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Review of the Balance
of Competences between
the United Kingdom and
the European Union
Review of the Balance
of Competences between
the United Kingdom and
the European Union
© Crown copyright 2013
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This document is also available from our website https://gcn.civilservice.gov.uk/ Contents This report examines the balance of competences between the European Union and the United Kingdom in the area of taxation. It is a reflection and analysis of the evidence submitted by experts, non-governmental organisations, businesspeople, Members of Parliament and other interested parties, either in writing or orally, as well as a literature review of relevant material. Where appropriate, the report sets out the current position agreed within the Coalition Government for handling this policy area in the EU. It does not predetermine or prejudge proposals that either Coalition party may make in the future for changes to the EU or about the appropriate balance of competences.
The Balance of Competences Review aims to provide an analysis of what the UK’s membership of the EU means for the UK national interest. As part of the review HM Treasury published a Call for Evidence on Taxation1 to gather evidence and facilitate discussion with interested parties in order to inform this taxation report. The evidence received and discussions with interested
parties focused around broad themes including:
• The considerations in determining the appropriate level for decisions on taxation to be made;
• The future challenges the UK may face in relation to the balance of competence on tax, including proposals for changes to tax policy and legislation at the EU level.
The appropriate level for tax policy Respondents identified decisions on taxation, in particular direct taxation, as primarily for Member States, especially where this concerned personal taxation.
They felt that tax policy measures to address obstacles to cross-border business, or administrative co-operation between Member States could be suited to action at the EU level where these obstacles could not be addressed by domestic action. Respondents also noted a role for tax policy at the international level would be preferable where this was necessary to facilitate global business, for example the creation and maintenance of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention to help address double taxation.
The Government’s review of the balance of competences between the United Kingdom and the European Union: call for evidence on taxation, HM Treasury, 30 November 2012.
6 Review of the Balance of Competences between the United Kingdom and the European Union: Taxation The impact of the current balance of competence Respondents recognised that the balance of competence on taxation is subject to an underlying tension between a level playing field within the internal market and a reduction in burdens for cross-border business activities on the one hand, and the ability of Member States to respond to specific national circumstances through design of their own tax systems on the other.
In recognition of this tension, respondents welcomed those indirect taxation measures which had facilitated, or addressed obstacles to, cross-border business activity. For example, respondents highlighted the use of a largely harmonised value added tax (VAT) regime as ensuring consistency in the internal market and enabling cross border-trade. On direct tax, respondents welcomed the limited EU tax legislation which they felt provided certainty of the tax treatment in specific cross-border situations. For example, respondents highlighted the benefits of the Mergers Directive2 which provides a common system of taxation applicable to crossborder reorganisations of companies situated in two or more Member States.
Many respondents also highlighted as beneficial the removal of tax discrimination through enforcement of the fundamental freedoms and through representations by the European Commission when negotiating bilaterally with EU candidate countries, third countries, and at the international level in forums such as the World Trade Organisation (WTO).
While noting that unanimity voting on taxation has been essential in safeguarding the UK’s interests, respondents acknowledged that unanimity voting could have some negative consequences because of the need to achieve agreement by all Member States. In particular, this had impacts on the probability of legislation finally being agreed, the nature of the legislation and the time frames for agreement. However, respondents clearly advocated the retention of unanimity voting and suggested other methods be used to address any downsides.
Where the UK would benefit from more or less EU-level action on taxation The views expressed by respondents to the call for evidence and by those with whom the review was discussed were broadly similar. In particular, respondents and interested parties were content with the current balance of competence on taxation, taking account of the protections offered by unanimity voting. Whilst individual respondents suggested areas where existing measures could be updated to reflect modern business practice and development, no respondents identified any major gaps in the existing tax legislation. A number of respondents cited the proposed financial transactions tax as an area where they questioned the appropriateness and utility of EU-level action.
How tax policy and legislation could be improved Many respondents sought improvements to the process of creating tax policy and legislation at the EU level. Respondents pressed for greater consultation by the European Commission with interested and affected parties, more detailed analysis of the effects of EU tax policy on Member States and greater accountability for impact assessments.
Council Directive 90/434/EEC of 23 July 1990 on the common system of taxation applicable to mergers, 2
The future challenge the UK faces on the balance of competence on tax Concerns expressed by respondents and interested parties focused on what they viewed as risks to the UK’s tax sovereignty or national interests. These included the inclusion of tax or fiscal measures in non-tax proposals which are not assessed by tax experts and undermine unanimity; the use of enhanced co-operation on tax measures which could have extra-territorial effects; and the impact of rulings by the Court of Justice of the European Union (CJEU) on domestic tax measures and Member State competence.
The views generally expressed by respondents were that:
• Unanimity voting for taxation should be retained;
• Taxation is primarily a matter for Member States; and • EU-level action is appropriate only where there is a clear internal market justification and the principles of subsidiarity and proportionality have satisfactorily been shown to be met.
The Balance of Competences Review The Foreign Secretary launched the Balance of Competences Review in Parliament on 12 July 2012, taking forward the Coalition commitment to examine the balance of competences between the UK and the EU. It will provide an analysis of what the UK’s membership of the EU means for the UK national interest. It aims to deepen public and Parliamentary understanding of the nature of our EU membership and provide a constructive and serious contribution to the national and wider European debate about modernising, reforming and improving the EU in the face of collective challenges. It will not be tasked with producing specific recommendations nor will it look at alternative models for Britain’s overall relationship with the EU.
The review is broken down into a series of reports on specific areas of EU competence, spread over four semesters between autumn 2012 and autumn 2014. The review is led by Government but also involves non-governmental experts, organisations and other individuals who wish to feed in their views. Foreign governments, including our EU partners and the EU institutions, have also been invited to contribute.
More information can be found on the review at www.gov.uk/review-of-the-balance-of competences, including a timetable of reports to be published during the process.
This report follows HM Treasury’s Call for Evidence on Taxation as part of the Balance of Competences Review. This was published on 30 November 2012 and invited evidence to be submitted by 22 February 2013. The analysis in this report draws on written evidence, seminars and discussions during the call for evidence period, and existing published material, including that which has been brought to our attention by interested parties, such as past select committee reports or reports of the European Commission.
This report begins with a summary in Chapter 1 of the existing balance of competence in the area of taxation. Further background detail can be found in the call for evidence published on HM Treasury’s website: http://www.hm-treasury.gov.uk/int_balance_competences.htm.
Chapters 2 to 6 report on the evidence under the following broad themes set out in the call
• The main considerations in determining the appropriate level for decisions on taxation to be made;
10 Review of the Balance of Competences between the United Kingdom and the European Union: Taxation • Where the UK may benefit from more or less EU-level action on taxation;
• How tax policy and legislation at the EU level could be improved; and • The future challenges and opportunities the UK may face in relation to the balance of competence on tax.
A list of evidence submitted can be found in annex A. Annex B sets out the meetings and events held or attended by the Treasury. A literature review of relevant material used to inform this report is included in annex C.
Competence The term competence is normally used to describe the powers conferred on the EU by the Member States to undertake specific actions. The EU’s competences are set out in the EU Treaties, which provide the legal basis for any actions taken by the EU institutions. The EU can only act within the limits of the competences conferred on it by the Treaties. This means there must be a legal basis for the EU to act.
There are different types of competence: exclusive, shared and supporting. Only the EU can act in areas where it has exclusive competence, such as the customs union and common commercial policy.
In areas of shared competence, such as the internal market, environment and energy, either the EU or the Member States may act. To the extent that the EU exercises its competence, then the Member States are not free to exercise their competence, but may do so again once the EU ceases to exercise the competence.
In areas of supporting competence, such as culture, tourism and education, both the EU and the Member States may act; but action by the EU does not prevent the Member States from taking action of their own and the Treaties explicitly prohibit harmonisation of laws.
Where the Treaties do not confer competence on the EU or the EU has not already acted, the competence remains with the Member States.1 When the EU exercises its competence in the area of taxation, it must act in accordance with the general principles of EU law and fundamental rights, as set out in the Treaties. The EU must also act in accordance with other articles in the Treaties, including adhering to the principles of subsidiarity and proportionality under Article 5 of the Treaty of the European Union.
Article 4(1) TEU.
Introduction 11Box A: Subsidiarity and proportionality Under the principle of subsidiarity, where the EU does not have exclusive competence, it can only act if it is better placed than the Member States to do so, because of the scale or effects of the proposed action.
Under the principle of proportionality, EU action must not exceed what is necessary to achieve the objectives of the EU Treaties.
1.1 Legislative proposals must have a legal base in the EU Treaties appropriate to the proposal.
Box 1.A: The Treaties of the European Union The European Economic Community (EEC) was established by the Treaty of Rome in 1957.
This Treaty has since been amended and supplemented by a series of Treaties, the latest of which is the Treaty of Lisbon.
The Treaty of Lisbon, which entered into force on 1 December 2009, re-organised the two Treaties on which the European Union is founded: the Treaty of the European Union (TEU) and the Treaty Establishing the European Community (TEC), which was re-named the Treaty on the Functioning of the European Union (TFEU).
The internal market 1.2 The internal market of the EU is an area without internal frontiers designed to ensure the free movement of goods, services, capital and freedom of establishment: the so-called fundamental freedoms.
14 Review of the Balance of Competences between the United Kingdom and the European Union: Taxation Box 1.B: The fundamental freedoms Article 21 TFEU (formerly Article 18 EC) on the free movement and residence of EU citizens1.
Articles 45 – 48 TFEU (formerly Articles 39 – 42 EC) on the free movement of workers2.
Articles 49 – 55 (formerly Articles 43 – 48 & 294 EC) on the freedom of establishment3.
Articles 56 – 62 (formerly Articles 49- 55 EC) on the freedom to provide services4.
1.3 The fundamental freedoms are the subject of separate reports as part of the Balance of Competences Review but are discussed in this report to the extent that they impact on the ability of Member States to exercise their competence over taxation policy.
1.4 Greater integration within the internal market reduces the autonomy of Member States to act independently, but can bring significant benefits as the barriers to trade between Member States are removed.