European Tax Harmonisation (Veto) Bill [H.L.]

HL Deb 18 June 1999 vol 602 cc592-620

2.8 p.m.

Lord Waddington

My Lords, I beg to move that this Bill be now read a second time. The purpose of this Bill is to require this and any future government to obtain the approval of Parliament and the public before agreeing to any proposal to limit further our right in Britain to decide on our own taxes and our own tax rates. That does not seem to me to be a very unreasonable requirement.

Not so many years ago it would have been thought unthinkable that any independent sovereign country would give up its right to levy whatever taxes it thought appropriate. A country's freedom to decide what to tax, and how much, is the bedrock of national sovereignty, one of the hallmarks of a free independent nation. The power of our elected representatives to decide what tax the voters should pay is a fundamental part of our democracy; and if this or any future government really are persuaded that there would be some advantage for the British people in our agreeing in some particular area to accept further inroads into our sovereignty, and into our democratic rights, they should come before the country to explain why and try to convince the public of their case.

The Bill comes before the House only a few days after the European elections. If the results show anything, they show that in Britain there is a deep-seated hostility to our giving up the pound, and that the brainwashing—the public money spent to convince people of the inevitability of our joining the euro—has had only limited effect, that people see nothing extreme or anti-European in keeping our own currency and something very extreme in the ambitions of others to surrender our national currency and monetary institutions. They certainly see that there is something terribly defeatist and absurd in the notion that the world's fifth largest economy, a country with membership of the European Union and free access for its goods into the European Union but with worldwide interests, cannot keep its own currency, while countries like Canada, New Zealand and Australia can keep theirs.

Most people can see that although it is perfectly possible to have a single currency and still have different tax levels—just as, for that matter, it would be possible for us to keep the pound and have the same taxes as others—the single currency in Europe is but a step to full economic and monetary union. There can be no disguising that fact, and if noble Lords want evidence of that, they need only look at the words of the president of the Bundesbank when he said recently, The European Currency will lead to member nations transferring their sovereignty over financial and wages policies as well as in monetary affairs. It is an illusion to think that States can hold on to their autonomy over taxation policies".

But I think that many people do not yet realise that even outside the single currency our right to pursue our own tax policies is under threat from the plans within the European Union to harmonise taxes throughout the Community and from the Government's pathetic failure to respond firmly to this threat. In fact, while the Government have protested their opposition to tax harmonisation. their actions have belied their words; and they have completely undermined what they say is their own position not just by their preparations to take us into the euro, but by their twists over the Commission's draft directive on a withholding tax, which is already threatening to drive the London eurobond market to Switzerland, by their leading role in the Code of Conduct Group on Business Taxation and their hearty endorsement of the EU's plans to do away with so-called unfair tax competition, and by their support for the federalist designs of their socialist partners on the Continent.

First, the withholding tax, where almost every day a new spin is being put on the Chancellor's step-by-step approach towards what looks like being an abject surrender. Let us go over the history. At first the Chancellor told us: The United Kingdom will not accept a directive that requires every member state to impose a withholding tax". A few weeks went by and then we were told that the Treasury was in discussion with the industry on a compromise which would limit the directive's effect to holdings of less than 40,000 euros. By the 25th May there seemed to be better news, with Alastair Campbell letting it be known that there was a growing optimism in Whitehall that the withholding tax would slip off the agenda at the ECOFIN meeting of that date. But for once Mr Campbell was not very successful in his spinning, and the very next day the newspapers were reporting that Germany was satisfied that Britain was not fundamentally opposed to the directive, and would soon strike a compromise. Mr Eichel, who had presided at the ECOFIN meeting, was saying: My feeling is that in principle there is a willingness to compromise". How could Mr Eichel have got that impression if Mr Brown had done and said nothing to warrant it? The answer is that he could not, and that Mr Brown had done something to warrant it. It turns out that he agreed to draw up a paper detailing ways in which a directive could be altered not to remove but to limit its impact on the London market. That was only a week or so after he had told the House of Commons that Britain would not accept any directive requiring member states to introduce a withholding tax.

It is about time that there was less of this business of telling one story in Westminster, and another in Brussels. It is about time that Mr Brown backed up his statement to Parliament, that he would accept no directive, with a clear indication, which he has not given, that the veto will be used.

Let us look at the plans to do away with so-called unfair tax competition. Unfair tax competition, which of course has nothing to do with tax evasion or illegal activities such as money laundering, is a concept beloved by those whose own improvidence and profligacy prevents them from matching the tax incentives offered by their neighbours to businesses looking for a congenial environment in which to operate. In the European context, it has been invented by Germany as a device to staunch the investment flight from Germany to states with lower labour costs and more friendly tax regimes.

Our rates of tax are below the European average. so when a country such as Germany talks of unfair tax competition, it is looking at Britain not as a fellow victim of unfair competition but as the villain of the piece. In short, Germany looks upon tax harmonisation as a way of undermining the advantage we now have as a result of lower tax and lower social security contributions, which allow us to attract business that it cannot.

The chosen instrument to bring about this harmonisation is the European Union Code of Conduct Group, chaired by Dawn Primarola, and set up in May last year to decide whether any business taxes or reliefs in member states constituted harmful tax competition.

Well, we know how Jacques Santer described the British decision to sign up to the code. He said, last November, that Britain's signing up to the code had the effect of nullifying the British veto and was a device to side-step the European Union treaties that require unanimity before tax harmonisation can be legally enforced. Perhaps the Minister will tell us in due course whether Jacques Santer was right or wrong on that, but surely we can all agree that the fact that he, in his capacity as President of the Commission, looked upon it as a device to bring about tax harmonisation is a very good reason why we should treat it as such, and not as the innocent exercise that the Government would have us believe that it is.

So where have we got to with this exercise? We may well ask. For the Government, which are for ever telling us of their dedication to open government, did their level best to conceal what was going on from the British people. Despite constant questioning in Parliament, the Government refused to disclose the list of taxes and reliefs under consideration by the Code of Conduct Group. The full extent of the exercise became public only after someone went to a Dutch Government website, and we then learnt that 185 tax measures and reliefs had been singled out for possible harmonisation or elimination.

We discovered that the ground was being prepared for British surrenders on capital allowances for small and medium-sized businesses in Northern Ireland; incentives for the film industry; roll-over relief on the disposal of ships; regional incentives such as enterprise zones; and various measures affecting the Channel Islands, the Isle of Man and the Dependent Territories. And now I read that we are in the ludicrous position of the EU committee chaired by a UK Treasury Minister also having in its sights some of the flagship measures recently introduced by Mr. Brown, which he said were measures necessary to boost Britain's productivity. I refer to 100 per cent capital allowances for scientific research and 40 per cent first-year capital allowances for small businesses.

What has finally given the lie to the Government's claims that they are against tax harmonisation has been their unstinting support for the declared federalist and tax harmonisation designs of their comrades in the socialist parties in Europe. Mr. Blair did not merely give token support for the socialist manifesto for Europe, The New European Way; the Chancellor's own adviser, Mr. Ed Balls, drafted it—including the commitment to deeper European integration, including tax harmonisation. Mr. Robin Cook, the Foreign Secretary, was the co-author with the leader of the French socialists of the European Socialist manifesto in the European elections. Mr Cook and his friends called for, co-ordination of economic policy, and a reduction in the use of the veto to block new European policies".

I do not want to weary the House with too many quotations, but it is quite ridiculous to argue that tax harmonisation is not high on the list of priorities of most key figures in the European Union and the Commission. When the former commissioner of the single currency was asked, "Will tax harmonisation eventually extend to VAT and personal taxes?", he replied, "Why not?". The Italian Prime Minister announced last November, In the age of the Euro, harmonisation of taxes is a necessity". I see that M Jospin, in his manifesto in the European elections, calling for EU-wide tax harmonisation, said: we want a tax harmonisation plan covering capital [dividends, capital gains, withholding tax] and corporation tax, with the abolition of the national veto in the Council of Ministers". As for Sr Prodi, he told assembled MEPs after his endorsement as president of the Commission that, The single market was the theme of the 80s, the single currency was the theme of the 90s, and we must now face the difficult task of moving towards a single economy and a single political union". Finally, we come to Chancellor Schroeder. Mr. Blair said the other day that Chancellor Schroeder was not one of these muddled-headed federalists, he did not want a single Europe; and that he had never met anyone who wanted anything of the sort. Chancellor Schroeder, who has talked of the single currency as a stepping-stone to political union, said that doing away with qualified majority voting on tax issues was the official position of the German Government. When he says that, he is pursuing an agenda which in his eyes flows remorselessly and inevitably from the goal of ever-closer union enshrined in the Treaty of Rome, but which is also of particular and immediate interest to a Germany determined to protect itself from the consequences of its own foolish taxation policies.

It is absolutely plain that the abandonment of the right to set our own taxes—the harmonisation for which these leaders in Europe and the European Commission yearn—can only mean that our taxes overall will rise to European levels rather than that European taxes will come down to ours. That means our taxes rising by at least one sixth and our business and top rates of income tax going up. Incidentally, if experience is anything to go by, as our taxes as a proportion of GDP rose to European levels our growth rate would fall and everyone would be the poorer. The message could not be plainer: if Britain wants to keep low taxes and continue to prosper it must stay outside Euroland, oppose the single currency and resist further attempts to transfer the power to tax from Westminster to Brussels.

I have no doubt that in reply the Minister will repeat what he said in this House: I do not believe that the threat … of tax harmonisation exists".—[Official Report, 20/1/99: col. 662.] He will say that the Bill is unnecessary and that the Government have either no intention of giving up the veto on tax matters or will give up the veto only when it is clearly in the country's interests to do so; and that it ill-behoves me to complain about tax harmonisation measures because the previous government agreed to some, as if the follies of the past justify equal foolishness in the future. While the Conservative government agreed to certain minimum rates of VAT, it is only under this Government that European tax harmonisation has extended to direct taxes; and it is only under this Government that harmonisation is being advanced as a move towards (to quote Sr Prodi) a single economy and a single political union".

If the public want it, well and good, but it should be their choice. I commend the Bill to the House.

Moved. That the Bill be now read a second time.—

(Lord Waddington.)

2.27 p.m.

Lord Stoddart of Swindon

My Lords, I congratulate the noble Lord, Lord Waddington, on bringing forward this Bill, although I do not agree with it entirely as I shall show. I also congratulate him on his speech. It is quite clear that, possibly for the first time, the noble Lord has listened to what people like myself have been saying for a very long time.

Lord Waddington

My Lords, I can assure the noble Lord that I have been listening to him for a very long time. I have been coming round to the view that the noble Lord was right long before I realised it.

Lord Stoddart of Swindon

My Lords, I thank the noble Lord for that admission. I am very pleased to have taken part in his tutoring as to the real meaning of the European Union. I and other noble Lords, for example my noble friend Lord Bruce of Donington and the noble Lord, Lord Pearson, have given warnings every time we have signed a new treaty, from the Treaty of Rome to the Single European Act. My noble friend Lord Bruce of Donington and I opposed that Act on behalf of the Labour Party. We warned that it would lead to huge increases in the power of Europe and the European Commission. but our warnings were ignored. We were also firmly opposed to the Treaty of Maastricht because we knew that that was the foundation of what we now have; namely, tax measures relating to economic and monetary union to build a country called Europe, which I and the noble Lord, Lord Waddington, do not want. I do not believe that the people of this country want it either.

I do not agree with that part of the Bill which calls for a referendum. I believe that that would undermine the position of Parliament; and that is precisely what I would not wish to do. The referendums would be expensive nightmares and would undermine the basic power which gives Parliament its sovereignty: that is, the power to raise taxes. We have to be careful that we do not undermine the power of the House of Commons to raise taxes and to withhold supply.

It is clear from Answers to my Written Questions on the subject of the withholding tax which was mentioned by the noble Lord, Lord Waddington, that Ministers now have a device whereby they, and not Parliament, decide on the taxes we pay. That is altogether reprehensible.

I must weary the House with my Questions which were answered on 27th May. I asked, (a) whether parliamentary scrutiny arrangements can prevent [the Government] from agreeing to any proposal by the European Council for a withholding tax; (b) whether, following such an agreement, there would be a breach of European Community law if the necessary tax legislation was not enacted in the United Kingdom; and (c) whether such a breach would undermine both Parliament's control of supply and the constitutional principle that one Parliament cannot bind its successors". This was the Answer from my noble friend who will reply to this debate. My noble friend Lord McIntosh of Haringey stated: There are long-standing government undertakings to both Houses of Parliament that they will not normally vote in favour of (or in some cases abstain from voting on) proposals in the Council of Ministers which are still subject to the established parliamentary scrutiny arrangements. The undertakings are embodied in a 30 October 1980 Resolution of the House of Commons (updated on October 1990). A failure to give effect to an obligation to transpose the provisions of an EC Directive would he a breach of our obligations under the EC Treaty, and would render the United Kingdom liable to infraction proceedings under Article 226 (ex-Aricle 169). The European Communities Act 1972 provides for effect to be given in our domestic law to obligations of the United Kingdom under the EC law, including, where necessary, for those obligations to override inconsistent provisions of our domestic law" —[Official Report, 27/5/99; col. WA 100.] That Answer indicates clearly, first, that without the consent of Parliament Ministers can agree to measures which then become binding on Parliament unless they repeal the European Communities Act 1972. That is the position we have.

Members of the House of Commons should be hopping mad about it. They should be having another civil war about it. The civil war was fought about whether the executive, the king, would be able to raise and levy taxes which had not been agreed by Parliament. The king was beheaded. But now we have the European Commission and the European Union.

What that means is that Ministers, despite the undertaking in 1990 not to vote in favour or abstain if EU proposals are still subject to parliamentary scrutiny arrangements, can, once scrutiny is completed, go ahead and agree to taxation proposals in the EU which Parliament could not undo at any time without being in breach of European law.

Thus, two basic tenets of our constitution are set aside at one fell swoop: first, that Parliament can withhold supply; and, secondly, that one Parliament cannot bind its successor unless it first repeals the European Communities Act 1972. I would love it to do that because it would set this country free to pursue its goals in the global environment, free from the depressive and depraved regulations which emanate from Europe and impose on this country a situation which does not suit its people, history, institutions or heritage.

If we are to remain in the European Community—and I do not believe that we should—and at the same time protect the power of Parliament, a constraint must be put on Ministers to ensure that they do not usurp the power of Parliament over granting supply and raising taxation.

My noble friend will no doubt protest that Ministers would not dream of trying to usurp Parliament's powers. Of course I would believe him. I respect him and I know that he would not want to mislead me at all. But, of course, some of us, perhaps including my noble friend, remember the sixth directive on indirect taxation which still hangs over British taxpayers like a financial sword of Damocles, agreed to by a Labour Government

Then, of course, there was the agreement by the previous Conservative government, in addition to modification of the rules relating to VAT, to abolish duty free goods, which could not be saved by either the Prime Minister, despite his best efforts, or Parliament. The British Parliament could not repeal the directive; it could not tell British people that they could continue to have duty free goods. They will be phased out at the end of this month. So Parliament has lost its right to give a tax concession to its own taxpayers.

Therefore, we can see that the Government cannot be trusted on this subject—I trust my noble friend, but I do not trust governments—because they have already taken action either by design or shear stupidity to undermine the position of Parliament. What I find very worrying, and I hate to say it, is that Mr Blair appears to believe that Labour MPs should act as ambassadors for the Government rather than as representatives of the people checking the excesses of the Government and holding them to account, especially in regard to expenditure and the raising of taxes.

MPs are servants of their constituents; they are not ambassadors for governments, whether they be Tory, Labour or any other kind. The very freedoms of this country depend on Members of Parliament being prepared to defy governments—their own government if necessary—to ensure that the rights and duties and sovereignty of Parliament are upheld. I hope that will be remembered and that my right honourable friend the Prime Minister will reconsider his strictures on Labour MPs that they should be ambassadors for his Government.

For the reasons I have mentioned, I cannot support the Bill in its entirety. However, I believe that it should be given a fair wind today; it should be given a Second Reading and, if necessary, amendments can be made at later stages.

2.39 p.m.

The Earl of Dartmouth

My Lords, I thank very much the noble Lord, Lord Waddington, for bringing forward this very important and interesting Bill. I have just been presenting myself to the electorate on a platform of "In Europe, Not Run by Europe", a phrase which some noble Lords may have heard a few times before. The reason why that phrase was successful is because to a very large extent we find ourselves in the present situation of being in Europe and run by Europe. There is perhaps no better example than the continuing pressure from the European Union for what it terms tax harmonisation. The Council of European Finance Ministers, chaired by our very own Gordon Brown, has already called for an end to what they call harmful tax competition.

There is a very good example not very far from these doors of what happens when we acquiesce in that. About six months ago 2.5 per cent VAT on art imports and exports was levied on the London art market. The effect of that has been the near termination of the London art market as an international entrepot and trading centre. Far from the business going to France or to Germany, which is probably what they would have liked, the business has been driven, and is being driven, outside the European Union entirely to Geneva, Monte Carlo and New York.

The imposition of the tax, which is droit de suite, will kill off what is left of the international element of the London art market almost entirely. Unfortunately, that is what happens when we allow taxes to be imposed on us from Europe.

The noble Lord, Lord Waddington, has drawn attention to the European Union code of conduct group chaired by a British Treasury Minister, Dawn Primarolo. The group has been called into being to review some 200 tax breaks, all of which are designed to lower taxes. The code of conduct group is there to stop what is called harmful tax competition. It is apparent from a Parliamentary Question and a reply dated 14th June—therefore it is fairly hot off the press—that eight of the tax breaks being examined are specifically British.

My noble friend enumerated them himself, so I will spare noble Lords the full list. But I make the very important point that four of those tax reliefs were introduced by the Government. They are—I stand to be corrected—100 per cent capital allowances for films; for scientific research; 100 per cent capital allowances for small and medium enterprises in Northern Ireland; and 40 per cent capital allowances for small and medium enterprises in the rest of the United Kingdom.

The decisions of the code of conduct group are not binding. However, the Government have said that they will abide by the conclusions of the group. In effect, therefore, the decisions of that group are binding. In terms of our national sovereignty that is an example of our present situation, which is being in Europe and run by Europe.

We have the bizarre paradox that a group chaired by a Treasury Minister will very likely have to negate tax concessions made just a few months earlier by the Government of which he is a member. I look forward to the Minister responding to that point.

Another example of action over which we have had no influence at all is the abolition of duty free. That was touched on with customary eloquence by the noble Lord, Lord Stoddart. Britain needs to have tax competition. That means low taxes and, in consequence, low unemployment. What brings international investment to our country is principally, among other factors, low taxes. It is not the Government's ability to get the German Chancellor over to a campaign meeting, nor is it the Government's commitment in principle to abolish the pound. It is low taxes and costs which bring investment here.

I turn now to the matter of indirect taxes, which is an area where we do have control. Indirect taxes, taken as a whole, are much higher here than in continental Europe. There is a strong argument for tax harmonisation, but it is to harmonise the levels of indirect taxes here and in continental Europe. In fact, the Government are busy deharmonising indirect taxes with the level of indirect taxes in the euro-zone. Specifically, they have increased taxes on cigarettes and petrol and they have failed to reduce taxes on whisky.

There is a free market to some extent, which has resulted in widespread smuggling and much lower revenue for the Exchequer. If there is a desire to harmonise taxes it is concentrated on indirect taxes, not on direct taxes. Furthermore, the heavy impost of indirect taxes on diesel fuel has placed heavy burdens on the road haulage industry. That has placed British road hauliers at a specific cost disadvantage to their competitors in continental Europe. Many hauliers will be driven out of business as a direct consequence of the Government's commitment to deharmonise indirect taxes; that is, to raise taxes here in relation to the level in continental Europe.

The British Parliament's ability to set its taxes at its own rate is a fundamental tenet of sovereignty. Indeed, that is what the English Civil War was fought over. I have some slight embarrassment in making this point, as my direct ancestor, the first Baron Dartmouth, was military governor of Oxford, the Royalist capital in the Civil War. So I am arguably estopped from making this point, but that does not make it any the less valid.

In conclusion, I make the point that tax harmonisation removes our competitive advantage in world markets. Should we adopt euro-zone levels of taxes, it would result in this country having euro-zone levels of unemployment. We must retain at all costs our low tax, low cost, low regulation, high employment, high growth economy. That means not succumbing to tax harmonisation, and, to coin a phrase which your Lordships may have heard before, being in Europe and not being run by Europe.

2.47 p.m.

Lord Nunburnholme

My Lords, once more I offer my congratulations to the noble Earl, Lord Dartmouth, on making good, hard points which he rammed home, and that is what must be done.

Once again, I must ask your Lordships to concentrate, as I did some six months ago, on the 20 per cent withholding tax. We should not forget also that the late departed Lord Denning warned strongly against the perils of the European Union. There is no doubt that Lord Denning will go down in history at the same level as F.E. Smith, the first Earl of Birkenhead and Marshall-Hall. He was in that category.

That tax harmonisation is seemingly to placate Germany which wishes to put a stop to money flooding across its border into tax havens such as Switzerland and Luxemburg. It will be an entirely fruitless exercise as the avoiders will simply send their money to Jamaica, the Caribbean or any other untouchable tax haven.

But no. That is not what it is about. That is not the purpose. The purpose is to weaken the City of London, the financial centre of Europe, and its eminence as a global financial centre. Germany wants that to be in Frankfurt. The USA would not be exactly displeased either. It knows that no sensibly minded investment adviser will tie his monetary assets into the euro, with its ever-changing bureaucracy and social chapter after social chapter, apart from its instability.

Have we any reason to believe that this Government, or any other future Europhile government, will not give way on tax harmonisation? They have surrendered on everything else, for example the fishing industry and the heavy art market, which has gone to New York, setaside, totally contrary to the interests of this nation—we are net food importers. Why set aside 15 or 17 per cent? What is the point? The list goes on and on. What will come next? North Sea oil?

The directly apparent earnings of the international bond market are £2.1 billion sterling per annum. That will be heading across the big pond and 'with it a further estimated £4 to £6 billion ancillary earnings; it may even be higher. That alone will double our cost of being in the EU. It is but one facet of the harmonisation and with it the 100,000 jobs which will go.

The incumbent of 11 Downing Street is known as the Chancellor of the Exchequer. He will always retain the title "Chancellor" but he will have to drop "of the Exchequer"; there will not be one. I could ask how long is this charade going on, but I do not have to. Clause 4 of the Communist Party manifesto and Clause 4 of the Labour Party manifesto are, as the Portuguese say, igual; that is, they are equal.

It is the intention of our dearly beloved president to tie his country into a seemingly socialist authoritarian state using the word "inevitable" as a propaganda tool. We can come out tomorrow and, with Europe's credit trade balance with us, there is nothing they can do about it. Apart from that, at present we pay the piper. The pro-Euros are being discourteous, to say the least, to the sovereignty of this nation. I could use a stronger word. This is farcical fiscal ineptitude.

2.53 p.m.

Lord Monson

My Lords, I am sorry that my name appeared on the wrong speakers' list. Nobody seems to know quite how that happened. In any event, there has been some chopping and changing today, but it all seems to have worked out all right in the end.

This Bill, so well introduced by the noble Lord, Lord Waddington, is surely sound and desirable in principle. Whatever may be the case in other countries, traditionally in the United Kingdom, as the noble Lord, Lord Stoddart of Swindon, reminded us, only the House of Commons can tax, notwithstanding that certain taxation powers may be delegated to regional parliaments or assemblies or, in the case of rates, to local authorities.

This principle applies both when a tax-raising proposal originates in a government which is formed from the current majority in the House of Commons and also when such a proposal comes from an outside source such as the European Commission via the Council of Ministers.

However, the idea that the electorate's endorsement of the tax harmonisation proposal be sought by means of a referendum is a rather different matter. I have never been opposed to referendums in theory, but in this taxation sphere the time, trouble and substantial costs involved would rarely be justified. In this small respect I differ from the noble Lord, Lord Stoddart; I believe that there might be rare instances where the implications of a tax harmonisation proposal were so grave—for example, if we were being pressed to raise the standard rate of income tax to the continental levels of 30 per cent or thereabouts—that it would indeed justify the expense of a referendum. Exactly how one could amend the Bill to provide for that hopefully unlikely contingency I am not sure, but I am sure it is not beyond the wit of man to do so.

The necessity of obtaining parliamentary approval for more mundane run-of-the-mill taxation changes would concentrate governments' minds wonderfully—that is governments of all political persuasions. Above all, it would encourage them to use the veto more whenever our national interest is threatened, just like other countries do. In employing the veto there is no need for stridency or table thumping, the alleged prospect of which always alarms fastidious bien-pensants; a quiet but firm "No"; a single unrepeated "No" is all that is needed, and nobody can reasonably be offended by such a courteous response.

After all, nobody in government or establishment circles is publicly nor, I suspect, privately, raging against the one or two Benelux countries for insisting upon the abolition of duty-free—mentioned several times this afternoon—after 30th June, against the wishes of the other 13 or 14 countries. Almost nobody—this is both surprising and significant—castigated Spain for threatening to veto the accession of Finland, Austria and so forth unless the Spanish were awarded more structural funds, more extensive fishing rights and so on; in other words it was accepted as normal and proper for Spain to act out of pure self-interest. What is right for Spain must be right for all other EU countries, including our own.

On the more specific issue of tax harmonisation, one cannot see Greece ever agreeing to modify the extremely favourable tax treatment accorded to the Dodecanese Islands to compensate them for their relative remoteness from Athens—favourable treatment which sits ill with single market principles. Yet it is difficult to imagine the French, Germans and Belgians seriously criticising the Greeks for sticking to their guns on this matter.

Apart from being good for Britain, this Bill, shorn perhaps of all or most of its referendum provisions, would actually make the Government more popular with the electorate. In this week of all weeks, such a prospect must be enticing to them. For that, and for more disinterested reasons, one hopes that they will give it serious consideration.

2.57 p.m.

Lord Pearson of Rannoch

My Lords, I, too, believe this to be an excellent Bill. I hope it will be given a fair wind.

I also find myself somewhat in agreement with the noble Lord, Lord Monson, and somewhat doubtful of the strictures of the noble Lord, Lord Stoddart, against the referendum in this case. That is because—I am sure the Minister will want to confirm this when he replies—the House of Commons has already lost the power to tax. That is to say, if the executive agrees to a tax modification or a new tax in the Council of Ministers, then it is illegal under European law for the House of Commons to disagree with it.

Apart from that regrettable fact of European law under the Treaty of Rome, it must be unlikely that if the executive agreed to a tax change in the Council of Ministers in Brussels, the House of Commons would throw it out. If we look at how the House of Commons is composed at the moment, it would not be a line of defence for the people if the executive agreed, for instance, the withholding tax in Brussels. So, in those circumstances, I do think that a referendum would be justifiable, especially as we are not just looking at the withholding tax which is very much on the stocks at the moment; we are also looking at tax harmonisation over a very large area, and massive tax increases will be proposed before long by Brussels.

Lord Monson

My Lords, perhaps I may just correct the noble Lord, Lord Pearson. I did try to make the point that I believe that the referendum should only be used in extreme circumstances.

Lord Pearson of Rannoch

My Lords, I agree with the noble Lord. I am simply saying that the withholding tax would, in itself, to me be an extreme circumstance, given the massive damage it would do to the City of London. Certainly the sort of tax hikes that are on the way if we were to join economic and monetary union, which have been estimated at a minimum of 25 per cent, would, I should have thought, be a matter of sufficient national interest to justify a referendum or, indeed, referenda.

The trouble is that, unfortunately, and thanks to the factual detail and working of the Treaty of Rome, to which successive governments have so foolishly committed us, we are much more committed to running our economy, including our tax policy, on communautaire lines than most people and perhaps the Government realise. For example, we do not actually have an opt-out from EMU. Our long-term ability to avoid tax harmonisation must be in doubt. One ploy which the European Union is contemplating at the moment is to simply make tax harmonisation a requirement of the single market. We have already been told that the single market cannot work without tax harmonisation. If the British Government were not strong enough to veto that development, then tax harmonisation would be subject to qualified majority voting under single market legislation; and that would be the end of that.

I say that we are much more committed to tax harmonisation than we think and that we probably do not even have an opt-out from EMU, against the background that there are at least six articles which were not included in Protocol 11 of the Maastricht amendments to the Treaty of Rome, which has become the new Protocol 25 under the Amsterdam amendments. So even if the United Kingdom continues to exercise its opt-out from EMU, which is contained in that protocol, these six articles would remain in force and their combined effect allows the UK to be taken to the Luxembourg court for unlimited fines if we do not run our economy on communautaire lines. I have no doubt—indeed, I am sure that we will eventually, if we have not left this wretched treaty—that we will be taken to the Luxembourg court for such anti-communautaire activities as exporting unemployment, competitive devaluation or, in the example covered specifically by this Bill, unfair taxation.

It is useful to bear in mind the decision of the Luxembourg court against what my right honourable friend John Major, when he was Prime Minister, thought was our opt-out from the 48-hour week. When one looks at that, one must realise that the value of our opt-out from EMU and from tax harmonisation is extremely 2010questionable. Perhaps I may very briefly quote three paragraphs of a letter which my right honourable friend sent to Monsieur Santer, the President of the Commission, on 12th November 1996, after he thought he had obtained an opt-out from the working time directive when he had insisted on an opt-out from the ELT's social policy, but the Luxembourg court showed that he was wrong. He wrote as follows: "Dear Jacques, My intention in agreeing to the protocol on social policy at Maastricht was to ensure that social legislation which placed unnecessary burdens on businesses and damaged competitiveness could not be imposed on the United Kingdom. The other heads of state and governments also agreed that arrangement, without which there would have been no agreement at Maastricht". That is quite an important statement. The letter continues, However, in its judgement today the European Court of Justice has ruled that the scope of Article 118A is much broader than the United Kingdom envisaged when the article was originally agreed as part of the Single European Act. This appears to mean that legislation which the United Kingdom had expected would be dealt with under that protocol can be adopted under Article 118A. That is contrary to the clear and expressed wishes of the United Kingdom Government and goes directly counter to the spirit of what we agreed at Maastricht. It is unacceptable and must be remedied".

My right honourable friend and the previous government then said that they would block everything to do with the Amsterdam Treaty if he was not satisfied on this point. However, he then lost the election and the new Labour Government regrettably signed up to the social chapter, the Amsterdam Treaty and all the rest of it.

I do not propose to weary the House with a full quotation of the articles concerned, but there are a few extracts which I think should be placed on the record to show exactly how serious this situation is for the United Kingdom. The first article I have chosen—which has not been excluded by Protocol 25 under the Amsterdam amendments—is Article 2 of the consolidated treaty on the European Union, loosely referred to as Maastricht. I refer particularly to the first indent thereof. The United Kingdom is committed to this. The article states, to promote economic and social progress which is balanced and sustainable through the strengthening of economic and social cohesion and through the establishment of economic and monetary union, ultimately including a single currency in accordance with the provisions of this treaty". That could not be clearer. We are committed to economic and monetary union in Article 2 of the Maastricht Treaty. Actually that article goes back to the original Treaty of Rome.

I suggest that "the strengthening of economic and social cohesion" must put strong pressure on our tax policies. Article 3 of the same Maastricht Treaty states, The Union shall in particular ensure the consistency of its external activities as a whole and in the context of its external relations, security, economic and development policies". There we are; once again we are committed to communautaire economic policies. However, the position becomes worse and more specific. Article 2 of the treaty establishing the European Community—known as the TEC—states, The Community shall have as its task by establishing a common market and economic and monetary union to promote throughout the Community a harmonious and balanced development of economic activities and economic and social cohesion and solidarity among the member states". There it is again; it is a case of economic and monetary union absolutely with knobs on, but I should have thought that tax policy was included in that.

Article 4 of the TEC states, For the purposes set out in Article 2 the activities of the member states and the Community shall include the adoption of an economic policy which is based on the close collaboration of member states' economic policies". I should have thought that it i s difficult to have al t entirely independent tax policy under that provision.

Article 98 of the TEC states, Member states shall conduct their economic policies with a view to contributing to the achievement of the objectives of the Community as defined in Article 2". The provision in Article 99.1 of the TEC is, I think, inescapable. It states, Member states shall regard their economic policies as a matter of common concern and shall co-ordinate them within the Council in accordance with the provisions of Article 98". I shall not weary the House with the penalties for falling out with this communautaire economic policy, as they are contained in Articles 226–229 of the TEC. They are draconian and allow for unlimited fines in the Luxembourg court, against which of course, in true Euro style, there is no appeal.

I welcome this Bill, but in this matter, as in every other matter concerning the Treaty of Rome, this country is much more bogged down than people think in the quagmire of the treaty into which governments of all hues have so foolishly led us over the past 25 years. I think that this Bill, if passed, would at least give the people a say. which at the moment they no longer have except through an extremely esoteric representation in the Council of Ministers by the executive and not by the House of Commons. It would at least give the people a say in whether they want to suffer the undoubtedly enormous tax increases which this country faces if we are to stay in the Treaty of Rome.

3.10 p.m.

Lord Bruce of Donington

My Lords, I am most grateful to the noble Lord, Lord Waddington, for introducing the Bill, if only as it enables us to refer to the question of the veto—which, I observe from the face of the Bill, does not appear anywhere except in the Title. The Bill is entitled European Tax Harmonisation (Veto) Bill but the term "veto" does not appear elsewhere. However, it affords us the opportunity of discussing the principle beyond it.

Lord Waddington

My Lords, perhaps I may refer the noble Lord to Clause 3 and "tax harmonisation proposal". Subsection (b) states: requires adoption by unanimity in the Council of Ministers". Therefore one is talking only of a tax harmonisation proposal where the Minister has a veto.

Lord Bruce of Donington

My Lords, I accept the noble Lord's further elucidation of the veto because it of course gives me the opportunity to raise the matter.

I well recall the occasion when my noble friend Lord Stoddart and myself had the opportunity from the Benches opposite—with the full approval of the Leader of the Labour Party, now a Commissioner in Europe, and of a parliamentary candidate who, sometime later, became exalted to a rather higher rank—of opposing the Single European Bill 1986, as it then was. My noble friend and I fought the Bill with some resolution and were opposed by the Conservative Party, which formed the Government at that time.

I also recall—as I hope your Lordships will recall—that my noble friend Lord Stoddart, myself and others were faced in the Maastricht Treaty deliberations with a rather different situation. My own party, the Labour Party, in effect, formed a coalition with the Conservative government at that time in order to get through the Maastricht Treaty legislation.

I say this because I hope that the House will realise that the attitude of myself and my noble friend towards the question of the veto has not been arrived at by some caprice or some gust of emotion that has arisen over the past two or three months or perhaps even years but was put before this House as a result of a very deeply held conviction that we were quite right in insisting on the veto. That received an affirmative response from the then Leader of the House, who said that the veto still remained intact.

We queried it then from the Opposition Benches because we recalled a situation in May 1982 when the British Government in Council tried to veto a settlement in that year of the price review. The Government at that time, through the then Minister, proceeded to try to exercise their veto. A difficult situation then arose because the Council declined to accept the veto on the ground that in its opinion Britain's national interest was not involved. Our opinion of course was that it was involved, otherwise we would not have tried to use our veto. In the end the Council's decision not to accept the British veto and to refuse to acknowledge it won the day. This put doubt in the minds of my noble friend Lord Stoddart and myself when it came to the debate on the Single European Act as to whether the veto was valid. I had the honour of reciting to the then Conservative Benches the events of May 1982. Notwithstanding that, an undertaking was given in the most specific terms that the British right of veto on matters affecting national interest would be retained.

My noble friend and I raised exactly the same point in relation to the Maastricht Treaty. We asked whether the British right of veto still remained. We were given the most equivocal undertakings, which appear in Hansard, that it did. The House will recall that in recent months, following the raising of the tax harmonisation proposals, I asked exactly the same question. I was given the unequivocal answer—as a matter of honour of course—that the veto still remained.

Before I conclude, I shall repeat that question. If I am told that the British right of veto is still exactly the same as it was when I was given that affirmative answer two or three months ago— I shall not bother to produce the quotation from Hansard, which I can obtain quite easily—I shall immediately accept that. However, I shall accept with some misgiving. I shall do so not because I in any way mistrust my noble friend the Minister or the Government but because I know the way that the Commission works. I have had long experience of it not by remote control in London but personally in Brussels. I know the way it works.

We have seen the Commission documents. There was an initial proposal for a code of conduct over tax harmonisation but it was not to be binding. I remember the words well. Over the months, the term "binding" seems to have disappeared. There has been an insidious process of trying to modify the code of conduct and to remove the British veto.

The Commission produced a memorandum a few months ago on own resources in which it made it clear that it wanted to tax itself in order to augment its own resources. At the same time it advocated that the British rebate should be cancelled. The Commission has never made its position clear. It wants to levy its own taxes outside the scope of the British Government, among others. I shall be glad if my noble friend the Minister can repudiate what I have said. As a matter of honour, I would immediately accept and welcome his repudiation.

There is much talk about the necessity of Britain being at the heart of Europe. I wonder what that means. It cannot be said that we are not at the heart of Europe in defence matters as we have recently dominated military proceedings. It cannot be argued that our language is unknown in Europe and that we do not have any claim to be heard. The fact is that English is generally accepted as being the language not only of Europe but of most of the world.

I ask my noble friend this question. Is it really right, for the sake of perhaps personal friendly contacts, which I agree are extremely important, that every time we want something different from what may be wanted in other countries we should be accused of being anti-communautaire? Is there any real obligation on the British Government to agree with everything that the other states want? Is that up to us? What means do we have to do anything other than state our minds? We are a nation, a country, and we have a history. Some of us may say that it is distinguished, others less distinguished, but nevertheless we have a history of our own. I plead with my noble friends that for the sake of being highly regarded in Europe in personal, political and technical terms it is not necessary to agree with everything or to believe that, because we disagree, there is something reprehensible about that and that we need to be cast into the outer darkness of European affairs. That is a lot of nonsense.

If there is a future for us in Europe, a proper future, it is a future in which Europe respects us too. It is one in which the Commission is not seen as a commission of bureaucrats and as the only body in Europe that really matters, particularly when we consider its recent record which has been so miserably revealed over the past few months. That is not exactly the kind of ideal administration to which respect should be given as of right.

Lord Pearson of Rannoch

My Lords, before the noble Lord sits down, does he agree that even if his noble friend the Minister were to agree on the points that are being put to him, the fact that we still have the veto—I hope that the Luxemburg compromise, as it is known in the jargon, goes slightly wider than the veto on tax matters—does not really help us and does not obviate the need for the Bill? If the Executive go ahead and agree to tax harmonisation in Brussels, the House of Commons and the people will still be stuck with the results. As I understand it, the purpose of the Bill is to ensure that no Minister can agree to any tax harmonisation proposal without the express instruction of Parliament through a vote and of the people through a referendum. In other words, if the Bill were to become law, a nod from the relevant scrutiny committee would be insufficient. No Minister would be able to go ahead and agree, as Ministers have done in the past, if that nod was not forthcoming.

Lord Bruce of Donington

My Lords, the noble Lord has asked me a question. I was concerned with establishing a principle—that there is either a valid veto or there is not. Whether or not the Government decide to exercise a veto can be argued about as and when the occasion arises; and I shall argue my corner. I merely want to be satisfied that the Government themselves consider that they still have the right of veto and still maintain that right.

3.24 p.m.

Lord Taverne

My Lords, time is getting on and hope that noble Lords will not make two speeches in every debate. First, I wish to address myself to the Bill, which seems to be unworkable. We cannot possibly have a. referendum on every tax change that may take place. There would not be many tax changes as a result of harmonisation in Europe, but there may well be some. I hope that the Commission's proposals on the harmonisation of pension taxes will go through. That would be greatly beneficial to fund managers and others in the City of London and elsewhere. If they do, is that the kind of issue that should be brought to a referendum? Even those who are in sympathy with the general tenor of the remarks of the noble Lord, Lord Waddington, recognise that the Bill itself is unworkable and that we cannot have referenda on all these changes.

I want to turn briefly to the general questions that have been raised about tax harmonisation. The case for tax harmonisation in Europe is a somewhat limited one. In so far as it exists, it flows from the existence of the single market, although the arguments might be strengthened, and even more so if we are members of monetary union. The case is strongest, and is only really acceptable, where the subject to be taxed is mobile. Otherwise, taxes can be left to subsidiarity. That is true in the case of indirect taxes, as we see with cross-border shopping. The noble Earl, Lord Dartmouth, seemed to accept that in regard to indirect tax there was a case for harmonisation. That is why we have a common system—

The Earl of Dartmouth

My Lords, I accepted a case for harmonisation only because it would result in lower taxes. What we are seeing is continual disharmonisation, which is resulting in higher taxes.

Lord Taverne

My Lords, the case in which the noble Earl believed it was likely to apply was that of indirect taxes, and we certainly see that in cross-border shopping. There would be great benefit if some of the excise duties on the Continent went up. It obviously makes sense that we have a single system of VAT, which was agreed by a Conservative government in the past, within broad ranges. There is presently no proposal that the ranges of corporation tax should be narrowed or changed.

The case is at its weakest in relation to income tax. There are no present proposals for the harmonisation of income tax. There is currently very little mobility. Some people move from one country to another, but they do not on the whole move for tax reasons. There are all kinds of other considerations that matter more than tax.

On the question of corporation tax, one should always distinguish between the rhetoric and the reality. It is true that Lafontaine, when he was Finance Minister, called for the harmonisation of income tax at a common level. There is a case for a common tax base. It would have considerable merits in a single market. However, it is a rather academic case, because it is practically impossible to achieve any agreement on the harmonisation of a tax base. The Ruding Committee examined that possibility and made complicated proposals which have totally withered on the vine.

Harmonising tax rates is totally irrelevant. One has only to look at the difference between Britain and Germany. Germany has much higher nominal tax rates—they average something like 45 per cent—while the UK has much lower tax rates, at 30 per cent. Our corporate tax burden is much heavier. Our corporate taxes yield something like 3.6 per cent of GDP; German corporate taxes yield 1.9 per cent of GDP. It indicates how irrelevant are proposals for a common rate if we do not have harmonisation of a tax base, which is an academic question.

As regards labour taxes, there is not a great deal of mobility of labour, and all the pressures in Europe are presently for downward pressure on labour taxes. Most countries now recognise—it is recognised in, among other things, the new agreement with Chancellor Schroeder—that labour taxes in Europe are too high and that it is one of the many causes of unemployment. A recent study by the World Bank has underlined what an adverse effect high labour taxes in Europe have had on employment.

We then come to the more controversial areas, where there are proposals for harmonisation. First, there is the code of conduct to deal with unfair tax competition. It has been accepted by the Government. It is almost self-evident that there can be cases of unfair tax competition. That no longer applies to whether our labour taxes are unfair—that is not what the code of conduct is about—or whether we should harmonise corporate tax rates. It is about individual cases of harmful tax competition.

We all accept that there are cases of harmful state subsidies that distort competition and are unfair. In principle, there is no great difference between a state subsidy and a tax incentive. There is some difference—

The Earl of Dartmouth

My Lords, I find it absolutely astonishing that the noble Lord sees no difference in principle between a subsidy and a tax allowance.

Lord Taverne

My Lords, there is a considerable difference. Certainly, there is a difference in the impact on total spending. There are also considerable similarities. A particular tax incentive can have exactly the same effect as a particular state subsidy. If one has unlimited tax incentives so that instead of giving a state subsidy to a particular company one gives it a special tax incentive, one can achieve exactly the same effect, which can constitute unfair tax competition.

Individual cases have been looked at. I do not believe that we have a great deal to fear. For example, I believe that the Commission has approved the special arrangements for the film industry. There are other cases where we have a great deal to gain. I believe that this must be looked at case by case, as has been done. In some cases action will be justified; in others not.

That brings me to the question of the withholding tax. I believe that these proposals are deeply flawed. This concerns not just the bond market, although that is of considerable importance to the City of London. There is concern about the whole idea of a withholding tax on interest which does not extend to the whole of the OECD but is limited to the European Union. The Germans tried a withholding tax and it was a disaster. Billions of deutschmarks flowed into Luxembourg. They had a second go because of a ruling of the constitutional court in Karlsruhe. Again, the yield was very disappointing because there was a great outflow of savings. Now the Germans, the Commission and a number of other member states want to see an EU-wide withholding tax. It would make no sense. There could be easy withdrawal of savings to Switzerland, the United States or other various tax havens.

The proposal has been criticised not only by people in Britain but by a very prestigious French institute. The most devastating criticism that I have seen of the withholding tax is contained in a report prepared for the Edmond Israel Foundation by the Promethée Institute which is one of the foremost institutes in Paris. To my mind, those arguments are overwhelmingly persuasive. I believe that this is a deeply mistaken proposal, and I am glad that the British Government are beginning to win allies in opposition to it.

Finally, I deal with the perpetual refrain about the coming of a European superstate. There is a lot of rhetoric about this. We must distinguish the rhetoric from the reality. There are many German politicians who always talk about a federal superstate. Their actions tend to contradict their words. One cannot have a federal superstate if one has a veto. It is very interesting that at Amsterdam it was the German Government who opposed the extension of qualified majority voting which the British Government supported because of the pressure of the Lander who have no enthusiasm for a federal superstate.

Of even greater importance is the question of taxation. One cannot have a strong federal superstate without substantial central revenues. Who are the great opponents of central revenues? The Germans. They are not alone in their opposition. They are just as opposed to a greater contribution to the centre as are we and other countries. It is clear that 1.27 per cent of total GDP resources—half of which at least is spent on agricultural policy—is no basis for a federal superstate. The Germans insist not only that that should apply until the year 2006 but that after that the budget should be frozen altogether. The rhetoric is totally contradicted by their actions. This great federal superstate is a wonderful bogeyman with which to frighten children, but it is not a realistic prospect.

3.33 p.m.

Earl Attlee

My Lords, I am extremely grateful to my noble friend Lord Waddington for introducing the Bill this afternoon. I warmly welcome it. My noble friend is to be congratulated on the measured way in which he introduced it. It was in the 1970s that the British electorate saw the advantages of a free trade area, which we have now developed into a single market. The recent Euro elections, despite the low turnout, amply demonstrate that we on these Benches are right to be extremely cautious about the single currency.

I believe that tax competition is highly desirable. We need to have the most favourable tax environment possible. We look at the high non-wage costs of employing workers of our continental friends and then notice that they also have high unemployment. I do not believe that we want to follow their example. We exist in a global competitive environment, as mentioned by the noble Lord, Lord Stoddart. (I see that he is not now in his seat, but I am sure that he will return to hear the Minister.) It is no use having a cosy EU tax cartel, if I may put it that way. when we would be at the mercy of overseas competition. Does the Minister agree with Professor Tim Congdon of Lombard Street Research who has calculated that taxes in Britain would have to rise by at least one sixth to bring them into line with other EU member states? I do not know whether the noble Lord agrees with him on that point. But that works out at £2,000 per taxpayer.

If all our taxes were harmonised in full economic and monetary union, how could we be sure that we still had a sound fiscal policy? How could we be sure that we still have the best policy in order to maximise employment across the Community?

My noble friend Lord Waddington and others made the point that if one has a single currency, tax harmonisation has to follow—I would say as surely as night follows day. My noble friend's point is that Parliament and the British public should formally agree to any tax harmonisation policies after public debate. My noble friend Lord Waddington and many other noble Lords mentioned the spectre of the withholding tax and the threat of financial markets moving their business outside the EU. The noble Lord, Lord Taverne, covered that point well.

Like the Minister's right honourable friend the Deputy Prime Minister, I am confused as to how the tax will work. However, my confusion relates to why the tax will not severely damage UK business. The tax may be complicated but the outcome is simple. Thousands of jobs in the City of London will be lost to Switzerland and New York.

In the EU we do not have significant labour mobility—and certainly not when compared with the United States. In any case, work undertaken and paid for in Germany is taxed under German tax arrangements. If the same work is carried out and paid for in the UK, it is taxed under our arrangements. But when we look at road Fuel duties we see that the Government have widened the differential in duty between ourselves and other EU members. Your Lordships will be aware of the difficulties created for road hauliers—a point raised by my noble friend Lord Dartmouth—and the opportunity for large-scale smuggling between the Republic of Ireland and Northern Ireland. The Minister will no doubt point to the higher non-wage costs, to which I have already adversely referred. What is crucial to road hauliers is the marginal cost per mile. Fuel is a major component of marginal costs of road transportation.

It seems to me that we should retain full control of our tax system but at the same time avoid diverging EU tax and duty on goods when it encourages smuggling and other illegal activities.

I am sure that the Minister will draw attention to the annual Budget and the accompanying Finance Act. Can he assure the House that it is not possible to vary UK tax or duty rates by means of secondary legislation in particular under the European Communities Act 1972.

In conclusion, we on these Benches are not in favour of tax harmonisation. We are in favour of tax competition even where that means that our Government may have to cut taxes. We believe in low taxation. The principle of my noble friend's Bill would help to maintain our current competitive position in the world and our relatively low unemployment—surely a commendable objective. That is why I support the principle of the Bill.

We on these Benches want to be in Europe but not run by Europe. If we agree to tax harmonisation we really would be run by Europe.

3.38 p.m.

Lord McIntosh of Haringey

My Lords, I am grateful to the noble Lord, Lord Waddington, for introducing the Bill which gives us an opportunity to place on record yet again the Government's position on taxation within the European Union. I say "yet again"' because when I make absolutely clear and unequivocal statements I find noble Lords behaving as though they had not been made, or, more importantly, as though the Chancellor, Chancellor Schröder and former President Santer had not made clear statements. Noble Lords simply brush them aside and say, "We don't believe that so we'll go on regardless".

I congratulate the noble Lord, Lord Waddington, on rounding up the usual suspects. He has got together virtually the full gang of Europhobes to whom we listen. I have the battle honours, too—

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 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 he 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". 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 SchrÖder 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.

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.

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 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.

Earl Attlee

My Lords, perhaps I may briefly intervene. The Minister referred to "the usual suspects". I plead not guilty to that. I welcome the principle of the Bill, but I am not sure that I would like to see it on the statute book. I raised the point about the single currency inevitably leading to tax harmonisation; that if the single currency did not work we would have to go to tax harmonisation to make it work. Does the Minister have anything to say on that?

Lord McIntosh of Haringey

My Lords, I acquit the noble Earl from being among the usual suspects, with great pleasure. The answer to the noble Earl's question can be given by looking at the United States. They have had a single currency for more than 200 years. They do not have tax harmonisation; it does not follow.

3.57 p.m.

Lord Waddington

My Lords, that is a completely bogus point, for a start. Eighty per cent of the revenue raised in the United States is raised by the federal government and only 20 per cent by the states, so there is tax harmonisation. By far the largest slice of all taxes is taxed by the federal government. I have to say to the Minister that he may have made some good points today but that is a particular bad one.

I shall have mercy on the Minister and all noble Lords present because time is getting on. I thank all who have taken part in the debate. I am very flattered indeed that such acknowledged experts as the noble Lords, Lord Bruce of Donington and Lord Stoddart of Swindon, should come along. I occupy a room not very far from the room which, until recently at any rate, was occupied by the noble Lord, Lord Bruce. I always marvelled at his ability to get into the room because the whole place was full of Community documents. So nobody can pretend that he is not an expert in this field. All those who have spoken today feel strongly about these matters.

I do not accept for one moment the argument that the Bill could not work because we would be having referendums every second day. The object of the Bill is to prevent a Minister going to Brussels and signing up to tax harmonisation because we do not think that it is right and we do not think that it is necessary.

I noted the comments of the noble Lord, Lord Taverne. He said that the Germans tried a withholding tax and that tax was a disaster. Indeed, he is right. My understanding is that the directive on the withholding tax was actually formulated at the behest of Germany following its mistaken decision to introduce a 10 per cent withholding tax on domestic interest payments. That led to a massive shift of funds out of German domestic bonds by foreign investors to Luxembourg. It is beyond my comprehension why we should now be spending so much time trying to protect Germany from the consequences of its own folly.

We were told by the noble Lord, Lord Taverne, that the continual refrain of the "superstate" caused him much irritation and all this rhetoric must be entirely discounted. I ask noble Lords to look at the quotations I gave today. They do not come only from Germans. They come from throughout the Community, from statesmen from almost every country in the Community and also from presidents of the Commission.

The noble Lord, Lord McIntosh, did not reply to one of the most important questions I put to him. He will remember that I said that Jacques Santer described the British decision to sign up to the code as a decision which had the effect of nullifying the veto and was a device to side-step the EU treaties that require unanimity before tax harmonisation can legally be enforced. Does he agree that Jacques Santer said that? If he said it, was he right? If he was wrong, does the Minister agree that we would be very foolish if we did not look upon the code of conduct exercise as an exercise in tax harmonisation if that is what a former President of the Commission thought it was?

Lord McIntosh of Haringey

My Lords, I do not know that he said it; I do not have the source in front of me. If he did say it, he was wrong. When the code of conduct is finally signed it will be a political contract which specifically reserves member states' national competence on tax.

Lord Waddington

My Lords, I am grateful for that reply so far as it goes. I note that there is no denial that that is what the President of the Commission said. We should take note of that. I shall not weary the House further. I thank all noble Lords who took part in the debate. It has been a useful exercise and I hope the Bill will be given a Second Reading.

Bill read a Second time, and committed to a Committee of the Whole House.