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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Wednesday, 5th May 2004

The European Union - an Unionist/Ulster perspective and Tax harmonisation and EU Competition policy

 

 

Jeffrey Donaldson MP
Carl Mortishead

 

 

Jeffrey Donaldson, MP, MLA


Democratic Unionist MP for Lagan Valley
The promised referendum on the EU constitution has given the British people a golden opportunity to transform the debate on Europe and to put the facts about the proposals before the electorate. The European elections offer the chance for a national debate on the European Union, but the real issue is not Europe but the ability of the British people to determine their own future. After a generation of seemingly inexorable movement towards European Union the promise of a referendum on the European Constitution has finally given the British people an opportunity to take our destiny back into our own hands.

the promise of a referendum on the European Constitution has finally given the British people an opportunity to take our destiny back into our own hands


There is no more fundamental democratic issue than the question of sovereignty. This is an area in which people who live in Northern Ireland have a particular interest. What is it that marks out a nation, apart from it's people? What makes a nation powerful? Surely, it is the capacity to control your own economy in order to generate wealth and the ability to defend yourself from attack and to act in the national interest from a security perspective. In short, it is economic and military power. Why do you think the promoters of Euro federalism want a single European currency and a European army? When you give control of your economy and your defence, you give up your sovereignty.

Whilst flawed comparisons with little value have been made between the situation in Northern Ireland and other conflicts throughout the world, I believe that there are valuable lessons to be learned from Northern Ireland in the debate about sovereignty.

As a part of the United Kingdom which has a land border with the Euro Zone, a part of the United Kingdom which has witnessed how this Government will approach a referendum which they want to win at any cost and a part of the United Kingdom which understands that sovereignty is not a light switch that is simply turned on or off at will, we recognise that there are indeed clear lessons and warnings from the experience of Ulster.

I thought it might be useful to examine the European issue from the Northern Ireland perspective and see what lessons can be learned from our experience.

In Northern Ireland regardless of whether the issue is the future of Northern Ireland, the Scottish football team supported, one's view on the Middle East conflict and even Europe there is a fundamental division between unionists and nationalists. Of course there are people from the unionist community who are strong supporters of the European Union and the movement towards a European Superstate, but the overwhelming number of unionists would regard themselves as Euro-sceptics.

Both major unionist parties could broadly be described in this manner and find common cause with those in Great Britain who oppose the Euro, the new Constitution and the diminution of sovereignty in the UK. Debates within unionism during the European Parliamentary election will probably not focus so much on the big question of the direction of Europe as both parties take a similar position but on the question of who can best deliver from Europe for the people and the constitutional question of the day in Northern Ireland.

To a greater or lesser degree since the European Parliamentary elections were first held in 1979, Northern Ireland has returned two 'euro-sceptic' MEPs. Indeed back in 1975 Northern Ireland, I believe voted to stay in the Common Market by the smallest margin in the entire UK. There was a clear unionist majority for leaving the Common Market but nationalists had very strong support for staying in.

The SDLP are unapologetically pro Europe and see it as the solution to every problem


Whilst the debate has moved on considerably since the 1970s, the general division between unionists and nationalists remains. The SDLP are unapologetically pro Europe and see it as the solution to every problem. Sinn Fein are somewhat more confused about their position. Having been in the vanguard of the campaign against the Nice Treaty in the Republic of Ireland they now appear to support the introduction of the Euro into the UK.

For the last thirty years the people of Northern Ireland have faced a challenge to their sovereignty both at home and abroad. Whilst we, like all British citizens, have had to face the ever growing threat from Europe we have also had to face challenges to our own citizenship at home.

I think the central reason that unionists in Northern Ireland are overwhelmingly Euro sceptic is related to our understanding of the importance of sovereignty and the dangers inherent in giving it up. We have battled from the inception of the state of Northern Ireland and even before then to preserve the supremacy of the Westminster Parliament against the designs of Irish Nationalists, therefore I suppose it is not surprising that we do not wish power to be transferred to Brussels.

One lesson which is common to both the Northern Ireland question and the Euro debate is that change is always gradual, a kind of 'creeping integration' and the proponents of change sell it as a sensible and natural evolution. Dangers inherent in such movement are often dismissed as scaremongering and those who raise such issues are castigated.

In 1975 if the Government had explained exactly what the next thirty years would hold in Europe would the result of the referendum not have been very different? We have learnt the bitter lesson that what Governments say on such issues and what Governments - all Governments, do are very different.

The Euro has been the central issue in the European debate over the last few years as it was seen as the first opportunity the British people would have to cast a vote on Europe.

In Northern Ireland we are in the unique position within the UK of having a land border with the Euro Zone. That gives us a particular understanding of the impact that the introduction of the Euro might have. It is clear that the Euro in the Republic of Ireland has led to higher and higher prices with the country now being one of the most expensive places to visit in Europe.

I do not believe that it is in the interests of the people of Northern Ireland in particular or the people of the UK in general to be a part of the Euro zone. I believe there are sound economic reasons for this view, of which I am sure you are all well aware, but fundamentally I believe that this issue goes beyond economics. It is a question of sovereignty.

There are some Europhiles who are honest enough to concede that a single currency is merely a staging post for some form of United States of Europe, but more often they suggest that our currency can be abandoned without any impact on our sovereignty. They are quite wrong. When a nation gives up it's currency and a large degree of fiscal control, it gives up sovereignty.

We have now been promised a referendum on the issue of the new Constitution. This is one Government U-turn which is to be heartily welcomed. There is no doubt that the scale of the volte-face on this issue has been truly remarkable. The true motivation for it may well have much more to do with internal power struggles within the Labour Party than it does with any belated conversion to uphold the rights of the British people.

There may be a commitment to a referendum and this is undoubtedly a victory but as we have learned in Northern Ireland - where there are opportunities there are also dangers. Defeat for the Euro constitution at the hands of the British people will be the first really significant electoral brake which will have been put on the European train in the UK.

It will be a signal that the British people can no longer be taken for granted and the direction of the EU must change.

No matter how strong our position is today - and recent opinion polls would suggest that opposition to the Constitution is solid - complacency is our greatest enemy.

There is undoubtedly a lack of knowledge in the community about what a European Constitution would mean for the British people. The most crucial weapon in this debate is information. This referendum looks like an act of folly by Tony Blair but do not write off the ability of the Government to shape the debate and win the debate.

There are parallels between the way the Government won the referendum on the Belfast Agreement in Northern Ireland and how they will seek to win the referendum on the European constitution


There are parallels between the way the Government won the referendum on the Belfast Agreement in Northern Ireland and how they will seek to win the referendum on the European constitution. Fortunately there are also significant differences.

The yes campaign in Northern Ireland did not wish to debate the detail of the Belfast Agreement or analyse the consequences of a yes vote.

Instead they painted the battle as a simple good versus evil, peace versus war and the future versus the past. This is a convenient way to ignore the difficult issues which are presented by constitutional change.

The yes campaign in Northern Ireland did not wish to debate the detail of the Belfast Agreement or analyse the consequences of a yes vote
I imagine the yes campaign for the constitution will play the same game. The constitution will be sold on the basis of the only sensible approach to take, difficult consequences will be ignored and opponents will be castigated as enemies of progress. Yes, scare tactics will also be deployed, perhaps with subtlety, but they will form part of the campaign to 'persuade' the British people that the proposed constitution is in the national interest. You can hear it now.....loss of influence in Europe, damage to our economy, international isolation etc., etc.

Do not underestimate the ability of the Government to sell the unpalatable. In 1998 they were able to persuade the people of Northern Ireland that terrorist prisoners should be released, Sinn Fein/IRA granted automatic places in Government, and the police force, the Royal Ulster Constabulary, which combated terrorism for thirty years should be disbanded. By reducing this debate to the simplistic and suggesting that there is no alternative to the Government's proposals the seemingly unattractive is presented as the only show in town.

Indeed it was a campaign which was not beyond deploying misinformation and saying whatever it took to win. Claims by the no campaign which have proved to be accurate were dismissed as scaremongering and instead the pro-agreement forces made claims which were manifestly inaccurate.

Even despite all of the huge advantages the pro agreement campaign in the early stages of the referendum struggled to convince the unionist population. Indeed in the final days the Prime Minister himself was brought to Northern Ireland to try to sell the advantages of the Agreement to the people there. In the final days of the campaign he made five pledges to the people of Northern Ireland. This was seen as a turning point in the campaign. What has been forgotten by many is that within months the Prime Minister began dishonouring the promises which he had made. Political expediency dictated that they be dispensed with and the agreement having been approved these 'solemn' commitments were quickly disposed of.

A pliant media in Northern Ireland played along with this illusion, uncritically accepting the Government line and demonising those who opposed it. Coverage to the opponents of the Agreement was limited and the debate was dominated by those who supported the Agreement.

On the European issue the forces are much more equal but the same tactics will be attempted. Opposition to the Constitution will be equated as a desire to leave the EU itself and the Government will seek to make this the key issue of debate. The choice offered will not be between the constitution or no constitution but more likely between sensible working arrangements for co-operation and the end of Britain's role and influence in Europe.

The forces against the European constitution have strong political support and backing by a large chunk of the print media. Whereas the anti agreement parties in Northern Ireland were faced by a daily barrage of propaganda from the Government. At least on the European issue the playing field is much more level. Equally in the area of funding the pro agreement campaign was well financed - from far beyond Northern Ireland.

We were faced by the combined ranks of the US President, the British Prime Minister, The Irish Prime Minister, U2 and even Richard Branson. With all of these people supporting the Agreement there was a clear indication about how people were expected to vote.

As I have mentioned, there are great opportunities for the British people to put a brake on the project towards a European Superstate. Our position is strong but we must be wary of what lies ahead.

There is no greater protection for our position than a full debate on the issues. We must not allow the Government to set the terms for the debate or fight the referendum on issues which are not before the British people. They will seek to use every form of persuasion and pressure possible. The more desperate they will become the more outlandish the claims will become.

When the referendum does finally come, the campaign against the European Constitution can be assured of the support of the vast majority of unionists living in Northern Ireland. We must take advantage of the opportunity for a debate on this crucial issue and reassert the sovereignty of the British people.

Carl Mortished

Tax harmonisation and EU Competition Policy
I would like to talk to you today about two things but I fear that you may find neither of them pleasant topics because both concern tax and tax is dull, painful to experience and dull to deal with. To add to your pain, I am going to suggest that tax is going to get worse for ordinary people in Britain. What I hope will make it worth listening to is that the reasons that tax may get worse are both surprising and difficult to avoid. Much of it has to do with the EU but the EU is not entirely to blame.

Tax is going to get worse for ordinary people in Britain. What I hope will make it worth listening to is that the reasons that tax may get worse are both surprising and difficult to avoid. Much of it has to do with the EU


The two things I wish to talk about are tax competition and tax harmonisation. Harmonies sound sweet but for anyone with even a remote acquaintance with the European Council of Ministers will know that there is probably less chance that 15 European governments will agree a common business tax rate than that they will agree to the creation of a common European army and defence policy.

We are told repeatedly by Gordon Brown that tax is a red-line issue over which he will not step. The power to tax is not just a question of sovereignty, important though that may be to many in this room. It is far more important because along with the authority to go to war tax is the base line of the state's power over its citizens. If Gordon Brown gives up the right to tax us (and having already devolved the setting of interest rates to a committee what is there left of the Chancellor's job?) he becomes nothing more than a bureaucrat He is no longer a finance director making strategy but a mere treasurer counting the pennies.

Tony Blair would have us believe the fiscal levers are safely locked up in Westminster. Well, don't be fooled, because there are much bigger forces at work


So, Tony Blair would have us believe the fiscal levers are safely locked up in Westminster. Well, don't be fooled, because there are much bigger forces at work. Bigger than Parliament and even bigger than Brussels. Businesses are mobile; tax is just another facet of the business plan of a successful multinational. Take Siemens, the German engineering firm as a theoretical example. It might design a new mobile phone and it could do that in one of its British laboratories, manufacture it in the Far East and sell it in America. When each phone is sold, how much of the profit is earned in Britain, how much is attributable to the American distribution arm or to an Asian low-cost manufacturing location. Is any of the profit earned and taxable in Germany?

I am sure that Siemens declares and pays every penny of tax it owes but we all know that multinationals employ scores of people to ensure that the value in a transaction is seen to be earned at the point and in the location where less if not the least tax is payable. That is their duty to their shareholders and we know GlaxoSmithKline is disputing a $5 billion claim from the American Internal Revenue Service which alleges that the drug company used transfer pricing to minimise its US profits. In this world of itinerant opportunistic companies the locus of profit is a convenience and governments are at the mercy of large corporations.

Schröder chose the moment of accession to spoil the party by complaining about the low business tax rates offered by the new EU member states... He called their low rates tax dumping and his finance minister, Hans Eichel again suggested a solution and he mentioned the big bad bogy words: tax harmonisation


Hence, tax competition. A world of freely competing tax jurisdictions sounds wonderful if you are a mobile taxpayer. You hop across the globe watching finance ministers compete in a sort of Dutch auction of tax rates, forcing them to bid down to the level of lowest tax jurisdiction. But Gerhard Schröder, the German chancellor, sounded underwhelmed at the prospect of such a future last week. Schröder chose the moment of accession to spoil the party by complaining about the low business tax rates offered by the new EU member states, countries that hope to benefit from EU structural funds. He called their low rates tax dumping and his finance minister, Hans Eichel again suggested a solution and he mentioned the big bad bogy words: tax harmonisation. He said: 'When people start asking why we are sponsoring the transfer of jobs outside of Germany, then this is a problem for everyone'.

To get a feel of what Eichel is talking about, let us look at those new tax rates. Most of the original 15 EU member states have a corporation tax rates of between 30 and 35 per cent. According to KPMG, the accountancy the firm, the old EU-15 corporate tax rates have not change much over the past year, falling from an average rate of 31.8 per cent to 31.5 per cent. France is 34 per cent, Italy 37 per cent and the UK is 30 per cent. Germany leads with 38 per cent but only Ireland has adopted an exceptionally low rate of just 12.5 per cent.

On that basis, the UK is quite competitive in Europe with a lower than average tax rate. But everything changed when the 10 new states joined the club. They have taken the average business tax rate down more than four points to 27.4 per cent. Britain is now well above average.

What has happened is the Irish chucked a low tax snowball down the hill as a domestic experiment in stimulating investment but the Irish snowball seems to have caused an avalanche way out east. Anticipating their accession to a big new pool of business capital, the Slovak Republic and Poland both cut their business tax rates from 25 and 27 per cent respectively to 19 per cent, half the German level. Latvia has cut its rate from 19 per cent to 15 per cent, bringing it down to the same level as its neighbour Lithuania and Estonia has decided to dispense with taxing business income altogether, provided that earnings are reinvested.

The tax challenge of the former Comecon states has not gone unnoticed. Hungary has cut its rate from 18 per cent to 16 per cent, prompting a panicky response from Austria which has just cut its rate from 34 per cent to 25 per cent. At one time the Central European state was on the frontline in the defence of Western values from Soviet Communism. Now the Austrians are protecting their socialist backsides from a competitive assault by enthusiastic capitalists in the east.

Mr Eichel described Estonia's policy as 'a problem'. If one were to dare to put words in the mouth of the Estonian finance minister, he might say: 'Your problem is our opportunity'

Britain's policy is to support the likes of Poland and Estonia and along with the Irish to vote against any harmonisation measures that might dare to creep into a new European Constitution, if there is ever to be such a thing. But is the Treasury really happy about all this? The answer is no. They are not happy at all, they are worried and not just worried. They are terrified because the well of business tax is depleting every year.

At its peak in 2000, Britain earned some £33 billion in corporation tax receipts. We are well off the peak with 2003 revenues down to £29 billion and many tax experts believe that the chances of making significant recoveries in CT receipts are slim with or without a major profits recovery. The reasons are not entirely clear? Some believe that the City has lost its ability to deliver the super profits that characterised the stock market boom of the late 1990s. But tax avoidance must be a major factor and that erosion of the revenue base is likely to accelerate. KPMG's latest survey of business tax rates worldwide shows that overwhelming majority of states reduced their business income tax rates last year. The OECD average rate fell from 30.9 per cent to 29.9 per cent, making Britain marginally uncompetitive for the first time among the industrial countries.

And there is worse because, while the Council of Ministers in Brussels argues about the respective merits of tax harmony and tax dissonance, another European institution in Luxembourg is tearing apart the tax laws of member states faster than parliaments can write them.

The 12 judges in the European Court of Justice are singing in perfect harmony from a hymn book that all the member states have conveniently forgotten about. It is called the Treaty of Rome and it says there shall be something called freedom of establishment. No one in the finance ministries across the Union imagined that taxpayers would claim this freedom in challenging their tax bills.

In their increasingly desperate attempts to capture business income and prevent its escape across borders to greener tax-free pastures European governments have been hoisted by their own laws. In his last budget, Gordon Brown introduced a set of bizarre rules governing transfer pricing between UK companies and their domestic subsidiaries. Transfer pricing is what I mentioned earlier, the ability of companies to load their taxable profit from a high-tax country to a low-tax country by selling or buying goods between companies within the group at higher or lower prices. Governments go to great lengths to see through these arrangements but in a series of judgments the ECJ has ruled that a tax law that discriminates between European subsidiaries on grounds of nationality is unlawful. Seeing a major plank of his anti-avoidance provisions about to be shredded the Chancellor created a nonsense. Henceforth the British subsidiaries of British companies will have to comply with transfer pricing rules, a measure which will cost of millions of pounds in administrative burden for large companies. The new rules are utterly useless and the Treasury will earn not a penny of extra tax by their enactment. It is being done solely to protect the tax code from the European Court's shredder.

The cases from Luxembourg are coming thick and fast. Discriminatory taxation of foreign dividend income was an early and successful target. More recently, the court has gone after anti-avoidance laws seeking to capture tax sheltered in thinly capitalised companies. The Lankhort-Hohorst case was a major victory for multinationals because it prevented the German government from seeing through a debt-laden subsidiary and taxing the payments to its parent as a dividend which is taxable rather than as an interest payment which is deductible. Marks & Spencer has joined the ranks of eurotax litigants, claiming that losses it sustained at a French subsidiary should be offset against its UK taxable profits. Is this not a common market, asks the retailer? Needless to say, the Inland Revenue does not agree and the matter will have to be decided in Luxembourg.

The Treasury could lose billions of pounds in tax receipts as pages and pages of tax legislation accumulated over years in a painstaking effort to prevent the escape of profit from the UK is consigned to the dustbin


The Treasury could lose billions of pounds in tax receipts as pages and pages of tax legislation accumulated over years in a painstaking effort to prevent the escape of profit from the UK is consigned to the dustbin. What the European Court is doing is nothing less than harmonising business taxes but this is not the same harmonisation that Germany seeks. It is harmonisation downwards. The prospect of companies quitting the UK, free of tax, cannot now be precluded because of a decision by the Court this year. In the De Lasteyrie case, the ECJ annulled a French law imposing capital gains tax on the transfer of an investor's residence from France to Belgium. One of the main impediments to companies moving abroad is the risk of creating a deemed disposal, and a consequential taxable gain. The ruling in De Lasteyrie , which concerned an individual, removes that risk within the EU. Tax experts believe the case is also applicable to companies, opening the door to British companies that might seek to benefit from Ireland's 12.5 per cent tax rate, or for that matter Estonia's nil tax rate.

Could the European Court of Justice be signing the death warrant for corporation tax? As a revenue raising measure, business income tax doesn't work very well. Its main impact appears to be negative, the export of profits, which in turn leads to the loss of investment capital and ultimately the export of jobs to countries that offer lower tax rates. Governments attempt to balance that effect by offering huge capital allowances which in turn reduce the revenue potential of the tax. The biggest beneficiaries of corporation tax are probably the accountants and lawyers who dream up schemes to avoid it.

Recognising this problem, the European Commission has a wizard scheme, a proposed directive that would create a common European tax base. This would not be the dreaded harmonisation but a set of rules that would determine not how much a company pays but how big its profits were. A sort of European accounting standard for the definition of taxable profits.

This would be a dream solution for corporate taxpayers. Wherever you are in the EU, your profits would be deemed to be the same number of euros, for example. The only question that would remain is at what rate the French fisc taxes you and whether Finland might offer your company a better deal.

Needless to say, its a pipe-dream. Can we imagine for one second that Gordon Brown would give up his right to fiddle with the rules on depreciating research and development expenditure. Would not the Finns insist that employee daycare must be an allowable expense and will the French require that all restaurant bills, regardless of how incurred, be deductible from taxable profit.

Perhaps we should give it all up as a bad job. There is an argument to suggest that corporate taxation is just a tax on investment and, instead, we should tax employees and the receipt of dividends. That is the Irish solution but we in Britain have a problem going down this road. We derive a higher percentage of our overall tax revenue from taxing company profits. Figures compiled by the Institute for Fiscal Studies show that between 1996 and 2001, the average take from corporation tax amounted to 10.5 per cent of total tax revenues. That compares with 8.5 per cent for the US, 8.2 per cent for Italy, 6.3 per cent for France and only 3.9 per cent for Germany.

If Gordon Brown is introducing nonsense law to protect his corporate tax base, it is because he knows he must do so or throw in the towel. And even if he did remove his towel and expose the tax system for the frail creature it really is, what should he do? How is he to fill the £30 billion hole left by the demise of corporation tax? Indirect taxes already accounted in 2001 for 14.2 per cent of GDP, above the European average as was the personal income tax burden, some 11 per cent of GDP.

In this country, the tax burden is rising, not diminishing. Between 1995 and 2001Tax as a percentage of GDP increased from 35.4 per cent to 37.5 per cent. That does not leave many avenues open to a future chancellor to fill a hole should he choose to relieve the corporate sector by a few billion. Where would he look? Could we rely on those non-domiciled football mad Russian billionaires to pay a bob or two? But something tells me that their affection for Britain might prove short-lived. I fear that we, the ordinary taxpayers, will have to bear the full burden of international tax competition unless we look again at that thorny issue of how much of our money we want the government to spend.

Ordinary taxpayers, will have to bear the full burden of international tax competition unless we look again at that thorny issue of how much of our money we want the government to spend