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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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Consultation 5.3 Under Article 17(2) of the TEU, the European Commission usually has the exclusive right to initiate legislative proposals. This “right of initiative” enables the European Commission to coordinate the EU’s legislative programme, although the Council and the European Parliament may also ask the European Commission to put forward a proposal. One respondent suggested that “the Commission’s right of initiative should perhaps be curtailed” so that it does not “lead to unnecessary interference” 1.

5.4 During the course of discussions other respondents expressed similar concerns about the volume of legislative initiatives on tax being suggested by the European Commission.

Respondents proposed that refinement of the right of initiative could perhaps involve a stricter application of the principles of subsidiarity and proportionality, including in a form which could be challenged in the courts. Greater consultation prior to the introduction of a proposal was also suggested as a means of managing the large volume of material on tax resulting from the European Commission’s right of initiative.

See evidence submitted by the Institute of Directors.

46 Review of the Balance of Competences between the United Kingdom and the European Union: Taxation 5.5 The European Commission may issue a public consultation to seek the views of interested parties where it has identified an issue on which it may need to take action on, although this is not a requirement in order for the European Commission to introduce a proposal.

5.6 Increased and more transparent consultation by the European Commission as part of the legislative process was a common request in the evidence received2 and during the course of discussions. Some respondents noted and welcomed the increase in public consultations undertaken by the European Commission in recent years in line with the European Commission’s communication on consultation standards3. However some, including the British Bankers Association, felt that there was less consultation than in the UK policy-making process and there was room for further improvement. One example given of where policy would have benefited from greater consultation was on the proposed general anti-avoidance rule4 contained within the European Commission’s Recommendation on Aggressive Tax Planning5.

5.7 The British Bankers Association argued that the role of business in the consultative process needed to be more clearly defined to achieve better quality tax proposals. The IMA went further, arguing that the European Commission did not have “an effective mechanism for consulting with the public and business on the impact of action on taxation”.

5.8 Options suggested for improvement included “clear consultation documents, consult[ing] all relevant target groups, leave[ing] sufficient time for participation, publish[ing] the results and provid[ing] feedback” 6.

5.9 These suggestions were welcomed by interested parties when raised during the course of discussions who considered that while this was done to a high standard, in some instances, notably in relation to the VAT strategy, there were other instances where this was not done to a satisfactory extent. It was envisaged that greater consultation, although potentially time consuming, would result in a higher quality of proposal that functioned as intended, as well as helping to curtail initiatives that were not beneficial.

Impact assessments 5.10 Another concern amongst respondents was what they viewed as poor quality impact assessments for proposed tax measures at the EU level. Respondents noted that impact assessments were often incomplete and Oxford University’s Centre for Business Taxation felt that “their conclusions at times do not sit comfortably with the content of the legislative proposal” 7. Some respondents suggested that impact assessments should be carried out on a Member State by Member State basis8, to ensure that the proposed measure did not create distortions. The British Bankers Association suggested that impact assessments could helpfully include a cost-benefit analysis.

5.11 PWC suggested that the appointment of an ombudsman to oversee the drafting of impact See evidence submitted by the British Bankers Association and evidence submitted by 2 PriceWaterhouseCooper.

General principles and minimum standards for consultation of interested parties by the European Commission, 3 COM (2002)704, final.

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

4 Commission Recommendation of 6.12.2012 on Aggressive Tax Planning C(2012) 8806 final.

5 Evidence submitted by the British Bankers Association.

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

7 See evidence submitted by the National Farmers Union, and evidence submitted by the British Bankers 8

–  –  –

assessments could help to improve their quality. Similar suggestions were made by stakeholders in the course of informal discussions, as well as the idea of an independent ombudsman to whom impact assessments could be referred to if it was felt that an impact assessment fell short of the necessary requirements and standards. A number of comments were made that the current process for the European Commission putting forward proposals was too political and their impact assessments and the views of stakeholders expressing concerns about a proposal were not given sufficient weight.

Impact assessments with greater accountability could help to address this, as part of wider changes such as increased and more transparent consultation.

Sunset and review clauses 5.12 A number of respondents expressed a desire for more action to be taken to ensure that existing EU tax legislation was kept in line with modern business practice and evolving standards and to ensure that legislation worked as was intended (see Chapter 4 above).

During the course of discussions interested parties considered a range of options of how this could be ensured. A number of groups suggested the inclusion of review or sunset clauses into legislation in order to require the European Commission and Member States to review legislation and choose whether to re-enact it after a given number of years.

5.13 PWC suggested that new tax legislation could include an initial review period of three years, with extensions being agreed every three to five years. While this could prompt Member States and the European Commission to review legislation and examine whether legislation is up-to-date, respondents also noted that it would increase the number of tax negotiations and potentially be used as an opportunity to extend EU competence on taxation.

5.14 PWC also suggested that reviews could potentially include opt-outs for Member States.

An opt-out would ensure Member State tax sovereignty was protected by allowing a Member State to choose not to be bound by a tax measure when it was adopted. This option would have the advantage of protecting Member State tax sovereignty while not blocking progress for other Member States as can be the case where a veto is exercised under unanimity voting. When this idea was raised during the course of discussions, stakeholders noted the beneficial use of the UK’s Justice and Home Affairs opt-out.

However, some questioned whether a tax opt-out was necessary given the use of unanimity voting on tax, and the possibility for nine or more Member States to use the enhanced co-operation procedure to proceed with a tax measure that did not receive full support from all Member States. Interested parties also expressed concern that an optout (and the use of enhanced cooperation on tax) could lead to a more fractured internal market rather than aiding its functioning.

CJEU processes 5.15 In addition to concerns about the effect of the CJEU’s rulings on domestic tax regimes discussed above, respondents also raised concerns about the decision-making process and how domestic courts respond to CJEU rulings. Respondents expressed concern that in some cases CJEU rulings had led to delays, uncertainty for tax payers and governments and the need for further litigation9. The Marks and Spencer case (see Box 3.C above) was highlighted by a number of respondents as an example where a CJEU ruling and the reaction of a domestic UK court have caused delay, uncertainty and significant cost. In this case, the UK amended its domestic law in response to a ruling by the CJEU.

5.16 Whilst recognising the problems caused in some instances by CJEU rulings and the Evidence submitted by the Law Society of England and Wales.

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

reactions of domestic courts to such rulings, the Law Society cautioned that:

“while certain CJEU decisions might be said to make a Member State’s legislation less clear, the resulting doubt over the scope of the Member State’s legislation has to be balanced against the need for a level playing field to be maintained and the value businesses attach to this”.

Limitations placed on the CJEU and clarity of judgments 5.17 Respondents felt that one of the factors contributing to repeat referrals to the CJEU was the limitations placed on the Court on what it can take into account when forming its judgment. In evidence, the Law Society noted that proceedings before the CJEU “are inevitably limited by the facts and circumstances presented to the Court by the Commission [and] the parties in the reference”.

5.18 A number of respondents also noted the limitations of what the CJEU can consider, expressing concern that the CJEU was left unable to take account of balancing factors in other parts of a domestic tax system, national circumstances or to accommodate the types of policy considerations that are seen as essential for complex tax policy decisions.

5.19 In evidence the CIOT noted that “the judgments of the CJEU are not always very clear” and this “frequently results in protracted litigation in national courts and multiple references at the same time”. The ICAEW note that this results in uncertainty for tax payers and governments. As an example of this, the ICAEW highlighted the FII GLO case10, which has recently been referred to the CJEU for a third time.

5.20 To help mitigate the uncertainty caused by a number of judgments which do not adequately take account of national circumstances or are unclear, some respondents favoured giving interested parties and Member States the opportunity to question or comment on judgments before they are finalised. The CIOT suggest that this should be done where “the questions put have not been answered in a manner capable of application nationally.” Another respondent suggested introducing the possibility of responding to an Advocate General’s Opinion could help to ensure the CJEU took “better account of the specific national legal context” 11.

Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue (Case C-446/04) [2006] 10

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5.21 Respondents recognised that this may lengthen the judicial process in the first instance, but shorten the overall process by reducing the need for further references to be made to the CJEU as well as reducing the uncertainty about the consequences of the ruling.

Retrospection of decisions

5.22 One of the concerns for Member States who face action before the CJEU on a domestic tax matter is the large liability they may incur as a result of a ruling. A Member State may be liable to repay taxes collected under a domestic tax law if that tax is found to contravene EU law. This liability may commence from where the tax measure was introduced, making it potentially very costly12. This liability will fall upon tax payers in the Member States. There is the possibility for an applicant to the CJEU seeking a judgment to ask for the effect of a ruling to have limited temporal effects, for example that the judgment has limited or no retrospective effect. An example of such a request can be seen in the joined cases of FIM Santander13 where the French request for such a limitation was rejected by the CJEU.

5.23 Noting this concern of Member States, the Institute of Directors and other respondents suggested that the retrospection of decisions could be limited, for example, to a given number of years, to help Member States manage their liability. In concurrence with this,

the Oxford University Centre for Business Taxation suggest that:

“the limitation of retrospective effect could help Member States to manage the budgetary implications of case law: this possibility can be linked to a number of qualifying conditions, such as the uncertainty surrounding the application of EU law in a specific case”.

However, there is a 10 year limitation period that relates to the recovery of unlawfully granted State aid, as set 12 out in the implementing regulations 659/1999.

C-338/11 to C-347-11.

13 Summary 6.1 Interested parties were invited to provide evidence on the future challenges to the UK on the balance of competence on tax. One of the key themes from discussions was that certainty over the tax system was essential, particularly for businesses. In addition, the ability of Member States to retain control over the shape of their tax system was also seen as essential to protect national interests. Respondents also raised general concerns around potential future euro zone integration on tax and any “two-speed” Europe having potential spill over effects on the UK.

6.2 The future challenges identified by respondents were those which created uncertainty, such as CJEU rulings (discussed in Chapter 3) and those which posed a risk to individual Member States control of their tax systems, from undermining unanimity or the use of enhanced co-operation on tax.

6.3 Respondents proposed a number of actions to reduce uncertainty including reform of the CJEU process and recommended greater protection for Member State interests, through amendments to the enhanced cooperation procedure and maintaining the veto on taxation.

6.4 There was also a recognition among respondents that in certain future circumstances international action on taxation is likely to be necessary.

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