Taxes in the EU:ECC Report

HL Deb 03 November 1999 vol 606 cc915-79

5.25 p.m.

Lord Grenfell rose to move, That this House take note of the Report of the European Communities Committee on Taxes in the EU: can co-ordination and competition co-exist? (15th Report, HL Paper 92).

The noble Lord said: My Lords, in rising to move the Motion standing in my name, perhaps I may say how delighted I am that my noble friend Lord Lea of Crondall has chosen this debate in which to make his maiden speech. We very much look forward to hearing it.

With the leave of the House, I begin by paying some well earned tributes. I want to thank, first and very warmly, my fellow members of Sub-Committee A whose names are listed in Appendix 1 of the report before the House. They worked very hard from mid-March to early July of this year in order to produce what the Paymaster General has been generous enough to describe in the Government's official response as: one of the most comprehensive examinations of taxation in the EU so far undertaken".

I thank her for that recognition of our efforts. If your Lordships agree that we have dealt with the important and complex subject in a clear and instructive way, much of the credit must go to our clerk, Dr Elizabeth Hopkins, who worked tirelessly to draw together into readable and persuasive drafts the mass of testimony gathered from witnesses and the fruits of our own extensive deliberations. She did a truly splendid job. I am also very grateful to Professor Stephen Smith, our specialist adviser, who drew on his considerable knowledge of the issues to point us in the right direction and to keep us on track during the long weeks of our work.

Let me say a word about the genesis of the report. In the summer of 1997, the committee conducted an inquiry into tax and competition policy in the single market, based on a recent Commission communication on harmful tax competition and an action plan for the Single Market. That inquiry yielded some valuable evidence from witnesses, but was shortly thereafter overtaken by events when the Commission produced a number of specific proposals in the field of taxation.

By early 1999, there was a widespread concern, much fuelled by certain sections of the media, that the European Union was planning some sort of a tax takeover. The committee decided that this called for a major new inquiry into both the formal proposals already on the table for co-ordination of direct and indirect taxes and some broader informal ideas which had been floated far the future. Sub-Committee A began its work in March this year.

We took evidence from a wide range of interested parties, including the European Commission in the person of Mario Monti, major business organisations such as the CBI and the Institute of Directors, the Bank of England, the private banking community, the financial markets, the City of London, the Treasuries of France, Germany and Ireland as well as our own in the persons of the Paymaster General and senior Treasury and Inland Revenue officials, and from individual experts from academia and the legal profession. We really covered the field.

The resulting report, which is prefaced with a summary of the committee's opinion, considers first some of the fundamental underlying questions on. EU taxation. It then looks at the detailed proposals which have now been brought forward by the Commission, and next considers the ideas for further tax co-ordination which have been floated within the European Union, but which are not yet the subject of firm proposals. This is followed by our concluding comments.

I confess that I am somewhat disappointed that Her Majesty's Government, in their response to the report, decline to comment on our quite lengthy discussion in Part 5 of these informal ideas for further tax coordination in the future, but I must assume that that is because they have either not yet formulated views on them, or that they have but prefer at this juncture to keep them to themselves since the ideas are not yet formal proposals. But we hope that the Government will in due course consider seriously the points we have made in the report.

Some of your Lordships may find it surprising that this report is unanimous. I assure your Lordships that there was no dodging of divisive issues. In a few areas members expressed differing views, which are given due place in the text. We were nonetheless able to reach agreement on the recording of the committee's opinion and conclusions, as there was a strong shared interest in shedding light on the often complex issues and the arguments surrounding them, and a strong collective will to demythologise the whole question of EU taxation, which those with a less objective agenda had sought to invest with truly nightmarish characteristics.

As we recorded in our concluding comments at paragraph 249, we were persuaded that, recent scare headlines about a European Union tax takeover were unjustified, and ill served a British public insufficiently informed of the facts to judge the validity of the reporting".

The three principal conclusions that we reached are set out in paragraph 49 and repeated in paragraph 250. They are summed up in a final single sentence: Within these parameters we believe that pragmatic tax coordination and fair competition can not only co-exist but complement each other, to the greater benefit of taxpayers within the European Union".

We found it rather disappointing that the Government, in their written response to us, confined their comments on paragraph 49 to a mere 85 words. I feel somehow that we have not been engaged in as profound an exchange of views on our conclusions as we should have wished. We note at the outset of the report that there are of course many more pressing issues facing the EU at this time, such as enlargement and the reform of its institutions. Nevertheless, EU taxation proposals are still a major issue and will become more so in the years ahead.

It is not easy to summarise our findings in a short speech, but I shall do my best. The first and crucial point is that it is no longer practicable for the member states of the European Union to establish some elements of their tax regimes in isolation without recognising their interdependence with other member states. To accept this is to accept an approach which we believe is more accurately termed "co-ordination" than "harmonisation". Since tax co-ordination does not by definition exclude tax competition, we were faced with the question: when is tax competition fair, and when is it harmful? Most of our witnesses found "harmful tax competition" quite difficult to define precisely, but on the evidence we concluded that while tax competition can be healthy, there were measures that were preferential or discriminatory, which we termed "predatory tax measures", which were plainly harmful. That question is discussed at some length in paragraphs 57 to 61.

We further wondered whether progress in the single market for financial services would call for more tax co-ordination, and we concluded in paragraph 73 that, while it would tend to lead towards some convergence of tax rates, there could also be pressures to introduce selective tax inducements, which might call for some positive co-ordination between member states. In paragraphs 78 to 83, we asked the same question about EMU and came up with two views. One was that monetary union increased the pressure for tax coordination, since monetary and tax policies can be properly managed only if both are under the same political control.

The other view, which seemed to be rather more broadly held, was that the Eurozone made it more, rather than less necessary for individual states to be able to adjust their own tax rates, since they could no longer manage their economies through monetary adjustments.

We looked at the interesting question of whether, in an era of increasing globalisation and electronic commerce, tax co-ordination limited to the EU member states made any sense at all. We concluded, after exchanges with Commissioner Monti, the CBI, the OECD and others, that co-ordination measures could be genuinely effective only if they applied in third countries as well as in the EU member states. But we could not see what incentive there was for third countries to fall in line quickly with EU measures against harmful tax competition.

We insist, however, that that should not be used as an excuse for doing nothing within the EU in the meantime. With others playing by different rules, we have to watch very carefully the effect on the EU's competitive position on the global playing field.

Commissioner Monti was adamant that one of the fundamental principles of tax co-ordination was that it must not lead to higher taxes. The German Treasury witness and the OECD, among others, shared with the commissioner the view that, to the extent that coordination implied a broader tax base through the elimination of tax breaks, it would lead to reduced tax rates. Others, like the CBI, were not so sure, and Graham Mather of the European Policy Forum was convinced that harmonisation, as he put it, would remove the competitive stimulus, leaving governments with a free hand to raise taxes.

As we saw it, much would depend on the effect of the actual measures adopted on tax rates and bases. We found reasonable Commissioner Monti's argument that the elimination of tax breaks opened the way to lower tax rates. But, as we record in paragraph 92, the stronger argument was for us that as long as tax rate decisions remained with the member states, as they should, the wish of politicians to be re-elected would act as a mighty restraint. Only if tax decisions were handed over to a supranational body unaccountable to electorates would there be a real danger of unchecked upward alignments.

We then considered the view of the Commission that increasing taxes on capital income could help to reduce unemployment. The theory is that harmful tax competition has been steadily reducing the tax burden on capital, and that in order to generate the required amount of revenue, member states have had to raise tax levels elsewhere, in particular on labour, thus causing unemployment levels to rise. We heard many witnesses on that subject, and we came to share the view of, among others, the Treasury, the Corporation of London, and the Bank of England, that there was insufficient firm evidence to support a causal connection between an increase in taxes on capital income and a fall in unemployment. Indeed, when the German Government blame their high rate of unemployment on high labour taxes, we suspect that the real causes might rather be restrictive labour legislation and lack of labour market flexibility.

The last of the fundamental issues on EU taxes which we tackled was whether tax changes could be imposed on the United Kingdom. Of course, with tax bases as highly mobile as they are today, the concept of national sovereignty in tax matters feels pressure from the markets, and governments may be unable to set tax rates, particularly on the income from savings, that differ much from rates ruling elsewhere. In practice, that is a reduction in fiscal sovereignty, but we suggest that international co-ordination may be the way for EU states to regain collectively some of that fiscal sovereignty surrendered as a result of market integration.

Although some of our witnesses saw the unanimity principle leading to unwieldy compromises giving undue weight to purely national concerns, we saw, as recorded in paragraph 114, no case for a departure from it unless openly and explicitly made through a treaty change which would itself require unanimous approval. That could arise at the next intergovernmental conference, and we assume that the Government will stick to unanimity for major issues. But—and it is a big but—as the EU enlarges, we see it as neither necessary nor practical to apply unanimity to all minor administrative measures merely because they relate to taxes.

Our report then turns, in Part 4, to the package of direct taxation proposals currently on the table on harmful tax competition, which received political approval at ECOFIN on December 1st 1997. We examined each of the package's three elements in turn. The first is the code of conduct on business taxation concerning those measures which affect, or may affect, in a significant way, the location of business activity in the European Union. Measures are regarded as "potentially harmful" if they provide for a significantly lower effective level of taxation than that which generally applies in the member state in question.

Under the code, member states commit themselves not to introduce such potentially harmful measures and to eliminate them quickly where they exist. The code of conduct group, which is chaired by our own Paymaster General, Dawn Primarolo, is charged with selecting and reviewing the tax measures under assessment and forwarding its findings to ECOFIN, which may or may not publish them.

We have a number of concerns about the code of conduct and about the proceedings of the group. However often the Government repeat that the code of conduct is not legally binding, it seems to us that agreeing to it has created at least a moral obligation to roll back tax measures ultimately deemed harmful, and not to introduce any similar new ones. That could oblige us, in practice if not in law, to adopt tax measures damaging to our legitimate interests. That would matter less if all other member states took the same view as to how binding the code was, but, although they have all signed up to it, we doubt that that is the case. So, can such a code work, and work equitably in such a diverse union of states?

We believe that Parliament deserves a clearer explanation of how the system is supposed to work than it has so far received. Perhaps the Minister will give us an assurance on that point this evening. Furthermore, we are unhappy that we simply do not know how the code of conduct group goes about its business. We cannot directly blame the group's chair, Dawn Primarolo, for the serious lack of transparency imposed by ECOEN, but the Government must bear shared responsibility for that. No wonder that the code of conduct is left open to charges of being some kind of obnoxious Star Chamber inflicting secret taxation when that is not in reality the case. It is difficult to change the rules of a game already in progress. But if this perceived stigma is to be lifted, the Government must urge other member states to agree to publish the group's reports to ECOFIN and make them subject to parliamentary scrutiny in the normal way.

The second item in the direct tax package is the draft directive on the taxation of interest and royalty payments between associated companies of different member states. It does not solve the problems of large multinational corporations operating in a number of member states. However, it is a step in the right direction and we believe that the Government are right not to stand on the letter of subsidiarity when Britain's business interests can be furthered by it, as the Government readily acknowledge.

It is the third and last element of the package—the so-called withholding tax proposal for a minimum effective taxation of savings income within the Community—which, not surprisingly, caused us the most difficulty. In view of the strength of the opposition to the proposal, we looked very carefully at why it had caused so much controversy, taking extensive written and oral evidence from City representatives and others.

The new draft directive, which relates only to the taxation of interest paid in one member state to individuals who are resident in another, was clearly introduced as a measure to combat tax evasion. It was not a new tax, insisted Commissioner Monti; it was simply a mechanism to ensure that a tax which in principle has to be paid will be paid in practice.

We agree that payments of this kind, which are not reported to tax authorities, obviously offer scope for tax avoidance or evasion. When this happens between EU member states, it affects the pattern of capital flows, not to mention the fact that it puts a higher tax burden on those who are unable or unwilling to place their savings abroad.

However, the withholding tax proposed is perceived as posing particular problems for the Eurobond market. Maybe as few as 10 per cent of such bonds are held by individuals who would be liable to the tax. But because of "grossing up" technicalities, described in paragraph 170 of our report, the imposition of the tax could result in some investors suffering capital losses. More seriously, it is claimed that the introduction of the tax in its present form would be likely to give a major incentive to the Eurobond market to move out of the European Union so that investors could continue to receive interest payments gross. As the City of London is recognised as the main Eurobond market and a major source of income for the UK, both City and Government would be expected to object, and indeed they have.

The directive proposes a so-called "co-existence model" whereby member states can choose either to impose a 20 per cent withholding tax at source or provide the member state, where the recipient is resident for tax purposes, with enough information to ensure that the payments are duly taxed in that state. We doubt that that co-existence model can work well, with some countries choosing the tax option and others the reporting option, as long as the practice of banking secrecy is maintained in some EU countries, thus forcing the withholding option on states which may prefer the reporting option. We agree with the Government that a properly adjusted reporting option on an EU-wide basis would provide the better solution. But that, of course, depends on an agreement to abandon banking secrecy, not only in EU countries but also in important third countries. That may well prove an insurmountable hurdle.

We looked at possible compromises. The case for exempting Eurobonds altogether was championed by City witnesses, as we would have expected, as a second best to what we call the "nuclear option" of vetoing the entire directive. A less radical option was the short-term exemption of Eurobonds; in other words, "grandfathering"—allowing interest on existing bonds to continue to be paid gross. Grandfathering had a certain appeal for us, but even that would not solve the perceived longer-term problems of business moving outside the EU.

The problem for your Lordships' committee was that, despite claims and counterclaims, we were left with no firm evidence about the likely effect of a withholding tax on the City of London. The Corporation of London told us that if the whole bond market moved out of the EU to, say, the US or Switzerland, the loss could be of the order of 3 trillion dollars in capital and more than 100,000 jobs. Deutsche Bank told us that it doubted that the impact would be as significant as claimed. They referred us to a study by the Centre for European Policy Studies which states bluntly that there is no basis for the assumption that the London market would be severely damaged. Of course, we accept that there would be damage as a result of any outflow of business, but such figures as were presented to us were insufficiently substantiated and too disparate to be convincing. Thus we could not reach a conclusion on the likely scale of the effect. We hoped that the long-awaited paper which the Government were producing in conjunction with the City would shed further light on the matter while our inquiry was in progress. However, to our frustration, the report was much overdue and did not appear until September.

That paper proposes—and I am sure that the Minister will expand on this—two possible approaches, the details of which I shall not go into now because of the shortage of time. The question is: what are the chances now of an agreement being reached by the deadline of Helsinki's December summit? Precious few, I should guess. Grandfathering seems to have support, but it would seem that the rest of the package has had a decidedly mixed reception, and there was little progress towards agreement at the informal ECOFIN meeting held on 29th October. Therefore, we are far from the end of the story of the withholding tax directive. I can only wish the Government well at the next ECOFIN meeting.

Lastly, I say a brief word on proposals on indirect taxation currently on the table. In 1996 the Commission announced that it would bring forward plans for a new and simplified VAT system. However, no radical proposals have so far been made. Some minor ones on the rates and scope of VAT and on administrative simplification have appeared. We examine those in our report in paragraphs 202 to 212. We have no objections to proposals for tidying up VAT arrangements provided that there are no significant new burdens. Nor would we be concerned if proposals relating purely to the administration of VAT were adopted by qualified majority voting or provided for subsequent decisions to be taken by that system.

As I mentioned at the outset, we are disappointed that, in their written response, the Government declined to comment on our quite extensive review of ideas for the long term, mooted in the Commission and elsewhere, in particular on corporate taxation. In view of the increasing integration of business within the EU and increasing globalisation, there are attractions for both companies and tax authorities in the idea of some kind of a co-ordinated framework for corporate taxation. Several witnesses told us how the current diversity of corporate tax systems is an obstacle to cross-border integration, and that the cost to business of complying with 15 different tax regimes was escalating. The Commission has been asked to bring forward a mandate for a study on this issue. I hope that the Government will play a constructive role in the discussions. Failing a comprehensive solution, we see a case for considering an optional single European corporation tax along the lines suggested by the CBI.

I commend this report to your Lordships' House. The committee and the Government do not see eye to eye on a number of matters. But that is evidence that we have raised some real issues. On the whole, there is much more in the report on which we do agree. Therefore, I hope that this report will be an encouragement to Her Majesty's Government to pursue European tax issues with vigour and imagination in the European Council and ECOFIN.

Personally, my fondest hope is that the committee's efforts have gone some way to demystifying and demythologising the issue of European Union taxation proposals. If we all want Britain to play a competitive role in a globally competitive European Union, as we surely do, we must encourage a pragmatic, not dogmatic, approach to European tax issues. We believe that this report supports and justifies that approach. I beg to move.

Moved, That this House take note of the Report of the European Communities Committee on Taxes in the EU: can co-ordination and competition co-exist? (15th Report, HL Paper 92).—(Lord Grenfell.)

5.47 p.m.

Lord Saatchi

My Lords, we welcome this report, not only because of the importance and topicality of its subject matter, but also because the noble Lord, Lord Grenfell, and his whole committee have earned the gratitude of the House for producing such an illuminating and informative document.

I hope that I do not exaggerate, nor in any way embarrass, when I say that, on these Benches, the noble Lord is held in admiration and affection. Indeed, I should like to place on record our very great regret that, at the end of this Session at the insistence of the Government, his talent and expertise will no longer be available to your Lordships' House.

There are three vexed issues upon which the report concentrates. They are, first, the slender nuances between harmonisation and co-ordination; secondly, the work of the code of conduct group on business taxation; and, thirdly, as the noble Lord has just said, the on-going saga of the withholding tax, which the Government refrain from vetoing.

First, none of us should be misled into assuming that the distinction between co-ordination and harmonisation is merely a matter of semantics. The report rightly states that the term "co-ordination" implies, fewer connotations of compulsion and imposition from above", and, leaves more room for variations as between member states". In all logic that must mean that co-ordination includes some elements of compulsion and imposition but that those elements are less visible than they would be if the process were called "harmonisation". If any of your Lordships doubt this analysis, they need look no further than the furore which erupted following the former German Finance Minister's pronouncements on tax harmonisation. As he expressed so bluntly: It is necessary to harmonise tax policy. The unified currency area needs a fair and equal tax framework". That is the perspective from which to view the German Government's position, as quoted in the report.

Germany's government say: Direct taxes should be co-ordinated, but in no circumstances harmonised". They say they want, to concentrate on how best to avoid ruinous tax competition in the field of business taxation", yet they are quick to assert that there is no proposal for a uniform European corporate tax system.

The German Government explain that a, totally different social security system in Germany … makes a need for a higher tax burden". It emerges that the German Government appear to be opposed to harmonisation because it might mean the harmonisation of European taxes at a level lower than their own. But they are in favour of co-ordination because that offers the delightful prospect of raising the burden of European countries' tax to their own level.

We heard much the same from our Government only last week in a European committee of another place in a debate cm energy tax harmonisation. The Financial Secretary to the Treasury asserted: We see no case for general harmonisation of direct taxes, and no such formal proposals are on the table", but a few moments later he extolled the virtue of tax harmonisation saying: If there were to be progress on raising the levels of duty on road fuels across Europe … it would be a welcome development". Is not the use of the word "co-ordination" just a presentational attempt to pour oil on potentially very troubled waters because there is a wide consensus of opinion in Europe, both at academic and political levels, that the single currency, which this Government intend to join, inevitably requires tax harmonisation?

Let us take, for example, an article in the EC Tax Review by the respected former Finance Minister, the Dutchman Onno Ruding. In answer to his question, which forms the title of his article, After the Euro, corporation tax harmonisation?", he argues: A successful EMU requires a high degree of policy co-ordination, on economic as well as political matters, and will unavoidably reduce remaining national autonomy, including on tax policies". Because the British public are deeply opposed to the higher taxes harmonisation would bring, the Government, who have the unenviable task of somehow selling the single currency to the British people, have decided to use soothing words to airbrush out the less appealing aspects of economic and monetary union.

An article in the Sunday Times earlier this year reinforced such concerns. It stated—and I am sure that the Minister will wish to comment on this—that the Government had sent out a list of forbidden terms which should not be used in the context of discussions on the European issue. Lo and behold, one of them is "harmonisation". Surely, as long as the difference in the tax burden between the UK and our European partners remains as great as it is today, the issue will continue to generate deep anxiety which no amount of carefully chosen words from Ministers will dispel.

Secondly, I turn to the code of conduct group. I do not know how familiar your Lordships are with that body. The Minister is certainly about to tell your Lordships that there is nothing to worry about in the work of the code of conduct group; that the decisions at which it arrives are not legally binding; and that there is no treaty obligation on us to accept greater EU control of our direct taxes. Yesterday, I had the pleasure of being at lunch with one of our most senior judges, who said that when a man comes before him who says that there is nothing to worry about, "I always have a good look at him." Well, my Lords, we shall want to have a good look at the Minister when he says, as he is going to, "Don't worry".

Until the Government drop the secrecy in which that code of conduct group operates, it will continue to worry people because they cannot understand what the group is doing. What is its agenda? What is the Government's position on the work of a body which is chaired by one of their own Ministers? Perhaps the Minister will take the opportunity to explain to the House how it was that while our Government refused to divulge the working of the code of conduct group, the proposals it had made were easily to be found on the Dutch Finance Ministry's website.

Why is there that need for secrecy from a Government pledged in their manifesto to ensure, greater openness and democracy in EU institutions with open voting in the Council of Ministers and more effective scrutiny of the Commission by the European Parliament"?. I am sure that the Minister recognises, as the report certainly does, that the reason the issue of tax harmonisation causes such angst is precisely because of the cloak-and-dagger approach which the Government have adopted. If there is nothing to hide, why do not the Government tell us what is going on in that group? There are many who find it difficult to understand why conventional channels were not sufficient to deal with harmful tax competition which that code of conduct group is understood to be addressing. This may provide the answer: If the rule of unanimity should block progress on tax decisions in the EU for many years to come, the question arises as to whether member states might prefer to take steps towards tax harmonisation among a smaller group of members only, either the participants in the EMU or members who agree on a specific measure. This approach can only be accomplished outside the EU treaties". In other words, the code of conduct group provides a fast-track route to the type of harmonisation which it would be impossible to push through under the unanimity required in the Council of Ministers. The Minister will, of course, again remind the House that EU treaties contain no requirement for direct tax harmonisation. However, it is precisely because the code of conduct group works in the grey area outside the remit of the treaties, but under the auspices of the Council of Finance Ministers, that it is able to press on with an agenda not contained in the treaty.

Let us look at the precise wording of the rubric introducing the code. It says that it is the, resolution of the Council and the representatives of the governments of the member states, meeting within the Council". "Within" is the crucial word. That half-in, half-out position allows the Paymaster General to say that the work of the group is "not legally binding" on the one hand when it is quite clear that the code of conduct group has the political momentum generated by its small but high-level membership to drive forward the harmonisation programme.

It allows any member state to call an investigation into another's system on the grounds that it is harmful. Under that understanding of avoidance, tax revenue paid to one country is essentially tax lost to another EU member. I suppose that is what prompted the former German Finance Minister, Theo Waigel, to describe London as a tax haven because he observed German bankers coming to work in Britain to avoid higher German rates of personal tax. That is an extraordinary observation.

We can perhaps see why the British Government are so anxious to remain silent about the group. Why else, in answer to repeated requests by the shadow Chancellor in another place for the Government to publish the agenda, minutes and conclusions of EU tax Ministers, do we repeatedly hear the opaque reply that the Council, agrees that the work of the code of conduct group shall be confidential"?. The reason is that the work of the code of conduct group reveals the extent to which the Government are involving other countries in our own tax decisions. After all, when we briefly caught a fleeting glimpse of the work of the group, we discovered that it dealt with UK measures to help the film and shipping industries, designed to enhance UK business and create UK jobs to which the other countries had taken exception. Therefore, I ask the Minister to update the House on the future of those incentives so that companies which may wish to invest in UK films or shipping know exactly where they stand.

Is it surprising that the Select Committee states: We remain unclear about the implications for the United Kingdom of having agreed to this code"?. Will the Minister tell us whether the group will be disbanded when it has dealt with its current agenda, whatever that might be, or will it find further work? And will he tell us whether the UK Government will accede to legislative proposals from that group in the future.

Finally, I turn to a crucial matter in the report, mentioned by the noble Lord, Lord Grenfell, which is deeply significant for the future of the City of London; namely, the withholding tax on interest. That is no stranger to this side of the House. When it was introduced in 1988, the Conservative government vetoed it without any fuss or bother. Nor was there any lasting ill will. I am told that that swift action saved the City much concern and prevented investors from becoming alarmed. Let us compare that with the painfully lethargic manoeuvring of the Government today, which does such damage to the confidence of business and investors in the City. The impression created is that the Government are unwilling to defend Britain's flourishing financial services industry. Meanwhile, I am told that competitors are licking their lips at the thought of what that piece of legislation can do for them. Perhaps the Minister will tell us the latest instalment of an epic battle which the Government have created for themselves. I believe that his answer will reveal the huge gulf in philosophy between his side of the House and ours.

Our approach is to cut taxes to stimulate growth and investment and to allow European countries to compete with us to find a natural convergence at a lower level, an attitude totally at odds with the concept of tax harmonisation. This week William Hague told the CBI: In the next millennium, nations will fight each other not for territory but for business and their weapons will not be guns but tax rates". So our view is to look at these matters in the context of a highly competitive global economy, not to hope that huddling together through legislation will insulate us from countries which are hungry for our business. We believe ours is a realistic view of the world and we believe that the Government's view is profoundly backward looking. I have yet to hear of a single government in the world beyond the EU that is signing up to a text which promises to erode its competitiveness rather than enhance it.

We greatly welcome publication of this report and the scrutiny of it by your Lordships' House because the report reflects the widespread concerns about this Government's attitude to an area of policy that is fundamental to the wealth and prosperity of our country.

6.1 p.m.

Baroness Sharp of Guildford

My Lords, as a member of the EC Committee, I pay tribute to our chairman, the noble Lord, Lord Grenfell, to our specialist adviser, Professor Stephen Smith, and to our Clerk, Dr Elizabeth Hopkins, for helping us to produce a coherent and lucid report on such a complex and detailed subject. I look forward to the maiden speech of the noble Lord, Lord Lea, whom I knew 20 years ago when I worked in the National Economic Development Council—Neddy as it was known.

Our chairman has given the House an excellent summary of the report. I shall not spend time going over the details but shall concentrate my remarks on three areas; first, the general issue of the European Union and tax harmonisation; secondly, the question of tax competition and what is and what is not harmful in terms of tax competition; and, thirdly, the longer run issues in relation to corporate taxation.

I shall not discuss the issue of the withholding tax other than to say that I fully concur with the conclusion that we reached in the report. Surely the best solution all round is one based on an exchange of information. It is absurd that we should have imposed upon us an unsatisfactory, second-best solution just because some member states are faced by bank secrecy laws that they feel they cannot challenge.

I turn to the more general issue of the European Union and tax harmonisation. When discussions began in the spring of 1999 we were faced by alarmist newspaper headlines suggesting that the European Union agenda was a wholesale take-over of our tax system, with Oscar Lafontaine held up as the bogey-man who would take our money away from us. When the committee looked at that matter the actual proposals on the table were only three: first, the withholding tax issue—a big issue for the City but pretty irrelevant to the average man or woman on the street, or even to the Deputy Prime Minister, if I may say so; secondly, proposals for a common system of taxation for interest and royalties paid between branches of a multi-national company with branches located in different European Union countries, a proposal that, while it had its downsides, was generally endorsed by all concerned; and, finally, the code of conduct on business taxation in which negotiations were led by a British Minister.

In addition to those three clear proposals, there were vaguer proposals being discussed about the possibility of a maximum as well as a minimum level range of VAT and about closer co-ordination of excise taxes and earlier there had been proposals on energy taxation. There were even vaguer discussions going on about the longer-term development of both VAT and corporation tax. Only one of that range of proposals—the withholding tax—was really contentious. As we made clear in the report, as long as the Government maintain their insistence on the unanimity rule in relation to taxation, that can pose little or no threat to UK interests.

As to other issues, let me reiterate the conclusions of our report: there are certain areas where some sensible, well-justified co-ordination—in particular to reduce fraudulent tax evasion and to help create conditions in which tax competition can be pursued harmlessly—could serve both United Kingdom and EU-wide interests, and ought therefore to be pursued in a spirit of pragmatism rather than being dismissed out of hand on purely dogmatic grounds". In other words, the fuss about the EU's tax plans has been grossly exaggerated.

I turn now to the issue of tax competition and the concept of harmful tax competition. I suspect like many noble Lords, I have spent some time living in the United States. I lived in Washington DC. I discovered in that country that there is considerable variation in tax rates between the states and the localities which leads to some cross-border trafficking. Those from Maryland and Virginia came into Washington DC to buy wine and spirits and those from Washington DC crossed into Maryland and Virginia to buy clothes and consumer durables because sales taxes were lower in those states. Movements were relatively marginal. How far will one drive to get something 10 dollars cheaper.

That situation is important because it creates pressures for convergence. As we know from the problems we are now experiencing in relation to beer, wine, spirits and tobacco trafficking across the Channel, where rates of tax—mostly excise taxes—are vastly different from one country to another, such cross-border trades can become substantial, with both traders and the Exchequer feeling the pinch. The pressures are now on the Chancellor to bring down British excise taxes closer to levels on the Continent. In other words, competition in tax rates has brought about a natural process of convergence.

Within the next 10 years two developments will add considerably to these pressures. First, e-commerce will make cross-border trading much easier, especially in areas like financial services where there are no postal or delivery charges. Variations in VAT and other sales taxes will become more significant. Secondly, those variations will become even more apparent once we begin to use the euro. Even if Britain remains outside the euro, we shall find many prices in this country quoted in euros, and price differentials, at present obscured by the different currencies, will become all too transparent. All that suggests that in the next decade competition will bring increasing pressures for a natural convergence of tax rates within the EU.

What is harmful tax competition? I quote from Jeffrey Owens, Head of Fiscal Affairs at OECD, with whom the committee spoke during our discussions. He was at pains to set the issue within its global context and argued that: Increased liberalisation of financial markets has improved the international allocation of savings and capital and reduced the cost of capital to enterprises. But it has also: widened the scope for international tax planning; increased opportunities for tax evasion and avoidance by making tax havens more accessible to taxpayers; reduced the feasibility of taxing capital income; and contributed to the erosion of the tax base in many countries. … Harmful tax competition is triggered as governments, in an attempt to outbid their neighbours, seek to develop increasingly advantageous tax niches". The great danger, of course, is that in seeking to meet this competition from these increasingly advantageous tax niches—tax havens, as we call them—we find ourselves dragged into a race to the bottom, each country seeking to outbid the other in an attempt to attract mobile financial capital. One possibility is that we just accept as a fact of life that capital and savings are mobile and that we should give up trying to tax them. But this has implications for the taxpayers. It means shifting the burden of tax increasingly on to the immobile factors of production, especially labour, and it has implications for equity. Is it right that those whose incomes are largely unearned should go untaxed?.

Jeffrey Owen said that he had pointed us in the right direction. He said: Governments do have a choice other than letting the erosion process dictate their tax and spend decisions: greater international co-operation". This is what the OECD is now trying to put in place—an accepted network of bilateral tax treaties which not only avoids double taxation but also contains provisions to counter international tax evasion.

By working internationally to identify the harmful regimes and to put pressure on them to reform their ways or face international ostracism, some progress is being made. However, as a committee, we were wary as to how far this route could eliminate the problem. Nevertheless, what is clear is that only by working with others at the international level do we stand a chance of cracking it.

It is within the context of co-operation that we should see the EU's own committee working on the code of conduct for business taxation which was established after the ECOFIN summit of December 1997. It is being run in close conjunction with the OECD initiative and, as far as we can tell, because its proceedings are confidential, it is going well. What is clear is that many of the issues being discussed there relate to specific tax breaks for specific industries or sectors—for example, preferential treatment for small firms—and that its agenda is being driven as much by the single market initiative, the need to create a level playing field for business, as by considerations of tax structure or tax equity.

I turn now to my final point about the long run issue of corporate tax. At present, any company that has dealings with the EU faces having to cope with up to 15 different tax regimes. Two interesting features emerged from our investigations. First, although nominal corporate tax rates vary a great deal from country to country, "effective" tax rates—that is, the actual tax paid after all allowances are taken into account—vary very little from one country to another. Most, including the UK's, are in the region of about 10 per cent. Secondly, we also learned that many multinationals, having to deal with all these different tax regimes and different sets of paperwork, would prefer to pay what in effect would be a very similar rate of tax and were in favour of moving towards a single tax regime.

Michael Gammie, one of the experts who gave evidence to us and who had spent some time investigating company views on this issue, told us that what businesses wanted was, a coherent proposal that resolves these issues". By contrast, the Paymaster General, Dawn Primarola, made it clear that the Government were firmly set against any such proposal. She said: We argue actively against the harmonisation of corporate tax rates. We do not believe that this is the way forward". She was joined in this not only by many of our own witnesses from industry, but also by the views we heard from Germany and France. In other words, there is presently very little enthusiasm anywhere in the EU for the idea of a single, corporate rate of tax.

Nevertheless, the CBI, while opposing the idea, pointed out that the majority of its members did not do business in more than one or two member states and that many small companies did not export at all. They suggested that there could be trials of an optional, parallel system for companies doing business in several states which could choose to be taxed at a Community level on a single consolidated result. I suggest that there is a precedent for such a trial.

In the pharmaceutical field, in which companies were similarly faced a decade ago with having to run the gamut of many different national regulations in relation to launching a new drug, a fast track procedure was established at Community level which was introduced only for the new, biotechnology-based drugs. Companies could, if they wished, opt for this fast-track procedure. As more drugs came on to the market, companies gradually switched over to the new procedures. Indeed, in due course they provided the core procedures for a new and highly successful European Medicines Evaluation Agency, which is located here in London. This example shows that it is possible to have two regimes, one run by member states and the other by the Community, working side by side and effectively. I therefore agree with the committee's conclusion that the CBI's suggestion is worth exploring. I hope that we may hear further on this from the Minister.

The concepts of competition and co-operation lie at the heart of Liberal democracy. I have been at pains to suggest that on many occasions competition between countries, states or even regions in the taxes that they charge may indeed be good for us, and that this competition will in itself bring about a natural process of convergence. There are, however, times when competition does not work, when it destroys itself in the race to the bottom. It is on these occasions that cooperation is required.

The final conclusion of our report is, that pragmatic tax co-ordination and fair competition can not only co-exist but complement each other, to the greater benefit of taxpayers within the European Union". I wholly endorse that conclusion and commend the report to the House.

6.16 p.m.

Lord Lea of Crondall

My Lords, perhaps I may first say how much I have appreciated the courtesy which has been shown to me on all sides of the House and by the Officers of the blouse since my introduction.

I feel very privileged to be the fifth member of the TUC secretariat to come here, following in the distinguished footsteps of Walter Citrine, Victor Feather, my noble friend Lord Murray of Epping Forest—for whom I worked for 20 years and who I am very glad to see in the Chamber this evening—and my noble friend Lord Whitty, who, before becoming General Secretary of the Labour Party, worked for me in the early 1970s and not only survived the experience but seems now to have comfortably inherited the mantle of "Lord High Everything Else". For one moment the other day, I thought that he was running for Lord Mayor of London!

My submission today, I trust without being at all controversial, is that in some fields we need more tax co-ordination in Europe rather than less. I have taken some interest in this area in my work at the TUC, but I have been particularly involved through the European TUC, in the 1980s as Chair of their Economic Committee and subsequently as its Vice-President.

I can confirm that the House of Lords Select Committee on the European Communities has a very high reputation in Brussels. It was Jacques Delors himself who said that the work of this committee was outstanding among all the national parliaments. I have often given evidence to the Select Committee, and I look forward to following its work closely in the future. One of the reasons for the committee's reputation is its pragmatism. This properly underpins the very timely report that we are considering today.

I thank the noble Baroness, Lady Sharp of Guildford, for her kind remarks. I congratulate my noble friend Lord Grenfell on his excellent exposition, and I extend to him every good wish for the future.

Pragmatism has also been the watchword of the European Commission and the Council of Ministers, and they are inching the debate forward. For example, something akin to a minimum withholding tax must be right at some stage if we are to protect an equitable tax base in Europe, albeit safeguarding the legitimate interests of London and, indeed, Luxembourg.

I want to take as my main illustration a rather different area of fiscal policy—the question of energy taxation—which the sub-committee recognised as important but decided not to consider at this stage in any detail. I wish to refer in particular to the announcement by the Chancellor in this year's Budget that, arising from our European and international commitments agreed at Kyoto two years ago on greenhouse gases, he will introduce into next year's Budget and operate from the year 2001 a climate change levy to raise of the order of £1.75 billion per annum, offset by reductions in employers' national insurance contributions across business generally. Side by side with that there are currently negotiations led by the DETR on rebates based on energy-saving schemes. No doubt we will hear more of that in the Chancellor's Green Budget next week.

It has been clear since the Rio Summit in 1992, when I had the honour to be a member of the British Government delegation, that the OECD countries had to give a lead if the Rio aspirations were to be seriously addressed. Since then, very important work has been done both by the previous government, but most notably by the present Government and by the Deputy Prime Minister in particular.

As the House will be aware, the EU group negotiates as a team, and it was and is as an EU group that the commitments to the necessary fiscal changes were entered into. The UK levy is a major step towards closing the gap in delivering the deal done in Kyoto, our part of the EU commitment being to reduce our output of greenhouse gases by 12.5 per cent by 2010 as compared with 1990.

So far so good. But then we meet the difficulty. There are now growls of dismay coming from many of our industries and trade unions precisely because, although there is a common goal in Europe, we have at present no common fiscal method of implementing the agreement. And this is no academic debating point. The tax in Britain will be charged per unit of energy, and the cost of energy is a factor which of course varies enormously, as a share of value-added, between industries.

As currently designed, the levy will potentially have a major impact on costs and jobs in such industries as chemicals, steel, cement, paper making, glass and aluminium. But given that, there is no intention to impose any discriminatory impact on our industry relative to that of our EU partners. Then industry naturally looks at the on-costs and compares them with what is happening in Germany, France, Italy, Holland and so on, all of which in different ways seem to be applying the policy differently—and, it would appear, less onerously in relation to their heavy industries.

The question I want to put, therefore, is as follows. Would it not have been far better if the European level agreement had gone on to specify some degree of coordination of methods of implementation? I know how I would answer that question, but can anyone in this Chamber challenge the affirmative conclusion.

Throughout British industry it is being said—we saw it at the CBI Conference in Birmingham only this week—that we want a level European playing field. Indeed, the point is obvious and self-evident. But what is a "level European playing field"? First and foremost it begins with a recognition that if the EU has entered into an international obligation we should all be in the same boat and do the job together according to the same rules. That means that the fiscal regime—the framework conditions as they are sometimes called—should apply across the EU (I would say QED).

Before concluding, perhaps I may dispose of one red herring which is often dragged across this trail. In a perfect world we would get the Americans on board as well. But on the whole matter of global warming and the international protocols arising from that, the Americans unfortunately have had to be dragged kicking and screaming into the 21st century. The US has operated for many years on an energy price which is less than half ours, and Europe has had to give a lead to the world. Notwithstanding that, if people raise the spectre of Kyoto losing us in European competitiveness, let us keep some sense of perspective. Who is it that has a 200 billion dollar balance of payments deficit? It is the Americans. And who has the substantial surplus? It is the Europeans.

In any event, though there is a global market and a global benchmark price, geography and transport costs are two of the several reasons why Europe must have its own common fiscal regime in responding to Kyoto.

In conclusion, I suggest that Sub-Committee A might like to turn its attention in the coming Session to precisely this common framework. It is certainly an issue which will not go away and I believe that, just as we in Britain took the lead in the climate change negotiations, we could give a lead as to what that common fiscal regime should be.

6.25 p.m.

Lord St John of Bletso

My Lords, it gives me great pleasure to congratulate the noble Lord, Lord Lea of Crondall, on his outstanding maiden speech. The noble Lord comes to this House with an extremely distinguished background and will be a classic all-rounder. Not only was the noble Lord assistant General Secretary to the TUC from 1977, but he has also been secretary to the TUC Committee on European Strategy since 1989 and a member of the EU Steering Committee on Social Dialogue since 1992. He is therefore ideally qualified to speak in this debate and is also an ideal choice for the noble Lord, Lord Grenfell—who I hope will continue to be the chairman of the sub-committee—to be a member of Sub-Committee A. Not only does the noble Lord come here with his distinguished background but also, with his enormous experience in environmental issues, he will be a perfect candidate for Sub-Committee E.

While some of the noble Lord's remarks on energy taxation were somewhat wide of the core inquiry of this report, they certainly raised the spectre of whether there ought to be a level playing field on taxation in Europe. I hope that we shall hear a lot more from the noble Lord in years to come, whether or not I survive the "cull".

I have been enormously privileged to have been a member of this sub-committee for the past four years, and particularly to have been part of this intensive inquiry, ably chaired by the noble Lord, Lord Grenfell, into the controversial issue of proposed future tax co-ordination within the European Union. Like all other members of the sub-committee, I extend my thanks to our clerk, Dr. Elizabeth Hopkins, for her tremendous help and support, as well as to our specialist adviser, Professor Stephen Smith.

Paragraph 48 of the report aptly sets the scene when it says: Taxation, whether direct or indirect, is a highly sensitive issue, and there is a clear need to ensure that proposals on tax matters emanating from the institutions of the European Union are properly publicised and accurately reported". Other speakers touched on that. Without regurgitating the many recommendations of our report, my basic premise is that tax competition between European countries should not be impeded. Obviously, however, there needs to be some level of co-ordination so as to prevent harmful tax competition. But I entirely concur with the sentiments of the outgoing German Bundesbank president, Hans Tietmeyer, that tax competition is essential to creating strong economies and a strong monetary union.

I was going to draw a parallel between tax competition on alcohol in the European Union and what happens in the United States, but I am delighted that the noble Baroness, Lady Sharp of Guildford, touched on that issue. I sincerely hope that the Chancellor takes cognisance of her recommendation that duties do not rise in the future but hopefully fall—not that I have an excessive amount of alcohol.

I must declare an interest as a consultant to Merrill Lynch, as well as being a consultant to Overseas Companies Registration Agents, even though I have no involvement with the fixed income market. Like all those who have spoken on the issue, I am obviously alarmed about the potential consequences for the eurobond market, particularly for the City of London, should the proposed savings directives be introduced without a carve- out provision.

I was encouraged to read in the Treasury's recent report on international bonds that the Government are of the firm view that the approach of the current draft savings directive will not effectively tackle tax evasion but will have the unintended side effect of seriously damaging EU financial markets. Its conclusion was that this would, in turn, jeopardise the EU's programme of economic reform. I obviously hope that the Government wil be successful through the options set out in this report in securing an exemption from the directive for eurobonds and other similar instruments, so as to preserve the competitiveness of EU financial markets.

I agree with the Treasury's view that the single most effective means of tackling tax evasion is through an exchange of information on as wide an international basis as possible. Obviously, this touches on the thorny issue of banking secrecy, which the British Government believe should be addressed more widely both within the European Union and the OECD. It was encouraging to hear in the evidence we received from the Paymaster General, Dawn Primarolo, that the German Government, who have for many years maintained bank secrecy, now accept that the exchange of information is the best way forward.

I share the vision of the Cardiff European Council that one of the priorities in the European Union is to promote growth, prosperity, jobs and social inclusion. However, I reiterate my concern that this should in no way stifle fair competition within the EU. With the free movement of capital flows, should the savings directive as currently drafted be introduced, there is no doubt that this would in all likelihood result in the relocation of the eurobond market from the City of London and the European Union to non-EU centres, which do not have these directives. That would obviously have totally the converse effect of impeding growth with the possible loss of many thousands of jobs.

Although the noble Lord, Lord Saatchi, has already covered this point extensively, I also want to touch briefly on the issue of the code of conduct. One of the justified concerns in our report was the lack of transparency—or I could almost refer to it as the lack of accountability—in the agreement between the Council of Ministers and Her Majesty's Government on the code of conduct. While I accept that the code of conduct is not legally binding, the secrecy with which it was negotiated can only heighten public suspicion of secret, undesirable tax measures being introduced through the back-door.

I entirely endorse the recommendation in paragraph 20 of the report that the Government should seek agreement from other member states that the progress reports which the code of conduct group makes to ECOFIN should be published and subject to parliamentary scrutiny in the normal way. Certainly—and here I refer to paragraph 128 of the report—Parliament deserves a much clearer explanation of how the system is supposed to work than the Government have so far provided. I am baffled as to why ECOFIN decided that the work of the code of conduct group should be confidential.

I am pleased that the Government have reiterated their commitment to retaining the unanimity rule for decisions on taxation. Can the Minister give us assurances that this will not be watered down in the future.

In conclusion, whether the reference be made to tax co-ordination or tax harmonisation, there is a strong case in certain areas for sensible, well-justified coordination, particularly to reduce tax evasion. However, the key question will be how much coordination is necessary to allow the EU's single market to function at an acceptably high level of efficiency. Clearly, the politics of Europe suggest that tax systems mean different things to different people.

Although I can see no compelling argument for broad tax harmonisation in the EU, I agree that a moderate level of co-ordination and fair competition can co-exist to the greater benefit of taxpayers within the European Union. To that end, I recommend the report to your Lordships' House.

6.34 p.m.

Lord Currie of Marylebone

My Lords, perhaps I may join other noble Lords in congratulating my noble friend Lord Grenfell and his committee on an excellent report. Indeed, I should also like to congratulate my noble friend on his very insightful introductory speech to today's debate. I believe that the report sheds a great deal of light on an issue which is often exaggerated or demonised, and where the discussion is over-simplified and misleading.

The report comes to some pragmatic and commonsense conclusions; for example, that tax competition is not always harmful, nor is it never so. I think the last point that tax competition can be harmful was amply dealt with in the excellent maiden speech of my noble friend Lord Lea of Crondall. There is also the conclusion that some taxes do require coordination, while others do not, and that therefore tax co-ordination and competition can co-exist, and that where co-ordination is required it does not require greater centralisation in Europe. It is something that can happen through co-operation between national governments agreeing between themselves. I believe that those conclusions need to be broadcast much more widely because the debate on this question in the country is wildly misleading.

It is worth recalling that the setting up of the European Community was based on a very fundamental act of tax convergence; namely, the agreement to replace the widely different sales tax systems across Europe with a single value added tax system. Without that act of tax convergence, the single market, which I am sure almost all of your Lordships would support—there may be one or two who dissent—could not have happened. It is possible that we may need to go further in similar convergence in the corporate tax area to deal with some of the issues which arise from disparities there.

I believe that this illustrates the nature of what we are talking about—co-operation on tax, agreed by member states on a unanimous basis and allowing some disparity in tax rates and in the precise definition of the tax base for VAT. Yet without that fundamental act of bringing in VAT as a common system which we, as a country, also bought in when we acceded to the common market, the single market would not have been possible and European consumers and companies would have been the losers.

It is an example of a more general point that has already been made; namely, that the impetus for tax convergence and tax co-operation comes from the process of integration in the single market itself. A number of commentators relate it to the euro but this is somewhat misleading. The relationship to the euro—the need for tax harmonisation as a consequence of the euro—is, to a large extent, incidental. The euro is only relevant in so far as it accelerates the process of economic integration in the European market by introducing price transparency, by eliminating exchange risk and by introducing a much more effective market for corporate control. Those changes will accelerate integration and, as a consequence, may require a further move towards tax convergence.

However, it is the consequence of integration rather than the introduction of the euro that is the key point. If the UK were to stand aside, with a view to avoiding that tax convergence, we would be the losers because we would be missing the efficiency gains and the benefits that come from the introduction of the euro because of those developments.

There are two broad arguments for tax convergence of this kind, one at the macro-economic level and one at the micro-economic level. At the macro-economic level, there is a case for a degree of fiscal co-ordination, largely of deficits and debt policies, with a view to maintaining an appropriate balance in monetary and fiscal policy in the eurozone and concerning the value of the euro against the dollar or the yen.

It seems to me that there is a case for some coordination in that area but, again, it does not require a European-wide tax system; rather, simply cooperation between nation states. The European budget is far too small to be used for those macroeconomic purposes. The developed national governments have large budgets which, in an integrated Europe, need to be co-ordinated in a sensible way.

However, I think that the real pressures for convergence, where they come, will be more at the micro-economic level. The case for a European corporate tax system—although not necessarily a common tax rate—is strong. Comparisons of corporate tax rates across Europe are often rather misleading. Tax rates vary widely, but if one looks at tax revenues—the tax take—one finds that they vary much less. High corporate tax rates go together with a narrow corporate tax base. We in the UK have a wide tax base and a low corporation tax. It is not the case that the burden of corporation tax is significantly lower here than elsewhere. It is somewhat lower but not much lower, but is not reflected in the differences in tax rates.

The consequence of those differences is not only that it is inconvenient for companies operating across Europe, which it is, but it is also an opportunity for them—almost all problems for businesses also create opportunities—in that it creates a real opportunity for companies operating across Europe to manipulate their books to minimise tax take to the detriment of the taxpayer in Europe. There is therefore a good case for co-ordinating the corporate tax system in Europe to avoid both the costs that the differences impose on companies, but also to remove those tax avoidance elements.

Similarly in other areas, predatory tax policies and excessive tax competition are surely self-defeating. The widespread practice of undue tax holidays in Europe is a game that all countries can play—and all countries do to some extent play that game—but it is essentially self-defeating when all countries play it. There is a great deal to be said for all countries in Europe agreeing unanimously to a self-denying ordinance on such practices. The argument that my noble friend Lord Lea of Crondall has put forward for cooperation in the area of environmental taxes is similarly strong. One cannot introduce environmental taxes to deal with the problems of global warming and the like through tax competition, which simply does not work in this area. There are major benefits for Europe and the international economy in moving in that direction. One requires co-operation and a common approach to such taxes to secure the environmental benefits we need.

Finally, there may be some areas where factors are so mobile—capital is one of them—that increasingly we shall find the need to eliminate tax disparities. Again that is an area where I believe that what is called for is co-operation between national governments rather than the central laying down of policy. But the areas of tax this applies to are really not that large. We are talking about a relatively small proportion of the taxes of national governments.

None of these forms of co-operation on tax policy represents anything like a move towards a form of federalism that many people fear. They rely on the traditional mechanisms of the European Union; those of intergovernmental co-operation motivated by enlightened self-interest. They do not entail the creation of a pan-European system of taxation but rather the gradual and co-operative evolution of national tax systems. They do not involve the move to wholesale decision making on the basis of qualified majority voting; co-operation is feasible without the abandonment of the principle of unanimity.

There will be those in Europe who will not be satisfied by this gradualist approach to tax cooperation. There will always be those who argue for much greater tax centralisation and they will indeed be quoted by those who wish to demonise Europe on this issue. I think that we have heard one or two examples of that already in this debate. Those voices will be heard but they will not, I believe, prevail, for there will be equally strong opposition to centralisation from a number of member states in Europe, not just the UK. The UK will not be isolated in its opposition unless we play our negotiating hand lamentably, and of that I think there is little sign.

6.45 p.m.

Lord Boardman

My Lords, as the first speaker on this side of the House after the excellent maiden speech of the noble Lord, Lord Lea of Crondall, I congratulate him and I look forward to hearing him speak on many occasions in future. I recall that he gave evidence once to a Select Committee of which I was a member. He did that with skill and conciseness, although not necessarily with my wholehearted agreement! I hope that we may look forward to that pattern often in the future.

I also congratulate our chairman, the noble Lord, Lord Grenfell, whose wide experience and ability and wide international knowledge were a tremendous asset to all the members of the committee, to whom he showed such considerate leadership. We were most fortunate to be served by the noble Lord and the clerk of the committee, Dr Elizabeth Hopkins, in getting this long and complex report put together. That was done to remarkably good effect.

It is inevitably difficult to judge the effect of any change in taxation on various parts of the country. In a limited area such as the UK a change in the Budget can have a quite different effect in the north of England as compared with the south of England, and so on. Those effects are multiplied as regards the 15 member states in Europe. Let us imagine the complexities that would arise in trying to apply any form of unitary taxation or in centralising taxes in many respects with regard to those different countries. To some changes in taxation may constitute friendly competition—perhaps I should have said friendly co-operation; to others they will constitute hostile competition.

I refer to those nation states which are members of EMU. I believe that ceding control of their taxes to some central European body would result in their losing both fiscal and monetary control. I believe that that must inevitably lead to surrender or ceding of political control. It must be a step towards a federal Europe that some of us—myself in particular—dread. On listening to the comments of the noble Baroness, Lady Sharp of Guildford, and indeed those of the noble Lord, Lord Currie, I had the impression—perhaps I did not understand the speeches sufficiently—that the harmonisation of taxation, together with the harmonisation of monetary control, was a useful and positive lead towards the kind of state that I am worried about. Fortunately that question does not arise at this stage. As our report makes clear, the Government have firmly stated that they have no intention of ceding control of taxes without treaty changes. However, the report refers to the real dangers that could arise should the Government weaken at all in this area.

My noble friend Lord Saatchi has told us not to worry. Perhaps I ought not to worry yet, but I am just a little nervous, and the report makes it clear why there is that anxiety. There is obviously a feeling of frustration where co-ordination which is agreed among member states cannot be effected on those outside that immediate net—the European Union—who understandably wish to go their own way and secure the advantages that follow from that.

It is absolutely ridiculous to imagine that we can secure co-ordination of what we might like to have in Europe among all the OECD countries, the United States of America, Switzerland, the Cayman Islands, and so on. Apparently it is the ambition of the OECD to try to persuade us that, if we will agree to certain things, it is confident that it can get all these other nations to agree. I doubt that is possible. It is most unlikely to be achievable.

The noble Baroness, Lady Sharp of Guildford, was more optimistic about this than I can possibly be. For example, I refer to the withholding tax. I will say more about it in a moment but, quite clearly, what might be quite acceptable to some nations will be competitively and in every other way hostile to others.

Let me turn now to the withholding tax. The purpose of the withholding tax is to enable those member states which are unable to collect tax to collect tax revenue from their own citizens. Germany is perhaps one of the principal complainants because it cannot collect the tax from its own citizens. The effect of the draft directive is that we should suffer the disasters to which the noble Lord, Lord Grenfell, referred—in London, on employees and on businesses—in order that Germany and the like can collect tax from their citizens who are defrauding them of tax. Although the numbers are somewhat speculative at the moment, very serious losses will be suffered. I find it very difficult to get enthusiastic a bout this situation.

One of the consequences would concern the issue of bonds. The issuer of the bonds—which normally stand at a substantial premium because interest rates have fallen—would be able under the terms of the issue to redeem those bonds at par. That would represent an enormous bonus to the issuer of the bonds and an enormous loss to the holders of the bonds, many of which are large insurance companies. That would be one of the consequences of the directive.

This is all because the Germans and others do not pay their taxes; or because they have banking secrecy laws which help them to cover up so much of the revenue that should be disclosed and taxed. I find it difficult to understand why we should impose upon ourselves serious penalties in order to help them out of their problems.

If we must do something—I do not see why we should—perhaps the reporting option to which the noble Lord, Lord Grenfell, referred may be the preferable choice. "Grandfathering" is suggested by the Government. That is a possibility but, at the end of the day, it is for each country to collect its revenue and taxes from its own citizens.

The Government's response to the report was rather disappointing. It did not cover many of the rather important points which are raised in the report. They agreed with the report's conclusion about the scare headlines and the public not being sufficiently informed. The scare headlines and the rumours which were spread around as regards what was happening were caused largely by the code of conduct. The code of conduct was kept confidential and rumours were spreading far and wide around London that the code of conduct was arranging taxing of this, that and the other in a way which was extremely damaging. The code of conduct has been the cause of much complaint. When the Paymaster General gave evidence it was stressed of course that whatever happened was confidential.

The members of the committee received a report as at 11th December 1998. So it is hardly up to date. We were not sent annexes setting out the recommendations in regard to tax. Perhaps I may quote from the annex sent by the Paymaster General of the first progress report presented on 11th December 1998. It states: It was also emphasised that the Code is a political commitment and does not affect the Member States' rights and obligations". It goes on to say: In the Code Member States commit themselves not to introduce new tax measures which are harmful within the meaning of the Code. Also Member States commit themselves to amend existing laws and established practices as necessary". I emphasise "Member states commit themselves". It is true that the covering letter stated that the conditions of the code of conduct have no legal effect, but what would happen if a Minister, on behalf of the Government, committed them to a certain course; and then the Government find that they do not like it and rat on it? I find this issue extremely difficult. I hope that the Minister will be able to answer that question.

Further on in the report it states: Also, Member States with dependent or associated territories or territories in respect of which they have special responsibilities or taxation prerogatives committed themselves, within the framework of their constitutional arrangements, to ensuring that the principle of the Code are applied in those territories. The Group will examine the tax measures in Member States' territories to assess whether they are consistent with the principles of the Code". Did the dependencies or associated territories give their approval to this combing over of their accounts and taxing? Did they agree to be pressurised to alter their taxing to conform with whatever the Paymaster General believed was necessary in order that she could enter wholeheartedly into the code of conduct? I hope that the Minister will be able to reply to those questions.

The report covers a wide field. The noble Lord, Lord Grenfell, explained it very fully and very well in his opening speech. It raises very important questions which I hope the Government will consider. I hope that they will answer them more fully than they have done so far. I hope that they will digest the points made. The report makes clear the Government's attitude that no taxation is to be imposed at the request of Europe; that that will not be acceded to; that the Government will not agree to that. Anything which is not acceptable to the Houses of Parliament will not be accepted unless there are treaty changes.

The report was excellent. We had a lot of assistance and lot of good evidence. I hope that the Government will read it carefully and pursue it to the right end.

6.58 p.m.

Lord Rathcavan

My Lords, the noble Lord, Lord Grenfell, introduced this debate with his usual ability and clarity. I am sure that the House will miss him when he goes off to pursue his next career of writing novels in Paris. I do not think the report will provide him with much of a plot, but one never knows.

I was rather fearful when I found myself on the list between the formidable economic brains and reputations of the noble Lords, Lord Boardman and Lord Desai. I will confine my remarks to the simple issue of corporate tax competition across the European land border in Ireland.

As noble Lords may know, the nominal rate of corporation tax in the Republic of Ireland is shown as 30 per cent. However, in practice, the majority of companies pay a rate of 10 per cent, allowed for all manufacturing and for the international financial services industry, which has been such a success, largely because of this profit-related concession. In their written evidence to the committee's report I noted that the Irish authorities were quick to record their agreement with the Commission under the code of conduct to phase out the 10 per cent rate between 2003 and 2010, to be replaced by a new rate of only 12.5 per cent, which will apply to all businesses. That still leaves a huge margin on corporation tax between the Republic of Ireland, Northern Ireland and the UK, even allowing for the tax concessions on capital allowances unique to Northern Ireland within the UK. Like other noble Lords, I wonder what the code of conduct is all about.

The land border highlights this disparity, which is also an obstacle to cross-border co-operation. There are many Northern Ireland companies which, quite legally, have been able to organise their affairs to maximise their corporate tax liability at the lower rate across the land border. Even more significant is the fact that the Republic of Ireland—the Celtic Tiger economy—has been the most successful of any region in these islands, and probably in the European Union, in terms of attracting inward investment. It is a formidable competitor in that field of inward investment because of the incentives of a uniquely low rate of corporation tax which is a key driver on the choice of location.

As Northern Ireland emerges from a long period of political instability which has seriously constrained its economic development, it must seek every opportunity to attract inward investment and new employment, which is so important to the peace process. This cross-border inequity in corporate tax is uncoordinated and unfair competition which cannot co-exist, to misquote the title of this report. Now that the Republic of Ireland has the blessing of the code of conduct for its low rates of corporation tax, we will have to look to our own side for some kind of convergence.

The existing concessions on capital allowances have reflected the willingness of our Government to consider special tax arrangements for corporate sectors in less favoured regions. I am greatly encouraged by the recent economic report, Strategy 2010, facilitated by the Department of Economic Development as one of the commitments in the Good Friday agreement. The report urges the new Economy Minister in a new devolved assembly—which, pray God, we will have before long in some form—to seek other profit-related, even if time-limited, corporate tax concessions, at least for new inward investment. That would level the competition and stimulate economic growth and employment in the deprived border areas.

I know that the Minister will not give me much of a response, but I am taking the opportunity to mark up this issue again. I hope that he will refer it to his Treasury colleagues with the passion it deserves.

I wish to make one other brief observation on the report. I know that its remit was constrained to taxation in the European Union, but I am surprised that it did not make more reference to examples of the American tax culture and tax structure.

It is said that in the US 15 per cent of all Americans with jobs are working in businesses which did not exist five years ago. Why have we failed to support to the same extent innovative industries that have become such big employers and wealth creators in America, despite the fact that in Cambridge we now have one of the world's greatest centres of brains, research and innovation?.

One problem may be that the investment capital to support innovation and start up companies is controlled by a small number of huge institutions. I have seen an estimate that only 20 institutions now control 85 per cent of pension funds. Noble Lords will know that big fund managers like to invest in big stocks and big amounts, not start-ups and small innovative companies, even if managers in their personal capacity do just that.

I have seen another estimate that only 15 per cent of quoted UK shares are now owned by individuals, compared to 40 per cent in America. The reason for that is the tax culture. American tax breaks are more available directly to individuals who have greater choice and control over their savings and pension funds. They like to support smaller, innovative companies, maybe with only an average 5 per cent of their funds, but it aggregates to very large amounts.

There was a lot of talk and debate this week at the CBI conference about a new enterprise and innovative investment culture, not only by business but also by the Government. In Europe, let alone the UK, to achieve that culture we need more of the personal tax breaks that have encouraged the American economy to remain so strong and successful. This report gives us a good background and I found it of great interest. However, I hope that a further report by the committee will look at comparisons and lessons to be learnt between the American and European tax systems.

7.6 p.m.

Lord Desai

My Lords, I join other noble Lords in congratulating my noble friend Lord Grenfell, and our clerk, Dr Hopkins, on their excellent steering and quick production of this rather complex report. One of the tasks that perhaps we should perform more than we do is that of education. It is a great pity that many of the reports of House of Lords committees are not more widely available. The European reports should be published in paperback form. I have had the privilege of taking part in the production of a number of reports—on enlargement, on financing the EU and on tax co-ordination. If such reports were to be published in a more attractive way, I believe that we would contribute a good deal to education. I wish to concentrate on educating the public and the media on problems of taxation.

First, I should like to congratulate my noble friend Lord Lea of Crondall on his excellent maiden speech. He solved an outstanding problem for those who have to make their maiden speeches. What should one speak on? Most noble Lords cast around for a suitable subject. My noble friend has been most innovative by stating that, whatever the subject, he would make his speech. That is an example that all noble Lords should follow. My noble friend made an excellent speech on energy taxation and I look forward to hearing more from him.

The noble Lord, Lord Saatchi, recently gave a lecture in which he said something along the lines of, "Happiness cannot buy you money". All I can say in reply to that is that the promise of tax cuts cannot buy you votes either. The noble Lord tried to raise the spectres of tax harmonisation, federalism and so forth. However, what emerges from the report is the surprising fact that despite differences in corporation tax rates, as several other noble Lords have pointed out, when we examine tax take, which is the effective tax rate, there is a remarkable uniformity in corporation tax rates. Clearly there is a process of response by the private sector to the different and somewhat complex regimes that operate. By some form of competition and response, the outcome is that of ex post convergence, although ex ante the rates are different.

For that reason, one of the most important points that we should bear in mind is that when tax is debated at the political and economic level, we must be careful to identify exactly what it is that we are worried about. Even with the mainly large cross-border ex ante tax rate differences—the noble Lord, Lord Rathcavan, gave us an illustration of that fact—that does not mean that businessmen move from one end of the continent to another because businesses have many other factors to take into consideration.

The effects of tax rate calculations are important. When NAFTA was being debated, I recall Ross Perot saying, "If we sign this, all American jobs will go 'whoosh' across the border". Nothing of the kind happened. The number of Americans in employment is now higher than it was before NAFTA. It is rather paradoxical. Economists teach in textbooks that for small price differences there will be large responses. Only politicians take it seriously. Economists do not take it seriously. We know that it may be good for textbooks, but there are other considerations which we hold constant when we know that they are not constant at all.

That is what brings me to the complex problem of withholding tax. As the noble Baroness, Lady Sharp, pointed out in an excellent speech, in this area one has to rely on co-operation. In a global economy, if one wants to have some fiscal autonomy left—one needs some fiscal autonomy—one cannot go on taxing the immobile factors of production all the time. One needs some kind of co-ordination. I have problems with a withholding tax. It is tax evasion by the German taxpayers. They happen to be rather rich people and I do not have much sympathy for the tax problems of rich people. To what extent should we connive in tax evasion by rich people? While I am quite willing not to work too hard on behalf of the German Government, or any other government, I am worried that if we begin to build industries which are tax evasion-related industries that will be a fragile basis for prosperity.

The City argued this Ross Perot "whoosh" theorem—if anyone touched the tiniest withholding tax, entire industries would disappear. I was shocked and rather sad that the City did not come up with a better argument. It was basically scaremongering. As we remarked in the report, there was no real detailed calculation of—

Lord Taverne

My Lords, I thank the noble Lord for giving way. It is perfectly true that the City did not give a great many details. But is there not the rather uncomfortable and worrying precedent of the American interest equalisation tax, which again dealt with evasion by very rich people but whose final result was very damaging to the United States?

Lord Desai

My Lords, I think America has survived. It did not suffer too much. Some industries have gone down but other industries have grown up. I would have bought the City's argument if someone had produced for me a calculation of the size of the market. What is the size of the market in which very small eurobond buyers have an involvement relative to the whole eurobond market? A withholding tax will affect only personal taxpayers.

I just wish that the technical level of the response to us of people who fear a withholding tax had been better. Having said that, I agree that the committee's conclusions are the correct ones. Therefore, for the time being, it is not persuaded of the arguments and would prefer information co-ordination to a withholding tax regime. However, if I were sitting in judgment I would not be very impressed by the scaremongering stories. I was certainly not impressed by them.

I also felt the same about the code of conduct. I quite agree that transparency is required and that it should not happen in secret. However, when listening to the Paymaster General, I felt that what she was describing was more like an idle seminar than a serious administrative arrangement. We are talking about various taxes across various countries. As soon as people start talking about taxes, they feel that they have to be secretive about it. Since the conclusions of the code are not to be binding and since no conclusions have been come to so far as I can see—people are discussing only various tax concessions which they could or could not find distortionary—I am not worried except that it is a PR disaster of first order. This Government, of all governments, should have tried to do something better.

I shall stop at this point because other noble Lords have said what I could have said. But I want to add my sentiment to that expressed by other noble Lords. I shall miss the noble Lord, Lord Grenfell.

7.5 p.m.

Lord Shaw of Northstead

My Lords, I should like to add my congratulations to the noble Lord, Lord Grenfell, on his chairmanship of the committee. Under his gentle and wise leadership, he never disguised his knowledge and experience of this whole subject. That was of tremendous help to us. He had working with him, in the shape of Dr Elizabeth Hopkins and her colleagues, a team that seemed to me never to work in less than overdrive. The speed with which the results were produced was impressive and incredibly helpful. Her work was added to by the work of Professor Stephen Smith.

The subject of our debate today has to be of the utmost importance considering the future development of the European Union. That there should be some co-ordination is generally agreed. But how much? That is very much open to argument. Behind all the discussions that are taking place lie several fundamental questions: how far should the "same for all" principle apply; how far should centralisation in Brussels be taken; what value should be placed on subsidiarity; and how far should the discipline of competition be allowed to bring about a natural process of co-ordination? And over all there rests the basic question as to whether the future of the EU lies in movements towards a single federal state or whether we are to aim at a developing community of European nations. Noble Lords will hardly be surprised that I approach this subject firmly from the latter point of view. I hope that our report will help to open up and stimulate a better informed debate.

At the outset I welcome the clear statement by the Treasury official, Mr Colin Mowl. On voting, he said that, the maintenance of unanimity on tax matters is a Government commitment set out in its election manifesto … To change that would require a Treaty change which itself would require unanimity and the United Kingdom would not agree to such a change". The reaffirmation of the Government's position is particularly reassuring, in view of the warning words of Commissioner Monti that, a few Member States have already pronounced in favour of shifting … from the unanimity rule to the qualified majority rule". One has heard that kind of view put by others as well.

So far as concerns tax co-ordination, we believe that some may be necessary. But we believe also that tax decisions must primarily belong to individual member states. It is clear that the membership of the single market itself will in any case bring about a measure of convergence, although we must also remember that tax competition can help to keep down rates of taxation, which in itself is always a desirable objective.

It has been suggested that joining EMU will make tax co-ordination inevitable, since, it is said, the successful management of monetary and tax policies can be achieved only if both are under the same political control. Personally, I strongly support the contrary argument; namely, that, since national governments can no longer have recourse to monetary policy they have an even greater need to use tax policy to manage their economies in pursuit of legitimate national objectives". In any case, I firmly believe that all authorities, national or local, which have responsibility for spending money should also have responsibility for raising that money. Otherwise, the old maxim will apply: "He who pays the piper calls the tune". For that reason, we must maintain firm control of our own taxes.

I should like to say one final word on the argued need for co-ordination of taxation to help reduce unemployment. It is argued that there has been a shift from taxation of capital to taxation of labour, with a consequent increase in unemployment. We found no firm evidence for that view. Indeed, we found significant instances where it just was not true. So we state in the report that, we do not agree with the Commission that employment promotion is an argument which can be used to support the proposed tax co-ordination measures". Perhaps I may add my comments to those that have already been made on the code of conduct. One of our principal subjects of concern has been the code of conduct group—or perhaps I should say the code of conduct of the code of conduct group. Our concern has been that there are consequences that will flow from the decision taken by the group.

The Paymaster General has told us that the code of conduct is not legally binding on member states. Yet Colin Mowl, the UK representative on the group, has said, Although [the Code] is not legally binding, the Government has entered into an international commitment which it expects to honour and expects other people to honour". Incidentally, since our own representative chairs that committee, our commitment must be the greater.

Were we wise to agree to join such a group under such conditions of secrecy, since while we accept that its decisions are not legally binding, on the other hand Ulrich Wolff of the German Ministry of Finance tells us that, there is no big difference between legally binding instruments and politically binding instruments in the area of international conventions". The suspicion voiced by witnesses is surely justified; namely, that this device could be used to side-step the unanimity rule.

It is, therefore, even more important that the secrecy that surrounds the group's proceedings should be lifted. This Government are pledged to "open government". Yet they are now engaged in discussions which, on the one hand, could be on matters of minor importance yet on the other could be of major concern to business and the taxpayer alike. The facts should be known. Harmful rumours arising out of ignorance should be squashed.

In their reply, the Government state—completely inadequately—that they, will make available to Parliament any reports from the Group to the Council which the Council agrees should be published". No great deal is being promised; the information will be with us in any case.

I now turn to mutual assistance in debt recovery, which is taken up in paragraph 210. We were told by HM Customs and Excise that it placed a great of emphasis on mutual assistance by revenue authorities. The report states that, Existing Directive; provide for limited mutual assistance between Member States in the recovery of tax debts. There is a proposal currently or the table, which would modernise and extend the provisions in relation to both indirect and direct taxes". We have expressed surprise that the Government have felt obliged to block that proposal. In their response, the Government, in turn, express their surprise at our surprise. Whereas it seemed to us a useful administrative measure, the Government point out that, As well as having a direct impact on taxpayers, this would affect the levels of tax recovered and thus the revenues of member states". While I do not want to question that opinion—indeed, I confess that I think it is right—I believe that this important matter should not be left undecided. Therefore, will the Government confirm that they are in favour of the proposal in principle, and that the only objection is that it should be passed under Article 94, and not Article 95EC? If so, and as everyone is then in favour of the proposals, one's instinctive reaction is to say, "Splendid. Let's get on with it, no matter which article may be involved". But, alas, we all know that that is not possible.

But it would also be wrong not to pass this unanimously approved proposal. Common sense tells us that it must be enacted. If agreement cannot be reached on the use of Article 94, is it too much to hope that common sense can find a procedure for its acceptance without the creation of an unacceptable precedent for the future.

7.26 p.m.

Lord Shore of Stepney

My Lords, there are a number of fundamental questions, raised by the noble Lord, Lord Shaw, that need answering. They arise to some extent within the context of the report, careful as it is. Indeed, it includes above all the question of questions: are we en route for the creation of a state in Europe; or are we still somehow clutching onto the remnants of our national sovereignty and our democracy here at Westminster? I fear that the matter is already largely decided in favour of the former rather than the latter. The report has some bearing on the matter, which I shall touch upon shortly.

First, I should like to thank my noble friend Lord Grenfell for presiding over the report. I know his feelings on these matters. He belongs to what may be described as the Europhile camp. Because of his own feelings, and those of a substantial number of members of the committee—a clear majority—it is all the more creditable that my noble friend feels the necessity to probe and to come up with honest questions, to make sure that people do not get away with the kind of general statements that are designed, frankly, to confuse rather than enlighten. I genuinely congratulate my noble friend on his role in this.

I should like also to congratulate my noble friend Lord Lea on his maiden speech. It was an extraordinarily good one. I hope that we shall hear more from the noble Lord in the future. He speaks with considerable authority and experience, not least in the questions that we are now deciding. What he has not learnt, as a serious Europhile, is how unwise it is to be too open in an assembly such as this. It is quite clear to me—and my noble friend hardly restrained himself from saying it—that he would like harmonisation.

He gave a good example of where it might be to our benefit. It is very healthy for those who hold that view to be a little more forthcoming and not quite so constrained as regards their genuine ambitions in that area. Therefore, we welcome my noble friend Lord Lea and hope to hear from him again.

There is no question of the importance of tax harmonisation or tax co-ordination—whatever the difference may be—for several reasons. Incidentally, the reason that it is particularly sensitive to us should be plain to everyone. In terms of a number of direct and indirect taxes we have a considerable advantage compared with the generality of our colleagues in the European Union. They have a very good reason for saying that it is good to have co-ordination and harmonisation of taxes even if exactly the same rates cannot be achieved across Europe, including Britain. But if they can get rid of at least some of our advantages in terms of tax allowances and other matters, what a benefit that would be. Yes, they would benefit and we would lose.

Although Luxembourg has an interest in the proposed withholding tax, that is almost uniquely a British asset. What could be better, frankly, than to see that asset shared—if it could be—more generally with the other countries in the Union? Naturally, they have brought to bear strong pressures and want the withholding tax to be the subject of a directive which would seriously disadvantage us. Those seem to me to be two obvious reasons why we should take tax matters very seriously.

There is a third reason. In December 1997 the Commission put onto the agenda of European Union discussions not just one tax but a battery of them, including the establishment of a code of conduct committee with a vast remit—to which I shall turn in a moment—including a withholding tax, which I have just mentioned, and a tax that would affect the tax arrangements of companies with subsidiaries in different parts of the European Union, which I do not believe is particularly worrying. A good number of other members also have reasons for wanting harmonisation on VAT. There was also an energy tax. That is a formidable agenda.

How do my noble friends respond to it when people like myself bring it to their attention? They say that we are being hysterical, as though we have imagined that this agenda comprising tax measures exists. They say that we are paranoid about it. They also say that we have nothing to worry about because of the various safeguards to which they point and which they believe give us a strong defensive position against any possible attack.

As to the study on the code of conduct, according to the Commission it is about, those harmful tax measures that may affect in a significant way the location of business activity in the Community". That is a very serious matter. If tax differences—or lack of tax harmonisation—can allow one state to enjoy a significant advantage in attracting investment to its territory, we should be concerned as good Europeans and seek a code of conduct, or harmonisation, that removes this obvious British advantage. However, that is not on the face of the report, although it may be in the hearts and minds of one or two of those who helped to write it. I put that on one side and turn to the attitude of the Government and the assurances that they have given.

At a fairly early stage the Paymaster General, Dawn Primarolo, told the other place: All EC proposals on tax require unanimity before they can be adopted. We will not accept any proposals which are not in the national interest".—[Official Report, Commons, 22/6/99; col. WA 325.] My noble friend, who is to reply this evening—I informed him that I would raise this matter—gave assurances in the most extravagant terms. He said it was inconceivable that we were under threat. On 20th January he quoted, with approval, Mr Kenneth Clarke, whose opinion was that, 'In reality there is at present no serious or credible euro threat to Britain". My noble friend continued: If we think it is unfair we shall veto it and it will not happen. It is as simple as that. The failsafe position is on my side of the argument and not on my noble friend's side".—[Official Report, 20/1/99; col. 662.] He was referring to me at that time. That is an important guarantee.

On 28th January, again in reply to me, my noble friend said that the difference between harmful and non-harmful matters could be well explained and properly discussed, and finished with the following splendid quotation: 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".—[Official Report, 28/1/99; col. 1209.] I do not believe that he could have been stronger and more affirmative.

We then had a farce. I am sorry that my noble friend should have been ambushed in this way. One of the five measures in the Chancellor's 1998–99 Budget was the Northern Ireland 100 per cent capital allowances for small and medium size firms. That was mentioned by both my noble friend here and his ministerial colleague in the other place when those guarantees were given. That was suddenly struck down on 9th July when the wretched Minister in the Commons had to move a new clause to delete the old one which had given 100 per cent capital allowances and put in its place something of far more modest proportions.

I raised this matter with my noble friend, as I was almost bound to do, when we last debated these matters just before the Summer Recess. He said that it was all quite clear, that there was no real problem and it simply fell under the heading of state aids. State aids are not just direct payments, subsidies and the like; they are also tax allowances. Incredibly, without a protest or challenge my honourable friends in the other place and my noble friends here swallowed that.

That leads on to some interesting fundamental questions which relate mainly to the code of conduct. The first one follows naturally from what I have just said. How many other tax allowances and measures—we know of four others: shipbuilding, films and so on—can also be considered under the heading of state aids rather than taxation? As to state aids, there is no question of a veto; it is for the Commission to decide. The Commission has decided the matter—and against our interest. So all those promises of, "We will not allow anyone to affect our interests if we judge it not to be acceptable" fall. They are exposed at once to a major gap in their credibility.

That is the first question that I want to put. What other of our tax measures are to be judged as state aids and therefore totally unprotected by our British law? Secondly, I want to ask the question that the noble Lord before me also raised, which is the very important question: is the code of conduct binding or is it voluntary and can it be rejected if we do not like it or do not like the effect? On this, like others, I am baffled indeed. We have had the junior Minister in the Commons before the committee and before that House affirming strongly that it is entirely up to the Government to accept whether recommendations made in the code of conduct are implemented. There is no legislative compulsion, as it were.

I have here an agreed document, the progress report of the ECOFIN Council to the European Council at the end of last year. The code has already been adopted, although what measures are to be covered by the code are still at large though they hope to finish this by November this year. This is their first report in which they say: In the Code Member States commit themselves not to introduce new tax measures which are harmful within the meaning of the Code. Also, Member States commit themselves to amend existing laws and established practices as necessary…". That is from Brussels, the great source of authority, not just from the lips of a junior Minister in the House of Commons. I think we are entitled to be worried because of that as well.

I finish with the last point that worries me, and no doubt my noble friend will say that I invented all these things or he will give me some promise and repeat what he has said on other occasions. However, the question of whether the next IGC will come up with a proposal to institute qualified majority voting in the area of taxation will arise. When, as my right honourable friend in the Commons, Robin Cook, says, as he did yesterday when asked whether we would veto anything, "Yes, no question; we would not allow that", I have a very serious doubt and I will tell noble Lords why. First, they do not like to be isolated as they could well be in Europe; secondly because the Commission and the major partners, France and Germany, have already indicated that they would be in favour; and, thirdly—and let us grow up and be sensible—it is a bargain and, if we do not accept a majority view and qualified majority voting over taxation, we will have in effect to veto the extension of the European Union to embrace the countries of eastern Europe. That IGC is about clearing the way for them to join and making institutional changes that are deemed to be necessary. When the British Foreign Minister and Prime Minister are faced with the bargain, either accept QMV or be seen to be the nation that stopped the expansion of the European Union into eastern and central Europe, I could not be at all sure what the Government will do.

7.45 p.m.

Lord Hussey of North Bradley

My Lords, the control of taxation is at the heart of every country's economic and political governance. It is also at the heart of most of us unfortunates who have to pay the taxes. Any proposal therefore that might appear to give the European Community the right or the potential right to adjudicate on the justice, injustice, relevance or legality of any tax proposal is likely to invite considerable hostility. This is accepted by the Community in the unanimity rule under which any Community decision must be unanimous. This gives the opportunity for any country to exercise the veto on tax measures which would affects its citizens.

The point is properly and clearly made in our report: So long as the Government maintains its insistence on the unanimity rule in decision making and on the principle shared by all member states that national taxes raising revenue from domestic taxpayers are a strictly national matter, current proposals pose little or no threats to the interests of the United Kingdom". Adding, for good measure, that the Government must remain permanently vigilant to ensure that undesirable tax measures are not smuggled in through the back door.

That said, clearly in an association of 15 countries, shortly perhaps 20 or 21 countries, with more to follow, there has to be a certain give and take on these issues, a certain freedom of action for member states—what is described as subsidiarity. This report on whether co-ordination and competition on taxes can co-exist is an extremely complicated one, raising several vital principles of importance to every state and its electorate.

As our discussion developed, I felt we were sailing through iceberg-infested waters, catching sight of the peaks jutting above the waves but realising the dangers lurking beneath them. For instance, should taxes be either co-ordinated or harmonised? Would either lead to higher or lower taxes? Could taxes be imposed on the United Kingdom? Should all tax proposals remain subject to veto or should some of them be decided by QMV? What about the taxation of royalties or withholding tax, about which feelings run so strongly.

On our voyage, we were lucky to have an excellent and experienced captain in the noble Lord, Lord Grenfell, and a skilled and equally experienced pilot in our clerk, Dr Elizabeth Hopkins. With their advice, we were able to circumvent most of these icebergs and not hit any of them, gliding elegantly past two noticeably dangerous and controversial ones: excise duty and energy taxation.

If I may add a personal interest, as someone with a house in Somerset and a disability, energy taxation is certainly worth looking at, but not in this context. For that reason, I welcome the excellent speech by the noble Lord, Lord Lea of Crondall.

So what conclusions did we reach? Most important of all, we have to face the fact that as members of the fast-expanding European union, it is no longer possible, practical or wise for member states to carry out their own tax regimes without reference to their fellow members. Tax competition can have advantages if an individual country like Eire, for instance, knows how to work the system and does so with enthusiasm. Equally, there are occasions on which tax competition could be harmful. It is not an open and shut case.

There is very little about these issues which could possibly be described as open and shut. Individual states must have the right to run their own economies to achieve their national objectives. Equally, they cannot totally disregard the other members of the club. We came to the conclusion that tax co-ordination was preferable to harmonisation.

It is a somewhat esoteric point but, to us at least, harmonisation carried an unsavoury whiff of compulsion and seemed likely, or possibly likely, to lead to higher taxation as tax reliefs or low rates are queried and perhaps removed under the excuse of unfair tax competition.

Co-ordination, on the other hand, carries a cosier feeling of mutual discussion and agreement. Although decisions on taxation can be a direct matter for individual states, they cannot always be taken in isolation and can lead to some degree of convergence: the trade-off of limitations of national freedom against the potential gains from co-ordination. For instance, there is some sense in the argument for the convergence of corporation tax throughout the Community.

That is where qualified majority voting comes in. Within a relatively restricted context, it is clearly a valuable principle, but only on the less important issues. The business of raising funds for the Community must go on, so there has to be a certain give and take. I do not doubt that there will be both when these issues are judged by QMV.

It reminds me of my newspaper days when I chaired the Newspaper Publishers Association, a motley collection of highly competitive and tough newspaper barons. We had to seek compromises, which were usually weak and invariably broken. But of course I accept that, happily, there is no similarity between the negotiations among the newspaper proprietors and those of the European Council. However, I did learn one thing of importance which I have never forgotten—the larger the group, the longer it takes to reach a decision and the less likely it is to be strictly effected.

The issue that has produced the most steam is the withholding tax. We found it difficult to reach any final conclusion about this. The evidence is conflicting and anyway hypothetical, except that Germany introduced it and shortly afterwards abandoned it. The German problem was not the same as ours. London is the centre of the eurobond market, so we have considerable financial and employment risks at stake. We were told that Switzerland would welcome with open arms a European Union withholding tax and the capital it might receive as a result. There might be a drift of capital also to the United States. A severe loss of jobs is possible. Unfortunately, the figures were unquantifiable.

The Government promised a paper several months ago, but did not produce it until last month. So we did not have enough evidence to reach a view. It is for the Government, and the Government only, to decide whether a veto is appropriate.

There was one issue which our report did not hesitate to condemn, and I hesitate to raise it in front of your Lordships. It is the manner in which the group devising the code of conduct for business taxation is going about its business without any reference to Parliament. It has pledged not to accept new taxes that are harmful. But who judges what taxes are harmful.

Ever since I had the privilege to serve on the committee—and it is a great privilege to serve on the committee—the senior members of the Commission, from Herr Duisenberg to Signor Monti and Monsieur Trichet, have emphasised the need for absolute transparency in the European Community's conduct of affairs.

As someone who has spent many years in the media, I am, of course, strongly in favour of absolute transparency, although I have to confess that these days what some would regard as reasonable transparency others might regard as a gross infringement of privacy—but not our code of conduct committee, which at the moment appears to answer to nobody.

Our report makes plain that we are left in total ignorance about the way the group is operating. We do not know whether it could turn out to be an obnoxious method of inflicting secret taxation or an innocuous discussion group. I very much hope that the Minister will be able to clarify that.

For my part, the greatest concern I have about the relationship between tax co-ordination and competition—each in its own way conceivably meaning different things to different countries—is that in the end, although my colleagues do not entirely agree, I do not see how it can work effectively without some central political and monetary control, probably exercised by a non-elected body; the European Commission.

That brings me back to where I started: each member state must have the right to exercise control over its own domestic taxation, achieving its own national goals, but must equally accept that we live in a global economy and in an expanding club which must accept a flexible fiscal regime to allow for the stress involved in satisfactorily and profitably aligning different economies.

Above all—and it is the most important aspect—the citizens of the European Union must have total confidence that the decisions about their taxes will be fairly and honourably reached. Our report underwrites this. It is, I believe, a highly important one on a highly important issue. I wholeheartedly commend it to your Lordships.

7.55 p.m.

Lord Inglewood

My Lords, like every other speaker in the debate, I begin by congratulating the committee of the noble Lord, Lord Grenfell, on its report on taxation in the European Union. The topic goes to the heart of the very nature of Europe.

On previous occasions, I have explained to your Lordships that I believed that the political arrangements known as the European Union are not an alternative to the traditional nation state. Rather, they are the framework within which the member states are evolving and the system through which they work with each other.

One of my reasons for that belief is that the EU is not a revenue raising entity to any significant extent and I do not believe that it should become such. That is significant because, contrary to much popular perception, the EU is not and should not principally be concerned about raising and spending money.

Of course, there are provisions in the treaty which relate to tax and there has been a great deal of discussion about them tonight. However, they are also tied to the unanimity rule, which is important, as a member state cannot participate without actively agreeing to do so. Indeed, it has the legal freedom of manoeuvre, which is no different from that which it enjoys in an intergovernmental context.

Taxation is not merely a question of raising and spending money. I believe that whether it is appropriate for the European Union to lay down a legal framework within which member states should exercise their own revenue raising and spending powers is an important question to pose.

As a Conservative, I am an advocate for lower rather than high taxation. Within the single market, tax competition is not merely acceptable; it is desirable. In a world where tax competition is good, can there be unfair and hence unjust tax competition within it? At the beginning of the debate, the noble Baroness, Lady Sharp, asked: what exactly is unfair tax competition?

As a number of your Lordships have said tonight, the Government have signed a non-legally binding code of conduct in respect of business tax to which they have appended their political authority. But as we have all heard tonight, it is surrounded by a penumbra of uncertainty and vagueness. I join other speakers in the belief that the Government should explain and define that concept and tell us what are the exact parameters to the project to which they have signed up.

On a number of occasions, Commissioner Monti, who was the commissioner with responsibility for tax matters until earlier this year, has explained his view. In his evidence to the committee he said: Member States, for example, should not set up special schemes which significantly influence the location of business activity within the Union, particularly where they involve lower levels of taxation than the one generally applied in the Member States in question". But how wide is that proposition? Does it cover all forms of taxation, and, if not, which and why? I suspect that Commissioner Monti would say that his definition covered merely business taxation. But is it really possible in economic terms satisfactorily to distinguish between classes of taxation in this way? After all, it seems to me that what really matters is the purpose and the effect of taxation. That point was made rather well by my noble friend Lord Saatchi when he quoted Theo Waigel's comment that Britain was becoming a tax haven on account of the low levels of income tax.

We have at European Union level—we all know it, and it is a policy which I support—a policy about state aids which relates to financial inducements to encourage businesses to locate in particular places. Equally, as the noble Lord, Lord Shore, pointed out, that policy specifically includes—again it is spelt out in the treaty—a provision for tax provisions intended to achieve the same purpose within its scope.

If the extent of European state aid policy stretches that wide, do the Government believe that possible Community rules of unfair tax competition would go further than state aid rules, or is it merely duplicating the rules which already exist in relation to state aids? If so, then is the whole matter not something of a paper tiger? I should be interested to know the Government's views.

It slightly surprises me that no reference has yet been made to a recently published document from the Commission dated 28th September, entitled Communication from the Commission to the European Parliament and the Council—The Strategy for Europe's Internal Market, which, as chance has it, is being debated I believe at this very moment in the European Parliament in Brussels. Under the heading of the section concerned with what it calls improving the business environment, there is a subsection concerned with eliminating tax barriers to the internal market and unfair tax competition.

Perhaps your Lordships will allow me to quote from the document. Of course, one must remember that it is written in that form of English prevalent in Brussels, which is spoken nowhere in the world by someone whose first language it might be. The document states: The impact of different forms of taxation on the operation of the Internal Market is one of the main determinants of Community taxation policy. Some degree of tax harmonisation is indispensable to the proper functioning of the Internal Market. Harmonisation is not required in all areas and where it is required, the extent of harmonisation will vary". It continues: Indirect taxes are a more conspicuous impediment to intra-Community trade than direct taxes". It then goes on to say: There are however aspects of the tax systems of Member States which will not require any co-ordination or harmonisation. Personal income tax requires no action other than the elimination of double taxation which may impede citizens exercising their rights of free movement. There is, however, an intermediate zone of direct taxation on highly mobile tax bases, in particular the taxation of companies and the taxation of capital. Here Member States agree that a certain degree of co-ordination is required to prevent both the erosion of tax bases and double taxation". I should be interested to know whether the Government agree with that point of view expressed by the Commission, and if not, what their view on these matters is.

I believe that there is a tendency to view some of these issues as abstractions, or perhaps intellectual conundra, somehow set apart from the day to day issues of daily political life. However, it was only last week that I read in a newspaper that England's nine development agencies had put proposals to the Government to help "rebalance" our country's local economies. One of the key proposals is to shift away from down payments of regional aid from central government to a system of rewarding companies through the corporate tax system.

Even though the code of conduct recognises the appropriateness of incentives for regional development so long as they are proportional to the end target, it very much seems to me that this approach looks a prime candidate to fall foul of either state aids policy, or possible rules on unfair tax competition, or both. I conclude by asking for the Government's views on that comment.

8.4 p.m.

Lord Randall of St Budeaux

My Lords, it gives me great pleasure to tell the House that I was on the committee which produced this report. It is an excellent piece of work—it is extraordinary really. Like others, I, too, thank my noble friend Lord Grenfell for the tremendous leadership that he showed. I regret very much that he will be leaving the House. That is a tragedy in my view. I repeat also what a number of other noble Lords have said about Dr Elizabeth Hopkins, our clerk, who has worked at a great pace, producing a good deal of high quality work.

I should also like to take this opportunity to congratulate my noble friend Lord Lea of Crondall. I wish him the very best for the future and I know that he will make an enormous contribution to the working of this House.

Taxation can be extremely boring for some people. Therefore, in my short contribution I should like to limit myself to discussing those parts of the report which bear directly on the globalisation process taking place in the world and, in particular, the impact that it will have inside the European Union. This relates to e-commerce, or, more significantly at this point in time, to e-business, where the rates of change are so phenomenal that I believe we need to take into account the speed with which we develop and sort out our taxation in the European Union so that there will not be distortions or a loss of opportunity in exploiting e-commerce.

Furthermore, I believe that if Britain maintains its present stance—it is doing extremely well in the areas of e-commerce and e-business—it will become a much richer place. I emphasise that the timescales we are discussing here are incredibly short. I should like to illustrate that point. The opportunity is here and the question is: how do we respond? First, there is the obvious point that SMEs (small and medium-sized enterprises) and big companies need to become involved in education and in training people so that they understand what e-commerce and e-business are all about. As I said, e-business is business-to-business on-line. The key area in which they are currently involved—there is a revolution taking place—relates to procurement around the world.

Secondly, we must ensure that our tax structures do not distort and weaken the markets. We do not want to have a bottleneck in the way of developing and improving the European single market. The market at present in the European Union is substantial and the majority of our trade is done there. Therefore, it is in Britain's interest to ensure that there is a full commitment to developing that market.

Perhaps I may give one or two facts and figures relating to e-commerce. Two years ago, in the United States, business-to-business sales were 19 billion dollars. In three years, that figure has gone up to 251 billion dollars, and will grow to 1.4 trillion dollars in a further three years' time. To take the comparable European figures, two years ago the amount of e-commerce was negligible. It is now up to 17 billion euros, which is about £11 billion, and will grow to 340 billion euros in three years' time. We are talking about incredible timescales. I can think of nothing as revolutionary in our lives.

A new EU directive is coming from the European Union. We must ensure that British SMEs can compete and do well. Government plans in the Queen's Speech will have a theme of enterprise and fairness. There will also be an e-commerce Bill to help IT businesses. Later this month in his pre-Budget report the Chancellor of the Exchequer will emphasise productivity and enterprise. We must decide how we are going to increase productivity. The Government are spending £600 million on 1,000 new IT centres. How shall we exploit that for e-commerce education? Internet traffic in general—we all know that it is fantastically large—is doubling every 100 days. In all of these matters, we are talking about extraordinary change.

In addition to the exploitation of e-commerce that I have just touched on, what other tax matters need to be considered in order to open up this single market in an optimal fashion? First, as regards tax policy, I believe it is important to recognise that in the single market there is inevitably interdependence between member states. I believe it is absurd to argue that certain member states would or could create their tax regimes in complete isolation from other member states. It is not possible to return to the situation which we had in 1986 when we voted for the single market. We cannot return to those days; it has all gone far too far. Therefore, we need efficient exploitation of the European single market. That means that there is a need for co-ordination of tax regimes in a way that eliminates distortions in the markets.

It does not make sense—I give a specific example—that a trading company in one member state should win a contract at the expense of a company in another member state entirely because its prices are lower because it is favoured by its own domestic tax regime. That is the kind of distortion that we need to eliminate. It is absurd and crazy.

It can be argued—and this point has been raised this evening—that we can let tax competition prevail instead of co-ordinating tax regimes across the EU. The problem with that argument is that we can never be sure when competition will create distortions which will give one member state advantages over another in a way that will be harmful. There are times when competition is desirable. However, in this case the committee stated that it believed that, pragmatic tax co-ordination and fair competition can not only co-exist but complement each other, to the greater benefit of taxpayers within the European Union". The Government's response to that part of the report was that the European Council in Vienna last December concluded that tax policy co-operation was not inconsistent with fair tax competition.

An important question arises; that is, to what extent should there be more co-ordination of taxes in order that the single market works effectively? The committee felt that that was difficult to answer because the powers to make tax decisions exist at individual member state level. Nevertheless, co-ordination may be necessary to prevent selective tax inducements by certain member states.

Reference has been made to the decision of ECOFIN in December 1997 to adopt a code of conduct as part of a package to tackle harmful tax competition. That code of conduct is aimed particularly at dealing with potentially harmful tax measures which could result in companies relocating to another EU member state. My own view is that in principle the code of conduct technique has many advantages. I know that so far everyone has criticised this, but I believe that if we could do something to reduce the number of treaty changes, that would be very helpful. However, I admit that there are problems of enforcement because of the nature of the agreement between member states.

Another question that arose in the committee was the extent to which tax co-ordination should be limited to within the EU. Unquestionably, with the growth of e-business throughout the world to which I have referred, the pattern and extent of trade is bound to change in the short term. The OECD is attempting to introduce measures that will encourage third world countries to trade with the EU. So far, it has been unsuccessful. I feel that it will only be a matter of time before the forces of globalisation change that.

I end by saying that the committee pointed out—I believe, quite rightly—that in introducing tax co-ordination measures, careful consideration should be given by the EU to the possible impact which such measures might have on future trading opportunities with countries outside the EU. In the end, it is in the interests of the EU that third countries follow the EU steps of preventing harmful tax competition.

8.16 p.m.

Lord Birdwood

My Lords, I have tried, I have really tried, to squeeze out of this magisterial Select Committee report a conclusion simple enough for me to absorb and articulate. Yet it asks such a simple question in its title. Can co-ordination and competition co-exist? Under interrogation, how would I answer, based on the recommendations in the report? "Yes, easily"? "No, absolutely not"? "Yes, but"? "No, sort of"? "Don't know"? "Don't want to know"? After struggling through some of the evidence, I know that years ago I was right to put a life of service in the Inland Revenue very low on my list of career choices.

As I skimmed the pages, I started to feel an increasing separation from the real world. The intellectual density of the evidence is overwhelming. The quality of the questioning from the committee members was of the highest calibre. One would expect nothing else. Although the temptation to stray must have always been there, the committee admirably stayed within its brief. However, an irreverent observation from years back kept intruding: you could make a duck into an economist by teaching it the meaning of the words "supply" and "demand".

There seemed to me a detachment from the lives of ordinary human beings which brought a dream-like quality to those deliberations. I suppose that it is up to the social engineers in the nation, rather than its financial managers, to reconcile those arid concepts with the lives of its citizens.

Tax touches everyone. On page 56 of the report, leading into the concluding comments, we read the words: Taxation, whether direct or indirect, is a highly sensitive issue, and there is a clear need to ensure that proposals on tax matters emanating from the institutions of the European Union are properly publicised and accurately reported". Boy, you can say that again. Tax is not just a game for clever folk to play. It is in the fabric of the idea of citizenship, defining relationships one with another. It defines the relationship of the individual to the state. It is the stuff of defining even ourselves to ourselves—fear and greed, honour and virtue, sacrifice and self-reliance. Of course, those were way outside the remit of the committee yet were the ghosts which hovered just at the edge of all the committee's fine conclusions.

Since the Treaty of Rome, three strands of understanding have been followed, pretty much unbroken. The first is that indirect taxes have always been candidates for harmonisation. The second is that it has always been quite off the agenda for other taxes to be harmonised. The third is that the European Union strategists have always been hoping to encroach on the second.

So the sense of relief in recent weeks has been almost tangible at the offerings from the incoming Commissioner, Mr Frits Bolkestein. At his confirmation hearing he said: It is difficult to see how even in the long term you could harmonise income taxes; nor do I see any pressing need for that, since different rates of income tax do not distort the market". So that is all right then. However, I wish to make a point to your Lordships about our own reaction to those emollient words. Thinking clearly about it, I do not know which I find more distasteful: the programme of naked intervention on tax sovereignty which was ascribed to Mr Mario Monti, the previous Commissioner; or the new, soothing tones of Mr Bolkestein. I mean, we are talking a classic hard-cop/soft-cop routine here. In either case, individuals of awesome power are making pronouncements which remove money from British citizens.

It is like apologies from two different kinds of pickpocket: one, charming and consensual; the other rather more explicit. In either case, the victim did not exactly exercise much choice. And one notices that reassurances about income tax were comfortably aired but other categories received a more guarded treatment.

It is appropriate to touch on our own Government's less than transparent programme of tax reconciliation with our European neighbours. Earlier, my noble friend exposed that superbly.

I make a point in passing. When comparing one country's taxes with another, the only form of impartial tax is zero. Once there is tax at source, it is automatically partial. Let us consider this. The overall tax burden in the UK hovers at about 40 per cent while in the rest of Europe it is about 50 per cent. Do we seriously believe that harmonisation will bring down the percentage of the others? The real-life outcome must be that our tax burden will drift upwards and by a number not far short of 25 per cent.

At rock bottom, governments must always tax things which do not move. Largely, the citizens of a particular country fall into that category, as do assets based on property. In the United States, a model has evolved where certain taxes are perceived as the costs of citizenship. It may be if the European ideal of psychological unity drew close—and I do not wish that it should do so—then that acceptable entry ticket feeling could spread.

At this time, I believe that we are in a socially dynamic model with no predestined outcome to its development. There is the potential for increasing resentment of a tax regime with not so much as a democratic deficit but rather a democratic total vacuum. And we have the reality of an economic landscape on a world scale in which Europe looks increasingly like a city under siege. So far, political stability has been highly appealing to the inward flow and retention of capital. Long may it be so.

But two things are happening from which there is no turning back. The first is that capital is loose upon the world in quantities and with an emotional volatility which gives it the characteristics of a life form—predatory, wary and utterly unaware of man-made boundaries. Capital is feral and trying to tame it with the whip of tax will not have predictable outcomes.

The second is that the very foundations of economics have shifted to give dominance to information-based paradigms. A country can tax its loyal people some but not very much more. It has a much more difficult job pursuing the labours of those same people into cyberspace. And it has a near impossible job if it wants to couple up those people to tax regimes imposed from the ambitions and whims of our own fractious version of Olympus in Brussels.

My fear is that even with stability and a competent regulatory framework, there will come a time when Europe will be increasingly toxic to development capital. The world owes Europe no financial favours; neither do our European neighbours feel they owe us. I am trying to put myself into the mind of a Treasury official in the present day. Do we have a catalogue of tax categories in other European countries which we should wish to "harmonise" with our own—categories which we should wish to see being matched by being brought down? If there is such a list, I should be extremely interested to see it. It may be an illusion but it feels as though everyone else is free to suggest to us that we should introduce this or that tax but we are constrained to keep our own suggestions secret. Why? I thought that the EU was one big family now with a culture of unity and no financial secrets between member nations. I suppose that the real world intrudes again.

This is neither the place nor hour to blunder around in the detail of the Select Committee report. It is sufficient to say that I share the expert anxieties about the withholding tax. That is as nasty a bit of precedent that one could fear to see. I hope that this Government will honour pledge after pledge to use what treaty instruments they can to protect the interests of their own countrymen and enterprises. But, I suppose, if we cave in on this, as so much else, we shall see our old friend, the strategic communications unit, being wheeled out to present our pusillanimous acquiescence as another triumph of negotiation.

8.28 p.m.

Lord Ashburton

My Lords, I add my thanks to those which have already been expressed to our chairman. He made our work a pleasure and ensured that the ground was covered without unduly fettering the members of the committee in the way they asked questions of witnesses. I add my thanks also to Dr Hopkins. She did not do miracles; she very nearly moved mountains in getting some of the work done and to us.

I am very sorry to hear reports about our chairman's political demise, which I hope are exaggerated. I feel that if I went out to Ladbroke's to try to get a price, I should find that he had not yet been written out of this House.

I also much enjoyed being present for the maiden speech of the noble Lord, Lord Lea of Crondall, to whose trenchant style I became accustomed during the years when I was chairman of the NEDO committee on finance for industry. I have little doubt that he will not be totally silent.

At this low place in the batting order, which I asked for but never attained before, I feel no inclination to dwell on the detail of the debate or the report which has been commented on already by a number of speakers. Therefore, I hope to be relatively brief.

Despite its undoubted importance and the fact that it provides considerable dissatisfaction, taxation is not a subject that appeals to a large number of people. The technical details can be difficult for a lay person to get their mind around, and indeed it would not be unfair to say that many people's reactions are of the, "I know what sort of tax system I want; don't bother me with the detail", kind. Unfortunately, in an area where avoidance, not to say evasion, is attractive, the detail is absolutely vital. Loopholes are immediately exploited.

The committee took a considerable amount of evidence on the more detailed side of taxation issues, but in many ways I. believe that the most important conclusions to come out of the committee's work were of a more general nature. I shall return to that at the end of my remarks.

The evidence that we gathered usually pointed to there being at least two sides to most of the arguments, sometimes to the extent that we found, as in the case of ideas for a fundamental reform of the VAT system, that it was difficult to be convinced that the case for the advantages of change had been convincingly made out. There are few changes that can be made to fiscal arrangements that do not entail heavy costs which have to be weighed against gains.

However, the committee concluded pretty clearly that we could not agree with the Commission's contention that employment promotion is an argument that can be used to support proposed tax co-ordination measures. There was little solid evidence that lower taxation on income from capital had led so far to higher taxation on labour, nor that rises in the former would lead to reductions in the latter, and even if it did, that that would lead to a reduction in unemployment. Nor were we convinced that a Community-wide withholding tax on savings income was necessary to deal with what appeared to be, at least in the first place, an acute attack of tax evasion by German nationals.

It cannot be denied that the single market, which I personally regard, as do many noble Lords, as extremely precious, will lead to a degree of co-ordination, although not necessarily to complete harmonisation of tax rates. At first sight those would appear to be more in the area of indirect taxation. But it has to be recognised that there is no impenetrable screen between indirect and direct taxation. Low effective rates of direct tax, for example, must have some influence on the location of new enterprise. Direct tax is certainly one of the areas where the reservation of competence to individual states and the maintenance of unanimity are most necessary if a tendency towards centrally imposed taxation is to be avoided.

I conclude by saying that, although at present there are more obviously large issues concerning the European Union, including notably enlargement, the CAP and the attempt to make realistic progress on defence and foreign policy issues, I believe that taxation issues are vitally important. This area is not easily susceptible to popular debate or understanding. I heartily endorse the remarks of the noble Lord, Lord Desai, about the educational potential of reports such as this. They deserve the maximum exposure so that relevant public opinion is better informed.

I commend to your Lordships the concluding comments in paragraphs 250 and 261 of the report. It could be all too easy, as the noble Lord. Lord Shore of Stepney, has pointed out, to sacrifice the UK's interests and the unanimity principle as part of a bargaining process over other issues, and we have to be aware constantly that by no means all the arguments put forward by other members of the European Union are inspired purely by high-minded, communautaire altruism. National interest is alive and well in the European Union and no one who has had the good fortune to serve on Sub-Committee A can fail to be aware of how often that became obvious during the collecting of evidence.

I count myself a europhile and do not find myself totally aligned with the noble Lord, Lord Shore of Stepney. Nevertheless, from time to time I find myself wishing that some of my europhile friends did not appear to have put their critical faculties in mothballs. I look forward to hearing the response of the noble Lord, Lord McIntosh.

8.35 p.m.

Lord Phillips of Sudbury

My Lords, I am grateful for the opportunity to speak in the four-minute slot. I have one point to make, but, first, I commend the reference made by the noble Lords, Lord Desai, Lord Birdwood and Lord Ashburton, to the importance of public education on this matter. I do not understand why reports of this nature should not have, as a compulsory component, an abbreviated, plain English form capable of being understood and read by any ordinary mortal. That would do wonders for the public awareness of the work of this House; it would do justice to reports of the eminence and utility of this one; and, above all, it would start to narrow the widening gap that I believe exists between this place, Parliament, and the people at large.

I want to speak about charities in relation to European taxation. It is easy to forget that the charity sector in this country is bigger than the automobile sector and bigger than the agriculture sector. It is easy to forget that Jacques Delors decided, for reasons that there is no time to delve into, to bring the voluntary sectors of Europe into the EU competence through the Maastricht Treaty.

It is also easy to be too complacent about the prospect of making tendencies uniform, vis-à-vis charity or voluntary sector taxation. Already there are moves in that direction. Although the noble Lord, Lord Currie, said earlier that one should not worry about such matters, I am not so sure. I have been in the charity sector for 25 years. Wherever there is a cross-national organisation it will tend, necessarily, inevitably, and without any malice, to start thinking up reasons for building on its own power-base and extending its own competence and influence. I see those tendencies evident in the charity sector now.

The charity sector in this country is enormous; it is vital; it has its own legal structure and its own regulatory structure. It is quite different from the rest of the European sector. In addition, the tax concessions for our charities are vastly more generous than those of any other member state of the European Union. In this country charities and those who give to them have total exemption from income taxes, corporation taxes, capital taxes and inheritance taxes. I am afraid that there is competition even within the wonderful world of the voluntary sector—a competition that can exist between governments and between charities. There are already charities champing at the bit to have a uniform structure of charity taxation so that they can make appeals across the frontiers of Europe without any let or hindrance.

My point is simple. In my view the voluntary sector should be absolutely free of any attempt at uniformity or harmonisation, or whatever euphemism one wants to use. If one likes, the voluntary sector is the cottage garden of our country where individuality, diversity, eccentricity, indeed anarchy, flourish and should flourish. God bless it. Please, Minister, assure us that temptations or tendencies that work in the direction of harmonisation, vis-à-vis the voluntary sector, will be utterly resisted.

8.40 p.m.

Lord Taverne

My Lords, what struck me most about this report was the obvious common sense and the hard-headedness of it. As everyone has agreed, it is an excellent report. Indeed, one would not expect anything less from a report whose author was the noble Lord. He is, on all sides of the House, one of its most highly regarded Members.

Unfortunately, as many noble Lords have said, it is not likely to have much of an impact in the United Kingdom. It is not likely to lead to headlines in the Daily Mail stating, "We were wrong". On the other hand, it is likely to have a considerable impact in Brussels, as the noble Lord, Lord Lea of Crondall, pointed out. May I say what a pleasure it is to find him now a member of this House. We first met a long time ago, during the first Wilson government. With no disrespect to his colleagues in the TUC, I always regarded him as one of the most likeable and sensible members of the TUC in the days when he worked there.

I would like to make a few detailed points and one general one. I shall try not to repeat points already made. First, I refer to the thesis which Signor Monti produced. Signor Monti is someone for whom I have always had a very high regard. He has been very helpful to this country in general. However, I believe that there is a fundamental fallacy, as a number of noble Lords have pointed out, in his thesis that lower capital and corporation taxes have been the cause of higher taxes on labour.

It is quite clear why taxes on labour in the European Union have risen. It is because of the demands of social security, and in particular because of the European pension system. The fact that their pensions are pay-as-you-go pensions has meant that a smaller workforce has had to support, with the demographic changes, a higher number of pensioners, and social security costs have, of course, inexorably risen. That is why the German Government, at the cost of considerable unpopularity, are now trying to reverse the process and limit the cost to the state pensions. It has nothing to do with taxation on capital or taxation on companies.

With regard to taxation on companies, I agree with what the noble Lord, Lord Currie, said. It would make sense to have a greater degree of co-ordination of corporate taxation. However, I am very pessimistic. I believe that there is not a cat in hell's chance that we shall see it in the near future. One has only to look at the attempts that were made by the Ruding Committee to arrive at some sort of basis of harmonisation of corporate taxes. The Ruding Committee report has sunk without trace. The problem is that the bases for taxation are very different.

It was mentioned that there is no point in harmonising rates. I refer to a small contribution that I made to this question in Tax and the Euro, in which I drew up a table of taxation as a percentage of GDP. One then found that, despite the fact that German taxes are much higher in terms of rates than our corporate taxes, the yield as a percentage of GDP of German corporate taxes was 1.7 per cent, and the yield of UK corporate taxes, with much higher rates, was 3.6 per cent—twice as high. Those figures are not be taken at complete face value, because certain German corporate taxes are paid as income tax. But there is no doubt that we have a much higher yield from corporate taxes despite much lower rates.

Let me say something about the code of conduct. I agree with the remarks that have been made on all sides of the House about transparency. I agree very much with what the noble Lord, Lord Saatchi, said about transparency. However, I do not agree with his view that we cannot have other people interfering with our taxes at all—of course, there is a measure of independence—and particularly in some of the issues which are part of the inquiry under the code of conduct committee. It is true that one cannot regard state aid as exactly equivalent to tax concessions, but sometimes they have an absolutely identical effect. You can help a company by lowering its taxes or you can help a company by giving it money. We have a very strong national interest in ensuring that the competition in giving different forms of state subsidies is controlled by the Commission. We have a similar interest in ensuring that there are no unfair ways of helping particular companies which could be exactly similar to a form of state aid. We are inter-dependent.

On the question of the withholding tax, with respect, I do not agree entirely with the noble Lord, Lord Lea of Crondall, that there is a case for a minimum withholding tax. In principle, a withholding tax seems quite sensible. However, there are several objections. First, there are the objections, formidably put in the Government's paper on international bonds and the draft directives on the taxation of savings; I say no more about that. However, I would go further and say that, in my opinion, the whole idea of a withholding tax is a mistake. If it was entirely a question of greater disclosure of information, that would do no harm at all.

The case against the withholding tax is not just that it would lead to the taxation of international bonds. The history of it is very unfortunate. When the Germans introduced it for the first time, they lost billions because savings were moved to Luxembourg. They tried it again, because of the ruling of the Frankfurt court, their Karlsruhe court, and again they lost a great deal of money, which is why they are very keen to see it on a European scale. But why should it work on a European scale.

In fact, the most effective criticism of the withholding tax was made by a French institute, the highly regarded French think tank, the Prométhée Institute, which gave a number of reasons why, in its view, the withholding tax would be a mistake. First, there would be formidable complexities and bureaucracy. Paying agents, having to keep elaborate records, may not always find it easy to identify the place of residence of beneficiaries. Life would be much easier for paying agents outside the European Union and many of them would go out. Secondly, the tax only applies to interest payments, a valid point that others have made. But what interest payments? Interest-paying unit trusts may escape the withholding tax because they can amalgamate with non-interest paying unit trusts. In addition, what would be the position about zero coupons? There are a lot of complexities.

The biggest problem about the withholding tax is that, just as German savings went to Luxembourg when it was imposed in Germany only, so European savings will go outside the European Union if it is imposed in the European Union only. They can go to Switzerland and a number of other places.

The problem is that those in the Commission have looked at the matter very much as an internal problem. I do not believe that they have taken a broad enough view of the future of the euro as a global currency. If they had looked at it as a global currency and considered its future as such, they would not be concerned with rather narrow questions of tax avoidance. The United States was very much concerned about the narrow question of tax avoidance when in 1963 it imposed the interest equalisation tax. The result was that an enormous new development was entirely lost to the United States and came to Britain—very favourable to us, very bad for them.

Finally, I make one general point. The report disproves the scare stories. It will not, of course, stop Mr Portillo saying that the euro is going to bring much higher taxes in the United Kingdom and it will not stop those who say that tax is yet another example of the inevitable drive towards a European super state. The belief that the European Union is hell-bent on creating a European super state is almost an article of religious faith which cannot be contradicted by any evidence.

When the noble Lord, Lord Shore, speaks on the subject, he speaks with the passion of an Old Testament prophet. I greatly admire his eloquence. He is a pleasure to listen to, although I sometimes wish that he did not speak at least twice as long as anyone else. In fact, this report, and the tax experience more generally, proves the opposite. You cannot have a European super state unless you have substantial central resources. Many speeches are made about the European super state. But what do the countries actually do? They have all agreed that they are not going to give any more resources to the centre. You cannot have a European super state if the central tax resources are limited to 1.27 per cent of the GDP of the European Union.

Germany, whose leaders often make federal speeches, is in the lead in opposing any further sums to the centre. When one looks at trends in the European Union, they contradict the drive towards a federal super state. The European Union has both federal and "confederal" characteristics. The federal characteristics tend to be concerned with the areas in which the Commission is involved—the matters of the single market; competition policy—where certain executive decisions can be taken by the central body, the Commission. But in the past decades power has been moving towards the more "confederal" body, the Council of Ministers. That is where the two new pillars were created after Maastricht.

One finds, therefore, that the whole trend is not towards this federal super state; it is much more to something which is a mixture of the two with a strong confederal element. Indeed, one of the matters which is preventing the creation of a single super state is the limit on the central resources; and tax is the proof that that is in fact not going to be increased.

8.50 p.m.

Lord Kingsland

My Lords, first, from the Benches of Her Majesty's Loyal Opposition, I want to say how much we all enjoyed the maiden speech of the noble Lord, Lord Lea of Crondall. Not for the noble Lord the niche topic. Both in his choice of subject and mode of exposition, the noble Lord was bold. I think we would all agree that, both from the sincerity of the message and the directness of the exposition, we not only derived great pleasure from his speech but also experienced a great sense of anticipation. We look forward to the next instalment. I thank the noble Lord for his contribution this afternoon.

I should also like to congratulate the noble Lord, Lord Grenfell, on his report. As a skilful exponent of the art of popular fiction, the noble Lord must have found the subject matter of the report somewhat intractable. But his unique blend of intelligence and lightness of touch produced an end product which I know your Lordships will agree is both readable and perspicacious. I have known the noble Lord, Lord Grenfell, for more years than I care to admit, and I would have expected nothing less.

One of the most interesting themes of the report concerns the contrast between harmonisation and co-ordination. It is quite clear what we all mean by "harmonisation" in the European Community. The Commission makes a proposal; the Parliament is consulted; the Council deliberates and a directive or a regulation is made which is justiciable in the European Court. We should make no bones about it: this is, in effect, a judicial federation. And in circumstances where the laws are made by qualified majority rather than unanimity, it also has the character of a legislative federation. These are arrangements into which successive British governments have entered over a number of decades.

By contrast, "co-ordination" can mean a number of things. For example, it can mean what the noble Lord, Lord Hussey of North Bradley, referred to when he discussed the arrangements entered into by the press barons—arrangements which he said were painfully reached and almost invariably broken. Equally, at the other end of the scale, co-ordination can involve contractual arrangements which are regarded by those who participate in them as legally binding.

As I understand it, the position of the Government on the Code of Conduct Group, to which most notably the noble Lords, Lord Shore and Lord Boardman, spoke, is that it does not breach the principle of unanimity and its decisions are not legally binding. I have been looking at a section of the report which deals with the evidence of Mr. Cohn Mowl, one of the United Kingdom's representatives on the group. At paragraph 124 of the report we find Mr. Mowl quoted as saying: Although [the Code] is not legally binding the Government has entered into an international commitment which it expects to honour and expects other people to honour". The report continues: Asked what might happen in relation to particular United Kingdom measures being examined by the Group, he said that if they were found to be harmful 'the terms of the Code would come into effect. There is a commitment in there that Member States will roll back according to certain timescales … any actually harmful measures.". If that is not, in contractual terms, legally binding, I do not know what is. The only thing which distinguishes its legal quality from that of the harmonised system, which I sought to explain to your Lordships earlier, is that in the harmonised situation there is a recognised way of drawing in the Court of Justice when there is a dispute about what a regulation, directive or other measure means. In this case, there is no system for dispute resolution; but that does not mean that this undertaking is not legally binding.

I turn now to the question of unanimity. Somewhat further down in paragraph 124 we find Mr. Mowl quoted again. He says: If some Member State disagrees with some aspects of the conclusions then its view is put forward in the report of the Group. To some extent this is unchartered territory, but there will then be a collective discussion in ECOFIN no doubt, but because this process reflects national competence any action taken is for individual Member States to take. It is not as though you need unanimity formally". Again the report continued: The Paymaster General confirmed that the Code of Conduct Group itself did not take votes, but was 'charged to reflect the views expressed in the discussion of the subject'". It is quite clear that once the Code of Conduct Group has come to a certain view collectively, the individual member state that is the subject of that discussion is obliged to act, if necessary by rolling back, in conformity with a specific timescale, the criticised tax. In my submission that is a clear breach of the principle of unanimity.

I wish to draw attention to two other matters concerning the group. The first is that, as many noble Lords have said, the activities of this group are carried out entirely in secret—your Lordships are not allowed to see the agendas; your Lordships are not allowed to see the minutes; your Lordships are not allowed to see the progress reports.

Many people in the United Kingdom believe that a viable alternative to the classical harmonisation approach is the approach of intergovernmentalism. They believe that because intergovernmentalism, in principle, allows national parliaments to retain control of political debate and decision-making. We have here a very important intergovernmental mechanism to control a matter which a vital part of this nation's sovereignty. What role does our national Parliament have in that intergovernmental mechanism? The answer is none. If we are to manage the decision-making processes of the European Community in future on an intergovernmental basis, we simply cannot allow deliberations of this importance to take place in secrecy.

The second point, which arises out of my suggestion to your Lordships that the work of this Code of Conduct Group is both legally binding and not unanimous, concerns the relationship of the Code of Conduct Group to the state aid rules in the treaty. Those rules are directly binding on the government of each member state and, in circumstances where a member state breaches one of them, that member state is open to infraction proceedings by the European Commission. There is a clear procedure laid down transparently in the treaty.

As I understand it, every single item on the agenda of the Code of Conduct Group qualifies as a potential illegal state aid. Why has the Community chosen not to deal with these issues by the mechanisms laid down in the treaty? Why has it chosen to invent instead a completely new mechanism which duplicates exactly an existing mechanism? I leave it to your Lordships to speculate. Could it have something to do with the wider issue of transparency, or is there some other motive of which we know nothing.

Indeed, in the light of the fact that the Code of Conduct Group is exactly mirroring a procedure which is already set out in the treaty, I would go as far as to ask: is it legal? Is what is being done by the Code of the Conduct Group contrary to the treaty on the grounds that the latter already has a mechanism to deal with these matters and the group is seeking to evade it? I simply pose the question and wait with interest to hear what the Government will have to say in response.

I have just two final reflections to make on the report. The first concerns the desirability of tax harmonisation in a continent where 11 member states are already part of European monetary union. Becoming a member of the European monetary union and embracing the single currency means that one of the two major instruments of economic policy is now lost to the nation state, leaving only fiscal policy. Far from those member states who are members of economic and monetary union harmonising taxes, I have always believed that their interests were in exactly the opposite direction. If you no longer have the capacity to adjust your interest rates and your money supply, it is even more desirable to have complete freedom of manoeuvre when you are dealing with fiscal policy.

Over the past 20 years, the Dutch and the Germans have had, in effect, a single currency. The reason why they have been able to keep their rates of exchange exactly fixed between each other is that they have followed widely divergent fiscal policies. If they had had to follow a uniform fiscal policy, I think it highly unlikely that their currency policy would have been as successful as they believe it has been.

For many centuries now there has been a debate about the extent to which politics should interfere with monetary policy. In the late 19th century not only was the Bank of England completely independent of political control, but our currency was also attached to the gold standard. Therefore, in a sense, not only did Parliament lose control of issues concerned with money supply but the nation also lost control for a period of 40 years.

I believe that the debate about the desirability or the degree of political interference in monetary matters is genuinely still out to the jury. But there can be no debate about the crucial importance of national parliamentary control of fiscal matters. In my submission, that is absolutely central to the notion of democracy in a modern nation state.

In the area of VAT and in the area of excise duty the United Kingdom Government have, by unanimous decision, decided to cede certain powers to the European Community, rightly or wrongly. However, what we are seeing here is the Parliament of a nation state attempting to cede further taxation powers to the European Community by majority voting, uncontrolled by the national Parliament. That must be unacceptable to the United Kingdom.

9.5 p.m.

Lord McIntosh of Haringey

My Lords, I share the tributes that have been paid by all noble Lords who have taken part in this debate to the work of the committee and its staff and, in particular, to my noble friend Lord Grenfell. I am gutted by any suggestion that he might choose to be no longer with us. The noble Lord, Lord Shaw of Northstead, said that the tribute to this report was that it would stimulate better, informed debate. Indeed, it has. If I may say so, it has stimulated a very much better informed debate both this afternoon and this evening than we had on 18th June when we discussed the Private Member's Bill introduced by the noble Lord, Lord Waddington.

It is because we have had the detailed and careful considerations and analysis of the committee's report before us, together with the benefit of the very expert evidence that witnesses gave, that we have been able to have a debate of such excellence. I believe I can reveal—at least, I think I can because no one has told me that I cannot—that Commissioner Monti remarked privately to the Government on the outstanding quality of the report. He is not someone who is known for paying excessive tributes.

As well as considering current issues, the committee commented on some ideas on the future of European Union taxation. I very much enjoyed that part of the report and it makes some interesting points. Despite my noble friend Lord Grenfell saying that he wished that we would comment on it, I think he will understand that we do not want to commit the Government in public on those points today. I think that it is best for me to restrict myself to the current issues in this report which are of great importance.

Let me say straight away that the Government welcome the report and the conclusions of the committee. The noble Lord, Lord Grenfell, said that it is very much in line with the Government's position and we agree with that. The report confirms what I have said to this House time and time again; namely, that the United Kingdom has nothing to lose and everything to gain from engaging in constructive dialogue with our European partners on tax issues.

As the report states—and as we agree— we believe that pragmatic tax co-ordination and fair competition cannot only co-exist but complement each other, to the greater benefit of taxpayers within the European Union". That has been confirmed by a number of noble Lords who have spoken today, notably my noble friend Lord Currie. This statement entirely reflects the opinion of the present Government. I take the opportunity to respond to the points raised by noble Lords during the course of the debate and to expand on the Government's response to the committee's report.

In the past, British businesses, operating in a relatively neutral tax system, may have had to compete in Europe with companies which enjoyed the benefits of a tax system weighted in their favour. As Europe moves towards a single market, this is recognised as being no longer acceptable. Now the Government are working with other member states to create a more level playing field for business across Europe. I recognise the force of what the noble Lord, Lord Rathcavan, said about our only land border with another member state being in the island of Ireland. I am always careful to try to avoid politically incorrect descriptions as regards Ireland, but I know that I shall get it wrong. The island of Ireland has a land border within it and it is quite clear that that causes great problems. I am sure that the Treasury will pay great attention to what the noble Lord has said.

But do not misunderstand me. The measures under consideration do not purport to create a unified tax system. This is not the way forward for Europe. For the benefit of those who have not fully understood that, I shall happily repeat what I have said before. My noble friend Lord Shore says that I do so in extravagant terms, but as I have to do it so often I must be forgiven for a little bit of "embroidery" each time, although fundamentally I am saying the same thing. The priority for Europe is the promotion of employment, economic reforms and competitive markets, not tax harmonisation.

As we have been talking about the difference between tax harmonisation and tax policy co-operation, I think that it is better if we define our terms, certainly as regards tax co-ordination. Tax policy co-ordination in the progress reports from ECOFIN to the European Council is defined on the principles of national competence: that is, policies wholly a matter for individual member states if the Community does not have competence under the treaty; subsidiarity: that is, action at Community level only where accepted objectives cannot be achieved by countries acting alone; and unanimity—each member state has a veto. That is its definition of tax policy co-operation and the Government believe that that is the way it should stay.

Lord Shore of Stepney

My Lords, I hope that I may interrupt my noble friend on that very point. After what he has heard during the debate today, does he still affirm in unqualified terms that we have a veto over all tax measures as it were emanating from Brussels? Has he not recognised that in certain ways he has misled us?—I do not say deliberately; quite the contrary. But from the beginning of this year onwards on about eight occasions the House was given absolute assurances that the veto would apply on all matters dealing with taxation. Now we know that a great part of it is classified as state aids and has therefore no veto attached. What has my noble friend to say about that?

Lord McIntosh of Haringey

My Lords, my noble friend described his speech today as an ambush. It is a funny kind of ambush when he made exactly the same speech on 23rd July and I replied to it in terms at that time. I shall reply to his points when I come to deal with his intervention. I have not forgotten what he said.

During the debate in the House in June this year I reminded the House of the conclusions of the Council of Ministers which confirmed again this basic truth I have mentioned. I hope that I shall not have to mention it again. The noble Lord, Lord Inglewood, challenged me on a Commission communication on the strategy for the single market. This is a consultative communication by the Commission. It has not been agreed to by the Council. The Commission's views are well known and are not new. Commissioner Bolkestein said roughly the same thing in his evidence to the European Parliament. We do not agree that harmonisation of corporate tax is necessary and there are no proposals of this kind on the table.

I am happy to acknowledge that the Committee recognises that, recent scare headlines about a European Union tax take-over were unjustified and ill-served the British public". The noble Baroness, Lady Sharp, confirmed that. I was sorry to hear the noble Lord, Lord Saatchi, and my noble friend Lord Shore again raising the spectre of a federal Europe. They were well answered by my noble friend Lord Desai and by the noble Lord, Lord Taverne.

It does not help to have this continuous repetition of quotations from former German Ministers, like Herr Lafontaine and Herr Waigel. I would remind the House about the recent joint statement issued by Mr Blair and Mr Schröder—which I suggest has much more validity—which underlines this sentiment running through Europe. They stated: We do not favour a unified European system of corporate taxation. We agree that further consideration could be given to how harmful tax competition in the area of corporate taxation might best be avoided. But we will not support measures leading to a higher tax burden and jeopardising competitiveness and jobs in the European Union". If those are extravagant terms, there is something wrong with the way in which people who hold that view have formed their views. They are utterly unequivocal. They are in the names of the leaders of this country and of the Federal Republic of Germany. We should take that statement seriously and cease these unjustified accusations and continual harping on about a creeping advance—or retreat—towards a federal Europe. The statement is a very clear indication that all energies in Europe are focused on working together to stimulate investment and create jobs within the European Union. Eliminating harmful tax competition and fighting tax abuse and evasion are a means by which to achieve these goals. Tax harmonisation is not.

The Government are pragmatically pursuing all avenues available to promote UK interests in Europe. As the report suggests, we will not dismiss any opportunities for promoting UK interests on dogmatic grounds. Of course we will not agree to measures which threaten British interests. The Government have made it clear that they will not accept any measures which will jeopardise British business. If all other alternatives available to the United Kingdom fail, the Government will not hesitate to use their veto.

The Government firmly believe—as do many other member states; we are not alone in this—that tax policy is ultimately a matter for member states to decide. The Government have no intention of abandoning the veto on tax matters. The Prime Minister confirmed this in the House of Commons in November last year when he said that we shall not agree to any lifting of the veto in areas such as tax, defence or our border controls.

Lord Shore of Stepney

My Lords, does my noble friend accept, and should he not say so, except when the commission rules that it is a state aid?

Lord McIntosh of Haringey

My Lords, I will reply to my noble friend at an appropriate time in my speech. I am developing my argument. I shall respond to my noble friend and to all the other noble Lords who have taken part in the debate.

I turn now to the committee's comments on the code of conduct. The Code of Conduct Group was established to examine potentially harmful tax measures in European Union member states. While welcoming the aims of the group, the committee worries that the code may have implications for national sovereignty and the principle of unanimity in tax matters. The noble Lord, Lord Saatchi, knew that I would confirm that these fears are completely unfounded.

The code is not a legislative process; it is not legally binding; it is a political agreement between member states to investigate and consider harmful tax competition and the damage that does to the competitiveness of the European economy. It is about jobs and growth. All the code does is to provide a forum in which member states can discuss these issues. At the end of the process there will be no compulsion; there are no votes in the process of the committee, either on individual issues or on collective issues.

All this will become clear very soon indeed. The group has been asked to report before the Helsinki European Council, which takes place on 10th and 11th November of this year. That means that the final report is likely to be considered by ECOFIN on 29th November—this month. Surely we can contain our patience for a little bit longer in order that we may debate the issue on a basis of knowledge rather than on a basis of speculation.

I do not underestimate the sincerity of noble Lords who say that there should be transparency and accountability to Parliament. That is a respectable view and I understand it. However, ECOFIN decided, when it established the group, that publicising the group's ongoing work would be prejudicial to the proper consideration of these sensitive issues. It would make it much more difficult to achieve a successful outcome. The key was to foster frank discussion within the group with all parties. That said, we will consider pressing in the Council for the final report of the Code of Conduct Group to be published in full.

The noble Lord, Lord Saatchi, asked whether the group will be disbanded. The answer to that question is that I do not know. That is not only because I do not know, but because nobody knows. No decision has been taken on that. However, publication of the group's findings certainly is a matter for ECOFIN to decide. Furthermore, it is for ECOFIN to decide how to respond to this report in all its aspects. We are confident that none of the UK measures which were reported to the group as potentially harmful will be adjudged to be harmful when finally the group produces its report.

The noble Lord, Lord Kingsland, adduced legal arguments about the role and scope of the decisions and procedures of the group. He suggested that the consensus process is in effect legally binding. I must disagree with that comment. The fact that the Code of Conduct Group may have come to a view on any tax measure is persuasive, but it is not legally binding. It is wholly a matter for member states as to any future action they take.

I shall turn to savings. We were disappointed to note that the committee could not reach an agreement on the way forward on the savings directive. Indeed, I had hoped that there would be a magic solution provided by the committee for the Government that we could have adopted with gratitude. However, it has not done that, perhaps because debates on this proposal too often generate more heat than light. The UK has now produced its paper on the effects of the directive on the international bond market. I am sorry that it was not available when the committee was sitting, but copies are now available and have been referred to. The paper reiterates the Government's support of the general aims of the directive, but it also emphasises the UK view that the approach of the directive will not effectively tackle tax evasion. Exchange of information on a global basis is in principle the best approach. I believe that a number of noble Lords have agreed with that point of view.

My noble friend Lord Desai thought that the committee was scaremongering about some of the potential effects on the international bond market. He called into evidence the fears of Ross Perot about NAFTA. I believe that the noble Lord, Lord Taverne, had a reasonable answer to that point. The Interest Equalisation Act—which I thought was introduced in 1973 rather than 1963, but I may be wrong—did certainly drive out that kind of financial activity from the United States. We do take the view that the more we can extend the exchange of information, the more likely we are to achieve a better result than by withholding tax, for the reasons that have been widely adduced tonight. It is the continued insistence on outdated arguments for banking secrecy in some member states—although the debate has made it clear that that does not now include Germany—and important third countries which is preventing a solution to evasion on these lines. We are grateful for the support here from the noble Lord, Lord St John of Bletso.

The draft directive, aimed at individuals, would also have the unintended side effect of seriously damaging European Union financial markets. We believe that there is evidence that the imposition of withholding tax on international bonds would have a profound impact on the international bond market currently based in the City of London, costing UK jobs and investment. Accordingly, the UK paper on international bonds puts forward two proposals including, but not restricted to, "grandfathering", which has been referred to in the debate. That was in fact proposed by the City of London. These are proposals for excluding international bonds from the scope of the directive in order to safeguard the competitiveness of financial markets. Both approaches secure an effective exclusion from the directive for eurobonds and other similar instruments, something for which the UK has argued from the outset. It makes clear that the exchange of information on as wide an international basis as possible is the most effective means of tackling tax evasion.

I appreciate, as my noble friend Lord Grenfell reminded us, that there are doubts about the co-existence model. That is why I emphasise the importance of a wide basis for exchange of information. But it should be remembered that the danger presented to the international bond market is only one of the areas of the directive which requires review. Several other issues also need to be resolved before the UK will agree to the draft directive.

We have made clear time and again, both to our European partners and to Parliament, that the Government will not accept the draft directive in its present form. We have determined from discussions at Council working groups that our paper has been taken very seriously indeed by other member states. It is now clear that they fully understand the UK position.

Perhaps I may now refer to some specific points raised in the debate. I shall do so as rapidly as I can. The noble Lord, Lord Saatchi, talked as though an early veto of these proposals would have been a good negotiating stance. Our view is that one does not start a negotiation from vetoes when some of the objectives of the group are shared by this country. Incidentally, the noble Lord is wrong about a veto in 1988 by the then Conservative government. The directive to which he referred was still on the stocks when we came to office in May 1997.

In an excellent maiden speech my noble friend Lord Lea of Crondall referred to energy taxes which are outside the scope of the committee's report. However, he made valuable comments on those which have certainly been noted.

The noble Lord, Lord Saatchi, talked about evidence from the Financial Secretary to the Treasury in favour of higher minimum excise rates on alcohol, tobacco and fuel. Indeed, we want to see higher minimum excise rates in other countries. Does the noble Lord disagree with that? There has never been any secret about it being government policy and I have never heard the Opposition say that they disagreed. But, explicitly, the Financial Secretary said that we would not be supporting the harmonisation of corporate taxes or of the tax base.

The noble Lord, Lord Boardman, referred to issues outside Europe and the views of the OECD. Perhaps I may refer him to paragraph 10 of the report. The committee said that, although it agreed that these are important issues, that is not an excuse for doing nothing within the European Union. He also referred to UK dependencies. I remind him that everything that we say about the UK dependencies will be, within constitutional arrangements; that is, existing constitutional arrangements". But it is clearly in the interests of UK dependencies that they should match up to the highest international standards and they share an interest in the health of the European economy.

The noble Lord, Lord Shaw of Northstead, referred to MARD. I say it as an acronym because I cannot remember what it stands for. In Tampere last month the Prime Minister, although he repeated that we would require unanimity on all European Union tax measures, did not suggest that we would be blocking the MARD. We welcome the principle of it but we think that more work is required on the detail.

I turn now to my noble friend Lord Shore of Stepney and his ambush. When he raised exactly the same point in a speech on the Finance Bill on 23rd July I made exactly the same reply as I propose to give now. This was one and only one of the items which were reported to the code of conduct group which has been adjudged by the European Commission to be state aid. State aid is clearly complementary, but is not the same as tax measures in the ordinary sense. We took the Commission's view on state aid and made the necessary amendments to the Finance Bill to modify the conditions of aid for 100 per cent capital allowances for small and medium-sized enterprises in Northern Ireland.

It has been the case ever since Britain became a member of the European Community and the European Union that this country, above all countries, has been opposed to unjustified state aids by member states. Governments of both parties in this country have always been opposed to discriminatory state aids which distort competition. Is it suggested that we should be the ones to decide what a state aid is? To take an example, if Monaco were to be a member of the European Union, should it have the freedom to decide what is a state aid? Clearly not. It must be a decision for the Commission. Otherwise, there would be no effective intervention against state aid. I thought that the noble Lord, Lord Inglewood, recognised that point in his speech. I hope that he did.

Lord Kingsland

My Lords, I thank the noble Lord for giving way. He drew the House's attention to the question of state aids and the crucial role that the Commission plays in policing that system. What then is the point of the code of conduct?

Lord McIntosh of Haringey

My Lords, the code of conduct system is concerned with tax measures which are not adjudged to be state aids by the European Commission. These are complementary sets of measures. State aids are very largely financial subsidies, although, as the noble Lord, Lord Inglewood, recognised, they can on occasion be tax concessions. I repeat: the undertakings I have given about unanimity and the use of the veto for tax concessions which are not state aids still apply. I do not withdraw from that in any respect.

Lord Shore of Stepney

My Lords, will my noble friend explain why that particular aid to Northern Ireland was considered to be a state aid other than a regional tax allowance incentive to help that troubled Province? What criteria can he offer and lay down that would give us some sense of security that other British tax allowance measures will not be similarly judged by the Commission, not by the British Government?

Lord McIntosh of Haringey

My Lords, I do not think that the House would appreciate it if this debate turned into a duel between myself and my noble friend. I have given assurances about the veto and about unanimity. I have explained that one of the eight measures that we have reported to the Code of Conduct Group has been adjudged by the European Commission to be state aid. I shall not set out on behalf of the Commission its reasons for that decision. However, I affirm that we are confident that the other items that are being considered by the Code of Conduct Group are not only not state aid but will be found in due course not to be harmful tax competition.

I commend the committee on its report. I am pleased that the Government can agree with so much of it. Again, I express my appreciation to all who have taken part in the preparation of the report and in this debate.

9.33 p.m.

Lord Grenfell

My Lords, the hour is late, and it is later for some than for others. I simply want to thank all noble Lords who have participated in the debate. It has been a first-class debate, with many thought-provoking contributions. I should particularly like to thank my noble friend Lord Lea of Crondall for an excellent maiden speech. That was what we expected from him, and we got it. I want also to thank all the members of Sub-Committee A who participated in the debate. It has been a privilege to work with such a high-quality group of people. I shall miss that association. I also thank the noble Lord, Lord Saatchi, for his kind remarks and for the comments directed to me by noble Lords who spoke after him.

The debate on the question of co-ordination and harmonisation will long continue. I doubt that the noble Lord, Lord Saatchi, and I will ever agree on that matter. I am more likely to find myself on common ground with Mario Monti than the noble Lord. I remember with some amusement that the noble Lord, Lord Rathcavan, thought that perhaps I would find the subject for a novel in this report. I do not believe that it would be Booker Prize material. However, I might try my hand at a play about tax evasion and give it the title "The Importance of Being Honest". Finally, I thank the Minister warmly for his, as always, thoughtful, authoritative and courteous responses to a long and often complex debate. He does us a great service with the excellence of his responses.

The time has now come to close. I remind noble Lords who are members of Sub-Committee A that it meets again tomorrow at 10.30 a.m. to put the finishing touches to yet another report. I am sure that all Members of the House, particularly members of the sub-committee, now want a short lie down before breakfast.

On Question, Motion agreed to.