Select Committee on European Communities Twenty-Eighth Report


9 June 1998

  By the Select Committee appointed to consider Community proposals, whether in draft or otherwise, to obtain all necessary information about them, and to make reports on those which, in the opinion of the Committee, raise important questions of policy or principle, and on other questions to which the Committee considers that the special attention of the House should be drawn.


Taxation and Competition Policy in the Single Market

COM(97) 564  Commission communication: A package to tackle harmful tax competition.

6793/97      Proposal for a Council Directive restructuring the Community framework for the taxation of energy products. (COM(97) 30) (+ Supplementary memorandum).

7861/97      Commission communication concerning the Draft Action Plan for the Single Market (COM(97) 184).

9000/97      Commission communication to the European Parliament on an "Action Plan for the Single Market" (CSE(97) 1).

  1.    Last year the European Commission published a package of proposals to tackle harmful tax competition and a number of other important documents relating to tax and competition policy in the single market. The Commission's draft Action Plan for the single market, published on 12 May 1997,[1] proposed a combination of improving the working of existing single market legislation and introducing new legislation where necessary. The Plan contains four Strategic Targets, each with a number of proposed action points. The first Strategic Target deals with making existing single market rules more effective, including a suggestion that Member States should seek to transpose all single market legislation into national law by 1 January 1999. The Plan also proposed a single market scoreboard, to show how well Member States were performing in both transposition and enforcement.

  2.    The second Strategic Target deals with key market distortions. This includes a desire to harmonise some elements of Member States' direct tax systems, and introduce a common system of VAT. It also proposes a new framework for taxation of energy products. The Commission wishes, in dialogue with Member States, to reduce the overall level of state aids, as well as restricting the regional areas which might benefit from that aid. It also proposes to simplify and improve competition rules and to decentralise the application of anti-trust rules to the Member States.

  3.    The third Strategic Target deals with remaining obstacles to market integration in certain sectors. A major area for work is in services. The Commission proposes action to liberalise financial services (particularly investment and pension funds) and public utilities, and further action to open air and rail transport markets. In order to improve the environment for cross-border operations by companies, the Commission wishes to see adopted its proposals on the Tenth Company Law Directive, and the European Company Statute. The Commission calls for action by Member States to deal with the problems of late payments to small firms. Finally, the Commission wishes to take measures to ensure confidence in electronic commerce and to seek protection of bio-technology innovations, as well as ensuring that no barriers are raised in new sectors such as these.

  4.    The final Strategic Target aims to increase the benefits of the single market to all European citizens. This includes a call for action on eliminating border controls and on the right of residence. The Commission also wishes to see social and employment rights further protected in the single market.

  5.    In July 1997 Sub-Committee A (Economic and Financial Affairs, Trade and External Relations) heard oral evidence on taxation and competition policy in the single market from the Department of Trade and Industry, HM Treasury, HM Customs and Excise and Inland Revenue, Unilever and Commissioner Mario Monti. In addition, a number of witnesses responded to the invitation to submit written evidence.

  6.    Since July 1997, when most of the Committee's evidence was received,[2] there has been a great deal of activity. Under the Luxembourg Presidency the Council reached political agreement on three of the four legislative proposals identified as priorities in the Single Market Action Plan, namely, gas liberalisation, biotechnology patents, and the extension of the transparency mechanism to the Information Society. Limited progress was made on the other proposal - the draft European Company Statute.

  7.    There has also been significant progress on several aspects of EC taxation. In its communication of 5 November 1997 entitled "A package to tackle harmful tax competition in the European Union" the Commission stressed the need for co-ordinated action at European level.[3] On 1 December 1997 the ECOFIN Council held a wide-ranging debate on that communication and agreed to a Resolution on a code of conduct for business taxation. That Council also approved a text on the taxation of savings as the basis for a Directive in this field and considered that the Commission should present a proposal for a Directive on interest and royalty payments between companies.

  8.    Following the agreement of 1 December, on 4 March 1998 the Commission adopted a proposal for a Directive on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States. The proposal is based on Article 100 of the Treaty, and therefore requires unanimity. It is designed to eliminate taxes levied at source on payments of interests and royalties between associated companies of different Member States. It would include interest and royalty payments made between the permanent establishments of such companies with cross-shareholdings of at least 25 per cent. The proposal includes provisions:

    (i)  to ensure that Member States are not precluded from taking steps to combat fraud or abuse;

    (ii)  to allow Member States not to apply the Directive to payments which qualify for a special tax rate lower than the rate normally applied; and

    (iii)  to give a transitional period to Greece and Portugal; as net importers of capital and technology, these countries would be allowed to apply a withholding of 10 per cent during the first two years and 5 per cent during the following three years following the entry into force of the Directive.[4]

  9.    On 20 May 1998 the Commission published a proposal for a Directive "to ensure a minimum of effective taxation of savings income in the form of interest payments within the Community". The proposal is based on the "coexistence model", under which each Member States applies a withholding tax at source or provides information on income from savings to other Member States.[5]

  10.    The preceding paragraphs have outlined only some of the current proposals on taxation and competition policy. In the light of the present high level of activity in these fields in the European Union, the Committee considered that the evidence which it has received so far on this subject should be published now, in the hope of informing debate within the House of Lords and stimulating further debate.


  11.    The Committee considers that these proposals raise important questions to which the attention of the House should be drawn, and makes this Report to the House for information.

1   Document 7861/97: COM(97) 184 Final. Back

2   In January 1998 the Department of Trade and Industry responded to a request to submit a supplementary memorandum to update the one they had supplied in June 1997. Back

3   COM(97) 564 Final, 5 November 1997. Back

4   Council of the European Union Press Release 6619/98: ECOFIN meeting Brussels, 9 March 1998. Back

5   COM (98) 295, p 4. Back

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