TALES OF TAX AND MORE TRICKERY (B)

As is well known, Gordon Brown "reserved the UK's position" on the Withholding Tax Directive at the Cologne ECOFIN in June 1999, which is why the Presidency Conclusions of 4 June 1999 merely stated that: "The Council [will] continue discussion on the proposals for a Directive on the taxation of savings and a Directive on interest and royalties so that agreement is reached before the Helsinki European Council." [para. 21].

 Now, Brown has already declared that he would make use of the veto if any attempt was made by the Commission to "harmonise" taxes [address to the EP, 29 January 1998, reported by British Data Management Foundation 24 April 1998, p.2]. The Withholding Tax Directive is clearly such an attempt.

Therefore, when Dawn Primarolo was called before the House of Lords' Select Committee on the European Communities on 22 June 1999 she was asked by Lords Shore, Boardman and Grenfell (Chairman) if she would use the "nuclear option" of the veto against the Directive. On no occasion did she say that the UK would use its veto. What she did say left much room for a cave-in: "We are engaging in good faith in the discussions with regard to tackling tax evasion but we will not agree to any Directive which causes serious damage to the financial markets, the City in particular ......... Until we see whatever the final Directive is we cannot make [a] final judgement ......... We are explaining to our European partners why this particular Directive is unacceptable at the present time .......... The Government is making it clear ..... in international fora .... that we want to see international tax evasion tackled effectively. Therefore it is for us to demonstrate if and why this Directive does not deal with the issue and then move onto the next business that does address the issue ....."[answers to Q441 - Q443].

At the time of writing (mid September 1999) some City observers are inclined to optimism. Chris Huhne Lib-Dem MEP opined in the Evening Standard (7 September) that the replacement of the professorial Monti by the businessman Bolkestein as the Single Market Commissioner in charge of EU tax policy may indicate a softening of the Commission's harmonising fervour.

Whilst this may be a consummation devoutly to be wished, it would be foolish to allow hope to triumph over the UKâs previous experience of the EU. The cast may change but the play is still the same. I fear that the outcome is, sadly, all too predictable. A form of words will be found which will allow the Government to claim that no "serious" damage is to be caused to the City, and that some Eurobonds have been exempted by some sort of temporary derogation. Once again the UK will have found that the "heart of Europe" is a thoroughly rotten and rot-inducing place to be.

If the tale of the Withholding Tax Directive proves that the UK will never be able to exert influence on a insensitive and politically biased Commission, the saga of the Code of Conduct for Business Taxation shows what happens to the honesty and forthrightness of British Government ministers when they are forced to pretend that the Commission is not doing something which they know very well it is doing.

The political motivation behind both the Withholding Tax Directive and the Code of Conduct has two sources; the Commissionâs desire to control fiscal policy in the EU and Germanyâs determination to curb the undoubted tax evasion practised by its citizens in the face of some of the highest taxes in Europe that peak at around 60%.

Theo Waigel, when he was Kohl's Finance Minister estimated that in 1996 there was a tax shortfall in Germany of around $23bn, much of which went into gross-paying accounts in Luxembourg and the Channel Islands, by way of "back-to-back" accounts in German banks [Anthony Fisher, loc. cit].

As with the Withholding Tax Directive, by 1996 both the Commission and Germany, supported by France and Belgium, saw that the time was ripe to push through tax avoidance measures at the EU level, which would help plug the German tax deficit and also prevent countries using corporation tax reductions as a means of luring industries away from highly taxed regions on the Continent.

Whilst the gross-paying regimes were uppermost in the Continentalsâ minds, the Republic of Ireland's 10% "manufacturing" rate of corporation tax and the progressive reductions in general UK corporation tax rates throughout the 1980s and 1990s from 52% to 30% also upset them.

The usual sort of Lobster Quadrille then ensued whereby both the Commission and ECOFIN invited the other to join in the dance of tax harmonisation. The Commission issued exhortations - Taxation in the European Union, Report on the Development of Tax Systems COM(96) 546; Towards Tax Co-ordination in the EU COM(97)495 - and ECOFIN at its various informal and "orientation" meetings agreed texts which were virtually identical to the papers given it for discussion by the Commission. From this too-ing and fro-ing emerged the Code of Conduct for Business Taxation, in the form of a Resolution attached as Annex 1 to the December 1997 ECOFIN Council minutes.

The language of the Code makes its tax harmonisation or "co-ordination" credentials abundantly clear. Its preamble recalls: ...

On the other hand, the preamble also emphasises that it is only:

This has been taken to mean - not least by Dawn Primarolo in her evidence to the House of Lords [cited above] - that the Code is not legally binding on the UK, and that any co-operation is therefore voluntary and any consequent harmonisation or "co-ordination" of business taxes is purely fortuitous, and even in the UK's interests [answer to Q420 from Lord Boardman].

But, as Anthony Fisher observed [loc.cit.]: "One can only speculate what a politician understands by a political commitment". Mr. Monti plans to use the package to create political embarrassment and shame governments into dropping special tax breaks. This is precisely the same behind-the-scenes political pressure exerted by the ostensibly non-political Commission which the City fears in connection with the Withholding Tax Directive. If British civil servants exerted such pressure on ministers, there would be justifiable outrage: when the Commission does it, there is merely acquiescence.

It is just not good enough for Dawn Primarolo to tell the House of Lords:

This is typically New-Labourite waffle. Compare and contrast with the words which Brown signed on behalf of the UK on 1 December 1997 [paras. C and D]:
"Member States commit themselves not to introduce new tax measures which are harmful within the meaning of this code.... Member States commit themselves to re-examining their existing laws and established practices, having regard to the principles underlying the code.... Member States will amend such laws and practices as necessary .... taking into account the Council's discussions following the review process."

That is an unambiguous commitment to amend national legislation, and Dawn Primarolo has misled the House of Lords in pretending otherwise.

Interestingly, the Commission originally wanted a time limit on the period allowed the Member States in which to change their laws. In the Draft Resolution presented to the EP on 5 November 1997 [COM(97)564 Final] "harmful measures" were to be eliminated within 2 years. ECOFIN removed the two years' limit. Perhaps in exchange, the EU ministers toughened up the attack on the Member States' dependent territories.

The Commissionâs original suggestion ran:
"Geographical Extension: The Provisions of this Code will apply within the Community. Furthermore, the Council considers that it would be beneficial that the principles supporting fair competition be adopted as widely as possible. To this end Member States will promote their adoption at an international level, and in particular will give active support to their adoption in their dependent or associated territories."

The Code agreed at ECOFIN wags a much stricter finger: "Member States undertake to promote their adoption in third countries; they also undertake to promote their adoption in territories to which the Treaty does not apply. In particular, Member States with dependent or associated territories... undertake to ensure that these principles are applied in those territorieS...".

Dawn Primarolo assured Lord Boardman [loc. cit.] that the conclusions of the Code of Conduct group she chairs "are not legally binding on the Member States and of course could not be legally binding on Dependent Territories because of our constitutional arrangements."

So who is right - the ECOFIN Code or Dawn Primarolo? Anthony Fisher, writing as the Development Director at the Gibraltar Financial Centre in International Money Marketing[20.2.98, p.14] is quite clear. He noted that the Home Office and the Foreign Office launched two reviews around the beginning of 1998 (a couple of months after the Code was agreed). "The Home Office examined financial regulation in Jersey, Guernsey, the Isle of Man and the Foreign Office looked at the same areas in the newly renamed "Overseas Territories", including Gibraltar. It is not a co-incidence that the two reviews have been announced at the same time. They are clearly connected and have the same objectives. The Treasury is the driving force behind the two reviews with a key objective being to deal with tax evasion."

It is, of course, the loss of tax to the German treasury due to the gross-paying interest accounts available in Luxembourg and the UK's off-shore tax areas that led Theo Waigel to insist on the Code in the first place. Fisher confirmed the inevitable consequence. Gibraltar "has had to upgrade its rules to European standards"; a discreet way of saying that it has had to buckle under pressure from the Commission to amend its fiscal regime, and the other "Overseas Territories" together with the Channel Islands and the Isle of Man are following follow suit. So much for Primarolo's assurances given to Lord Boardman. The lunacy of our ministers' craven deceptions was exposed by Primarolo herself in reply to a question from Lord Ashburton [Q431]. She made it abundantly clear that the UK disagreed fundamentally with the whole basis of the Commission's thinking on tax in the EU.

The [Commission's] argument is that international tax competition has eroded revenue on mobile capital forcing governments to increase tax on "labour". I should perhaps state absolutely clearly that the Government does not take this view and is not convinced of the argument.ä Yet this argument is adumbrated in both the Withholding Tax Directive and the Code of Conduct. From the Commission's report to the EP in November 1997 ("reversing the trend of an increasing tax burden on labour as compared with more mobile taxes") to the interim report of the Code of Conduct group which Primarolo chairs [13349/98 Limite Fisc 187 para. 3, "getting tax structures to develop in a more employment-friendly way"] and the June 1999 Cologne Presidency Conclusions [para. 6 ã· a decrease in the fiscal and social security burden on the labour factor, and an employment-oriented wage policy".], it is obvious that the Commission's view - absolutely at odds with the UK's - is the one which is prevailing. Primarolo and the UK government are powerless to do anything about it.

No-one who has observed the relations of the UK's ministerial representatives with the EU's institutions can be surprised at this state of affairs. The UK has been in a subservient position to the EU ever since the signing of its Accession Treaty in 1973. It is a great shame that our administocracy has to pretend otherwise. This pretence destroys the integrity of its ministers and civil servants, and drives them to mislead and tell tales to our parliamentarians, thereby hobbling our parliamentary democracy. The tax debate indeed highlights these deceptions with great clarity, but they plague our entire relationship with the EU. Equally "harrowing" tales could be told using the texts from the CAP, or the fishing directives, or those concerning other aspects of our trade. They will be told in the near future about the demolition of our independent armed forces, and the very institutions we use to govern and administer ourselves.

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