Tax Harmonisation

Damon Lambert 

States are meant to have responsibility for direct taxation, i.e. income and corporation tax. The founding Treaty of what has become the European Union, despite its many amendments eg the Treaties of Amsterdam and Nice, has no Article dealing with direct taxation, hence there is little specific EU direct tax legislation. However, the European Court of Justice (the ECJ) consistently makes judgements that not only bend European Union law but also override key tenets of domestic legislation under the guise that they are contrary to the Freedom of Establishment and Capital Articles in the EU Treaty. This has the effect of moving the EU towards a single tax regime.

The areas of UK law under attack from the ECJ’s desire to create an EU wide fiscal regime are the taxation of:

• overseas dividends,
• transfer pricing,
• anti tax-haven legislation (Controlled Foreign Company tax),
• taxation deducted from savings income (Withholding tax),
• the rules governing the use of tax losses belonging to one UK company to other companies in the same group (Group relief),
• rules that prevent overseas owned companies getting UK tax relief for excessive interest payments to their parent, (Thin Capitalisation).

The Freedom of Capital Article of the Treaty of Rome allows member states to apply their own tax law so that persons who are not resident in that member state, or those whose capital is located elsewhere, are taxed on a different basis. The Treaty also allows member states to take measures to prevent infringement of their own tax law. Basically, tax should, even under EU law, be a matter for national governments.

However, where tax laws are inconsistent with federalism the ECJ consistently overrides domestic laws. This occurs even where the intention of the national legislation is to try to ensure that overseas owned and UK owned entities are taxed on a commercially equivalent basis. It is also the case even when the law is in strict accordance with the OECD model (the usual guidebook for taxing cross-border business in an internationally co-operative manner).

The goals of the ECJ are clear; either write your tax legislation to fit within the goal of a single European state or domestic tax law will be overruled through wide and fortuitous interpretations of EU law

Defence of national sovereignty by reference to the need to maintain the tax base, consistency in the principles of UK tax, or to counter tax avoidance (key principles in managing tax revenues and which the Freedom of Capital Article plainly allows) are dismissed in a few words in ECJ judgements. The goals of the ECJ are clear; either write your tax legislation to fit within the goal of a single European state or domestic tax law will be overruled through wide and fortuitous interpretations of the Articles of Freedom of Establishment and Capital. The fact that the Articles were not intended to override domestic tax law, is conveniently forgotten.

The ECJ is effectively legislating for tax harmonisation under the thin disguise of judicial process

Judgements by the ECJ even refer to the fact that the get-out clauses that determine the areas where the Article of Freedom of Establishment should not override domestic legislation do not mention taxation. This ignores the fact that as direct taxation is the responsibility of Member States a tax get-out clause should have been irrelevant, and a tax get-out clause indicating that the EC Treaty should not override certain aspects of Member States' own tax laws is inserted in the accompanying Freedom of Capital article anyway.

The ECJ is effectively legislating for tax harmonisation under the thin disguise of judicial process. Whilst the ECJ is unable to change more obvious areas of taxation such as income tax rates, it is seeking to delete the domestic tax legislation of the Member States which allow the Member State to be a separate and independent fiscal area from the European Union.

Example areas where UK tax law has been overridden include;

• where tax is triggered when people seek to move assets offshore and would otherwise be able to dispose of them tax-free,
• taxation of dividend income received from overseas companies,
• and those laws that prevent UK subsidiaries of groups based in other EU states obtaining tax relief for artificially large interest payments on loans from their Parent Companies.

Further attacks are expected on areas such as transfer pricing, i.e. where a multinational is prevented from artificially pricing inter-group transactions in order to shift profits to where they would prefer the profits to be taxed.

...when the European Union imposes a single tax rate it never seeks to lower the tax burden

The overall effect of removing all these strands of legislation from the UK and other member states tax laws would be that, especially in the fields of corporate tax law and individuals' own investments, the member states will feel compelled to have identical tax rates in order to ensure that investment does not simply go straight to the lowest taxed countries.

New revisions to the EC Savings Directive attacked Luxembourg, Austria and Belgium, forcing those countries to gradually impose a 35% withholding tax on interest payable from bank accounts in those countries (compared to their present zero rate and the UK's 20% rate).

Tax Harmonisation is now being driven by the unelected and obscure ECJ, which overrules national parliaments, that were often created in the first place to ensure that taxes were only imposed by elected representatives

What is of particular relevance is that when the European Union imposes a single tax rate it never seeks to lower the tax burden.

Electorally unsavoury, Tax Harmonisation is now being driven by the unelected and obscure ECJ, which overrules national parliaments, that were often created in the first place to ensure that taxes were only imposed by elected representatives.