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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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3.25 Whilst the removal of discriminatory tax provisions at the national level can be beneficial, in their response Oxford University’s Centre for Business Taxation argued that it “does not always contribute to the establishment of a more level playing field on an EU-wide scale” 21. Where a ruling on a domestic tax system has ramifications for the domestic tax regimes in place in other Member States, there is a risk that they repeal measures which are beneficial to the internal market in order to avoid breaching EU law. As an example of this, one respondent highlighted the choice faced by Member States on whether to extend their group regime to cross-border situations or to abolish it in light of the Marks and Spencer ruling. The respondent points to the results of a study conducted by de la Feria and Fuest22 which shows that different responses by Member States to the Marks and Spencer ruling “could increase the differences between Member States in the cost of capital and the levels of production” 23.

The effect of the fundamental freedoms on the exercise of Member State competence on tax

3.26 Although respondents noted that the enforcement of the fundamental freedoms has demonstrable benefits for them, many respondents also expressed concern over the way in which the freedoms are enforced with relation to taxation. Respondents including the ICAEW noted that there is a considerable volume of CJEU case law “which significantly affected what the UK Government could or could not do in relation to its domestic tax system” 24.

Evidence submitted by Anzhela Yevgenyeva, Oxford University Centre for Business Taxation.

21 Rita de la Feria and Clemens Fuest, “Closer to an Internal Market? The Economic Effects of EU Tax 22 Jurisprudence” (2011) 12 CBT Working Papers.

Evidence submitted by Anzhela Yevgenyeva, Oxford University Centre for Business Taxation.


–  –  –

3.27 A number of respondents pointed specifically to the effect on the UK tax regime of the ruling in Marks and Spencer 25, where the UK was required to amend its cross-border loss relief rules, (see Box 4.C above) to illustrate the effect that the fundamental freedoms and the jurisprudence of the CJEU can have on domestic tax systems.

3.28 PWC described the rulings of the CJEU as “a significant influence on the way EU tax competences have been clarified and applied” 26. The Institute of Directors commented that decisions of the CJEU relating to taxation have been “a massive constraint on UK tax policy-making in recent years”.

3.29 A number of respondents felt that certain rulings by the CJEU had undermined the sovereignty of Member States over their tax systems. For example, one respondent

noted that:

“in some cases, the Court comes very close to the borderline of its competence by taking ‘quintessentially legislative’ decisions, which can be seen as contradicting the spirit of the Member States’ veto power guaranteed by the EU Treaties” 27.

3.30 This was felt most keenly where a ruling by the CJEU resulted in a taxation policy that respondents felt would not have been agreed if the policy had been voted on by all 28 Member States at Council using unanimity voting, as would have been the procedure for EU level legislation on a tax legal base.

3.31 While comments on the impact of the CJEU’s jurisprudence largely related to its effect in the area of direct taxation where competence remains primarily with Member States, the impact was also noted in relation to indirect taxation. The British Bankers Association in

their evidence commented that:

“In the VAT area, the Court of Justice has increasingly been refining and restricting the extent of [Member States’] ability to apply and operate the tax in a manner appropriate to their national jurisdictions”

3.32 In addition to restricting Member States’ ability to shape their tax system, EU litigation can lead to significant Exchequer cost and long periods of uncertainty for business. For example, where a Member State’s tax measure is found to be in violation of EU law, the Member State concerned can be liable to repay the tax collected through this measure.

This can result in a substantial cost, which may require revenue to be raised through alternative means. In addition, businesses or individuals may be left unsure of their tax liability, especially where legal proceedings are protracted or there are numerous referrals by a domestic court to the CJEU.

3.33 However, respondents including PwC did note a change in the approach of the CJEU since late 2005, with the CJEU now “more prepared to accept that domestic tax systems are generally compliant with the EU Treaty” but may require modification to make them proportionate28.

–  –  –

See also Kaye, T.A,2005. Tax Discrimination: a comparative analysis of U.S. and EU approaches [pdf], page 26 20 Available at: http://www.americantaxpolicyinstitute.org/pdf/Kayechapter_may_25rev.pdf Accessed 31 March 2013.

Evidence submitted by Anzhela Yevgenyeva, Oxford University Centre for Business Taxation.

27 Idem.

28 34 Review of the Balance of Competences between the United Kingdom and the European Union: Taxation

3.34 Respondents also noted that in an effort to ensure that domestic tax measures comply with EU law relating to the fundamental freedoms and State Aid rules, tax legislation had become increasingly complex. The Law Society noted that attempts to draft EU compliant

tax laws had led to:

“significant complexity in certain areas in the UK such as: the introduction of domestic transfer pricing; thin capitalisation rules; and expansion of dividend exemptions to non-UK dividends but with a series of complex exclusions to the exemptions that apply to both UK and non-UK dividends”.

Removal of tax discrimination in third countries

3.35 In their evidence, the Scotch Whisky Association noted that one of the advantages to their members of EU-level action on taxation has been the removal of discriminatory tax measures in countries which gave favourable tax treatment to their domestic products.

As an example of this they point to the removal of discriminatory tax measures as part of enlargement negotiations with countries including, amongst others, Poland, Romania and Turkey.

3.36 The Scotch Whisky Association also cited beneficial outcomes for their members from EU-level action on tax discrimination in third countries, through the use of the WTO dispute settlement mechanism.

3.37 In the WTO the EU acts for Member States for most purposes, including dispute settlement, because trade is an area of exclusive EU competence. The Scotch Whisky Association felt that action by the 28 Member States collectively as the EU at the international level carried more weight and expertise than an individual Member State, which in turn helped to secure the desired outcome, An example was the removal of tax discrimination against their members products in Japan, Korea, Chile and the Philippines.

Code of Conduct Group

3.38 Countries both within and outside of the EU have long recognised the difference between tax competition and harmful tax practices, for example in bilateral tax agreements, at the EU level and internationally at the OECD.

3.39 In 1997 Member States, with the encouragement of the UK, established the Code of Conduct Group for business taxation. By joining the Code Group Member States agreed to refrain from introducing any new harmful tax measures and to amend any laws or practices that are deemed to be harmful in respect of the principles of the Code29.

3.40 In 1999, as part of the commitment to roll back harmful tax measures, the Code of Conduct Group identified 66 harmful tax measures in EU Member States and dependant or associated territories within its report30. The Group has since been monitoring the rollback of these measures and Member States’ commitment not to introduce harmful tax measures.

The criteria for determining whether a measure is harmful can be found at:

–  –  –

3.41 The Code of Conduct is a voluntary political arrangement between Member States and has no effect on the balance of competence. However, Member States have committed to exercise their competence in accordance with the principles of the Code. In addition to each Member State, the UK’s Crown Dependencies – Jersey, Guernsey and the Isle of Man have all voluntarily agreed to comply with the Code Group. The views of these jurisdictions are represented by the UK at the Code Group.

3.42 Some respondents including the ICAEW and the Law Society considered that the work of the Code of Conduct Group could contribute to ensuring a level playing field for companies operating within the internal market and reduce the potential for companies to reduce overall taxes paid by artificially shifting profits to low-tax jurisdictions. This view was shared by interested parties in the course of discussions who felt that commitment to the Code Group could usefully provide an indicator of a jurisdiction’s good governance on tax matters for the purposes of discussions in international forums.


3.43 A derogation is a provision in an EU legislative measure which allows for all or part of the legal measure to be applied differently, or not at all. Derogations can give Member States flexibility in how EU legislation is applied domestically. The UK has a number of derogations from EU legislation on VAT, notably those negotiated when joining the EEC in 1973, including our zero rates.

3.44 Member States can deviate from the common VAT rules through a number of routes.

In some circumstances the VAT Directive allows for optional treatment, usually subject to meeting certain requirements. Examples include optional reverse charges31 and the options to adopt the reduced rates listed in Annex III of the VAT Directive. Individual Member States may also derogate from the common rules through arrangements negotiated on accession, or through “stand still” arrangements which usually allow the retention of historic arrangements during the so-called “transitional period” or by applying to the European Commission for derogations to combat evasion, avoidance or for the simplification of the system.

3.45 In evidence respondents raised derogations from tax legislation as having both beneficial and detrimental effects. For example, derogations allow Member States flexibility in applying EU law to suit their domestic circumstance, but they have the potential to cause distortions when used inappropriately.

3.46 In evidence, the CIOT argued that:

“In principle, derogations from generally applicable legislation should be kept to a minimum and should not interfere with cross-border trade.”

3.47 They argued that a lack of harmonisation on generally applicable legislation can result in double non-taxation or double taxation and protracted disputes with tax authorities.

Under Art 199 of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (“the Principal VAT Directive”).

36 Review of the Balance of Competences between the United Kingdom and the European Union: Taxation Reduced and zero rates

3.48 The most familiar UK derogation to most people in the UK is likely to be the zero VAT rate on certain foods, newspapers and journals. It is possible for the UK to apply a zero rate of VAT on these items because of special provisions included in Title V Chapter 4 of the Principle VAT Directive32, which authorise specific treatments to apply until the “definitive arrangements”33 for the EU VAT system are introduced. For the UK, Article 110 is a key provision as it provides the basis for the zero rate on the items mentioned above. Member States may continue to derogate from the Directive to apply a zero VAT rate or reduced rates lower that the minimum set down in the Directive34.

3.49 In evidence, the Charity Finance Group (CFG) and the National Council for Voluntary Organisations (NCVO) identified zero and reduced rates as “extremely valuable to charities, allowing them to undertake activities which might otherwise be unaffordable”.

They acknowledged the benefits of a harmonised VAT system and the contribution it made to the efficient functioning of the internal market, welcoming moves to simplify and harmonise the VAT regime across the EU. However, they cautioned that moves towards harmonisation had “in some cases proved detrimental to the UK charity sector” and it was “essential that Member States are able to respond to national needs and circumstances” through the use of zero and reduced rates.

3.50 The existing legislation on reduced rates is currently under review and subject to public consultation by the European Commission. This is in line with the European Commission communication on the future of VAT35, in which they set out what they identify as the fundamental characteristics that should underlie the new VAT regime, and their priority actions for creating a simpler, more efficient and more robust VAT system in the EU.

for the benefit of the final customer”.

Footnote 5, Chapter 2.

Summary 4.1 No respondents identified any significant gaps in EU-level legislation on taxation.

A number of respondents noted that more action on taxation could be of benefit to the UK where the existing EU legislation is in need of modernisation or where improvements might be made to administrative co-operation. The Interest and Royalties Directive was cited as an example of where modernisation of the existing Directive would be of benefit. Respondents also noted areas where they would like less EU-level involvement on taxation, because they saw the action as unnecessary for the functioning of the internal market and not meeting the principles of proportionality and subsidiarity. Respondents also called into question measures which they felt would have a detrimental effect on growth.

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