TAXATION: EU ALREADY HAS
OVER-RULING POWERS

 Remember all those shrill protestations from Messrs Clarke and Brown about maintaining the UK's sovereignty over direct taxes? Ken Clarke swore before last May's general election that the bits of the Maastricht Treaty he had read did not compromise Britain's continuing independence in direct tax matters. Even with Ken's Hush-Puppies off the Chancellor's desk and Brown's rugged toe-caps under it, the robust line against Monsieur 'Ector the EU-Tax Inspector has scarcely faltered. As recently as the March ECOFIN in York, Brown stated that there could be no EU encroachment on the member states' sovereignty in direct tax matters without the unanimous consent of the Council of Ministers.

 As ever in these matters, it is left to the European 'Court of Justice' to expose the insouciant ignorance of Britain's Euro-fanatics. Just as the Factortame case showed how much Parliamentary legislative independence we had lost to the ECJ in the wake of Heath's 1972 European Communities Act, so a life insurance tax case brought before the ECJ by a discontented Swede demonstrates with astral clarity to anyone who cares to read its transcript (with the probable exception of Kenneth Clarke QC) that the ECJ can over-ride the direct tax legislation of member states whenever it considers that the objectives of the 'single market' are not being attained (Safir v Skattemyndigheten I Dalarnas Laen, Court of Justice of the European Communities, judgment delivered 28 April 1998, reported Taxes, 22 May 1998, p.505/6 and Taxation, 28 May 1998, p. 218/91).

 The case concerned the way Sweden taxed life assurance policies taken out with companies not established in its territory. Swedish residents who took out such policies were required to apply to the Swedish tax authorities for tax relief, because of a complicated mechanism in Swedish tax law which was designed to neutralise the tax advantages which foreign-based life assurance companies might otherwise have when competing for business against Swedish-resident life companies in Sweden. Mrs Safir, a Swedish resident who took out a policy with Skandia, a UK company operating in the Swedish market, objected to this procedure and took her case to the ECJ.

 In its decision, the ECJ first observed that, "although direct tax did not fall within Community law at present, the powers retained by the member states should nevertheless be exercised consistently with Community law." (Taxes, op. cit, p.505, col.2.)

 Articles 59 of the treaty (new Article 49 of the Consolidated Treaty on European Union) was in point. It prohibits:

 Throughout its decision, the ECJ identified as its guiding principle the need to "enable the objectives of the 'single market' to be met". It concluded that these objectives were being frustrated in the present case, and that the Swedish tax regime governing life assurance policies taken out with non-resident life offices restricted the freedom of companies established elsewhere in the Community and was therefore contrary to Article 59 of the treaty. The court was good enough to outline for the Swedish tax men an alternative procedure for them to consider.

 This case sets an uncomfortable precedent for those, like Clarke and Brown, who would still have us believe in our fiscal independence. The ECJ is increasingly capable of setting aside almost any domestic tax provision that conflicts with its view of the objectives of the 'single market'. It is likely to rule the UK's old imputation system for corporation tax illegal under the treaty, given the referral of the Hoechst case on group relief to the court last year. In fact, it was the threat of this referral which led Brown to abolish ACT - the advanced corporation tax system - from April 1999 in his July 1997 budget. This was a move which Clarke was also planning.

 The case also dovetails neatly with the recent 'Code of Conduct on Company Taxation' published at the December 1997 ECOFIN. This code aims to eliminate 'harmful tax competition' and 'fiscal dumping' by reviewing and reversing any tax regimes which offer significant non-resident advantages to taxpayers resident in other member states. Though the code is declared to be 'political' and "does not affect member states' rights and obligations or the respective spheres of competence of the member states and the community in accordance with the treaty", it is clear from comments made by its advocates that it is intended as a forerunner of an EU directive. Jean-Claude Juncker, the Luxembourg Prime Minister, stated the day after the ECOFIN meeting that he could envisage such a directive "within two years".

 All this evidence points in one direction only - the abolition of national tax sovereignty. The European Parliament has already demanded "the introduction of majority voting in the Council on all issues concerning tax harmonisation" (Secchi Report on the Development of Tax Systems, PE221.840, 13 May 1997, quoted by Graham Mather MEP in his briefing note of 14 April 1998 on the Code). The EP also considers that the code "will ultimately render the principle of unanimity superfluous" [op. cit.].

 When Gordon Brown was questioned on the matter of the Code in the European Parliament on 29 January 1998, he indicated that the government's current position was that Britain would make use of the veto that all member states still retain over fiscal questions, should attempts be made to harmonise EU taxes. (Graham Mather's briefing note). He should be questioned again - along with Kenneth Clarke, his predecessor - in the light of the Safir case.

 They should both be asked a straight question - would they assert and defend Britain's fiscal sovereignty, even if it was challenged by the ECJ? They should be required to answer in terms a Sun headline writer could encompass - yes, or no.

Christopher Arkell, author of this article, is a tax consultant to one of Britain's largest companies.
He is also chairman of Conservatives For An Independent Britain and a member of the executive committee of the Anti Maastricht Alliance.

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