Select Committee on European Communities Twenty-Eighth Report


Explanatory Memorandum

  "Commission Communication: A Package to Tackle Harmful Tax Competition"


  1.    The communication sets out a possible package of tax proposals which have emerged in response to Strategic Target 2 of the Commission's communication of 4 June 1997 to the European Council called "Action Plan for the Single Market" (CSE (97)1 final). Explanatory Memoranda (9000/97) of 10 and 26 June 1997 on the Action Plan were considered by the House of Commons Select Committee on European Legislation on 22 July 1997.

  2.    The package of proposals has not yet been finalised and is the subject of further discussion in the Council. The Presidency's intention is to reach political agreement at ECOFIN on 1 December 1997. A package comprises three elements:

  • a Code of Conduct for business taxation, in which Member States undertake not to engage in harmful tax competition, and in parallel a Commission communication on the application of the state aids rules to fiscal measures that clarifies and refines its policy;

  • an agreement to take action in relation to the taxation of cross-border interest on savings on the basis of either a withholding tax or provision of information;

  • a proposal to eliminate withholding taxes on interest and royalty payments between companies.

  3.    The package originally also included various indirect tax proposals. The Commission has now said it plans to pursue these elements separately.


  4.    The Chancellor of the Exchequer is responsible for policy on taxation.

Legal Basis

  5.    This is a Communication and has no legal basis.

  6.    The Code of Conduct, if agreed, will be a political agreement which is not legally binding.

  7.    On taxation of savings, it is intended that political agreement be reached on the key principles which would form the basis for new legislative proposals to be drawn up, under Article 100 of the EC Treaty, at a later date.

  8.    The agreement sought on interest and royalties is to work towards early adoption of a Directive, the legal basis for which would also be Article 100.


  9.    Not applicable.


  10.    The package will only be adopted if there is unanimous support.


  11.    As the Code of Conduct would not be legally binding, it would have no direct impact on UK law. However, the Government is clear that it would only agree to the Code of Conduct if it intended to honour it.

  12.    In the area of taxation of savings and interest and royalties, the political agreement would have no direct impact on UK law but any subsequent Directive would require implementation in national law.


  13.    None of these proposals apply to the EEA.


  14.    Direct taxation is primarily a matter for Member States at national level.

  15.    The Code of Conduct is not a piece of Community legislation and would not be legally binding. It explicitly states that it fully respects the principle of subsidiarity and does not affect the respective competences of the Member States and the Commission.

  16.    Limited Community action, on the right terms, on the taxation of savings would be consistent with the principle of subsidiarity because it would help the UK and other Member States to tackle cross-border evasion of taxes. Similarly, Community action on interest and royalties would be justified because it would eliminate withholding taxes between companies in different Member States and thereby benefit UK businesses.


  17.    The Government is pleased that the draft Code of Conduct recognises the positive effects of fair tax competition. This means that the UK's rates of corporation tax could not be questioned under the Code. The Government agrees that harmful competition creates economic distortions both in Europe and globally. An EC Code of Conduct would be a useful first step in tackling the problem.

  18.    The draft of the Code is still under discussion. The Government has said that the Code should:

         not affect the respective competences of the Member States and the Commission;

         be agreed in parallel with the Commission's statement on state aids;

         be voluntary and without sanctions.

  19.    The Government has also emphasised that the peer review process, through which Member States will meet to discuss tax measures which could be defined as harmful tax competition under the Code, must e consistent with the voluntary nature of the Code. The Government has made it clear that there is no question of its notifying other Member States of new tax proposals before the Budget statement to its own national parliament.

  20.    On the taxation of savings, the proposals are designed to tackle tax evasion by residents in one Member State investing in another Member State. The proposals would do this by requiring Member States to take action on tax evasion. They would have the option either to provide information or to withhold tax on interest payments. Given this choice, the UK would take the first option.

  21.    The Government would welcome efforts to tackle tax evasion through the exchange of information. This would enable the right amount of tax to be provided to the right taxing authority. In contrast, a withholding tax would not get the right amount of tax and would not go to the country of residence of the investor.

  22.    The Government is mindful of the possible impact of the taxation of savings proposals on the City of London. It therefore welcomes recognition in the communication of the need to preserve the competitiveness of European financial markets.

  23.    The Government supports the principle behind eliminating source country taxation on interest and royalties paid between companies. This is in line with existing UK bilateral arrangements.


  24.    The Government has been in contact with representatives of the banking sector about taxation of cross-border income on savings.


  25.    Although impossible to quantify, effective action against unfair tax competition and tax evasion should have a positive effect on direct tax revenues in the long term. The financial implications of the interest and royalties proposals are not like to be significant, given overlap with existing double taxation agreements.


  26.    A compliance cost assessment on the elements of the package is not appropriate at this stage. Compliance cost assessments will be undertaken on the taxation of savings and the elimination of interest and royalties between companies across borders if detailed proposals are put forward.


  27.    The Luxembourg Presidency has invited the ECOFIN Council to reach a political agreement on this package on 1 December 1997. The timetable for the Directives on interest on savings and interest and royalties proposals is as yet uncertain.

Dawn Primarolo MP

Financial Secretary

HM Treasury

17 November 1997

COM(97) 564 Final: Communication from the Commission to the Council and the European Parliament: A package to tackle harmful tax competition in the European Union


  1.    On the basis of the Commission's Communication of 1 October 1997[6], the ECOFIN Council held an orientation debate on taxation at its meeting of 13 October. The Commission was invited to present refined proposals for a package to combat harmful tax competition as a basis for a political agreement at the 1 December ECOFIN meeting.

  2.    The global approach to taxation policy was launched at the informal ECOFIN meeting in Verona in April 1996. This approach recognises that co-ordinated action at the European level is needed in order to reduce distortions to the Single Market; to prevent significant losses of tax revenue; and to help tax structures to develop in a more employment-friendly way, notably by reversing the trend of an increasing tax burden on labour as compared with more mobile tax bases. This is in line with the Action Plan for the Single Market[7], which seeks to remove market distortions, to create a common system for VAT and to restructure the Community framework for the taxation of energy products. In Verona, Finance Ministers endorsed this global approach and asked a High Level Group of their personal representatives, chaired by the Commission, to take forward the analysis.

  3.    The High Level Group met between June and October 1996, and greatly assisted the Commission in the preparation of its Communication of 22 October 1996[8]. That Communication underlined the need for a permanent group to co-ordinate tax policies within the European Union—the Taxation Policy Group (TPG)—and drew attention to the need for further work, notably on harmful tax competition. This approach was endorsed by the Dublin European Council[9].

  4.    The TPG, which brings together personal representatives of Finance Ministers under Commission chairmanship, began its work in March 1997. Within the context of the global approach and in view of better co-ordination of tax policies within the Union, the Group has concentrated on developing a package of measures targeted primarily at tackling the issues of harmful tax competition. The approach was first debated at the informal meeting of Finance Ministers in Mondorf-les-Bains on 13 September and subsequently, on the basis of the Commission's Communication of 1 October, at the 13 October ECOFIN Council.

  5.    The adoption and implementation of a balanced tax package could increase the room for manoeuvre in rendering taxation systems more conducive to employment. For this reason, the Commission intends to include this aspect in its submission to the special European Council on employment on 21-21 November.


  6.    Since Verona, the progress towards achieving a more co-ordinated approach to taxation policy within the Union has been considerable. The Commission, recognising the need to avoid any suggestion that the respective competences should be disturbed, has sought to co-operate extensively with Member States in this process. The package outlined below is therefore proposed solely on the authority of the Commission but has drawn extensively on this co-operation. Some Member States have made it clear that they looked for a more ambitious package, but extensive debate within the Council and the TPG has shown that, at present, this is not attainable given the initial reluctance of others to consider any move towards tax co-ordination. Against this background, the Commission considers that the package now proposed would be a major step forward towards greater co-ordination and in the effort to combat harmful tax competition in the Union. Moreover, the Commission believes that the package offers the real prospect of agreement between Member States, provided that the spirit of compromise witnessed over the past eighteen months is maintained.

  7.    The package offers a better prospect of agreement than is possible if each policy issue is tackled separately. Nevertheless, the balancing of a wide range of differing interests will involve compromise on all sides. However, that there is a political engagement to make such progress is undeniable. It was confirmed by the Amsterdam European Council. The Council is now invited to grasp the present opportunity to make progress in this area and to signal that it is willing to act decisively in areas where Community action can reduce the burden of taxation on labour.

  8.    The Commission has reviewed the elements which it put forward on 1 October and proposes a package with the following three components:

  • a Code of Conduct for business taxation;

  • measures to eliminate distortions to the taxation of capital income;

  • measures to eliminate withholding taxes on cross-border interest and royalty payments between companies.
The Commission invites the Council to give a political commitment to this package on 1 December, and to keep its implementation under periodic review thereafter.

  9.    On the Code of Conduct for business taxation (for which a draft is attached in Annex 1), the Commission invites the Member States to commit themselves at a political level to respect principles of fair competition and to refrain from tax measures that cause harmful competition. In order to ensure its effectiveness, it will be implemented through a "follow-up" mechanism and will be subjected to a review after two years of operation. Although this text is put forward on its own authority, the Commission would again like to acknowledge the considerable debt that it owes to the co-operative efforts of the Member States in the Council and in successive meetings of the Taxation Policy Group. The Commission invites the Council to adopt a resolution incorporating the Code of Conduct.

  10.    There is a widely-shared desire on the part of Member States to make significant progress in the area of the taxation of capital income from savings. Although there are signs of positive movement in this area, discussions have revealed that some substantial difficulties which have hampered progress in the past persist. The Commission fully recognises the problem that such concerns present. Nevertheless, the Commission considers that Member States would contribute significantly towards progress by agreeing certain elements on which a subsequent Commission proposal for a minimum solution would be based. To this end, the Commission proposes in Annex 2 to this Communication five elements on which a Directive might be based. Member States are also invited to agree to work actively to allow the early adoption of the Commission proposal based on these elements.

  11.    On interest and royalty payments between companies, withholding taxes create difficulties for economic operators engaged in cross-border business. They can involve time-consuming formalities, result in cash flow losses, and sometimes lead to double taxation. As part of the package, the Commission invites the Member States to make a political commitment to work towards the early adoption of a directive for which the Commission will make a new proposal by February 1998.

  12.    The Commission stresses that the package put forward above is to be seen in the broader context, as noted in the Action Plan for the Single Market, and as further developed by the TPG. It notes, in particular, the support that exists for making progress within the TPG on many of the indirect taxation elements identified in its Communication of 1 October, and recognises in particular that the issue of VAT on cross-border leasing merits action that is no less urgent than the package.

  13.    The Commission appreciates the wish expressed by Member States for a commitment by the Commission in relation to fiscal state aids to accompany the endorsement of the package and the Code of Conduct in particular. Member States will be aware that the Commission has already begun its review of certain cases and is continuing to reflect on these issues in order to come forward with an indication of its position following a discussion in the College on 19 November. This will serve as a basis for the normal consultations with Member States on guidelines in this area, which will be conducted in parallel with the implementation of the package outlined above.


  14.    The Council is requested:

  • to endorse the package set out in this Communication, with a commitment to keep its implementation under periodic review;

  • o adopt the Code of Conduct for which a draft Council resolution is contained in Annex 1;

  • to endorse the elements for a minimum Community solution on the taxation of income from savings as outlined in Annex 2;

  • to make a political commitment to work towards early adoption of a Directive on interest and royalty payments between companies on the basis of a forthcoming Commission proposal;

  • to take note of the Commission's commitment on fiscal state aids; and

  • to give its support to the work on the other issues mentioned in paragraph 12.

6   "Towards Tax Co-ordination in the European Union", COM(97) 495. Back

7   CSE(97) 1 of 4 June 1997. Back

8   "Taxation in the European Union, Report on the Development of Tax Systems", COM(96) 546. Back

9   Presidency Conclusions, SN 401/96. Back

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