon the inhabitants of its territories a sense of their humbleness and to overawe them with its own majesty. Just as Wren's most fitting monument is his building, whose strength and beauty arise from the seamless interlocking of planes, surfaces and structural elegance; so the jigsaw puzzle of articles, protocols, resolutions and declarations is the aptest embodiment of the shadowy superstate that is emerging ex nihilo to swallow up Europe's former nation states.

 Yet the emergence - even the existence - of this superstate is denied by the very people in the administocracy who are frantically putting its pieces together. And nowhere are these denials more strident and desperate than in matters of taxation.

As we have all seen over the last few weeks, the grim little corner of the EU picture occupied by Monsieur 'Ector the EU Tax Inspector holds some real horrors for all inhabitants of the UK. We are supposed to take the assurances of Blair and Brown that the British veto will be used to halt further EU tax harmonisation at face value. Those inclined to do so can reflect on the insouciant way in which they abandoned the veto when the notorious EC's Code of Conduct on Company Taxation was being negotiated in autumn 1997. Anthony Fisher, a senior tax partner in accountants KPMG, set out the history of these negotiations in Taxation Practitioner, March 1998, Offshore Supplement, pp5 - 7. He traces the impetus for the code to the complaints that Theo Waigel, the erstwhile German Finance Minister, made in 1996 about Germans moving their money out of Germany to Luxembourg after German tax rates for both individuals and companies hit the 60 per cent mark. This in turn was a result of the extra taxes required to finance a monetary union between West and East Germany which the German Finance Ministry itself confessed had gone disastrously wrong. The German treasury was facing a shortfall of US$23bn and Waigel was demanding that EU should do something about it.

However, when questioned about these losses and the 'tax poaching' that he objected to, Waigel's response came as a surprise. "He said that, for example, Frankfurt was unable to compete on a level playing field with the City of London as a financial centre because of the personal tax regime in the UK. The UK non-domicile rules effectively allowed highly paid Germans to work in the City of London and to treat the place as a tax haven". [Fisher, p5.]

The Commission rose to the challenge and immediately set to work on the Code of Conduct. This is hardly surprising, given that the Commission had been angling for years to crack down on low tax rates in the UK and the Republic of Ireland [see Commission of the European Communities March 1992 Report of the Committee of Independent Experts on Company Taxation].

The process started at the informal ECOFIN in Verona 1996, where the ministers endorsed a global (that is, harmonised EU-wide) approach to taxation policy which included harmonising rules for the Single Market, preventing significant losses of tax revenues and reducing the tax burden on labour (with the corollary that it would be increased on capital). Kenneth Clarke was the UK minister responsible for giving up the British veto on these EU objectives.

Following Verona, a working committee was set up comprising the 'personal representatives' of the Finance Ministers, which was soon dominated by Germany and its demands for a curb on 'harmful tax competition'. The committee's proposals were ready for the Luxemborg ECOFIN in September 1997, and Mario Monti was astonished at the consensus which the personal representatives had reached. Fisher explains: "The UK had for many years, under a Conservative government, consistently vetoed any measures that threatened its sovereignty on tax matters. Now, under a new Labour government keen to show its European credentials, there was UK support for the proposals."

Nevertheless, argument still followed. The UK managed to restrict the scope of the code to business taxation, thereby preserving the personal tax advantages that Waigel had complained about so much. "The Commission agreed to remove personal taxation from the scope of the code, but made it clear that it would seek to draw up a similar code to deal with personal tax at some stage in the future." [Fisher, ibid.] So much for Blair's and Brown's staunch defence of 'British interests', as they put it! The UK's veto was abandoned by this pair without even the slightest hesitation, or attempt at public discussion.

Blair and Brown have both claimed that the code is merely 'political' and is unenforceable in EU law. As Fisher comments, "One can therefore only speculate what [they] understand by a political commitment" [Fisher, p6].

Now that the code is in operation, the Commission has just adopted a 'Communication' on the application of state aid rules as they apply to benefits provided through the tax system to companies. As the report on this Communication pointed out [Taxation 19.11.98 p. 189] "This comes as part of the aim to end harmful tax competition between member states", ie as part of the Commission's brief, under the Code of Conduct para J 'State Aid', to "publish guidelines on the application of the state aid rules to measures relating to direct business taxation .......... [and to] re-examine existing tax arrangements and proposed new legislation by member states, case by case, thus ensuring that the rules and objectives of the Treaty [on European Union esp articles 92 to 94] are applied consistently and equally to all." [quoted from the Code of Conduct].

Blair and Brown cannot possibly plead ignorance of the intentions of the Commission with regard to the code. Dawn Primarolo was appointed in May 1998 for a two-year term as the first chairman of the committee which is overseeing its implementation throughout the member states' separate tax jurisdictions [Inland Revenue press release 70/98]. Presumably Blair and Brown think that none of the above applies to them or the UK, and that the ECJ, the appointed guardian of the treaties, will agree with their insouciant dismissal of its prerogatives.

Of course, the Code of Conduct - whether with its present restricted scope of business taxation or its future guise of a comprehensive EU tax statute - is not the only instrument which the Commission and the ECJ have used to hobble our veto on tax matters. Brown has made much of the need to curb 'tax avoidance'. He instructed the Inland Revenue to produce a General Anti-Avoidance Rule (GAAR) which will apply initially to business taxation in the UK, but will later be extended to personal taxes. The first draft has been circulated for comments from the tax profession, and will be unveiled to a cringing public in Brown's next Budget (unless the tax profession can torpedo some of its draft clauses).

This is not, however, in any way a UK or New Labour initiative. The EU treaty already requires member states "to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation ......." [Art 58. 1.(b), new numbering]. The draft directive on withholding taxes (preambles (5) and (6)) moan that "in the absence of any co-ordination of national systems for the taxation of savings .......... scope for tax avoidance is creating ..........economic distortions which are incompatible with the existence of the internal market" [note, in passing, how 'Single Market' has become 'internal market']. In other words, no matter how much fuss will be made about the directive, it will come into effect in one way or another because, if necessary, the Commission will introduce it as a Single Market measure under Art. 95 [new numbering] which provides for the approximation of laws "which have as their object the establishment and functioning of the internal market".

This closeness between the wording of the preamble and Art 95 is no coincidence. The Commission has noted the ECJ judgments in the ICI v Colmer and Safir cases in both of which Single Market articles were adduced by the ECJ in support of its judgments, overturning the sovereign independence of the UK and Swedish tax authorities in the matter of company taxation [see my previous articles on these cases in the European Journal]. The directive should therefore be looked on as yet another cornerstone in the EU's tax code. And just as the Code of Conduct threatens us with an EU personal tax code, so the draft directive on withholding taxes threatens us with similar 'harmonisation' of EU taxes on pensions and insurance-packaged benefits - preamble (9):

"the problems relating to the taxation of pensions and insurance benefits will .......... be the subject of separate consideration leading, where appropriate, to specific legislative initiatives".

Blair and Brown - so voluble in their 'defence' of our veto rights - have been astoundingly silent on this explosive subject.

Indeed, as Torquil Dick-Erikson has repeatedly warned us since spring 1997, that grip is set to become tighter. While there has been some debate as to whether the provisions contained in the Corpus Juris document can be brought into the UK's criminal law without further overt parliamentary acquiescence, the draconian regulations introduced into the UK's tax statutes over the past year or two leave an impartial observer in no doubt that Corpus Juris will be the procedure adopted to pursue EU tax evasion and avoidance.

Hard on the heels of the Withholding Tax Directive, there came, in July 1998, a proposal to improve tax efficiency in the EU through a crackdown on non-payers of tax. Angela Cunningham reported on this for Taxation [13.8.98, p517]. "The new legislation would cover direct taxes and fines and penalties as well as the EU's traditional own resources [VAT and excise duties]. The enforcement legislation of the member states requesting assistance would be directly recognised and automatically treated as the law of the requested member state".

This would deal the final blow, as far as Europe is concerned, to the rule of non-enforcement of foreign taxes ........ stated by Mr Justice Tomlin in Re Visser [1928] I Ch 877, at page 884: "There is a well recognised rule, which has been enforced for at least 200 years or thereabouts, under which these courts will not collect the taxes of foreign states".

HM Customs and Excise are also joining in the tax collecting fun. They are reported [The Tax Journal 6.7.98, p.5] to be considering how to introduce civil penalties without doing so in primary legislation, to comply with the requirements of the Commission's forthcoming tax enforcement regulations. In their view the only viable procedure would be by secondary legislation under the vires of the European Communities Act 1972. "If this route is followed," remarks Gavin McFarlane of Titmuss Sainer Dechert, "it will be necessary for any legislation to concentrate on infringements of Community obligations and requirements............ [which will be] a very profound development in [UK] Customs law."

The House that the two Jacques (Delors and Santer) have been building these last 10 years or so is almost finished. Its structural rigidities are in place and all that is now required is the cosmetic fitting out to please the administocracy which will run it, and the plebs who will drudge in it for them.

And unlike Wren's masterpiece, it is the duty of every freedom-loving Briton who values the independence of his country more than the patronage of the nodding Euro-donkeys with which his legislature is crammed, to shake the pillars of the EU's palaces as hard and as vigorously as he can.

I therefore challenge Blair, Brown and their cohorts publicly to admit that they have already given away our veto on the Code of Conduct; that they intend to give it away on the withholding tax directive; and that they will go on doing so until tax is just another Brussels matter, presided over by a Commissioner and enforced by an EU form of tax police.

Thank you. You are visitor number since 0600 (GMT), 25Jul99.
For comments on this page, please contact Briame Gerdan.
For further reading at this site, please return to Briame Gerdan's "Public" Home Page.