European Standing Committee B
Thursday 25 November 1999
[MR. ROGER GALE in the Chair]
Taxation and Financial Services
[Relevant Document: European Union Document No. 8450/99.]
4.30 pm
The Chairman: Before calling the Minister to make her opening statement, I have a brief word to say about the scope of the questions and the debate. The scope of the documents is fairly wide, but there is one exception. European Union proposals relating to taxation of energy projects, which is one of a number of issues referred to in document 8484/1/99, were specifically considered by the Committee on 27 October, so they should not be covered in this debate.
4.31 pm
The Paymaster General (Dawn Primarolo): I am very pleased to appear before you today, Mr. Gale, to discuss these very important documents on taxation and on the financial services action plan. We have, of course, discussed the proposals in the tax documents several times before, both in a Standing Committee debate on harmful taxation on 26 November 1997, and when I gave oral evidence to the European Scrutiny Committee on 23 June this year. It may, however, be helpful to cover the background to the tax proposals again briefly.
In 1996, at the Verona Council, a Commission communication on the development of tax systems drew attention to the problem of harmful tax competition for the first time. This Commission communication, which was accepted by the then Conservative Government, recommended that a permanent group be established to oversee tax policy co-operation within the EU. The taxation policy group was born shortly thereafter.
By the time of the Economic and Finance Council on 1 December 1997, it was clear that there was continuing support for the need for co-ordinated action at European level to tackle the problem of harmful tax competition.
In the time that had passed since the Verona Council, the taxation policy group had developed a number of proposals in the field of direct taxation. Those proposals were presented to the Council, which decided that the proposals could help achieve certain objectives, such as reducing continuing distortions in the single market, preventing excess losses of tax revenue or getting tax structures to develop in a more employment-friendly way.
The proposals are contained in ``A package to tackle harmful tax competition in the European Union''. It has three elements: a code of conduct on business taxation; a proposal for a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States; and a proposal for a directive to ensure a minimum of effective taxation of savings income within the Community.
ECOFIN also agreed to make regular progress reports to the European Council on tax policy cooperation from the end of 1998. We are discussing today the second such progress report submitted to the Cologne European Council.
The code of conduct group was established to examine potentially harmful tax measures in EU member states. The code should create a more level playing field for businesses in Europe, strengthening the single market. This will protect United Kingdom employment and encourage investment into the UK.
The European Scrutiny Committee's 28th report comments that it is concerned about the confidentiality requirement surrounding the work of the group. I assure members of this Committee that there were very valid reasons for insisting on confidentiality.
ECOFIN understood that publicising the group's on-going work would be prejudicial to the proper consideration of these sensitive issues. It would make it much more difficult to achieve a successful outcome. That said, I am pleased to say that now that the central work of the group is largely complete, the Government will press the Council for the final report of the code of conduct group to be published in full.
The European Scrutiny Committee's report does not raise any questions or concerns about the interest and royalties directive. Indeed, I have heard little said against the directive in any forum in the UK. The Government support the proposal and have taken an active role in arriving at the present text. The directive is now in line with our double taxation treaties.
Unfortunately, the same cannot be said for the draft directive on the taxation of savings. The Government agree with the Committee that the draft directive, which is aimed at individuals, would have the unintended side effect of seriously damaging the European Union's financial markets, especially the international bond market based in the City of London.
Members of the Committee will be aware that the UK produced a paper on the effects that the directive would have on the international bond market, which was presented to the Council in September. Copies of that document have been placed in the Library. The paper emphasises that the directive's approach to the problem will not only damage the international bond market but fail to tackle tax evasion effectively. We believe that global exchange of information is the best approach.
It is the continued insistence by some member states and other important third countries on banking secrecy that prevents a solution to such tax evasion. Accordingly, the UK paper on international bonds proposed that international bonds be excluded from the scope of the directive, in order to safeguard the competitiveness of the European Union financial markets.
Today's debate also covers the action plan on financial services. Over the past 12 months, we have seen considerable activity in taking forward the single market in financial services. During the UK's presidency, the Government argued actively for, and launched in tandem with the European Commission, an initiative at the York ECOFIN meeting to bring about such a market. The Government therefore welcome the Commission's action plan, believing that it provides an excellent platform for further progress.
The Government believe that a single market free of unnecessary regulation and rules that favours domestic providers will bring enormous benefits not only for UK financial services but for business and consumers. With the removal of barriers, a single market will enhance competition, give businesses greater choice on how and where to raise investment capital and give consumers a greater choice of products designed to meet their needs and a better return on their savings. It will also allow financial firms to trade in larger markets and provide what consumers want rather than what national laws and regulations require. That will make it easier for firms to get started, to grow and thus to create jobs. The Government are actively participating in taking that plan forward. That concludes my brief opening remarks, Mr. Gale, and I shall be happy to answer questions.
The Chairman: We now have until 5.30 pm at the latest for questions to the Minister. I remind hon. Members that questions should be brief and asked one at a time, Given the number of Members present, there should be ample opportunity for hon. Members to ask more than one question, but the Minister must have the chance to answer them individually.
Mr. David Heathcoat-Amory (Wells): I am grateful to the Minister for her introductory remarks and for the documents that have been provided. They contain the traditional misprint: Wednesday 25 November is a date that does not exist. I hope that the millennium bug has not struck early.
My main concern is that there is no recent explanatory memorandum. Next week, the Minister will be agreeing—or disagreeing—these measures, yet the last memorandum that we have is that of July 1999. That oversight is compounded by the needless secrecy that the European Scrutiny Committee deprecates in its report.
Although a great many British and dependent territory measures are under scrutiny by the ministerial group on business taxes, we have not been provided with copies of those reports. Others have; the British Management Data Foundation received the complete list from the European Council. Why is it that others have the list of measures under scrutiny by the European committee chaired by the hon. Member for Bristol, South (Dawn Primarolo), but the House and the public at large are denied that information? If the hon. Lady is serious about open government and the public's right to know, why has she not given us a recent report; and will she now repair that—at least before next week's ECOFIN meeting—by providing a full list of the tax measures under consideration?
Dawn Primarolo: On the question of leaking of documents, the right hon. Gentleman has been told that those documents were provided for the Council. I have checked with the Council and the Commission and they both say that they did not release the documents. However, it is true that there are documents in circulation that purport to represent the progress of the work of the code of conduct committee
On confidentiality, ECOFIN's decision of March 1998 was recorded in the official journal. As chair of that committee, I am bound by that decision. That puts me in a difficult position, but I have informed Parliament of the UK measures before the group. I have always said that I am utterly confident that we shall be able to demonstrate that those measures are not harmful, and I remain of that view. If needed, I can explain the analytical process that the group undertook when considering harmful tax competition.
I am not aware of any outstanding explanatory memorandums. I have been told that we have provided the Committee with all the documents required. We had a little problem in the summer, but that has now been dealt with. As for the code, I have told the Committee that the Government will argue at ECOFIN on Monday that the report should be released and published. That will require a simple majority and I sincerely hope that the other members of ECOFIN will agree that it should now be available.
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