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Lord Stoddart of Swindon: My Lords, my noble friend described us as Europhobes. We are not--at least I am not. However, I am an Anglophile and I believe that we should conduct our own affairs through our own elected Government and our own Parliament. That is not Europhobic. What I fear about some people who accuse us of being xenophobes and Europhobes is that they are Anglophobes.

Lord Pearson of Rannoch: My Lords, before the Minister replies--

Lord McIntosh of Haringey: My Lords, no, I must reply to my noble friend first. Please, we must have some semblance of order in this House. I once accused my noble friend Lord Stoddart of being a xenophobe. He repudiated it and he was right. I apologised to him for it. However, I still believe that his words and his record over the years show that he is what I would call a Europhobe, but I use it as a descriptive term rather than as a term of abuse.

Lord Waddington: My Lords, the Minister ought not to be allowed to get away with that. Does he not realise what offence is caused? We make a perfectly reasonable proposition that we are a proud, independent country, with strong links with the EU; that we want to maintain those links and have free entry for our goods into Europe; but that we are also a country looking outwards to the rest of the world with which we have most important links and many great interests. To stigmatise any of us as being anti-European because we wish that relationship to prosper but we do not want a federal Europe, frankly, I find insulting. We hear it every time.

Lord Pearson of Rannoch: My Lords, perhaps I may point out to the Minister that in the earlier debate I mentioned that one of the most important points in the whole debate about the Treaty of Rome is the ambiguity of the word "Europe". Those of us who some people on his side of the argument describe as Europhobes, little Englanders, dangerous nationalists and so on, love the Europe of nation states which should be freely trading together. What we are phobic about and what we dislike

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is the Treaty of Rome and everything that that makes possible for Brussels to inflict upon us. That is an enormous difference and we are the better Europeans.

Lord McIntosh of Haringey: My Lords, if anything I say causes offence, I withdraw it. I have no intention of insulting anyone or of causing offence. But I believe that noble Lords know exactly what I mean. I object to using the weasel phrase "Euro-sceptic" because I do not believe that it describes the position of noble Lords.

I was congratulating the noble Lord, Lord Waddington, on rounding up the usual suspects. I was about to say that I have the battle honours, too. I spoke in the debates on the Single European Bill and on the Maastricht and Amsterdam Bills. I have heard it all before and it is almost nostalgic for me. Almost, but not quite.

During the time I have to reply to the debate, I want to set out the principles which underpin the Government's approach to European Union tax issues and apply them to a number of specific cases which have been raised today and in the recent past. I shall then turn to some particular difficulties that we have with this Bill.

When we first address the phrase at the heart of the Bill, "tax harmonisation", which we have heard so often, let us be clear about the fundamental issue. The priority for Europe is the promotion of employment, economic reforms and competitive markets, not tax harmonisation. The Government have made it clear that they will not support any action at European level which will threaten jobs or the competitive position of British business. We start from clear principles. In particular, we believe in the benefits of fair tax competition. The noble Earl, Lord Attlee, said that he believed in the virtues of tax competition and that in principle it is desirable. It is desirable, but at the same time it has to be fair tax competition.

We also wish to see concerted action to deal with unfair tax practices that distort real competition. We wish for the cessation of unfair state aid. Whether subsidies are the same or fundamentally different from unfair tax measures does not seem to be important. They have the same effect. I am on the side of the noble Lord, Lord Taverne, in that respect.

Lord Taverne: My Lords, does the noble Lord agree that sometimes they are very different? Tax can be much more general than a state subsidy. Sometimes they are very similar if the tax incentive is a particular one.

Lord McIntosh of Haringey: My Lords, indeed. We need to co-operate with our European partners to make progress in these areas. Britain is not alone in thinking in that way. At the Cologne European Council earlier this month the conclusions on tax policy were that the Council of Ministers,

    "emphasises the need to make tax systems in Europe more employment-friendly and to combat harmful tax competition".

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    That confirmed the conclusions of the Vienna European Council six months earlier which said,

    "Co-operation in the tax policy area is not aiming at uniform tax rates and is not inconsistent with fair tax competition, but is called for to reduce the continuing distortions in the single market, to prevent excessive losses of tax revenue or to get tax structures to develop in a more employment-friendly way".

Germany has held the EU presidency for almost six months. It was made clear in the joint statement made by the Prime Minister and Chancellor Schroder last December that there was no case for the harmonisation of tax rates. I understand that officials in the German Finance Ministry, in oral evidence to the current inquiry by the European Communities Committee of this House into taxes in the EU, made the same point.

The Government believe that EU taxation should continue to be based on the principles of national competence whereby policy is wholly a matter for member states if the European Community does not have competence under the EC Treaty, and unanimity whereby EU-wide taxation measures can only be adopted by a unanimous vote of member states.

We are not alone in insisting that direct taxation is a matter for the national state. There is no proposal and no prospect of one, for the harmonisation of income tax in the European Union. No member state believes that there is a case for a European rate of corporation tax. Even the former president of the Commission, M Santer, who has been quoted so often, said,

    "income tax and corporation tax are sovereign national matters and will remain so". The noble Lord, Lord Pearson, seems to believe that tax harmonisation can be agreed under single market rules and thereby avoid unanimity. The single market rules only apply to indirect taxation. Under Article 99 they do not affect the unanimity rule. There is no diminution of unanimity. As tax matters require unanimity, there is no question of tax changes that are not in Britain's national interest being imposed on us from Brussels.

Lord Pearson of Rannoch: My Lords, the Minister has represented the position exactly as it is at the moment. I mentioned in my speech what the plans are in Brussels to change that. There is a movement afoot in Brussels to make tax harmonisation part of single market legislation which the Government could veto. As I said in my speech, the Government are not mad keen on vetoes in Brussels.

Lord McIntosh of Haringey: My Lords, there is nothing I can do. I have tried to convince the noble Lord that the Government's position is clear and that of the European Commission is clear. There are no proposals to make any changes. The noble Lord is marvellous at conspiracy theories--not the conspiracy theory of history but that of the future. He has somebody plotting something wicked which will somehow be imposed on us despite the unanimity rules and all the powers that we have to maintain our national status.

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The point is that not only is that the case now but that is the way it will stay. The Chancellor of the Exchequer has been absolutely clear on that point. He said last December:

    "Everybody knows that EU tax proposals require unanimity and a change to that requires a treaty change which requires unanimity and that is simply not going to happen".

I say to my noble friend Lord Bruce that we shall retain the veto on tax issues. I have said it before and I shall say it as often as I have to. It does not become any more or less true with repetition. The Bellman only went up to three times. I am now on five or six. Perhaps it will eventually sink in.

Having outlined the principles which apply, let us consider the areas which have been the subject of speculation; for example, value added tax--and I was going to mention corporation tax but the noble Lord, Lord Taverne, has dealt with that point adequately--withholding tax and the codes of conduct.

On VAT, there are no detailed proposals to change the existing rate. We were elected on a clear pledge to maintain zero rates of VAT on food, children's clothes, books, newspapers and public transport fares. Our zero rates are fully safeguarded under existing arrangements.

The noble Lord, Lord Waddington, said that only under this Government were changes being brought forward. I cannot remember exactly when he left the previous government, but between 1992 and 1997 there were 30 VAT or excise harmonisation measures proposed by the Council of Ministers and adopted by this country. In addition, there were two direct harmonisation measures--the mergers directive and the parent and subsidiary companies directive.

If the noble Lord's Bill had been in operation, we should have had 32 referenda between 1992 and 1997. We should have had hardly any since 1997. The noble Lord should reflect on that.

All European Community VAT matters are subject to agreement by all member states. We shall stick to our pledge. I remind the House that the Conservatives introduced VAT on domestic fuel and sought to increase it from 8 to 17.5 per cent.

I turn now to the withholding tax; that is, the draft Commission directive on the taxation of savings. The motive behind the measure is one which I hope all noble Lords will be able to support; that is, the prevention of tax evasion. It is aimed chiefly at citizens of the European Union who place accounts in member states with highly secretive banking systems, such as Luxembourg, and then do not make a declaration to their own tax authorities. That is tax evasion, not avoidance.

The Government support effective action against tax evasion but we do not believe that the directive is likely to be effective. We agree with the noble Lord, Lord Taverne, that the draft directive on withholding tax is fundamentally flawed. In particular, it will be very damaging to the Euro-bond industry. We have made an oft-stated commitment to protect the European Union financial markets. Instead, we believe that member states with banking secrecy laws should reform their laws as soon as possible to make possible the exchange of information.

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There are clear signs that we are winning the argument. The Council working group discussions have resulted in an acknowledgement by the Commission in the conclusions agreed to at ECOFIN on 25th May that the draft directive poses real problems for the financial sector. Our case was accepted. A further review was agreed as regards the treatment of international bonds. The UK was asked to submit proposals for excluding the Euro-bond market. That is what we have been asked to do and that is what we agreed to do.

We shall continue to negotiate in good faith and on a realistic timescale to see whether a workable solution can be found. Ultimately, if the flaws in the directive are not addressed, we shall take whatever action is necessary to protect the financial markets in the City of London. If necessary, as the Prime Minister has made clear, we shall not hesitate to use our veto to block the directive.

I turn to the issue of the code of conduct. First, I make it clear that the group is working to produce a code of conduct. When it is produced, it will be a political compact which explicitly preserves the national competence of member states on taxation.

It is certainly not the case, as the noble Lord, Lord Waddington, seemed to think, that we have signed away any of our rights. However, as I said earlier, we think that there are potentially harmful tax measures where the effective level of taxation is lower than the general level of taxation. For a measure to be harmful it has significantly to affect the location of business activity. It could be argued, for example, that the differential taxation of small businesses is not harmful.

We have made public, and I made public last year, the five tax measures which we submitted to the code of conduct working group. That has been confirmed in a Written Answer within the past month. We maintain, and we will defend the position stoutly, that these are not harmful tax measures. We will continue to negotiate on that basis.

I turn to the Bill as we have it before us. I find it astonishing that the noble Lord should be proposing that no tax harmonisation proposal should be agreed to unless the House of Commons has approved it and a referendum has been held on the matter, and that a majority of those voting, including the abstentions on one side, which is a remarkable procedure, should be in favour of the proposal.

The Conservative Party has been against a referendum all its political life. When we introduced the narrow range of constitutional referendums on the Scottish Parliament, the Welsh Assembly and the mayor for London, the Conservative Party bitterly opposed them on the grounds that they would derogate from the authority of Parliament. I am amazed that the Conservative Front Bench should give even the general welcome which the noble Earl, Lord Attlee, gave. I am sorry, but this is not a sensible Bill in the terms in which it is drafted, nor is it effective in the terms in which it

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is drafted. It seeks to remedy problems which simply do not exist. Of course we shall not oppose the Bill, but we must be clear that we cannot support it.

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