Document originated:	12 March 1997
Original language:	French
Forwarded to the Council:	17 March 1997
Circulated by the Council in the original language:	21 March 1997
Circulated by the Council in English:	2 April 1997
Deposited in Parliament:	7 May 1997
Department:	HM Customs and Excise
Basis of consideration:	EM of 21 May 1997
Previous consideration:	None
Committee's assessment:	Legally and politically important
Committee's decision:	Not cleared, awaiting further information

Background

8.1  This is a proposal for a new Community framework for the taxation of energy products which would introduce a common system and common minimum rates of tax. The proposal fulfils three obligations placed on the Commission:

-    to report with proposals on the minimum rates of excise duties on mineral oils[27];

-    to review the exemptions applying to fuel used in international aviation and on inland waterways[28];

-    to make new proposals on the taxation of energy products, following the failure to reach agreement on the Commission's amended proposals for a carbon/energy tax at the ECOFIN Council on 11 March 1996.

The aim of the proposal

8.2  The proposal from the Commission is for a single régime for all energy products from 1 January 1998, extending the scope of taxation beyond mineral oils to cover all heating fuels, by adding:

-    coal, coke, lignite, bitumens and products derived from them;

-    natural gas;

-    electricity.

8.3  The Commission says that the aim of the proposal is:

" ... to establish a new Community framework for the taxation of energy products which makes it possible to restructure national tax systems and to better attain national objectives of employment, environment, transport and energy policy, while respecting a key Community achievement: the Single Market."

The adoption of this proposal, it says, would represent the first concrete action at Community level designed to give Member States appropriate fiscal tools to carry out environment and employment policies.

8.4  The Commission argues that the present arrangement, whereby a Community system of taxation applies only to mineral oils and not to other sources of energy, causes problems. It contends that the resulting proliferation of national taxes undermines the unity of the single market and the liberalisation of energy markets, and that the lack of harmonisation distorts competition. The Commission recognises that Member States must be given freedom of manoeuvre for political action, but claims that this should be within common rules - within which Member States could use the taxation of energy products for environmental purposes, and could restructure their national tax systems to favour employment.

8.5  The Commission says explicitly that it:

" ... intends, through this proposal for a Directive, to provide the Member States with a framework for target-oriented political action. Although, in accordance with the principle of subsidiarity, the responsibility for the political choice is entirely incumbent on the Member States, it considers that the opportunity they are being offered by this proposal to restructure taxation in a direction which is more favourable to the factor labour is an essential contribution. It therefore invites the Member States to give preference, in their policy choices, to the objective of tax neutrality."

The proposal in detail

8.6  For mineral oils, the proposal would retain the existing taxation structure, but would give the flexibility to Member States to introduce differential rates to reflect policy concerns (for example the UK's current high rate for super unleaded petrol). There would be a requirement for leaded petrol to be taxed more heavily than unleaded, though the differential is not specified.

8.7  For electricity, the Commission proposes harmonisation on the basis of output taxation, taxing the electricity itself rather than the fuels used in its production. The Commission contends that output taxation is the only way in which the principle of applying tax in the country of consumption can be uniformly achieved. Double taxation would be avoided, and Member States could choose to apply different tax rates for different users (for example to differentiate between final consumers and industrial use). In addition, the Commission proposes to allow Member States to differentiate tax rates in line with the environmental quality of the fuel used to produce the electricity.

8.8  On minimum levels of taxation, the Commission proposes that the current minimum levels on mineral oils be uprated, and that minimum levels be created for other products. These would differentiate between:

-    energy products used as motor fuels;

-    energy products used as motor fuels for certain industrial and commercial purposes;

-    energy products used as heating fuels.

A timetable stretching to 2002 is proposed for the various stages, and the Commission will make a subsequent proposal on the final minimum levels.

8.9  On flexibility for the pursuit of environmental, transport or energy policy objectives, the Commission proposes to offer a number of options for differential rates of taxation or exemptions. These might depend on the nature of the fuel (as with biofuels), on the use being made of it (such as rail transport), or on specific problems being tackled (for example, road congestion and air pollution). Member States with a small natural gas market would be allowed to apply tax exemptions or reductions for a transitional period.

8.10  To assist firms, Member States would be allowed to refund some or all of the tax due if energy costs were between 10% and 20% of production costs, and would be obliged to do so if energy costs exceeded 20% of production costs.

8.11  The Commission foresees benefits:

-    for Member States, by reducing tax competition and creating a new source of tax revenue, thus - it suggests - allowing Member States to help to cut unemployment by reducing compulsory levies on labour;

-    for firms, where reducing distortions in the energy market will help "level the playing field" and enhance competitiveness;

-    for the "citizen-consumer", who - the Commission claims - will face only a very limited rise in prices, and will benefit from the elimination of market distortions and from the enhanced quality of environment and the lower rates of unemployment which the measure should promote.

The Government's view

8.12  In an Explanatory Memorandum dated 21 May 1997, the Financial Secretary to the Treasury (Dawn Primarolo) draws particular attention to certain aspects of the proposal. She says that if adopted as drafted it would:

        "-  require the introduction in the UK, from I January 1998, of new taxes on natural gas, electricity, solid fuels, LPG and kerosene used for heating purposes, at rates at or above the Community minima. These taxes could take the form of traditional excise duties or be related to carbon content or energy value, or [they] could combine the two approaches.

-    relieve oil used in the generation of electricity [which is currently taxed in the UK] from duty (unless it was decided to tax fuels used in electricity production, which is an option under the proposal);

-    not require real increases in the UK rates of duty on motor fuels;

-    not require increases in the current UK rate of duty on heating gas oil, nor on heavy fuel oils before the year 2000 (but would do so thereafter);

-    remove the vires in EC law for the current full rebate of duty on heating oil used in horticulture and for the rebate on motor fuels used by buses. The rebated rate of duty on diesel for off-road use might have to rise slightly to meet the new minima (but this is unlikely after the effects of inflation are taken into account);

-    give an additional flexibility to introduce fiscal incentives in favour of low-sulphur heavy fuel oil and biofuels, should the Government wish to do so;

-    create other possibilities to differentiate duty rates, while respecting Community minima, along the lines of the separate rate of superunleaded petrol already introduced in the UK and the planned differential for ultra-low sulphur diesel;

-    require the introduction of measures to give tax credits to certain industrial users of energy."

8.13  The Minister then considers compliance costs, saying:

"The introduction of new taxes on gas, electricity and solid fuels would create record keeping obligations for those liable to account for the tax. However, the true extent of compliance costs, and any cash-flow advantages or disadvantages for those accounting for the tax, would depend critically on the design of any tax introduced to meet the requirements of the proposal. The proposal gives considerable flexibility, particularly in the case of electricity, as to the point in the production/distribution chain that tax should become due. The proposal also recognises, for example, that it would not be necessary to submit intra-Community sales of these products to the same system of warehousing and accompanying administrative documentation as currently applies to mineral oils.

"Compliance costs cannot, therefore, be calculated at this stage, but a full Compliance Cost Assessment would be prepared in the event of the directive being adopted. Were new taxes to be introduced, we would expect that, for reasons of administrative simplicity, and to reduce compliance costs, the tax point would be likely to be set at a point in the production/distribution chain that minimised the number of potential taxpayers. The Government would also aim to minimise the burdens on the energy industry, for example, through consultation on any proposals - a method used successfully in the introduction of the recent new taxes on landfill, insurance and air passengers."

8.14  Finally, the Minister looks at the financial implications of the proposals, insofar as it is possible to judge them at this stage. She tells us:

"Preliminary analysis suggests that, at the rates proposed from 2002, duties on gas, electricity and solid fuels would raise net revenue of just under £2 billion. Customs and Excise would require some additional resource to collect the new duties, but they could be expected to be very economical to administer, given that the number of those who would directly have to account for the tax would be relatively limited.

"The target rates for 2002 are estimated to add to expected energy prices for domestic users by around 4% (electricity), 8 % (coal), 9% (oil) and 11% (gas). Increases are higher for industrial users, ranging from around 6-8% (electricity and oil) to 22-23% (coal and gas). The impact on costs would vary across industries, depending on energy usage. The proposed exemptions for high energy users would moderate these cost increases, but it is unclear as yet precisely how they would work. Revenues could also be used to cut other business taxes, offsetting cost increases in whole or part. The effect on national competitiveness of increased industrial costs would be reduced to the extent that similar measures were introduced in other Member States (though not vis-à-vis third countries), and if revenues were used to cut other business taxes."

Conclusion

8.15  This is a major proposal which will undoubtedly require further consideration, possibly on the Floor of the House. But we are not able to make a detailed recommendation at this stage because we have been left in the dark about the Government's views. On the substance of the proposal, the Explanatory Memorandum simply points out the changes which would be implied for the UK, without commenting on whether the Minister considers that they are desirable. And on the issue of subsidiarity, the Minister merely tells us that "the Commission argues that the proposal passes the subsidiarity test on the grounds that a minimum common framework in necessary for the proper functioning of the Single Market"; she does not tell us whether the Government agrees with the Commission's argument.

8.16  We learn from the Explanatory Memorandum that this proposal was first presented at the ECOFIN meeting on 17 March, and that it has been discussed at various levels since then. We recognise that no decision is imminent because, as the Minister says, achieving unanimity is likely to be a long drawn-out process. Nevertheless we ask the Minister to supply, as a matter of urgency, a Supplementary Explanatory Memorandum setting out the Government's view on the proposal, so that we can consider it again. Meanwhile, we do not clear the document.

28  Directive 92/81/EEC. The previous Committee reported on the Commission's proposals on this aspect: (17711) 11452/96; see HC 36-ix (1996-97), paragraph 4 (15 January 1997) and HC 36-xviii (1996-97), paragraph 5 (19 March 1997). Back