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More action 4.2 Respondents generally welcomed further action on taxation if it “facilitated pro-growth cross-border cooperation, and further developed our capacity to agree international tax issues” 1 to the extent that “it is required for the proper functioning of the single market”2. Respondents cautioned that this must also meet the tests set out in Chapter 2, for example, that any future action is clearly shown to be in the national interest. While respondents were content with the EU legislation that had been agreed, no responses identified any significant gaps needing to be filled at the EU level.
Updating existing measures 4.3 A common theme from the evidence received and discussions with interested parties was that more action was needed to keep EU-level taxation legislation up to date with modern business practices and advances in other areas of EU law. Respondents expressed concerns that legislation could become damaging to cross-border trade if it was not amended to reflect modern business practice. One respondent noted that, in cases where legislation is not amended to address emerging issues, the CJEU may fill the gap through individual rulings, taking control from Member States.
4.4 During the course of discussions a number of respondents cited the adoption of the amendment to the Interest and Royalties Directive, revisions to the Savings Directive, modernising the VAT regime and the administration of VAT as necessary actions.
Evidence submitted by the Institute of Chartered Accountants of England and Wales.
Evidence submitted by the National Farmers’ Union.
40 Review of the Balance of Competences between the United Kingdom and the European Union: Taxation 4.5 The CIOT highlighted that in responding to the European Commission Green Paper on the future of VAT many of their members had called for further harmonisation of the VAT structure, but also harmonisation of elements of the administration of VAT3.
4.6 One specific area where respondents urged for EU legislation to be updated was on the VAT treatment of financial services4. The IMA highlighted that the proposal has “significant potential benefits to the investment management sector”, including “giving UK funds and asset managers certainty on VAT treatment of the services they provide, and providing a level playing field for cross border provision of services”.
4.7 Respondents also suggested a number of other areas where they felt action could have potential benefits, provided it met the criteria outlined in Chapter 2. These included the introduction of a standardised VAT return5 and a harmonised tax framework for funds to help achieve the principle of tax neutrality for investor funds in line with the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive6. The UCITS Directive sets out a harmonised regulatory framework for investment funds that invest in certain classes of assets, providing high levels of investor protection and a basis for the crossborder sale of these funds.
4.8 Some respondents suggested that there was an imbalance of prioritisation and division of resources between implementing and reviewing existing legislation on the one hand and bringing forward new initiatives on the other. During discussions stakeholders cited the priority given to reaching agreement on the financial transactions tax compared with implementing the VAT Strategy as an example of this imbalance. While the suggested prioritisation may not be reflected in, for example, the number of people working on a given issue at the EU level, respondents felt it was reflected in the efforts made to reach agreement. Therefore, this could lead to resources being diverted from the more important issues from a business perspective, the more pressing issues such as implementing the VAT strategy.
Evidence submitted by the Chartered Institute of Taxation, page 2. See also Submission from the Chartered 3 Institute of Taxation on the Commission’s Green Paper on the future of VAT: Towards a simpler, more robust efficient VAT system: http://www.tax.org.uk/Resources/CIOT/Documents/2011/05/EC_GreenPaper_VAT.pdf.
Proposal for a Council Directive as regards the VAT treatment of insurance and financial services, COM (2007) 4 747 final.
See evidence of the British Bankers Association and evidence submitted by the Chartered Institute of Taxation.
Less action 4.9 On the whole respondents were supportive of existing tax measures, but were concerned about some of the proposed actions on taxation which they did not see as necessary for, or aiding, the functioning of the internal market. The most common measure cited as being unnecessary for the functioning of the internal market and disadvantageous to the UK was the proposed financial transactions tax.
4.10 Concerns were also raised about the impact of the rulings of the CJEU in relation to tax (see Chapter 1) with some respondents suggesting a lesser role for the CJEU in direct tax matters and others going further and suggesting an explicit limitation of the EU’s power over direct taxation. This is discussed in Chapter 6.
The EU proposal for a financial transaction tax Box 4.A: The financial transactions tax (FTT) The FTT proposal, initially presented under Article 113 of the TFEU, aims to create a common system of taxation for financial transactions. This includes, for example, the sale or purchase of shares where one party to the transaction is in a Member State.
The Commission gave two justifications for the introduction of the proposed FTT:
• A coordinated framework at EU level would help to strengthen the EU single market9.
After some Member States made clear that they would not agree to adopt a FTT, 11 Member States are taking forward the proposal for a FTT under enhanced co-operation which was authorised by the Council in January 201310. This has resulted in a revised proposal11 which is currently under discussion. The UK is not participating in the FTT under enhanced co-operation and has submitted a legal challenge to the CJEU against the decision authorising enhanced co-operation. The case focuses on the extra-territorial aspects of the proposed tax.
4.11 The UK Government does not support the European Commission’s proposal for the introduction of a FTT introduced through enhanced cooperation and will not participate in it. The UK believes that the proposal will damage economic growth, and lead to significant job losses across the EU. Although the UK will not participate, there is a risk that activity taking place in the UK will relocate elsewhere. In the case of the European Commission’s proposal for a FTT, jurisdictions outside the EU may conceivably seek to block or refuse to comply with the extra territorial elements of the FTT as proposed.
Financial Transaction Tax: Making the financial sector pay its fair share, IP/11/1085.
7 Council Decision of 22 January 2013 authorising enhanced co-operation in the area of financial transaction tax, 8 (2013/52/EU).
Proposal for a Council Directive Implementing Enhanced Cooperation in the Area of Financial Transaction Tax, 9 COM(2013)71 final.
42 Review of the Balance of Competences between the United Kingdom and the European Union: Taxation 4.12 A number of respondents highlighted in evidence and during discussions that the FTT proposal was damaging to the UK’s interests and an area where they felt the EU should not be taking action. Respondents felt strongly that the proposed tax measure was “not in the best interests of the EU or UK economies” 10. This opinion was shared by a number of groups, including the House of Commons European Scrutiny Committee and City UK, who did not submit written responses to the questions raised in the taxation call for evidence document, but who asked for their work on the impact of the FTT to be considered as part of the review.
4.13 Prior to the FTT proposal being taken forward under enhanced co-operation, concerns had been noted about the disproportionate impact of the proposed tax on the UK. In their report “Towards a Financial Transactions Tax?” the House of Lords European Union Committee, having collected evidence from interested parties, noted that “revenue raised in the UK [from the FTT] would be 4.6 times higher than revenue raised in Germany and
10.9 times higher than revenue raised in France, and that 71.3% of overall revenue would be expected to come from the UK” 11.
4.14 Although the UK is not participating under the enhanced co-operation procedure in the FTT, respondents including the Northern Ireland Executive, the IMA, and City UK expressed concerns about the effect of the enhanced co-operation FTT on the UK, including that it would place requirements on non-participating Member States, for example, to collect revenues raised by the tax.
4.15 The ability of Member States participating in enhanced co-operation to place burdens on non-participating Member States led a number of respondents to question the use of enhanced co-operation on tax and whether reforms needed to be made. This is discussed in Chapter 6 below. To illustrate this concern in relation to the FTT, the City of London Corporation in their evidence to the Single Market Synoptic Review highlighted that the proposed ‘residence principle’, which applies if any one party to a qualifying transaction is based in a participating Member State. They suggest that this means that there is “the potential for such negative consequences to hit the UK even though the UK has exercised its right to opt-out of the FTT”. City UK pointed to the results of a study which they and the City of London Corporation commissioned to assess the impact of the FTT on corporate and sovereign debt12. This study revealed that the cost is likely to be greater on non-participating Member States, like the UK, because debt securities represent a greater proportion of their corporations’ capital structures.
4.16 On 18 April 2013 the UK submitted a legal challenge to the CJEU against the decision authorising enhanced cooperation on a FTT13. The case focuses on the extraterritorial aspects of the proposed tax. Evidence submitted by the Institute of Chartered Accountants of England and Wales.
10 House of Lords, European Union Committee, 2012. Towards a Financial Transactions Tax. (HL 287, 29th Report 11 of Session 2010-12) together with Formal Minutes London: TSO (The Stationary Office), recalling evidence submitted to the Committee by John Vella, Clemens Fuest and Tim Schmidt-Eisenloh, Oxford Business School.
London Economics, 2013. Impact of the financial transactions tax on corporate and sovereign debt, 12
A report conducted for the City of London. London:
Case C-209/13, UK v Council.
Chapter 4: More or less action on taxation 43Limiting the EU’s competence on direct tax 4.17 A number of respondents highlighted that Article 115 of the TFEU is not a specific legal base for direct tax measures in the way that Article 113 of the TFEU is specific to indirect taxation measures. There is no express provision in the TFEU for direct taxation.
4.18 In response to concerns about: the impact of CJEU rulings on domestic tax regimes;
concerns over the extent of the protection offered by unanimity voting; and the use of enhanced co-operation on tax measures with potential extraterritorial affects, some respondents could see merit in explicitly specifying the EU’s competence on direct tax, either through the introduction of a specific direct tax legal base, or through explicitly limiting the EU’s competence over direct tax.
4.19 One respondent suggested that competence on direct tax should be limited to “clearly defined areas, such as avoidance of double taxation or exchange of information” 14.
Another respondent explored the idea of excluding the application of the fundamental freedoms to direct taxation. The respondent concluded that this option “could endanger the integrity of the EU legal order, undermine the internal market and infringe the principle of the effective protection of rights under EU law” 15, bringing into question the desirability of this option. This concern was shared by other respondents, with the National Farmers’ Union noting that limiting EU competence on tax too much presented a clear risk of having “a detrimental impact on the ability of UK businesses to access the single market putting them at a disadvantage to their European counterparts”.
4.20 There was a general consensus during the course of discussions that competence on direct taxation should remain primarily with Member States, but that there was a need for limited action on direct taxation at the EU level to allow for the effective functioning of the internal market.
Reforming how tax policy and legislation is made at the EU level Summary 5.1 While broadly satisfied with the current balance of competence on taxation, a significant number of respondents raised concerns about the legislative process. They identified their experiences of EU policy and legislation as a key factor in determining what future action on taxation they would wish to see taken at the EU level. For example, the CIOT noted
“while harmonisation may in theory be desirable, obviously its desirability in practice may depend on the precise form of the proposals and their impact on national interests. The development of proposals raises questions about the decision making process in the EU”.
5.2 Many respondents suggested that the process of legislating and adjudicating on tax at the EU level needed reform to ensure a high quality and timely adoption of necessary tax legislation and to mitigate negative impacts on the national interest. Reforms suggested included: greater consultation; increased transparency at all stages prior to the adoption of legislation; full assessment of the impacts of proposed measures on individual Member States; and the use of enhanced review or sunset clauses in legislation. Similar comments were also made about tax measures taken forward through the enhanced co-operation procedure, which is discussed in Chapter 6 below.