«July 2013 Review of the Balance of Competences between the United Kingdom and the European Union Taxation © Crown copyright 2013 You may re-use this ...»
1.5 Action on taxation under both of the tax legal bases of the Treaty requires an internal market justification. For indirect taxation under Article 113 of the TFEU, the Treaty requires that the proposed action must be “necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition”. For direct taxation Article 115 of the Treaty requires that for there to be harmonisation it must “directly affect the establishment or functioning of the internal market”.
1.6 The EU today is a different place to that at the inception of the European Single Market 20 years ago. Commerce is now far more globalised. To ensure future economic growth, retaining the competitiveness of Member States and the EU is paramount.
1.7 Tax policy, in particular on indirect taxes, plays a part in ensuring the effective functioning of the internal market, for example the largely harmonised application of VAT which affects the pricing and competitiveness of products. However, any EU action on direct tax beyond administrative cooperation can have consequences for individual Member States’ ability to shape their domestic tax systems to raise revenue and to support domestic growth.
The competence conferred under these Articles will be part of the Review on the Internal Market: Free 1 Movement of Persons. This review began in the spring of 2013. Further information can be obtained by emailing FreeMovementofPersonsBoC@homeoffice.gsi.gov.uk.
The competence conferred under these Articles will be part of the Review of the Internal Market: Free 4 Movement of Services. This review will begin in the autumn of 2013. Further information can be obtained by emailing firstname.lastname@example.org.
The competence conferred under these Articles will be part of the Review of the Internal Market: Free 5
1.8 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 and national choices through design of their own tax systems and rates on the other. This in turn can have an impact on overall competitiveness both at the level of Member State and the EU as a whole.
1.9 While recognising these tensions, UK policy places priority on ensuring that the Government retains maximum flexibility to shape UK tax policy to suit UK economic circumstances. In line with the Coalition Agreement, the Government opposes any extension of EU competence in the area of taxation. The Government believes that tax matters should remain subject to unanimity and upholding the veto on tax is a priority.
Under the terms of the European Union Act (2011), giving up the United Kingdom’s national veto in a number of sensitive areas – including tax policy – would be subject to a referendum.
The exercise of competence on taxation 1.10 Assessing competence on taxation can be separated into three broad areas: indirect taxation, which is split between VAT, excise duties and other indirect taxes; direct taxation;
and other issues, including the constraints on Member State competence such as having to exercise their competence in line with the fundamental freedoms.
1.11 For the purpose of this review, indirect taxation is broadly defined as a tax paid to the government on expenditure (including on imports) by consumers rather than on their income. The tax is often collected by the supplier of goods or services on behalf of the government. VAT and excise duties are the main indirect taxes in the UK.
1.12 For the purpose of this review, direct taxation is broadly defined as a charge on the income, profit or property of people or companies, who are responsible for paying the tax to the government. Income tax and corporation tax are the main direct taxes in the UK.
Indirect taxation 1.13 The European Commission can bring forward proposals for indirect taxation under Article 113 TFEU. Proposals under Article 113 are agreed by all 28 Member States acting in the Council of the EU by unanimity voting. Under unanimity voting a proposal can only be agreed where no Member State votes against it.
Article 113 TFEU provides:
The Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition.
1.14 The EU has had an element of competence on indirect taxation since 1957, before the UK joined the EEC. This has been exercised and expanded over time with the consent of Member States to ensure the effective functioning of the internal market and improve trade.
16 Review of the Balance of Competences between the United Kingdom and the European Union: Taxation VAT 1.15 In 1967, the Council of Ministers of the original six Member States of the EEC exercised the competence on indirect taxation to enact the First6 and Second7 VAT Council Directive on VAT, which required Member States to replace their domestic systems of turnover taxes with a common system of VAT. This was done in order to minimise tax differences, which were distorting competition and hindering trade.
1.16 The UK joined the EEC in 1973 and implemented the VAT Directives, having negotiated some significant derogations from them, notably our zero rates. In doing so the UK replaced selective employment tax and purchase tax and extended the scope of indirect taxation to services as well as goods.
1.17 The VAT regime is now largely harmonised to ensure consistency in the internal market.
Member States have discretion (within a defined framework of minimum rates, subject to some derogations for the UK and one or two other Member States) over important areas, including VAT rates and how they control and collect VAT from their registered taxpayers.
Excise duties 1.18 The EU first exercised competence over excise in 1993 with the Directive on the general arrangements for products subject to excise duty8. This laid down the basic principles applicable for the holding, movement and monitoring of the products subject to excise duties, which are primarily tobacco, alcohol and energy. All EU Member States apply excise duties to these three product categories. The revenue from these excise duties accrues entirely to Member States.
1.19 The introduction of this Directive required Member States to remove their own domestic fiscal controls in this area. However, full harmonisation of the excise duty rates throughout the EU was not considered necessary for the proper functioning of the internal market.
Instead, a series of minimum rates were agreed by Member States. For example, the Directive on the approximation of the rates of excise duty on alcohol and alcoholic beverages sets down these minimum rates for alcohol taxation.
1.20 Therefore, Member States retain competence to set excise duty rates at the levels they consider appropriate according to their national circumstances. In doing so it is necessary to take account of the risks that any significant disparity in the excise duty of any one product between different jurisdictions may have, for example in providing an incentive for criminal activity.
Other indirect taxes
1.21 Member States are able to maintain or introduce the following indirect taxes, provided that the collecting of those taxes, duties or charges do not, in trade between Member States,
give rise to formalities connected with crossing of frontiers9:
• Taxes on insurance contracts;
• Tax on betting and gambling;
• Excise duties;
Council Directive 67/227/EEC.
6 Council Directive 67/228/EEC.
7 Council Directive 92/12/EEC.
8 Article 33 of the Sixth VAT Directive (now Article 401 of the Principal VAT Directives 2006/112) expressly 9
Current indirect tax proposals
1.22 The VAT Directive has been through several iterations11 since its introduction to respond to developments, including the increased use of e-commerce. The European Commission proposals to modernise the VAT rules for financial services12 and vouchers13 are current examples of this process. In addition, a European Commission Communication14 (White Paper) on the future of VAT in the EU was published at the end of 2011, following an EUwide consultation.
1.23 The White Paper provides a high-level plan for development and reform of the EU VAT
regime. It highlights future priority areas for the VAT regime, set against four broad themes:
simpler; more efficient; more robust and fraud-proof; and tailored to the internal market.
1.24 There are two indirect tax proposals not relating to VAT that are under discussion by Member States. These are amendments to the Energy Tax Directive (ETD)15 and a proposal for a financial transactions tax (FTT).
1.25 The ETD aims to update the existing rules on the taxation of energy products (e.g. gas, electricity, coal and road fuel) in the EU. This includes a number of elements, including revising the EU minimum rates for energy products. The proposal is currently under discussion between Member States.
1.26 The FTT proposal, initially presented under Article 113 of the TFEU, aims to create a common system of taxation for financial transactions. For example, this includes the sale or purchase of shares where one party to the transaction is in a Member State (see Box 5.A below).
1.27 Eleven Member States have taken forward the FTT under the enhanced co-operation procedure. The enhanced cooperation procedure is set out in the Treaties and it allows nine or more Member States wishing to take forward a proposal to apply to do so where agreement cannot be agreed amongst all 28 Member States, provided the requirements set out in the Treaties are met16. This includes respecting the competences, rights and obligations of those Member States which do not participate in it. The UK is not participating in the FTT under enhanced co-operation, and has submitted a legal challenge to the European Court of Justice (CJEU) against the decision authorising enhanced co-operation on a FTT.
A series of CJEU cases has established that taxes, duties and charges are to be regarded as being measures 10 in the nature of turnover taxes if they exhibit the essential characteristics of VAT even if they are not identical to VAT at all points.
The most recent iteration of the VAT Directive is the Principal VAT Directive (PVD) of 2006, 2006/112. This was 11 adopted under Article 93 TEC (now Article 113 TFEU).
Commission proposal for a Council amending Directive 2006/112 regarding the VAT treatment of insurance and 12 financial services, COM (2007) 747.
Commission proposal for a Council Directive amending Directive 2006/112/EC on the common system of VAT 13 as regards the treatment of vouchers, COM (2012) 206.
COM (2011) 851.
14 Proposal for a Council Directive amending Directive 2003/96/EC restructuring the Community framework for 15 the taxation of energy products and electricity COM (2011) 169.
Notably Articles 326-327 and 332 TFEU.
16 18 Review of the Balance of Competences between the United Kingdom and the European Union: Taxation Direct taxation
1.28 In respect of direct taxation, Article 115 of the TFEU is used as the legal base for direct tax measures which are necessary for the functioning of the internal market. The internal market is defined as “an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties”17. Measures relating to direct tax should be adopted under Article 115 of the TFEU which requires unanimity voting and in consultation with the European Parliament.
This is known as the special legislative procedure.
Article 115 TFEU provides:
Without prejudice to Article 114, the Council shall acting unanimously in accordance with a special legislative procedure and after consulting the European and the Economic and Social Committee, issue directives for the approximation of such laws, regulations or administrative provisions of the Member States as directly affect the establishment or functioning of the internal market.
1.29 In contrast most measures necessary for the functioning of the internal market, are proposed using Article 114 of the TFEU. Legislation proposed under Article 114 is agreed by qualified majority voting (QMV) of the Member States and through co-decision with the European Parliament. This is known as the ordinary legislative procedure. Article 114 is discussed in the separate Single Market: Synoptic Report. The reason tax measures are not adopted under Article 114 is that Article 114(2) expressly precludes the application of Article 114 to fiscal measures.
1.30 While any harmonisation of taxation should be decided by unanimity, there are circumstances where tax measures have been agreed by QMV and co-decision. The CJEU, the judicial authority of the Union and the body charged with interpreting EU law, has said in a number of judgments that a measure may have a clear main purpose, and only incidentally pursue some secondary objective. In those circumstances, the only necessary legal basis is the one corresponding to the main purpose. The CJEU has
expressed the principle as follows:
If examination of a Community [now EU] measure reveals that it pursues a twofold purpose or that it has a twofold component and if one of these is identifiable as the main or predominant purpose or component whereas the other is merely incidental, the act must be based on a single legal basis, namely that required by the main or predominant purpose or component18