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3.5 The Government believes that tax should remain subject to unanimity and upholding the Member State veto on tax is a priority.
3.6 Unanimity voting on tax was seen by most respondents as beneficial to the national interest because of the protection it offers against the imposition of disadvantageous tax measures. For example, the CIOT noted that unanimity voting can “act as a protection against disproportionate burdens being imposed on business and actions being taken contrary to a particular national interest”.
3.7 However, some respondents including the Investment Management Association, the British Bankers Association and the Chartered Institute of Taxation felt that at the same time unanimity voting can have disadvantages by acting as a block on or delaying 28 Review of the Balance of Competences between the United Kingdom and the European Union: Taxation necessary reforms which in turn leads to uncertainty. This view was also shared by interested parties during the course of discussions.
3.8 Unanimity was seen as blocking reforms in two ways:
• By reducing the capacity of EU Member States to respond to challenges through the adoption of new legislation or amending existing legislation; and • By producing legislation that may be sub-optimal as a result of compromises necessary to secure agreement by all 28 Member States.
3.9 Examples submitted by respondents of where unanimity voting has been a hindrance included blocks to adoption of amendments to the Interest and Royalties Directive and the EU Savings Directive1, neither of which have been adopted due to opposition from a small number of Member States. Respondents also highlighted the proposal on VAT treatment of Financial Services and efforts to introduce a standardised VAT return across all 28 Member States as being areas where useful measures have been hindered by unanimity voting.
3.10 The British Bankers Association noted that although a move to QMV might speed up the
legislative process, it would come at a high cost:
“an important loss of sovereignty in the ability of individual Member States to control a fundamental tool of economic policy”.
3.11 During the course of discussions some respondents questioned whether unanimity was in itself a strong enough safeguard to protect national interests on direct taxation, in light of the potential impact of CJEU rulings on taxation and the introduction of tax measures in non-tax proposals. The Institute of Directors noted in their response that “it is absolutely wrong to slide from unanimity to qualified majority, when a tax measure is incidental to a non-tax measure” 2. In written evidence, one respondent concluded that some additional protection was needed, including identifying “a set of core elements of taxation policy which will, at all times, remain outside EU competence” 3. Other responses suggested alternative reforms that could be made to better protect tax sovereignty, such as the creation of a specific, very narrow, direct tax legal base.
3.12 While most respondents agreed that maintaining the veto over tax policy was essential, some respondents, for example the National Farmers Union, could see the potential for areas of very specific indirect taxation which were “essential for the functioning of the internal market” to be decided by something less than unanimity, but acknowledged this did not necessarily mean it would be desirable.
3.13 Having considered the advantages and disadvantages of unanimity voting on tax, a majority of respondents felt that any EU action on tax should remain “strictly subject to unanimity” 4 and that unanimity on tax must remain universal. The reasons for advocating the retention of unanimity voting focused on the ability of Member States to ensure that tax measures at the EU level were in their interest and that a majority of Member States Council Directive 2003/48/EC of 3 June 2003 opn taxation of savings income in the form of interest payments.
1 Evidence submitted by the Institute of Directors.
2 Evidence submitted by HM Government of Gibraltar.
3 Evidence submitted by the Institute of Directors. See also evidence submitted by Her Majesty’s Government of 4
could not impose damaging tax measures on the minority5. Similarly, respondents felt strongly that Member States must retain the choice to decide between harmonisation and competition, and the ability to choose to introduce competitive business-friendly tax regimes, even where those Member States seeking to do so are in the minority6.
3.14 Many of those respondents advocating the retention of unanimity did however request reforms to the legislative process to accelerate the process of getting unanimous agreement on tax proposals. Reforms to the legislative process are covered further in Chapter 5 below.
Simplification and facilitation of cross-border trade 3.15 Giving British business access to a well functioning internal market was seen as imperative by respondents. Having a well functioning tax and regulatory framework at the EU level was identified as necessary to achieve this and one of the key influencing factors for a business in determining where to invest. As such, tax measures seen as necessary for the functioning of the internal market, such as a common system of import duties and a common destination based system of VAT, were broadly welcomed and supported by respondents, with the benefits being easily identifiable for UK businesses and citizens.
3.16 Respondents welcomed existing tax measures, such as the Interest and Royalties Directive7 and the Parent Subsidiary Directive8 (see Box 3.A below), which they identified as reducing the burden on business and simplifying their cross-border operations. On the whole it was felt that the EU taxation measures in place had helped to simplify and facilitate cross-border trade, for example, as noted by ICAEW, by providing “consistent tax rules for business and solutions to cross border tax issues” 9 such as double taxation.
3.17 Existing EU direct tax measures including the Mergers Directive10 and the ParentSubsidiary Directive were identified by a number of respondents including the British Bankers Association and the Law Society as beneficial. These Directives benefit UK groups which trade in Europe or restructure their European business by removing tax liabilities which could otherwise have existed and made such trade or restructuring costly and less attractive to business.
See for example evidence submitted by the National Farmers Union: “qualified majority voting in this area would 5 not be an appropriate system given that the intricacies and the full impact of proposals for some Member States may not be fully appreciated by the majority of Member States”.
This was the view expressed during the course of discussion. For written evidence, see for example evidence 6 submitted by the Institute of Directors.
Footnote 16 Chapter 1.
Evidence submitted by the Institute of Chartered Accountants of England and Wales.
9 Footnote 14 Chapter 1.
10 30 Review of the Balance of Competences between the United Kingdom and the European Union: Taxation Box 3.A: The benefits of the Parent-Subsidiary Directive In their evidence, the Law Society noted that “the UK could be a natural location for an intermediate holding company for investors into Europe” due to a long-standing policy of not imposing withholding tax on dividends as well as other factors such as the ease of setting up a business.
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. By abolishing withholding tax on dividends paid by qualifying subsidiaries the Directive “enhances the UK’s relative competitive advantage” as a location for intermediate holding company investment.
3.18 Whilst recognising the benefits of the above mentioned Directives, PWC and the CIOT, amongst other respondents, noted that the benefits from these measures could have been greater had the measures not been limited due to political compromises in order to reach unanimous agreement. However, respondents also recognised that the requirement for the unanimous agreement of all Member States had helped the UK and other Member States protect their national interests.
Removal of tax discrimination and enforcement of the fundamental freedoms 3.19 Respondents noted the positive impact of EU action in relation to tackling tax discrimination in two areas, firstly through enforcement of the fundamental freedoms, and secondly through representations by the Commission when negotiating bilaterally with EU candidate countries, third countries, and at the international level in forums such as the WTO.
Enforcement of the fundamental freedoms
3.20 As mentioned above, Member States must exercise their competence consistently with EU law, meaning that when the UK makes changes to its system of taxation, it must do so in line with EU law. In practice this means that tax policy set by Member States must not discriminate directly or indirectly against a national of another Member State or against the Member State’s own nationals who exercise the freedoms guaranteed by the Treaty11.
3.21 The fundamental freedoms – notably the freedom of establishment12, the freedom to supply services13, and the freedom to move capital14 – are prescribed by the EU Treaty and relate to cross-border movement between Member States15 (see Box 1.B above).
F.W.L de Groot v Staatssecretaris van Financien (Case C-385/00)  ECR I-11819, Para 94.
11 Articles 49-55 TFEU (formerly Articles 43-48 and 294 EC).
12 Articles 56-62 TFEU (formerly Articles 49- 55 EC).
13 Articles 63-66 TFEU (formerly Articles 56-59EC).
14 Additionally, the free movement of capital also applies to movements between Member States and third 15
3.22 EU level action to enforce the fundamental freedoms can be seen as a benefit to the UK where action is brought against a Member State whose national tax rules did not guarantee national treatment or when they discriminated on grounds of nationality against a UK citizen or UK business, as demonstrated in the case of Royal Bank of Scotland v Greece16.
Box 3.B: Royal Bank of Scotland Plc v Elliniko Dimosio (Greek State) The Royal Bank of Scotland (RBS) was resident in the United Kingdom and had a branch in Greece. Under Greek law the profits of the RBS branch in Greece were subjected to a higher rate of taxation than the profits of banks resident in Greece.
In its preliminary ruling, the ECJ (now CJEU) ruled that where there is no objective difference between two categories of companies a difference in treatment is not justified.
3.23 In explaining how the enforcement of the fundamental freedoms has been beneficial, the Investment Management Association (IMA) highlighted CJEU rulings, such as in the Santander17 case where it was held that levying dividend withholding tax on dividend payments to recipients in EU Member States (where no dividend withholding tax is levied domestically) was in breach of the enforcement of the free moment of capital (under Article 63 TFEU). The IMA submitted that the fundamental freedoms “are beneficial to investors and savers in the UK. Where enforced, they ensure that UK persons can freely invest across borders without tax acting as a distortion or a barrier to investment”.
3.24 British business can also benefit from the enforcement of the fundamental freedoms as it allows them to challenge UK tax measures which they feel do not guarantee national treatment. Cases cited by respondents to illustrate this include Marks and Spencer18, Cadbury Schweppes19 and Philips Electronics20.
Royal Bank of Scotland Plc v Elliniko Dimosio (Greek State) (Case C-311/97)  ECR I-02651.
Santander Asset Management SGIIC SA v Directeur des residents á l’étranger et des services généraux and Others Cases (C338/11 to C347/11) .
(Case C-446/03)  ECR 1-10837, Cadbury Schweppes plc, Cadbury Schweppes Overseas Ltd. V Commissioners of Inland Revenue (Case C-196/04)  ECR I-7995.
HMRC v Philips Electronics UK Ltd (Case C-18/11)  BTC 438.
32 Review of the Balance of Competences between the United Kingdom and the European Union: Taxation Box 3.C: Marks and Spencer plc v David Halsey (Her Majesty’s Inspector of Taxes) Marks and Spencer had a number of subsidiaries in other EU Member States in which it made a loss. It argued that it could offset the losses of its subsidiaries against its profits in the UK under the UK’s group relief rules. However, the rules did not permit such an offset where the loss-making subsidiary was not resident in the UK, or carrying out a trade in the UK. HMRC rejected the claim and Marks and Spencer appealed to the High Court. The High Court referred the question of whether the group relief rules breached the freedom of establishment to the ECJ (now CJEU) for a preliminary ruling.
The ECJ ruled that the UK group relief rules were largely consistent with EU principles as they applied to losses of subsidiaries in other countries. However, the rules were too restrictive in so far as they prevented the surrender of losses in circumstances where a subsidiary has exhausted all possibilities for using the loss relief in its state of residence and there was no possibility of relief in the country of residence of the subsidiary. As a result the UK was required to amend its cross-border loss relief rules.