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«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 ...»

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1.31 Tax proposals are decided by unanimity with Finance Ministers deciding policy at the Economic and Financial Affairs Council (ECOFIN). Generally, non-tax proposals are decided outside of ECOFIN on a non-tax legal base through the ordinary legislative procedure, where the voting is by qualified majority. Therefore, there is a possibility that tax measures, which would be subject to unanimity voting were they introduced under Articles 113 or 115 of the TFEU, could be decided by QMV if contained within a non-tax proposal.

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1.32 Competence on direct taxation remains primarily with Member States. Relatively few Directives have been adopted on direct tax. EU legislation to date on direct taxation has been aimed at removing particular tax obstacles, primarily for businesses, within the internal market rather than establishing broader common tax frameworks or rates. Three

notable examples are:

• The Mergers Directive19;

• The Parent-Subsidiary Directive20; and • The Interest and Royalties Directive21.

1.33 The Mergers Directive put in place a common system of taxation applicable to crossborder reorganisations of companies situated in two or more Member States.

1.34 The Parent-Subsidiary Directive abolished withholding taxes on dividend payments between group companies residing in different Member States and prevented double taxation of the parent companies on the profit of the subsidiaries.

1.35 The Interest and Royalties Directive put in place a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States. The Directive sought to abolish, wherever possible, withholding taxes on interest and royalty payments between associated companies of different Member States.

1.36 At present there is one EU direct tax proposal under discussion by Member States. This is the European Commission proposal for a common consolidated corporate tax base (CCCTB)22, which was introduced in 2011 under an Article 115 TFEU legal base. The CCCTB proposal aims to establish a single set of rules that companies operating within the EU could use to calculate their taxable profits. The UK will not agree to any proposal that would jeopardise our ability to shape our own tax policy and stop us from achieving our objective of creating the most competitive corporate tax regime in the G20.

Factors affecting the exercise of competence

1.37 Whilst direct tax remains primarily a Member State competence, Member States must exercise their competence consistently with EU law, meaning that when the UK makes changes to its system of taxation, it must not implement anything which is contrary to the Treaties, notably: Article 18 of the TFEU (formally Article 12 TEC) which contains a general non-discrimination provision; Article 110 of the TFEU (formally Article 90 TEC) which prohibits Member States directly or indirectly imposing internal taxation on the products of another Member State in excess of that imposed on similar domestic product; and the fundamental freedoms (see Box 1.B above).

1.38 The fundamental freedoms are directly applicable23 and so can be invoked before national courts to challenge the validity of domestic legislation.

Council Directive 90/434/EEC of 23 July 1990 on the common system of taxation applicable to mergers, 19 divisions, transfers of assets and exchanges of shares concerning companies of different Member States, as amended.

Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of 20 parent companies and subsidiaries of different Member States, as amended.

Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and 21 royalty payments made between associated companies of different Member States.

Proposal for a Council Directive on a Common Consolidated Corporate Tax Base COM (2011) 121.

22 Van Gend en Loos v Nederlandse Administratie der Belastingen (Case 26/62) [1963] ECR 1 and 23 subsequent cases.

20 Review of the Balance of Competences between the United Kingdom and the European Union: Taxation

1.39 The CJEU is the judicial authority of the Union and the body charged with interpreting EU law. It consists of three courts: the Court of Justice, the General Court and the Civil Service Tribunal.

Box 1.C: Types of action before the Court Preliminary ruling requests Where a domestic court wishes to clarify a point of EU law, it may, and in some cases must, ask the CJEU for advice. The CJEU will then give its interpretation of the relevant EU law, but it will not actually decide the substance of the case before the domestic court. This is known as a ‘preliminary ruling’.

Actions for failure to fulfil an obligation The European Commission is empowered to bring infringement proceedings against a Member State for failing to fulfil its Treaty obligations. This begins with a “Reasoned Opinion” by the Commission outlining the scope of the action and requesting the Member State to comply within a set time. The Commission may then refer the case to the CJEU. If the CJEU finds that the Member State has not fulfilled its obligations it is required to take the necessary measures to comply with the judgment. Failure to comply may result in a further European Commission request to the CJEU to impose a fine for non-compliance. A Member State may also bring an action for failure to fulfil an obligation against another Member State.

Actions for annulment

Chapter 2:

Considerations underpinning the level at which policy should be made Summary 2.1 As part of the Call for Evidence respondents were asked at what level tax policy should be made, for example domestically at the Member State level, at the EU level or internationally in a forum such as the OECD. There was an understanding among respondents that action on taxation was necessary at a number of levels, but that many decisions on taxation should primarily be undertaken at the national level. This was particularly so for decisions relating to personal taxation which is seen as being a matter for Member States, taking into account their domestic circumstances, and social and economic objectives.

2.2 Most respondents started from the premise that action on taxation at the EU level should only be undertaken where there was a clear internal market justification for doing so. For example, the Chartered Institute of Taxation (CIOT) argued that harmonisation of tax rules at the EU level was desirable where it “helps to facilitate cross-border trade or the exercise of the fundamental treaty freedoms”. Respondents felt that for EU-level action on taxation to be justified, the proposed action must also meet the principles of subsidiarity and proportionality (see Box 1.A above) and be demonstrated to be in the interests of Member States.

2.3 Respondents also considered certain action on taxation to be important at an international level in some cases, primarily for setting standards on internationally relevant taxation issues, such as transparency and matters affecting international business, and on tax evasion and avoidance.

Considerations for EU-level action on tax 2.4 The Call for Evidence asked respondents to identify what they believed the main considerations to be for deciding the appropriate level at which tax policy should be made.

2.5 Broadly, respondents felt EU-level action to harmonise rules could be desirable where:

• Such action was necessary to ensure the fundamental freedoms and the operation of the internal market;

• Member States could not achieve this through domestic action; and • The proposed action does not unduly infringe Member States’ ability to set their own domestic taxation policy and tailor their tax systems to support that policy.

2.6 The first consideration is reflected in the legal bases contained in the TFEU used for the 24 Review of the Balance of Competences between the United Kingdom and the European Union: Taxation introduction of tax measures, namely Articles 113 and 115 as discussed in Chapter 1.

2.7 The second consideration is reflected in Article 5 of the TEU in the form of the principles of 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.

2.8 In addition to these considerations on whether EU or international action was appropriate, respondents also noted a number of factors which they felt should be considered,


• Whether proper consultation with business and other stakeholders has been undertaken to understand the impact of measures proposed, with proposals then being refined accordingly; and • The cost and complexity of achieving agreement to harmonised measures and the updating of such measures to take account of developments.

2.9 In considering the appropriateness and benefits of EU-level action on tax in a given situation, some respondents identified a number of existing measures which they felt met the above criteria and were best undertaken at the EU level. These included, a common system of VAT and the Interest and Royalties Directive as these facilitated cross border trade and addressed cross-border business problems in a way that could not have been achieved through domestic action alone.

International action on taxation 2.10 There was recognition among respondents that in certain circumstances international action on taxation was necessary. Many respondents also argued that global consideration of tax issues was becoming increasingly important, although there was no call for harmonisation of tax rates at an international level. For example, given the global nature of business, action to counter aggressive tax avoidance and tax evasion was seen as something best undertaken through wider international agreements. International agreements to prevent double taxation were also seen as important.

2.11 In a globalising economy, businesses look for tax cooperation and coordination above the Member State level to allow them to operate effectively across borders. The Institute of Chartered Accountants for England and Wales (ICAEW) noted that “[in] a globalising economy where the UK wishes to increase its exports, increasing collaboration on tax issues is necessary”. This was representative of the views expressed by other respondents in written evidence and during the course of discussions. However, individual taxpaying citizens may prefer for tax sovereignty to be retained, with decisions affecting them, such as personal taxation, being decided at the national level.

2.12 Most respondents suggested that international standards on tax should be set at the widest level, with respondents generally identifying the OECD as the appropriate forum for this during the course of discussions.

Chapter 2: Considerations underpinning the level at which policy should be made 25

2.13 An example of international standards set by the OECD includes the OECD Model Tax Convention and the Model Agreement on Exchange of Information on Tax Matters.

Compliance with the OECD level standards on transparency and exchange of information is monitored by the Global Forum on Transparency and Exchange of Information for Tax Purposes, through a peer review process.

2.14 The OECD also plays a role in double taxation agreements between Member States.

Double taxation can have a number of harmful effects on the international exchange of goods and services, and the free movement of persons and capital. The OECD Model Tax Convention was presented in recognition of the need to clarify and help standardise the tax liability for taxpayers operating across borders. Although competence on the negotiation of double tax agreements lies with Member States, the OECD Model Tax convention serves as a guideline for these bilateral agreements.

2.15 An example of work currently being undertaken by the OECD on taxation is the project on base erosion and profit shifting (BEPS). The project, in response to international concerns on the allocation of profits by multinational companies, is looking at whether, and if so how, the current international tax rules need updating to reflect the allocation of taxable profits to locations where the actual business activity takes place. The OECD will report a comprehensive action plan to the G20 in July 2013 with options for addressing BEPS issues.

Chapter 3:

The impact of the current balance of competence 3.1 As outlined in Chapter 2 the economic and commercial landscape has evolved significantly in recent years with, for example, the burgeoning use of digital commerce and the increasing globalisation of trade. On tax issues that require a coordinated international response, the UK has taken the lead, for example, through multilateral action in the G8, G20 and OECD. However, this review focuses solely on the current EU balance of competence on taxation.

3.2 The Call for Evidence asked for examples of how the current balance of competence on taxation advantages and disadvantages the UK. Respondents noted that the competence conferred under Article 113 and Article 115 of the TFEU has broadly been exercised to produce tax measures which have benefited the UK.

3.3 Unanimity voting on taxation has been essential in safeguarding the UK’s interests, as recognised by respondents, who clearly advocated the retention of unanimity voting.

Some respondents argued that unanimity voting could impede the timely and effective agreement of legislation, because of the need to achieve agreement by all Member States.

Respondents also commented on the advantages and disadvantages of the constraints on Member States’ competence arising from the enforcement of the fundamental freedoms and State Aid rules.

The effect of unanimity voting on tax 3.4 Unlike other policy areas which are decided by QMV, voting for taxation measures is by unanimity voting, which means every Member State has a veto over a tax proposal. The ability of Member States to veto tax legislation proposed under Articles 113 and 115 of the TFEU has shaped how the competence conferred under these articles has been used.

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