The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.

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Bruges Group Blog

Spearheading the intellectual battle against the EU. And for new thinking in international affairs.

Brexit: UK now able to tackle tax havens

The EU is a dysfunctional organisation in the area of corporate tax

17th December 2016
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Summary

The EU is a dysfunctional organisation in the area of corporate taxes because:

 

1.      the EU Commission is not able to prevent EU countries such as Ireland, Belgium and Luxembourg operating as tax havens (this is because member states have not conferred legislative competence on the EU over direct taxation), and

 

2.      the Court of Justice of the European Union (CJEU) has developed the fundamental freedoms in its case law to prevent other EU countries tackling the artificial diversion of profits to these tax havens, unless the arrangements are “wholly artificial” (please see the CJEU’s decision in the Cadbury Schweppes case (C-196/204)). The CJEU applies the most liberal, even extreme, interpretation of Organisation for Economic Co-operation and Development (OECD) tax rules to allow multi-national corporations to avoid taxation.


 

One of the advantages of the UK leaving the EU is that the UK will be free to prevent UK companies from shifting their UK taxable profits to EU tax havens, such as Ireland, Luxembourg and Belgium, and non-EU tax havens.


 

Background

Tax avoidance is costing the UK billions, and the UK Government is powerless to address the problem all the time the UK remains in the EU.  This is because of the supremacy of EU law over English law.  Consider, for example, the CJEU’s decision in the Cadbury Schweppes case (C-196/204).  The case states that companies are free to shift their taxable profits to tax havens within the EU to reduce the burden of taxation in their host state unless the arrangements are “wholly artificial”.  Given that companies are able to ensure that their tax avoidance activities are not “wholly artificial”, this means that the UK is powerless to prevent UK based multi-national companies from engaging in tax avoidance in the other 27 member states.


 

Large UK based multi-national companies are not only aware of the opportunity which the CJEU’s decision has created, they are readily exploiting this decision for their own advantage.  This is one of the reasons why so many large UK based multi-national companies were in favour of the UK remaining in the EU.  They know that if the UK leaves the EU, there will be no restriction on the UK Government from tackling tax avoidance.


 

Countries remaining in the EU can only solve this problem by conferring on the EU authority over direct taxes, to determine the tax base and the rates of tax, so that tax havens no longer exist within the EU.  If this were to happen, companies operating within the EU would not be able to gain an advantage by shifting their taxable profits to the member state offering the lowest effective tax rate, or exploit the asymmetries between the bases on which member states levy tax.  Such a proposal is on the EU Commission’s agenda, because it recognises that it is impractical to have a single market where member states compete against each other for the taxable income of companies.  The only winners in such an environment are large multi-national companies.


 

The EU Commission has made proposals to remedy, one aspect of this problem, namely, for member states to have a common tax base (please see the Commission’s reports entitled A Common Consolidated EU Corporate Tax Base (2004), analysed first by the Bruges Group, and A Fair and Efficient Corporate Tax System in the EU (2015)).  If the EU Commission’s proposal were implemented it would solve part of the problem.  To solve the other part, the EU would need to be allowed to set the rates of tax for all companies operating within the EU.


 

In an environment where member states are able to compete for taxable income, the smaller EU states, such as Ireland, Belgium and Luxembourg, will always be able to offer the lowest effective rates of tax.  This is because they have less to lose than the larger member states from offering lower rates of tax to their domestic companies.   As a consequence, the EU has become an area for companies to seek out the lowest effective rate of tax for their taxable income.  This problem is particularly acute where income arises from mobile capital, such as finance and intellectual property, which for many large multi-national companies is their main source of income. It is not as though the smaller states benefit from this situation, because the amounts of tax which they collect are negligible.  The big winners are the large multi-national companies.


 

This is not a problem that critics of the EU have invented.  One only has to read the following comments by the EU Commission to realise that this is a real problem:

 

unfettered tax competition which facilitates aggressive tax planning by certain companies creates competitive distortions for businesses, hampers growth-friendly taxation and fragments the Single Market.


 

However, the co-existence of 28 different tax systems in one integrated market has also resulted in strong tax competition between Member States. As a consequence, Member States have progressively lowered their corporate tax rates, in order to protect their tax bases and attract foreign direct investment.


 

…….as corporate tax planning has become more sophisticated and competitive forces between Member States have increased, the tools for ensuring fair tax competition within the EU have reached their limits.


 

Differences in corporate taxation between countries are the driving force for corporate profit shifting”.


 

This is not a problem that was confined to Euro zone states, it applied to the UK.  This is one of the reasons the UK Government has had to cut the rate of corporation tax to 17% by 2020.  Because of the structural flaws mentioned above, all the time the UK remains in the EU it is engaged in a “race to the bottom” in corporate tax rates. 


 

Somewhat disturbingly, the EU has no power to tackle the problems mentioned above.  As the EU Commission states in its report the only way in which it is able to address this problem is by peer pressure:

 

The Code of Conduct for Business Taxation Group is composed of Member State representatives to deal with harmful tax competition in the EU, in a non-binding way, on the basis of peer pressure.


 

To tackle these problems the EU needs to have the unanimous backing of member states.


 

The flaws mentioned above have arisen because of the manner in which the EU operates.   The aim of the EU is to create a Federal States of Europe, akin to that which exists in the US.  The language of the EU Treaties, and in particular the fundamental freedoms, is open ended, which has allowed the CJEU to interpret these freedoms in an expansive manner.  The CJEU has applied them in a much wider range of scenarios than was ever intended.  For example, the Treaties were never intended to apply in the field of direct taxation, but the CJEU has not only applied them in this field more recently but also has prioritised the fundamental freedoms over domestic laws tackling tax avoidance. In contrast, the EU Parliament has been unable to enact a common corporate tax rate and basis for charging tax across the Union, because it has been unable to obtain the necessary support of all member states, as required.  To date, the smaller member states have been unwilling to support such measures because they would remove one of their competitive advantages.  However, the financial position of many member states is now so perilous that this has become a priority for the EU to address.  As a consequence, pressure may be exerted on the smaller member states to withdraw their objection to the EU Commission’s proposals for a Common Corporate Tax Base.

 

State Aid

The EU is able to take action against any member State offering “sweet heart” tax deals to specific companies.   This is because this type of behaviour distorts competition and violates the EU’s rules on State aide.   However, countries such as Ireland, Belgium and Luxembourg is able to circumvent the EU’s State aide rules by simply making the “sweet heart” tax deal available to all companies.

 

This is yet another example of how the EU does not have the power to effectively tackle tax avoidance.

 

Recent Comments
Robert Oulds
Thanks for your comment. You can see below a series of articles that show how the ECJ has continually been making decisions that a... Read More
Tuesday, 03 January 2017 19:56
Robert Oulds
Hi Gary. We should have a competitive tax regime and encourage businesses to operate here. The EU problem is that companies which ... Read More
Tuesday, 17 January 2017 10:32
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EU tax law creating £55 billion black hole in UK finances

HMRC has set aside £55 billion to cover the potential cost of payments, including interest, which the European Court of Justice will force upon the British taxpayer.

3rd December 2016
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EU law and direct taxes

The UK, in common with other EU member states, has not conferred any authority on the EU for direct taxes.  The Court of Justice of the European Union (CJEU) assumed this authority in the late 1990s by adopting a more expansive interpretation of the fundamental freedoms.


The staggering cost of EU law tax litigation
One of the consequences of being a member of the EU is that EU law is superior to English law.   Large UK based companies are, therefore, able to use EU law, and EU courts, to retrospectively challenge the legality of the tax laws enacted by Parliament.   This is highly profitable form of activity for large UK companies and their advisors, which is costing the UK Government tens of billions.  When UK companies challenge the legality of the UK’s tax laws under EU law they know they are “knocking at an open door”, because the CJEU is keen to expand its authority over Member States under the guise of “ironing out inefficiencies” in the operation of the single market. 


HMRC has set aside £55bn to cover the potential cost of the litigation in which it is involved.  There are two reasons why this figure is so large.  First in a number of cases involving EU law, UK companies are able to reclaim corporate taxes, dating as far back as 1973.  Second, EU law requires the UK Government to pay compound interest on these claims.  In the Littlewoods case, a claim of £208m, covering the period from 1973 to 2004, cost the Exchequer £1.2bn when compound interest was included.  The UK Government had previously estimated that the Franked Investment Income case (C-362/12) would cost £5-7bn.  However, this case could easily cost the Exchequer £30bn when compound interest is included, as it covers the period from 1973 to 1999.

 

European Career Politicians as EU judges
Each EU Member State is able to nominate an EU judge.  In 1995, Belgium nominated its Deputy Prime Minister, Melchior Wathelet, to be an EU judge.  Although Wathelet had studied law as a student, he had been a career politician from 1977 to 1995.  This raises questions about both his competence and his impartiality.


Wathelet was subsequently appointed as an Advocate General.  When a case comes before The Court of Justice of the European Union (CJEU) it is usually heard by at least five judges, one of which will be an Advocate General.  The Advocate General is responsible for writing a legal opinion on the case under consideration for the benefit of other judges.  In the majority of instances, the CJEU decides cases on the basis of the Advocate General’s opinion. This is what happened in the Franked investment Income case (C-362/12), a case that will cost the UK Government in the region of £30bn.  Wathelet wrote the legal opinion and the other judges agreed with his opinion. 


What did the UK Government do “wrong“ in the Franked Investment Income (FII) case (C-362/12) so as to breach EU law.
The simple answer to this question is: the UK Government did nothing “wrong”.  The reason the UK was held to have breached EU law is because the UK is a common law jurisdiction, rather than a civil law jurisdiction.  In fact, the UK is the only large common law jurisdiction in the EU, as the other common law jurisdictions are Ireland, Malta, and Cyprus.  All of the other EU member States are civil law jurisdictions.  This means that the EU commission is staffed, for the most part, with people from civil law jurisdictions, and the Court of Justice of the European Union consists mainly of civil law jurists.  This meant that in FII the UK was adjudicated on the basis that it is a civil law jurisdiction, notwithstanding that the facts of the case are unique to a common law jurisdiction.


In a civil law jurisdiction, only the State is able to create a restitutionary remedy against itself.  This means that the State has the opportunity to set an appropriate limitation period at the same time it creates a new remedy.   It is not possible for the UK Government to set an appropriate limitation period at the same time the English courts announce their decision to create a new remedy.  This is because the UK Government and the English courts operate independently of each other.  This means that the UK Government has no prior knowledge of the decisions of the English courts.


The reason the UK Government was held to have breached EU law was because the facts of FII were adjudicated by the CJEU on the basis that they arose in a civil law jurisdiction, notwithstanding that the facts are unique to a common law jurisdiction. The FII case is another example of the “one size fits all” philosophy, which prevails in the EU.

 

The UK Government and the BBC working together to conceal the truth regarding the EU
One of the Vote Leave claims was that the UK Government would have to repay £43bn in taxation because of EU law.

The BBC’s response to this claim on its Reality Check site was:

‘HMRC say: “There is no question of this amount or anything close to this amount [£43bn] ever being repaid as the figure is based on our losing every single case currently being litigated, which is not going to happen. In reality, HMRC wins most cases at Tribunal.”’


At the time HMRC gave this response to the BBC, it had produced its accounts for the year ending 31st March 2016, although they had not been published.    HMRC knew that the figure of £43bn was an under-estimate of the potential costs, because it had increased the figure in its latest accounts to £55bn.   Moreover, HMRC knew that the increase related to claims for breaches of EU law. 


There are several other comments that one can make about the comment HMRC gave the BBC. 

1.      Why did the BBC ask someone who reported to George Osborne to make a supposedly “impartial comment” on the Vote Leave’s campaign? 

2.      HMRC does not have to lose every single case for it to have to pay-out £43bn.   HMRC has already lost a number of important cases involving EU law that will require the UK Government to repay taxes dating as far back as 1973, together with compound interest.  These cases alone could cost the UK Government £43bn, or possibly more.  HMRC has consistently under-estimated the cost of settling these and other legal cases in which it is involved. 

3.      The courts decide who wins the cases in which HMRC is involved, not HMRC.  

4.      It is of no significance that HMRC wins most cases at Tribunal, because such cases are for trivial amounts.

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Tax Reform - Post-Brexit

Tax simplification for Brexit

Flat taxes to drive economic growth

Sir David Roche
9th November 2016
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The sole aim of Tax Reform is to get in more taxes.

 

The UK is running a large deficit between what it receive in taxes and what it spends on services. Albeit money is cheap, it cannot go on for ever. With money so cheap it is an ideal time to make changes.

 

The tax code is now very complex and needs to be thrown out and replaced with a very simple model all can understand.

 

The reason it is so complicated is that successive, Labour and Conservative governments have given ‘tax breaks’ to their supporters to get elected. They have stayed in the code while new ones get invented.

 

The Hall Rabushka model is a place to start. This book on Flat Tax was published in 1985. It suits a closed continental economy like America but would need some changes for the English Economy. The difference being that getting in more taxes is competitive. It has nothing to do with ‘International cooperation on tax avoidance’.

 

However, the principal is that a tax return should be done on a post card is a good one. The post card looks like this: [with some simple numbers]

Total Annual Income                                                            £110,000

Tax free allowance                                                                   10,000

Net taxable income                                                                 100,000

Tax @ 25%                                                                               25.000

Post Tax income                                                                        85,000

 

The big note is that other than the tax-free allowance to keep the lowest paid out of the tax threshold there are no other allowances. The other reason to have a tax-free allowance is that it is expensive employing people to collect small amounts of tax.

 

The tax payer can do what he likes with his post tax income. He can give some of it to charity; save some for his pension or spend it. Whole industries like the pension industry, the charity industry, the ISA industry will not like it and do its best to stop it. The number of tax collectors and accountants who calculate tax will be reduced dramatically. They will not like it either. But the taxpayer will.

 

The Daily Telegraph did a tax computation on this taxpayer some years ago. By the time they used the current tax avoidance schemes, pension, ISA, EIS etc. They got his tax paid down to about £4,000. “Aggressive Tax Avoidance” is caused by Governments.

 

‘Trickle down’ and ‘Net Immigration’

When Mrs Thatcher reduced the top rate to 40% this idea was that this rich people with more money to spend would spend it in England so it will trickle down into the economy. What happened was ‘trickle out’. Net immigration is the difference between poor people coming into the country and rich people leaving it.

 

Tolerance and the Treasury model.

England is the most tolerant country in the world but there is an intolerance to ‘high earners and bankers’. As they must live in England to bank or play football they all pay tax. The Rich are in fact the business owners who live in Monaco or Switzerland. We want them back because we want their money. A straw poll of Verbier residents, who currently pay no tax, would pay 25 to 30 percent of their world-wide income for the right to live in England on the above model, subject to no inheritance tax. The Treasury model is a closed system and does not include this vast store of wealth that could be tapped.

 

Inheritance tax; in 1979 Mrs Thatcher abolished exchange control which was designed to stop money flowing out of the country. The result was that so much money flowed into the country that the Bank did not know what to do with it; and at $2.40 to the £.

 

Inheritance Tax currently produces about 3.5% of total revenue, and it costs an estimated 40% to collect. It is not much compared to the flow of money into the country if it were abolished. If we get these people back, we get 20% of all they spend. Trickle Down would finally work.

 

Chancellor Osborne always knew about this but was been too frit to do it. He had a go at limiting tax relief to charities and got roundly beaten. He wanted to reduce corporation tax but fears abolishing it on the Estonian model:

 

Siim Kallas in Estonia found that company tax was yielding the least revenue and abolished it. But with a twist! No company tax was to be charged on company profits that remained in the company or its subsidiaries, but taking money out of the company by way of dividend, director’s entertainment, cars etc was subject to the flat tax rate, then 26%. This was done by simply adding an extra line to the monthly VAT form. This had two magical effects; firstly, revenue came in immediately instead of an 18 month wait and as companies did not have to depress their profits, which any accountant can do, to avoid tax. They declared as much as they liked and in a year, this doubled the country’s GDP.

 

Nothing had changed but the GDP pundits thought it must be a great place to invest, which they did, making it a self-fulfilling win, win situation.


With the confidence that comes from having available new computer models it is the time for a body in the City to research and run it on a simplified basis on a totally fiscal and non-political basis.

The current guide to taxpayers is here.

 

Sir David has been an advocate of Tax Reform for some years. Most notably in Estonia, Slovakia and more recently to an African country that has hopes of being the ‘Dubai of Africa’. With the Tax Payers Alliance he contributed to the Forsyth Commission. He has had contributions in these efforts from the leading Tax Chambers in London and a leading City economic Think Tank.
Sir David served as a Director of private companies in the sectors of energy; leisure, shipping, and Eastern European property. He represented Siemens Wind Energy on the Board of The British Wind Energy Association, and advised on Estonian, Czech & Slovak, and Balkan investments. Sir David has been the Chairman at Plaza Holdings Ltd since 2002 and a director and founder of Neasden Aggregates in the cement industry at present. He has been the Chairman of the Board of Directors at Strategic East European Fund . He held various positions including serving as the Chairman to Carlton Real Estate Plc and as a Member of the Estonian Government Tax Reform Commission from 1993 to 1994. Sir David is a regular commentator on the BBC, other television networks. Sir David qualified as a Chartered Accountant with Peat Marwick Mitchell, (now KPMG). He is also an FCA. He was senior manager UK Banking at Samuel Montagu, (now. HSBC)
Sir David was educated at Wellington and Trinity College Dublin.

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