TAX AND THE EUROPEAN COURT OF JUSTICE
WHILE
the EU struggles to build a common market, the
European Court of Justice is building a common European tax law. Growth in
trade within the EU has ³slowed to a crawl² and consumer price convergence,
which was rapid in 1993 when the internal market was launched, ³has come to a
halt². Such was the warning given by Frits Bolkestein to the European
Competitiveness Council. The Internal Market Commissioner¹s job is to make the
market happen, but the procrastinating and prevaricating EU member states won¹t
let him do it. The common market in goods and services may be stalled, but
convergence in tax matters is accelerating at lightning speed. While
governments hum and haw on other matters, the European Court of Justice in
THE
Government is braced for a wave of business exits from
M&S reckons that it ought to be able to reduce its corporation tax bill by offsetting profits made in the UK against losses incurred during its stumbling attempt to expand on the Continent. For the moment the Inland Revenue is rebuffing the claim. And quite right too, you might say. Why should the UK's tax coffers be denied revenues because of events that have little or nothing to do with Britain? Simple common sense dictates that tax breaks paid for by Britons ought to bring benefits, directly or indirectly, to those who are footing the bill. Moreover, if all UK companies were permitted to reduce their tax bills in the way M&S wants the cost to the Treasury would be enormous — the alarming figure of 5 billion a year is doing the rounds among senior UK corporation tax accountants. That is a lot of health service and quite a few miles of relaid railway track too. It may be that the die is cast and, irrespective of whether sterling joins the euro, the UK Treasury will have to make do without the billions lost to the tax harmonising powers already vested in the European courts. The pre-Christmas decision by the European Court of Justice in the case involving Lankhorst-Hohorst, a German company, suggests that the wind is blowing in the direction of pan Europe tax harmonisation for corporations. (The Times January 03, 2003)
Many European Union countries have tax rules on investment funds that could break European law, according to a report to be published on Monday. The research by PwC, the professional services firm, will say national tax laws are blocking the development of a single market in investment funds and could be costing consumers more than E10bn ($8.6bn) a year. The survey comes weeks after the European Commission said it would target countries with tax rules that discriminated against overseas companies. The research says most EU members have discriminatory rules, which force overseas fund managers to set up national subsidiaries and specially tailored products to take advantage of tax breaks aimed at local companies. The Commission last month said it intended to "be more pro-active" in challenging member state tax regimes that appeared to break European law. Tax experts said the Commission was likely to take an increasing number of cases to the European Court of Justice, the European Union's highest authority on tax law. (Financial Times 27/6/01)
Despite the lack of legislative development, the European tax system is emerging, shaped not by politicians, but by the courts. The European Court of Justice has consistently ruled that even in the absence of tax harmonisation, and despite the fact that taxation is a matter for member states, tax can only be levied in accordance with European law. The court is playing a significant role in levelling the playing field for multinational groups. Not only have domestic laws of member states been ruled ineffective. Tax treaties, which create illegal inequality, are under attack. Developing a tax system that reflects European objectives by litigation is hardly an easy way to go, but until the legislative process can deliver results, tax payers have little choice (FT 10/12/99).
VAT law in the UK has recently been changed by the Chicago Bank case - decided in the ECJ - which effectively brings within the scope of VAT the business of buying and selling FOREX. The National Bank of Chicago case turned on the ability to treat the profit on the 'turn' as consideration for the supply of a service, that is the supply of currency. It appears that the VAT treatment of bureaux de change will not change at present, although it is only a matter of time before a case is remitted to the ECJ on this subject too. (Eurofaq posting, Christopher Arkell 14/1/99). Gary Burnes is even more far-reaching in his summing up of the case. 'It establishes a new principle that VAT can potentially be imposed by reference to profit. It could also provide a new impetus for the supporters of the option to tax financial services. The judgement provides backing for the research being undertaken for the European Commission which is looking at methodologies for removing the existing exemptions [i.e. those contained in Art. 13, Directive 77/388] and introducing arrangements for taxing the financial sector. The radical approach adopted [in the case] is a further step down the road in this respect'. (Taxation 27.8.98). With UK householders having higher mortgages and outnumbering 2 to 1 those who rent, the burden of VAT at 17.5%, or even at the lowest rate of 5% at present permitted for items coming within the scope of VAT for the first time, will be a significant drain on monthly budgets. The UK is also the EU country most addicted to credit card and store card spending, in line with USA patterns rather than Continental ones. VAT will be levied on the interest and card charges too. (Eurofaq posting, Christopher Arkell 28/1/99)
Members of the government claim the EU has no jurisdiction over us on tax matters. This ignores Article 177 of the Treaty on European Union. Under this article the ECJ has the jurisdiction to give "preliminary rulings concerning the interpretation of the Treaty". This jurisdiction has two facets. The first is permissive in effect. "Where [a] question is raised before any court of a Member State, that court may, if it considers that a decision on the question is necessary to enable it to give judgement, request the Court of Justice to give a ruling thereon." The second is mandatory. "Where any such question is raised in a case pending before a court of a Member State against whose decisions there is no judicial remedy under national law, that court shall bring the matter before the Court of Justice." The 'permissive' route is exemplified by R v Commissioners of Customs and Excise ex parte EMU Tabac Sarl & ors Case C-296/95 in the ECJ. The matter in dispute was the right of Customs to levy excise duty on tobacco products brought into the UK from other EU states by an agent acting as the 'personal importer' for an individual UK consumer. The ruling handed down to the UK's Court of Appeal favoured Customs but the reasons given by the ECJ make grim reading for defenders of the UK's fiscal independence. "The Court took the view that, even if the agency principle were common to all Member States, it was one deriving from civil law, and more specifically from the law of obligations, and did not necessarily fall to be applied in the sphere of fiscal law, where the objectives were of quite a different nature. That is not the approach of the United Kingdom tax system whereby the rights and obligations arising from relationships, such as agency, ... underlie the tax treatments of the parties in those relationships." The threat to a central tenet of UK tax law is plain. As Angela Cunningham concludes; "if direct taxes are ever harmonised, who knows where the UK's rather delicate approach to tax-motivated relationships will end!" The second case is more worrying still. ICI v Colmer (now ECJ Case C-264/96) referred to the ECJ a series of questions concerning the compatibility of certain restrictions on consortium relief for UK companies with EU law. The matter in dispute was whether losses made by a group of companies not resident in the UK in which ICI had a consortium interest were disallowable for UK corporation tax purposes without prejudicing the general EU right to freedom of corporate establishment. The facts of the case were that there is no judicial remedy under national law against the Lords' decisions. The Advocate General began with the familiar mantra that "although, as Community law stands at present, direct taxation does not as such fall within the purview of the Community, the powers retained by the Member States must nevertheless be exercised consistently with Community law". The very formulation of this warning demonstrates, past all gainsaying, that the ECJ is working extremely closely with Commissioner Monti to demolish every last vestige of national tax sovereignty. Since the Advocate General's Opinion has been adopted by the ECJ now that it has issued its final judgement on the case, a truly dreadful precedent has been inserted into UK tax law, against which no amount of political complaint can avail. And the courts are now not only obliged to submit to the ECJ's ruling on Art. 56 matters, but will inevitably begin to refer all difficult direct tax matters - even, eventually, Income Tax ones - up to the ECJ on the 'permissive' route, for "preliminary rulings". Effectively, the European Court of Justice has become a United Kingdom tax court. It is clear from [this] decision that the Inland Revenue must undertake a full review of the legislation so that it can be amended to comply with European Community law. (C Arkell, European Journal October 1998)
Mario Monti's new version, entitled Towards Tax Co-ordination in the European Union, embodies current Commission thinking, in that it proposes introducing harmonisation through the Single Market machinery. Since this machinery is governed by qualified majority voting rules and is an area in which the ECJ has established supreme and exclusive jurisdictional competence, the need for unanimity on tax matters among EU finance ministers in ECOFIN is once again avoided. (Christopher Arkell Eurofacts 21/11/98)