Tax Harmonisation

HL Deb 28 January 1999 vol 596 cc1193-209

7.46 p.m.

Lord Willoughby de Broke rose to ask Her Majesty's Government whether they support current proposals for tax harmonisation in the European Union.

The noble Lord said: My Lords, I thank noble Lords who have taken the trouble to put down their names to speak to this Unstarred Question. I say that now because I understand that I shall not have the opportunity to thank them later. I am grateful to them for being here and I am sorry that they will have only three minutes in which to speak, according to the instructions which I have been given. Whatever one's view on tax harmonisation, that is a shame. After all, it is an interesting subject despite the unpromising number of COM(97)564 FINAL.

The hare that started running in this case was more interestingly entitled A package to tackle harmful tax competition in the European Union. That in itself is an interesting concept. "Harmful tax competition"; harmful to whom? Who defines what is "harmful"? As a starting point, perhaps the Government would like to define what they see as harmful tax competition. What was that "package" and what are the consequences?

The first element was a code of conduct for business taxation. The second part comprised measures to eliminate withholding taxes and interest and royalty payments between companies. The third part was to make progress in the area of taxation of capital from income.

The code of conduct to which I referred requests member states to adopt certain principles; for example, not to engage in harmful tax competition. It allows member states to discuss the tax levels of other member states and to evaluate whether they are harmful. It also covers business tax measures which affect, or could affect, the location of business activity in the Community. Member states can still be asked to amend taxes, with a view to eliminating harmful measures".

Incidentally, the code also brackets together in Section M tax evasion and tax avoidance. It states: The Council stresses its commitment to full co-operation in the fight against tax evasion and avoidance". Those are still two very separate matters in this country, but they seem to be equally treated as criminal in the code. The Government's Explanatory Memorandum states: as the Code of Conduct would not be legally binding, it would have no direct impact on UK law. However the Government would only agree to the Code of Conduct if it intended to honour it". To me, the code looks like a device for side-stepping the various EU treaties which require unanimity in respect of tax harmonisation. By signing up to it, the Government have at the very least limited their room for manoeuvre. After all, once the principle is conceded and other countries may have some kind of say in our tax matters, where do you stop in practice?

Further on in the memorandum the Government go on to say how, pleased it is that the Code of Conduct recognises the positive effects of fair tax competition. This means that the U.K. rates of Corporation tax could not be questioned under the Code". How wonderfully optimistic that sounded even in late 1997 and how naïve it sounds now in the light of the events of the past couple of months when European Finance Ministers have repeated and underlined their insistence that EU tax harmonisation, including corporate taxes, would be high on their list of policy priorities. This stance was supported by the German Chancellor and echoed as French policy by M. Strauss-Kahn. the French Finance Minister.

Where does all this leave the Government and, more importantly, Britain's interests? The Government's first reaction was to pretend that tax harmonisation was not on the menu at all; then, when their cover was blown on that, to say that Mr. Lafontaine's opinion on tax harmonisation did not represent official German policy. When they were smoked out of that position by the German and French Governments confirming that tax harmonisation was indeed their official government policy, the Prime Minister went on to pretend that tax harmonisation plans were supported by only a minority of member states. But that is not the case. It is clear that the Commission paper to which I referred earlier reflected majority opinion; it would not otherwise have been put forward.

Of course, the Economic Monetary Affairs Committee of the European Parliament has several times called for harmonisation of EU business taxes, with the leader of the Parliament, Jean-Claude Juncker, saying in 1997 that he expected this to take place within two years. The Chancellor of the Exchequer was thus forced back into a previously unprepared position—the threat to use the veto—and this from a government who still say they are winning the argument in Europe. That will be news to the London art market. But, sadly, even that position was booby trapped. The French and German Governments confirmed their belief that the principle of unanimity should be abolished with Finland helpfully chipping in to announce that it would make scrapping the veto a central plank of its EU presidency beginning in July this year.

However, according to a report in last Sunday's Independent, it now seems that the veto policy, which was made such a play of by the Prime Minister and the Chancellor of the Exchequer, has been abandoned. The report quotes a Whitehall source as saying: Ministers do not think this is veto territory". This decision was apparently taken at a meeting of the Cabinet Committee on Europe last Thursday.

On the Wednesday of that week, at the conclusion of the debate in this House on the introduction of the euro, the noble Lord, Lord McIntosh, while winding up for the Government, stated in reply to a question on tax harmonisation from the noble Lord, Lord Shore: If we think it is unfair we shall veto it and it will not happen. It is as simple as that".—[Official Report, 20/1/99; col. 662.] Would the Minister please clarify the Government's position? It would be helpful for business and for individuals to know whether the Government are preparing a climb down and, if so, how far they are going to climb down.

Perhaps I may just remind your Lordships that the UK has lower rates of tax, both personal and corporate, than all other members of the EU. For example, basic rate tax here is 23 per cent. against 38 per cent. in Germany; high rate tax is 40 per cent. here, as against 57 per cent. in France; and, corporation tax is 30 per cent. here, as against 43 per cent. in Italy and 64 per cent. in Germany. United Kingdom taxation is 33 per cent. of its gross domestic product, as against well over 40 per cent. of GDP in other European Union countries.

It is this comparatively light tax regime—and I use the word "comparatively", because I believe the tax man already gets a great deal more of our money than is good for him—which contributes significantly to Britain's position as the most favoured home in the EU for inward investment. Britain's share of this investment actually stands at about 34 per cent. In comparison, Germany attracts about 20 per cent. and France and Spain about 10 per cent. each—this despite the fact that inward investors were fully aware that Britain was not going to join the euro in the first wave. That only goes to disprove the repeated claims by our euro enthusiast friends that Britain will be "marginalised" by not joining the euro. On the contrary, it appears that foreign corporations are happy to invest in a free market economy with relatively benign tax rates and relatively low non-wage costs.

Significantly in Europe it appears to be low or zero taxes that are considered harmful and not high tax rates. I hope that the Government will draw strength from a report published in November of last year by the European Policy Forum entitled, Is Tax Competition Harmful?. It was written by Mr. Keith Marsden, a former World Bank economist. The report examines the taxes and growth rates from 20 economies and concludes: The empirical evidence is clear. Tax competition is not harmful … Lower taxes were associated with higher rates of growth, of investment, employment, productivity and private consumption. Countries that chose big government, and more public services financed by higher taxes, experienced slower economic growth". When the Minister comes to reply, could he please tell the House whether he believes that harmonisation, which is so firmly on the EU agenda, will harmonise our taxes upwards to our competitors' levels or downwards to our own current levels?

The Government, as their successive defensive positions have been overrun, have fallen back on assuring us that on matters of tax the principle of unanimity is "sacrosanct"—I think that that was the Prime Minister's word. But even if the Government have not now abandoned the "V" word and we are still in fact in "veto country", it appears that single market legislation, which requires only a qualified majority not unanimity, can be used to deal with tax matters. It appears that if varying tax levels within the EU are deemed to obstruct its further development, the European Court of Justice can apply single market law. Perhaps the Minister may care to comment in that respect.

Finally, will the Minister bring the House up to date with the position on eurobonds and on the proposed withholding tax? The eurobond market in London has grown from nothing to be the largest source of such funds in the world. It is a huge advantage to London, but it could easily be lost. Other financial centres do very little of this kind of business, so we would have nothing to lose by implementing the proposed directive. If the tax damages London—and even if the EU as a whole loses business—anything to weaken London's dominance would be seen as a plus by its rivals, notably in Frankfurt.

Therefore, could the Minister inform the House what the Government's intentions are, so that if the eurobond market does have to leave London for Geneva, Zurich or New York, it can at least switch out the lights before it goes? Are we still in veto country, or is a deal being cut to obtain some kind of temporary derogation? If that is the case, what is the price tag? British firms, British consumers and British taxpayers will rightly expect the Government to continue to defend Britain's interests and to maintain our competitive advantage. I hope that the Minister will be able to confirm this evening that they will do exactly that.

7.57 p.m.

Lord Desai

My Lords, I should begin by informing the House that the Select Committee of your Lordships' House on the European Communities brought out a report on taxation and competition policy in the single market last June. I am a member of Sub-Committee A which is occupied with the latter, and we intend to take up the question of taxation and harmonisation very soon. That will at least shed some light on the matter after a lot of heat.

I should say, first, that we ought to consider this question from the point of view of a single market rather than concentrating on the issue of federalism. If you have a single market it is worth considering, as a general principle, which taxes ought to be harmonised and which should not. For example, we know that the differential taxation of beer and spirits harms many businesses in the United Kingdom very adversely because people can go across to Calais and buy such things much more cheaply. Indeed, we have had many complaints in your Lordships' House from people who point out that it is unfair.

Moreover, we also know that between Northern Ireland and the Republic corporation tax is very different—30 per cent. in one and 10 per cent. in the other. That is very unfair competition for Northern Ireland, as has been pointed out in this House. It is not as if we are the lowest tax territory in the whole world and everyone else has higher taxes. The UK has suffered from unfair tax competition but it has also gained from it.

We ought to establish a few principles with regard to these matters. If we want to have a single market, taxation of certain tradeable goods ought to be, if not equalised, at least co-ordinated, because otherwise it will not be advantageous within a single market to have differential taxation. The Commission has come up with a proposal for VAT harmonisation. I know that we have differential VAT rates if one takes into account zero rating, but eventually, if we do not harmonise VAT, that will create anomalies and the advantage of the single market will be lost.

We should open our minds to thinking about a radical reform of taxation, perhaps moving away from taxation on capital and labour altogether and towards taxation of resources and consumption. Consumption taxation can be co-ordinated across the single market without doing harm to anyone. We should take a radical approach to taxation rather than insist that what we have is best.

8 p.m.

Baroness Ludford

My Lords, rather like the noble Lord, Lord Desai, I believe that we should approach tax harmonisation in the European Union in the same way as we approach fiscal policy domestically; that is, pragmatically, weighing up the pros and cons. This should not be an ideological issue on which Europhiles all take one view and Eurosceptics another. As a pro-European I do not jump like Pavlov's dog at the prospect of tax uniformity. We need to take a cool and not hot-headed look at what is really essential to the single market, what is good for Britain and Europe and what is good for competition and jobs in particular sectors; for example, financial services in the City.

Let us remember that harmonisation does not have to mean sameness. Harmony in music is the blending of different sounds, the opposite of discordance. The Oxford Dictionary defines harmony as, the combination or adaptation of parts … so as to form an orderly whole"; co-ordination, in other words.

It clearly makes sense to avoid or eliminate tax distortions, evasions and havens as much as possible on grounds of promoting a competitive market and stopping the excessive loss of tax revenue. Surely there can be no ideological objection in principle to that. If co-operation between tax authorities can tackle fraud, so much the better. If there could be some achievement of consistency in the definition of the tax base in the different member states—for example on corporate taxation—that could cut business costs by saving on accounting administration. If European tax harmonisation means that News International pays rather more than 7 per cent. tax on its worldwide profits, that would be welcome.

But what must be kept uppermost is the need to safeguard the competitiveness of the European Union and its member states at a time when they have all rightly put jobs at the top of the list of priorities. There will be a need, with a single currency and a single monetary policy, to retain flexibility in fiscal policy and the setting of tax rates. Let us make clear that there is no suggestion of harmonising income tax.

We must also be sure not to score a British or European own goal. There is some risk of this in the field of taxation of capital and savings. Some 10 years ago the Commission proposed a single common system of withholding tax on interest income. That has sensibly been withdrawn and the current proposal, the so-called "co-existence model", allows member states to choose either to apply a withholding tax or to provide information on income from savings to other member states.

Certainly the City is right to fear that the imposition of withholding tax in the eurobond market could drive that business away, and not to Frankfurt or Paris but out of Europe and offshore. Therefore Europe as a whole would be hurt. Only international co-operation on such taxation, for instance in the OECD, could prevent this disadvantage to the European Union. Even if a withholding tax was applied, that would leave the host member state with the tax receipts, not the member state of residence. Therefore it is insufficient on its own to solve the problem of Germans escaping German tax by putting their savings in Luxembourg.

The Government should therefore continue to oppose the withholding tax for the sake of jobs in the City, jobs in London and jobs in Europe. On the other hand we should support an energy carbon tax throughout Europe. We should be keen on tax co-operation in co-ordinating tax bases, exchanging information and pursuing tax evaders and fraudsters. For eurobonds especially, international agreement must precede a European scheme.

8.4 p.m.

Lord Harris of High Cross

My Lords, all countries have their own distinctive tax regimes. Each country develops a mixture of direct and indirect taxes shaped by history, political principles, expediency, electioneering and similar influences. For a free market economist most taxes are either distortionary or debilitating. The one common characteristic of all national treasuries is their insatiable appetite for revenue. On this rapacious approach there are two checks. The first is taxpayer rebellion through avoidance, evasion and emigration. The second is national economic damage as measured objectively by the effects of the Chancellor's depredations on the efficiency of a national economy as compared with competing national economies.

Competition was defined by the Nobel Laureate, Friedrich Hayek, as "the optimum discovery procedure." The Olympic Games are a classic model of competition. They enable us to discover the minimum time, the highest jump, the fastest swim, the longest throw and so on. We rule out artificial aids such as drugs, but we do not ban athletes employing rival techniques or training programmes to suit their taste. Competition works to test these elements and brings out the best system and encourages all performers to approach the best. In other words, under competition there is a natural drive towards harmonisation, as is exactly the case with free trade. If we rule out subsidies and tariffs, competition between economies embraces competition between rival labour markets, rival tax jurisdictions, rival educational systems, rival management techniques and other national policies. We can learn from the success of others, but we cannot lame them or deprive them of their advantages.

In the single market of the United States, 51 states compete with different sales taxes, income taxes, property taxes, even tobacco taxes. But we should mark the following well. Because high taxes would drive business elsewhere, taxes are kept low and differences between the various states are also quite narrow. Tax harmonisation through market pressures pushes rates down. Tax harmonisation through political pressures pushes taxes up. If the EU were to succeed in raising the general level of taxes and enforcing a withholding tax throughout Europe, it would weaken all European economies and would drive mobile capital and enterprise beyond their doomed jurisdiction. Such is the discovery procedure of free competition in the glorious global market.

The Franco-German summit in December called for rapid progress on tax harmonisation. Why will British Ministers not declare their opposition with equal candour and confidence? I ask plainly: will the Government use their veto to block these malignant Franco-German mischiefs of withholding tax and tax uniformity? To prove their European credentials, the Government tend to take abject refuge in weasel words, evasion and deceit about continued endless negotiation. How about the noble Lord coming clean tonight?

8.8 p.m.

Viscount Trenchard

My Lords, I am grateful to my noble friend Lord Willoughby de Broke for raising this subject today.

The analysis prepared by the London Investment Banking Association and mentioned in its submission to the Council of Ministers last September suggests that the proposals for an EU-wide withholding tax are unlikely to be more than marginally successful, because capital movements are fully liberalised. To the contrary, implementation of the proposals, unless all other OECD countries decide to adopt similar measures at the same time, would introduce incentives to divert business to other financial centres outside the EU, causing great damage to the City of London.

As Mr Howard Flight pointed out so clearly in his letter to the Financial Times on 23rd December, what is at peril is London's entire position as the world's main banking capital, not merely as the home of the hugely successful and important eurobond market. I cannot stress too strongly how great is the danger that is faced by the City. If bank deposits move to Hong Kong or New York, so will the related foreign exchange and derivatives business. The threat to employment is therefore at least 100,000 jobs. I, too, ask the Government to make it absolutely clear whether or not they will veto this proposed directive. Will the Minister state whether he has changed his view since the Answer he gave to my noble friend Lord Pearson of Rannoch on 5th October?

The second major area of concern that I wish to raise is that the establishment of the European single currency is leading inexorably towards harmonisation of taxes in general. Britain has the lowest rates of income tax in the EU and its corporation tax rates are also among the lowest. But Mr. Lafontaine has said that we must drive forward tax harmonisation in Europe. Mr. Tietmeyer has said that it is an illusion to think that EU states can hold onto their autonomy over taxation policies. The EU's Code of Conduct Group on business taxation has reportedly identified a list of unfair taxes which need to be addressed. Unfair to whom? Do France and Germany think that it is unfair that our low rates of corporation tax and low employment related add-on costs have helped to secure for the United Kingdom by far the largest slice of Japanese direct investment in Europe?

It will be very unfair to the British people if the Government throw away the hard won right of the House of Commons to determine tax rates in this country. I do not want to argue that tax harmonisation is inherently always bad. Clearly, in formulating our economic and fiscal policies in the global economy that exists we need to have regard to those of all our major trading and investment partners—not merely other EU countries, but the United States, Japan and others as well.

However, paramount must be the need to apply fiscal policies that best serve the needs of the British economy and preserve the beneficial tax environment in which the best parts of it—notably the City of London and the financial services industry—can thrive. I look forward to hearing the comments of other noble Lords, including my noble friend Lord Hindlip, who I believe will tell your Lordships about the similar and serious threat faced by the London art market. I hope that in the course of his reply the Minister will tell the House whether he agrees with the German Chancellor and the French Finance Minister, both of whom have recently said that EU rules should be changed to allow majority voting on tax matters.

8.12 p.m.

Lord Stoddart of Swindon

My Lords, perhaps I may follow the noble Viscount, Lord Trenchard, in referring to the democratic issue; namely, the power of the House of Commons to control supply. If we examine the Answer given by my noble friend Lord McIntosh to the noble Lord, Lord Tebbit, on 2nd November, there is no doubt that the rights of the House of Commons may well be at risk. His reply made the matter absolutely clear. He said that, If a directive is unanimously adopted by the Council of Ministers —that is, if Britain failed to use the veto— all member states are obliged to implement it".—[Official Report, 2/11/98; col. WA 28.] by a due date. Indeed, if the directive was not implemented by Parliament, Parliament would be breaking the law and could be fined. That is the position. Our sovereign Parliament would be breaking European law and could have to find the money to pay the fine.

I hope that my noble friend will confirm what I have said; or, if he does not, tell me why I am wrong. This is a fundamental democratic issue. The House of Commons gained its pre-eminence and sovereign power because it gained control over supply. Once it loses control over supply, Parliament will have lost its power, and the executive, whether it be the British or European executive, will have won, and we shall have returned to a situation similar to that under Charles I.

My second point has already been raised. It is the question of confusion. This week, there have been two reports on this matter in the press. One appeared in the Daily Mail on Monday and was headed: Labour to surrender EU tax veto". The article states: Ministers have abandoned their key weapon in the battle against common taxes in the EU. They have decided they will not use Britain's national veto to block German-led attempts to harmonise tax rates". That frightened me.

Yesterday, I read in the Daily Telegraph the headline: Hewitt pledges UK veto over withholding tax". Then, although I was slightly encouraged, I became confused—as are many other people, because they do not know what is government policy. This evening we should be told the answer. I hope that the Government will be absolutely firm and will say that they will use the veto on every occasion when our taxes are under threat from a European directive.

8.15 p.m.

Lord Hindlip

My Lords, I must declare an interest in this Question. My livelihood as a director of Christie's, and that of 40,000 other people employed in the British art market, is put at risk by the harmonisation of VAT on the import of works of art into the Community and by the imposition of droit de suite. In the brief time available, I wish to begin by thanking the Government for what they have already tried to do for the art trade. All of us who are involved in it are grateful to the Department of Trade and Industry, although I fear that the department under-estimates—by 5,000—the loss of jobs that harmonisation will bring.

We in the art trade must thank the Prime Minister himself. He has actively lobbied on our behalf and has written to the president of the British Art Market Federation, personally pledging his support. While the Prime Minister's lobbying has been vigorously and sincerely carried out, will it have any effect? Are the French or the Germans listening? It is sad if they are not, because the British art market is second in size only to that of New York, and second to none in its reputation for expertise and integrity. It is by far the largest European market; it is the only European market which can compete with America. The loss of business and loss of jobs as a result of harmonisation can only benefit New York. I point out to the noble Lord, Lord Desai, that it is not just a question of a single market; it is a world market. The single market to which he refers is only a small part of that world market.

This tax increase will decrease revenue, because there will be so much less to tax. Furthermore, is it really harmonisation? As the Minister knows, all the various other countries in the EU have differing rates of VAT. They are not being persuaded to reduce them to our level—we are just being forced to raise taxes nearer to their levels.

I remind the noble Lord, Lord McIntosh—whom I thank for his endless courtesy on this matter—of the Answer he gave to my noble friend Lord Pearson of Rannoch. I refer to the Answer already mentioned, on 5th October. He said: we are firmly committed to preserving the competitiveness of European Community financial markets".—[Official Report, 5/10/98; col. 162.] The art market is a financial market as well as a cultural one.

The noble Lord went on to say that there had still not been a cost/benefit analysis on the effects of harmonisation. I believe that that is still the case; perhaps the noble Lord will confirm that. We must have such an analysis. If, as I am sure it will, it bears out what all of us in the art trade believe, the Government must do everything possible including using the veto, not only to protect British interests but European interests as well.

If they do not, London as a commercial centre will suffer. Perhaps I may leave your Lordships with two thoughts. The first is that, out of the 100 offices where Christie's does business, the one in London is still the best and the most profitable. Secondly, this harmonisation is the triumph of the absurd. It seeks to raise taxes in order not to collect them. Worse than killing the goose that lays the golden eggs, it drives the goose into the rival's garden. Even a Brussels commissioner should understand the stupidity of that. In opposing this harmonisation and droit de suite, the Government will help London, help Britain and help Europe.

8.19 p.m.

Lord Shore of Stepney

My Lords, we are all indebted to the noble Lord, Lord Willoughby de Broke, for giving us the opportunity—however brief—to canter over the course in this important aspect of our relationships with Europe. In a sense, it follows logically that having got a single currency, an economic union and a monetary union, the European Commission should now begin to think about a fiscal union. It is no accident that taxation and harmonisation of taxation should appear as soon as victory has been finally won on the economic and monetary union and the single currency front.

Of course, we are faced with a major challenge and great British interests are at risk. I can only touch on one or two. Current proposals for tax harmonisation are important. Some have been listed, but I remind the House that there were five different tax matters on the agenda of the Vienna summit. On a withholding tax, we are in great danger. We are isolated. It is a British interest and we will have to fight hard to defend our interests, either by avoiding a compromise—which is simply a disguised surrender—or taking the unpopular course of using a veto and not being at the heart of Europe when we do so.

The other taxes are the energy tax—not mentioned but on the agenda—VAT, corporation tax, and the whole vast area of unfair tax competition. And as we know who chaired the study: Dawn Primarolo, the Paymaster General, in the other place.

I am worried, first, because the Government's reactions up to now have been complacent; secondly, because what has been said is ambiguous and unclear. They signed up to the presidency statement at the end of the Vienna summit. In the presidency statement they agreed to the following vague propositions: the need to control harmful tax competition; the need to reduce the continuing distortion in the single market; and the need to prevent excessive loss of tax revenues.

That opens up a vast area of debate and covers virtually all the range of taxation. Our colleagues in Europe have significantly higher tax rates than we have. Of course, they think it is unfair that we have that advantage. They would like to remove unfairness, and that is built into the treaty. Article 3(a) demands that in the internal market we should not have the distortion of competition. There should be a level playing field. My noble friend who relies heavily on the veto might well consider that among other dangers someone might take us before the European Court of Justice on the charge of the infraction of the basic treaties.

8.23 p.m.

The Earl of Clanwilliam

My Lords, I take part in the debate in order to draw attention to the possible confusion of provisions that will have to be made to cover the pension liabilities of other European states and to speculate on the possibility that harmonisation, especially of corporation tax, might be the backdoor route to involving the United Kingdom in their difficulties.

I have spoken previously on the subject in debate and in Starred Questions to the Government. Much water has flowed under the bridge since then. I was assured by the noble Lord, Lord McIntosh, that under Article 140b we would not be required to "bail out"—that was the noble Lord's expression—other member states' pension shortfalls.

The euphoria that followed the launch of the euro has led some leaders such as Herr Lafontaine, and many others already mentioned, to proclaim the arrival of the era of the federal state of Euroland for which harmonisation of tax rates is a pre-requisite.

We can recall that the social chapter was brought in under the health and safety regulations, with the connivance of the European Court of Justice. I ask the Minister: are we sure that Article 140b will not be equally outflanked? It is not a matter of some minor financial adjustment, nor even a canard, as the noble Lord, Lord Taverne, referred to it on a previous occasion. It is a real and large debt that is accruing. We know the cost to our companies who run occupational pension schemes is in the order of 6 per cent. of their profits which relates to some 12 to 16 per cent. of payroll costs. Any form of harmonisation will lead to an increase in our taxes to prevent what our neighbours regard as unfair competition. We should be in no doubt that it is our own diligence and forethought that has left us in the fortunate position of having some £850 billion stashed away in trust funds to pay at least part of the demographic bill that awaits us all. Let there be no mistake, this additional charge will compound the problems of those Euroland members who have fudged their way into convergence.

Now there is another plot to eliminate UK competitiveness with the withholding tax at an extortionate rate of 20 per cent. It is designed to damage the City of London and attack its "unfair" position as the leading centre of finance houses in Europe. It seems to be a case where they are cutting off our nose in order to spite their face. It is clear that the tax will drive business away from Euroland to Switzerland, the United States and the Far East.

Meanwhile, the droit de suite is being proposed by QMV. We are told that Her Majesty's Government are fighting it tooth and nail. Can the Minister enlighten us? Is he willing? It is not so much the effect of the euro on our economy that concerns me at the moment. It is the effect the euro has on our partners' aims and ambitions towards ever greater union and ever greater pressure on the UK to compromise its position in world affairs which concerns me.

8.27 p.m.

Lord Taverne

My Lords, as the noble Lord, Lord Desai, pointed out, there is a case within a single market for some harmonisation of taxes in some fields. It makes sense to have the same general system of value added tax within a broad range of rates. We would gain from some upward harmonisation of excise duties. It makes sense if we have taxes on the environment, but they should be European Union-wide. As I mentioned the other day, an energy tax could lead to a reduction of employers' taxes, increased GDP and more jobs.

It would make sense to have similar treatment of pensions so that fund managers in Britain could export their expertise to the Continent. There is some sense too in harmonisation of certain aspects of corporation tax. I do not see how Members of this House can object, quite rightly, to the subsidies that are paid to industry on the Continent and at the same time feel that there is no case whatever for looking at special incentives and corporation tax to promote foreign investment. There is a danger of ever bigger subsidies to attract foreign investment. Whether it is done by tax or by grants does not make much difference.

However, the Commission is wrong in its general argument that there has been a reduction of corporation tax and that that has led to higher labour taxes. The Commission wishes to reduce non-wage costs. But the main reason for high non-wage costs is the way in which social security is financed on the Continent. That implies a need to move towards more private pensions. Again, it should be noted that the share of corporation tax has been steady over recent decades. It is a small proportion of GDP. Although the UK has the lowest rates, its yield from corporation tax is average for the European Union as a whole. In any case, further harmonisation of corporation tax structure is enormously difficult, as one found from the Ruding report some years ago.

Finally, I wish to mention savings. Again, there are disadvantages in a single market if you can avoid or evade tax—quite separate questions—by investing in other countries. We have a 20 per cent. withholding tax in general and there would be advantages if that were more generally applied. But I accept the arguments which have generally been advanced against the proposals coming from the Commission on the withholding tax. It should perhaps pay more attention to its declared aim of preserving the competitiveness of European financial markets. The Commission could certainly learn from the German experience when that country unilaterally imposed a withholding tax and lost billions, or certainly huge amounts.

It is noteworthy that a recent report by the Promethée, a leading, highly regarded French think-tank, makes very much the same arguments: that this is a matter which cannot be considered solely within the European Union; it must be and should be considered within the OECD. The report refers to the danger of a loss of business across the Alps, or, indeed, across the Atlantic. It is not something which concerns only us; it is a general concern. The Commission has said that it will consult—and no doubt it will—and I am sure that the United Kingdom will be extremely effective in making its special representations.

8.31 p.m.

Lord Higgins

My Lords, the House will be grateful to my noble friend Lord Willoughby de Broke for raising this issue. In the time available, one can do really no more than ask questions. It is not an occasion for detailed analysis.

As I understand it, the European Union finance ministers were meeting today. Has anything emerged from those meetings to shed any further light on the Government's policy which, to say the least—despite some of the Minister's previous remarks—remains shrouded in mystery. He has sought to distinguish between the question of harmonisation of taxes generally and, in particular, concentrated on the question of whether there are harmful tax practices on which there might reasonably be a degree of harmonisation. But a definition of what is harmful is something which we still await.

My understanding is that the European Union working group has drawn up a code of conduct which contains 85 such dangerous practices. These have not been revealed to us. Can the Minister tell us whether he will publish that list? Clearly it is impossible to debate it, and great uncertainty is created if we do not have such a detailed list—if, indeed, it exists.

Let me take two examples. One of the suggestions is that the shipping industry is involved. I was much involved in that particular set of amendments. We have to recognise that the shipping industry is a worldwide industry and not simply a European industry. Harmonisation in Europe may damage our position worldwide. A similar situation exists in the art market. The effect of harmonisation in Europe may damage our competitive position in the worldwide market.

Many noble Lords have spoken about the problem of withholding tax. The issue is so clear that one really ought not say "Well, we may negotiate some compromise or fudge or whatever". We have an interest in this matter in a way which other European countries do not because of our dominance in the market. We ought to make it absolutely clear that, if necessary, we will use the veto and that it is not up for negotiation. That is a point on which the Minister has not made the position clear.

In addition, it is absolutely clear that there is a move towards harmonisation on value added tax. Previously the Minister has indicated that he does not think that this is so. That is not my understanding of reading the documents. Whatever one may say about rates, the crucial point as far as we are concerned—I steered this tax through the House of Commons originally—is the preservation of zero rating. Can the Minister assure us that zero rating will be protected? Certainly after all the fuss the Government made about the reduction in the rate of tax on fuel, one would have thought that they would have a line and again make it clear that zero rating is not negotiable.

The constant fudging of the issues is dangerous. We need an assurance from the Government that they will use the veto when it is clearly in our national interests to do so.

8.34 p.m.

Lord McIntosh of Haringey

My Lords, the Government approach European Union tax issues in the same way as they approach all European issues, and indeed all tax issues—with a hard-headed assessment of what is in Britain's economic interest. The noble Baroness, Lady Ludford, used the word "pragmatic"; I am happy to accept that.

The Government have made it clear that we shall not support any action at European level that will threaten jobs or the competitive position of British business. Any tax proposals will need to pass that fundamental test. The United Kingdom will not sign up to anything that harms investment and jobs or damages the competitive position of Europe.

The noble Lord, Lord Willoughby, and others, sought to cast doubt on what seems to me to be an absolutely clear and unequivocal statement by suggesting that there is something dangerous about the definition of what is fair and unfair tax competition. The position of those who hold the veto is a fail-safe position. It is for us to decide what is acceptable to us and what is not acceptable. If it is not acceptable to us by our own definition, we shall not allow it.

The Government will engage positively with our European partners. It is far better to engage in the debates and shape the outcome than to sit without power on the sidelines. The Government will discuss proposals constructively in our regular contacts with other member states, but we shall always judge proposals by what is in the national economic interest.

We are in favour of tax competition, not tax harmonisation. And here I pay tribute to the noble Lord, Lord Harris of High Cross, who gave a principled exposition of the need for tax competition rather than tax harmonisation. I entirely agree with him. The way forward for Europe is promotion of economic reforms and competitive markets, not tax harmonisation. Indeed, I said as much in my reply to the noble Lord, Lord Pearson of Rannoch, on 5th October.

However, where there is a case for action at the European level on tax, we will not be afraid to argue for it. In particular, we will continue to work to support effective action to tackle harmful and discriminatory tax practices. I say to my noble friend Lord Shore, we are not ashamed of the word "harmful". It can be well explained and properly discussed, and if we do not like the results of the discussions we shall not allow them to go ahead.

The Government are in favour of concerted action at European level to deal with unfair tax practices that distort real competition, to close tax loopholes and to cease unfair state aids and unfair tax breaks wherever they occur. The Government can deliver those promises. Questions of tax require unanimous agreement, so there is no question of tax changes that we do not support being imposed on us by Brussels.

That is without prejudice to the answer, which was literally correct, that I gave to the noble Lord, Lord Tebbit, on 2nd November. If a directive has been accepted unanimously it has to be enforced by Parliament—of course that is the case—but we have made it clear that British taxation will be decided by the British Chancellor of the Exchequer when he presents his Budget to Parliament. As I have already explained, we have the veto on any tax proposals that would counter that proposition.

We are not isolated in Europe in our stance on tax. UNICE, the European employers' organisation, in its report on company taxation in the single market, stressed that it did not think that full harmonisation of company taxation will ever be needed in the European Union. Just last week, the president of the federation of German industry, Hans Olaf Heukel, stressed that we should not try to eliminate competition between countries, and high corporate taxes across Europe cannot be the solution.

The Prime Minister and the Chancellor of Germany issued a common statement. They support tough action to prevent harmful tax competition and do not support a unified system of corporation tax. There is no question of harmonising income tax, and they will not accept proposals that destroy European Union jobs or damage European Union competitiveness.

I have discussed the principles of the Government's approach. Let me turn now to the tax measures which are under discussion and, indeed, the areas in which there are no proposals. There is no proposal for harmonisation of income tax in the European Union. There is no proposal, despite what the noble Viscount, Lord Trenchard, and my noble friend Lord Shore say, to harmonise corporation tax.

The Government have made it clear that they support EU action to tackle harmful tax practices. These distort competition in the European economies. As my noble friend Lord Desai said, other member states' harmful tax practices damage investment in the UK. Tackling harmful tax competition will create the preconditions for healthy competition. The code of conduct referred to in debate tackles business tax measures that may be harmful, and I am pleased to hear that it will be considered by the European Communities Committee. But it does not deal with tax harmonisation.

The code is being taken forward by the Code of Conduct Group chaired by the Paymaster General. Aspects of the UK system, together with those of other member states, are being considered by that group. There are five UK measures on the initial list being considered by that group. I say to the noble Lord, Lord Higgins, that although the total may be 85 at present, they are confidential submissions to ECOFIN by individual member states and it is not possible to publish them. I can tell the noble Lord about the UK's submissions. They relate to the following: international headquarter companies (although that matter is to be abolished in April of this year); special tax measures for the film industry; enterprise zones; 100 per cent. first year capital allowances for small and medium enterprises in Northern Ireland and roll-over relief on the disposal of ships. The fact that these are on the initial list of measures that are being considered by that group does not mean that they are harmful. The view of the UK is that none of these measures is harmful within the meaning of the code and the UK will submit a robust defence of the measures.

I turn now to the taxation of savings. The rationale of the draft directive is the prevention of tax evasion. The Government are committed to effective international action to prevent tax evasion and protect the competitiveness of the financial service industries of the United Kingdom and Europe. We believe that exchange of information on a global basis is much more likely to be an effective solution to the problem of evasion than the compromise formula that is currently on offer. We share the reservations expressed by the noble Viscount, Lord Trenchard, about withholding tax. But it is not only the United Kingdom that has problems in this area. There is a long history of difficulties in finding acceptable solutions. We shall negotiate in good faith to try to find a solution that is acceptable to all, but we have made it clear that any future directive must exclude the eurobond market and that the proposals as currently drafted are unacceptable and if necessary we would have to veto them.

A number of noble Lords, including my noble friend Lord Stoddart, said that they were confused. The noble Lord, Lord Higgins, said that the issue was shrouded in mystery. I am sorry to say that the confusion is in the minds of the popular press and noble Lords, not at all in the statements of the Government. We cannot be clearer than we have been.

On the subject of indirect tax, shortly before Christmas the Commission made a proposal to extend the temporary 15 per cent. minimum standard rate and introduce a new 25 per cent. maximum standard rate to the end of this year. That would not affect the UK's standard rate of 17.5 per cent. Like my noble friend Lord Desai, we support a minimum rate but we do not believe that there is an overwhelming case for a maximum rate. In any case, discussions have already indicated that a number of member states cannot accept the introduction of a maximum rate. The probability is that there will simply be agreement to renew the minimum standard rate first agreed by the previous government. Further, there is no risk of the United Kingdom being forced to give up its zero VAT rates on food or children's clothes. All EU VAT matters are subject to unanimity. Therefore, we can guarantee that we shall honour our manifesto pledges.

The Commission has also tabled a draft directive on energy products. This suggests the replacement of existing mineral oils duty directives with a new Community framework for the taxation of all energy products. The Government have made clear that they cannot accept for social policy reasons any obligation to put new taxes on the domestic consumption of gas, coal or electricity.

A number of specific points have been made in the debate to which I shall try to respond. The noble Lord, Lord Hindlip, touched on the art market. He is aware—because we have corresponded upon and discussed the matter—that we are very keen to extend the derogation on the minimum agreed by the previous government or preferably to level down to other countries. What we shall not do is level up to 5 per cent.

The noble Lord, Lord Willoughby de Broke, and my noble friend Lord Shore referred to the European Court of Justice. The ECJ cannot impose harmonisation of personal or corporate tax rates or introduce any common tax regime in areas where member states have not agreed one. These decisions are for governments and are subject to unanimity. The noble Earl, Lord Clanwilliam, said that on pensions water had flowed under the bridge. No water has flowed under the bridge; it has flowed only through his mind. I gave cast iron assurances last time we debated this matter and I stick to them.

The policy of the Government is clear. We shall judge every issue on its merits as determined by Britain's national economic interest. We shall engage constructively with our European partners but shall not accept a proposal if it is not in the national interest. We shall ensure that tax decisions continue to be taken unanimously. In "The Hunting of the Snark" the Bellman in the end was forced to say: What I tell you three times is true". I have told noble Lords far more than three times.