January 31, 2005

Tax Harmonisation by the Back Door?

I noted when the EU started trying to force Gibratar to end it's tax haven status that tax setting was the last area that the EU needed to have all the powers that a state had. It appears to be moving towards it using the existing powers of the previous treaties according to EU Serf, the text that he refers to is here . This story is confirmed from the Times. The question of whether UK tax law complies this EU law has already been placed before parliment, with the answer being according to Baroness Noakes that it does. However it is still going to be settled in the European Court of Justice, which tends to rule against states in 85% of cases, and if it does rule against the UK, which it will as their are precedents noted in the article found via EU-Serf.
"In Lenz, an individual in Austria receiving dividend income from a domestic company had the option of paying tax either at a flat rate of 25 percent or at half the normal tax rates. However, those options were not available for dividends from foreign companies, which were therefore taxed at full tax rates. In Manninen, an individual resident in Finland receiving a dividend from a domestic company was entitled to a tax credit reflecting the fact that the dividend was paid out of profits on which tax had already been paid in Finland. That tax credit was sufficient to cancel any individual tax liability as a result of receiving the dividend. However, no tax credit was granted for dividends from foreign companies, which were thus taxable in full.

In both cases, the ECJ ruled that the respective legislation was incompatible with article 56 of the EC Treaty. It was a deterrent to the residents of the member states concerned to invest outside of their own states, and was therefore a restriction on the ability of companies in other member states to raise capital in Austria and Finland, the court said. Having thus found that the legislation was incompatible with article 56, the ECJ then had to consider whether it fell within the permissible derogation in article 58. "

If this case is accepted by the ECJ it will lead to the forcing of the UK to harmonise it's tax system with that of the rest EU to avoid the aurgued discrimination. All future changes will have to be EU wide as well to avoid creating any possible new discriminations. So basically we lose our ability to set tax rates and that power gets transfered to Brussels. I guess this means that it is therefore true that the Constitution does not grant the EU tax setting powers, they are already there in the previous treaties, if you strech them far enough.

There is some interesting commentary on this issue from EU Referendum and some more here.


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