§ Lord Waddingtonasked Her Majesty's Government:
§ Whether they propose to make the Channel Islands modify or dismantle their tax arrangements to comply with the demands of the European Union's Code of Conduct Group on "unfair tax competition" and, if so, how.
§ The Parliamentary Under-Secretary of State, Home Office (Lord Bassam of Brighton)My Lords, the United Kingdom is committed to encouraging its dependencies to accept the principles of tackling unfair tax competition. The code of conduct is, however, a voluntary, non-legally binding agreement. We expect to start discussions with the Channel Islands on the code group's report. Channel Islands legislation has always taken the form of laws enacted by the islands' legislatures and it would be unprecedented for the United Kingdom to legislate for the islands on tax.
§ Lord WaddingtonMy Lords, I thank the Minister for his emollient reply but I suggest that it does not quite fit the facts. Does not the final report of the European Union Code of Conduct Group on business transactions reveal that Ms Primarolo committed the United Kingdom Government to eliminating a whole raft of tax measures in the Channel Islands on which the financial services industries of the islands depend? Is that not quite extraordinary and quite unacceptable when the Channel Islands are not a part of the European Union and the European Union has no right to interfere in the business of the Channel Islands; when the Channel Islands are not even covered by the—
§ Lord WaddingtonMy Lords, this is a question, and an important one too. As I said, the European Union has no right to interfere in the business of the Channel Islands when the Channel Islands are not even covered by paragraph m of the code, which refers to dependencies of the United Kingdom—which the Channel Islands are not—and when Britain has never exercised jurisdiction in tax matters in the Channel Islands.
§ Lord Bassam of BrightonMy Lords, of course the United Kingdom supports international measures to counteract harmful tax competition. The Government fully support the work of the Code of Conduct Group chaired by Dawn Primarolo. However, the tax code of 1296 conduct on business taxation commits member states to promoting its principles in their dependent territories, but only,
within the framework of their constitutional arrangements".I believe that that explains the relationship perfectly. All we shall seek to do in this instance is to work closely with our colleagues in the Channel Islands and in the Isle of Man to attempt to achieve our objectives through the usual methods of discussion and negotiation.
§ Lord TaverneMy Lords, is not the most important feature of the report of the Code of Conduct Group that, while it is likely to lead to the elimination of certain forms of harmful practices of tax competition, which can be harmful to this country as much as to other European countries, contrary to the usual prophecies of doom and gloom of Europhobes in the Conservative Party, it has left the UK system of taxation unscathed? There is no criticism of our support for the film industry, enterprise zones or special help for scientific research. Is not the overall effect of the report likely to be extremely helpful to this country?
§ Lord Bassam of BrightonMy Lords, the noble Lord makes a valuable contribution to the discussion. We have emerged with a clean bill of health. Our financial institutions have a good reputation across the world, which is in the interests of, and benefits, our economy. That ought to be welcomed by all.
§ Lord Lamont of LerwickMy Lords, is tax competition in the Government's eyes always harmful? If it is sometimes harmful and sometimes beneficial, when is it harmful and when is it beneficial?
§ Lord Bassam of BrightonMy Lords, it is unfair tax competition that is harmful. It is worth reminding the noble Lord of a communiqué issued by the G7 countries at the 1996 Lyons summit, which states,
Tax schemes aimed at attracting financial and other geographically mobile activities can create harmful tax competition between states carrying risks of distorting trade and investment and could lead to the erosion of national tax bases".That statement was signed by the previous Prime Minister, John Major.
§ Lord Shore of StepneyMy Lords, I note what my noble friend has said about the code of conduct. Clearly it cannot apply to the Channel Islands given their protocol and given the constitutional arrangements which have always obtained. However, I put the following question to him. What response has the Government received so far to their efforts to encourage the Channel Islands to abandon their present practices? Can I be assured that, having done her best to encourage the Channel Islands, my honourable friend in the other place will not in any way resort to efforts to pressurise the Channel Islands to accept the measure?
§ Lord Bassam of BrightonMy Lords, as I said in my initial response, we expect to start discussions on the code group's report with the Channel Islands in the near future. The success of the constitutional relationship between the UK Government and the Channel Islands and the Isle of Man has been such that we have always managed to proceed through discussion and negotiation. I am bound to say that that has been a successful process. The Edwards report, which considered the regulation of financial institutions, proves that point. That is the best way for us to continue to conduct ourselves.
§ Lord Pearson of RannochMy Lords, although the noble Lord said to my noble friend Lord Waddington that it would be "unprecedented" for the United Kingdom to insist on changing tax arrangements in the Channel Islands, will he confirm that the Kilbrandon report of 1973, paragraphs 1533 to 1535, is at least ambiguous on this point? First, will the Minister therefore give a clearer answer to your Lordships' House? Secondly, will he admit that hundreds of billions of pounds come to this country through the Channel Islands and other dependencies, and that to do anything to upset that flow of business would be suicidal, even by the standards of our collaboration with the European Union?
§ Lord Bassam of BrightonMy Lords, the Kilbrandon report of 1973 has served us well for approaching 30 years. From my studying of paragraph 1499, if there is ambiguity in the report, it is extremely helpful ambiguity.
§ Lord Wallace of SaltaireMy Lords, does the Minister accept that the Kilbrandon report left the constitutional relationship between the Channel Islands and the United Kingdom extremely unclear, although it does refer back to a charter of 1204 which makes the relationship rather clearer? Is it perhaps time for the Home Office to revisit the question of the constitutional relationship between the United Kingdom and the Channel Islands—and perhaps between the Channel Islands and the EU—since many Bills which come before this House have additional clauses on whether the Channel Islands are opting in or opting out of different parts of EU-related legislation?
§ Lord Bassam of BrightonMy Lords, I described it as helpful ambiguity; that is perhaps how we should leave it. We have no plans to interfere with the current constitutional arrangements, which, as I have described, have worked very well. The only occasion I can find when the UK government in any way tried to interfere in matters affecting any of the islands was in relation to the Isle of Man under the Marine, &c., Broadcasting (Offences) Act 1967. As I understand it, that Act was designed to deal with Radio Caroline.