HL Deb 25 February 2004 vol 658 cc313-28

8.2 p.m.

Lord Pearson of Rannoch rose to ask Her Majesty's Government whether direct taxation has been ceded to the European Union under the existing European treaties.

The noble Lord said: My Lords, I trust we all agree that control of taxation is fundamental to the sovereignty of a nation. In other words, our democracy is not worth much if we cannot elect and dismiss the people who levy our taxes—our Members of Parliament or, more precisely, our Members of the House of Commons. This seems to me to be such an historic and acknowledged assumption that I must ask the Minister whether the present Labour Government agree with it. I will not ask him many questions tonight, but I should be grateful if he would answer that one.

The purpose of the debate is to discover to what extent this fundamental part of our democracy may have already been ceded to the qualified majority vote in Brussels and to the Luxembourg Court. The Motion does not call for an assessment of what the situation might become if we signed up to the draft new constitution for Europe, which as your Lordships know is on the back-burner under the Irish presidency of the European Union and looks likely to re-emerge by the end of this year under the Dutch presidency at the latest.

The draft constitution explicitly envisages Brussels taking control of direct taxation, which is why the Prime Minister made tax one of his famous red lines in the stalled negotiations last December. So this debate is also partly to ask how much point there is in the Prime Minister's red line on tax, if it has already been potentially given away to Brussels.

I propose to deal with the Question under three broad headings, as the Minister knows, because, given the density of the subject, I volunteered them to his civil servants this morning. I shall start by explaining how the Commission and the Court can use clauses in the treaties to achieve an aim which may appear to be frustrated under more specific clauses. I shall then give examples of where the Court is already clearly encroaching on the nation states' prerogative to decide matters relating to corporation tax, and I shall finish by identifying clauses in the present treaties which would already allow Brussels, supported by the Court, to take control of all direct taxation, both corporate and personal.

Before any of your Lordships think I am being fanciful, let me clarify at once that I am not saying that Brussels is about to use this power in the near future. I am saying that the power is there, hidden in the existing treaties, to be used at a time when EU integration has progressed a bit further; at a time when Brussels feels it can get away with using it.

So, first, the contention that Brussels and the Court use hidden clauses in the treaties to achieve an aim which may appear to be frustrated under more specific clauses or prohibitions. I can do no better than to remind your Lordships of how the Working Time Directive, or 48-hour week, was deceitfully imposed upon the United Kingdom.

The 48-hour week was a central aim of the EU's social chapter, over which Brussels was keen to take control in the Maastricht Treaty of 1992. The Conservative government of the day was opposed to the social chapter in general and to the 48-hour week in particular. It therefore only agreed to the Maastricht Treaty as a whole provided that the UK was allowed to opt out of the social chapter. The treaty was duly signed on that understanding, but the Commission had a trick up its sleeve in the shape of Article 118a of the TEC. This article governed the health and safety of workers and had been introduced under unanimity in the earlier Single European Act that was made subject to the co-decision procedure at Maastricht; in other words, after Maastricht, we could be outvoted on matters relating to the health and safety of workers.

So the Commission asserted, despite our objection, that the 48-hour week was a proposal covered by health and safety at work and that it should apply to the UK. The Court as usual agreed, and so the UK was forced to accept the Working Time Directive after all.

I suppose it is just conceivable that some of your Lordships may think that this version of events is the usual Euro-sceptic negative scare-mongering. So I fear it is worth placing on the record in your Lordships' House, for the first time, a letter written on 12 November 1996 by the Prime Minister, Mr John Major, to the President of the Commission, Mr Jacques Santer. The letter goes as follows:

"Dear Jacques,

"My intention in agreeing to the Protocol on Social Policy at Maastricht was to ensure that social legislation which placed unnecessary burdens on businesses and damaged competitiveness could not be imposed on the United Kingdom. The other Heads of State and Government also agreed that arrangement, without which there would have been no agreement at all at Maastricht.

"However, in its judgement today, the European Court of Justice has ruled that the scope of Article 118a is much broader than the United Kingdom envisaged when the article was originally agreed, as part of the Single European Act. This appears to mean that legislation which the United Kingdom had expected would be dealt with under the Protocol can in fact be adopted under Article 118a.

"This is contrary to the clear and express wishes of the United Kingdom Government, and goes directly counter to the spirit of what we agreed at Maastricht. It is unacceptable and must be remedied.

"The United Kingdom will therefore table amendments in the Intergovernmental Conference to restore the position to that which the United Kingdom Government intended following the Maastricht agreement. Those amendments will be aimed at both ensuring that Article 118a cannot in future be used in ways contrary to the United Kingdom's expectation, and dealing with the specific problem of the Working Time Directive.

"I attach the utmost importance to these amendments and I shall insist that they form part of the outcome of the Intergovernmental Conference. I do not see how new agreements can be reached if earlier agreements are being undermined.

"Meanwhile, I urge the Commission to refrain from making proposals under Article 118a that properly belong under the other Member States' Agreement on Social Policy.

"I am sending copies of this letter to Heads of State or Government of European Union Member States.

"Yours sincerely,

"John Major".

I submit that that letter is one of the most important documents in the history of our relations with the European Union, about which it says so much. The inter-governmental conference to which Mr Major referred was the IGC leading up to the Treaty of Amsterdam. By the time that treaty was signed at the end of 1997, the Conservatives had lost a general election and a new Labour Government signed up to the treaty and to the social chapter. So Mr Major's letter became somewhat academic, but I trust that it serves to prove my point: that the Commission and the Court are very capable of using unexpected clauses in the treaties to advance their ambitions. I remind your Lordships that the Working Time Directive is much in our thoughts today.

How does that apply to direct taxation'? The obvious tax provisions of the European treaties are contained in Articles 90 to 93 of the TEC and appear at first sight to offer some comfort. Indeed, Article 93, which the Government never tire of reading out when pressed on the subject, states that there must be unanimity in the Council to adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation. So we have retained the veto over indirect taxation. But the treaties are largely silent on direct taxation; and they certainly appear to be silent on corporation tax and income tax.

Or are they? Have the Commission and the Court got another card up their sleeves? It would appear that they do, but that card is not to be found in the obvious place in the treaties, under tax provisions. It is to be found instead in the clauses which bring about the single market and specifically in the articles which ordain the four fundamental freedoms—being the free movement of persons, services, goods and capital and the right of establishment within the EU. Those freedoms are enshrined in Articles 39 to 60 of the TEC, which are often referred to as the anti-discrimination clauses: one EU country cannot discriminate against others to its advantage. Like all single market legislation, that whole area is subject to the qualified majority vote, so we do not have a veto here.

Of those clauses, there is one, Article 43, concerning the right of establishment, which is being used by the Commission and the Court to interfere in national corporation tax. Their basic long-term aim seems to be to eliminate the different tax regimes of the nation states and incorporate them into a single corporation tax regime—to be followed, I fear, by a harmonised personal tax regime, to which I shall return—all of it eventually under the benign control of Brussels. They justify that basic aim by saying that it is necessary for the completion of the single market; that we cannot have what they claim to be the benefit of a level playing field in the single market if we have different tax regimes all over the place. Hence the need for harmonisation and eventual central control.

For your Lordships to appreciate how dense and tenuous is the case for the Commission's and the court's interference in corporation tax, I fear that I should quote from Article 43. It states: restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting of the agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State. Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms", and so on.

Once again, I must apologise for quoting Euro-speak in your Lordships' House. I hope that your Lordships will agree that, as usual, it is numbing stuff—as it is always intended to be. But, from that verbiage, the Court has taken the power in some 80 cases so far to find in favour of company tax payers and against their national governments, on the ground that their national tax laws restricted freedom of corporate establishment. Thus, the Court found against Her Majesty's Treasury in a recent case brought by ICI, which claimed group relief for losses incurred by overseas subsidiaries, and in the Hoechst/ Metallgesellsehaft cases, which put paid to our requirement for UK subsidiaries of overseas parent companies to deduct advance corporation tax from their dividend payments upwards. Those two cases alone are estimated to have cost the Treasury about £2 billion. Can the noble Lord confirm that figure?

Whatever the noble Lord's answer, to which we look forward, that strategy of the Commission and the Court has become big business for our large accounting firms and their international clients, whom they are advising how to benefit from it. Those firms confirm what I have been saying, so your Lordships do not have to believe me.

For instance, last March, Ernst & Young issued a report entitled, Damned if we don't? How EU law is challenging and changing the EU tax system, which identified the Court's determination, to align the tax treatment of businesses throughout the EU … basing its position on the fundamental freedoms guaranteed by the EC Treaty". Or, as Mr Peter Corcoran wrote in Deloitte's World Tax Advisor report last August: Direct taxation was not originally a priority for the EU … It has been viewed by the member states as national business, and as one of the last bastions of sovereignty for member states … Nevertheless, the ECJ has embarked on a course to ensure that the fundamental freedoms of the EC Treaty are respected in the area of direct taxation". As an international UK businessman, one is tempted to welcome a regime that allows one's profits to arise in convenient tax regimes. I am sure that my finance director will not be altogether amused if he reads what I have said so far. But as a resident in our comparatively low tax regime—not to mention as a child of our democracy—one must be deeply worried as one contemplates the obvious development of the Commission's and Court's ambitions. It is clear that they will continue to widen their judgments against national tax authorities until the nation states concede a common corporation tax policy.

As Mr. Frits Bolkestein, the EU's commissar for the single market said recently: The concept of a common consolidated tax base for EU-wide activities of companies … is ultimately the only means of tackling the various tax obstacles in the Internal Market 'in one stroke'". Can the Minister tell the House what, if anything, the Government think they can do about this situation, and whether they intend to do it?

Finally, I come to my contention that the treaties already contain a clause which potentially cedes control of all taxation, including personal taxation, to Brussels.

This provision is Article 44(2)(h), and it appears in the next Article to the one that I have quoted above, in the same chapter on the right of establishment. It is therefore subject to the same wide and imaginative interpretations as its predecessor.

In order to spare noble Lords more Euro-speak at this time of night—I am sure that one dose is enough—I will paraphrase the key parts of Article 44 as follows: in order to attain freedom of establishment, the Council and Commission shall issue directives, in particular by satisfying themselves that the conditions of establishment are not distorted by aids granted by member states. They can therefore rule out "aids granted by member states"—those are the key—words if they think that they are discriminatory or to the advantage of one member state against the others.

When I first read those words some 12 years ago, I assumed that the word "aids" meant things like government aid to British Steel, or perhaps Air France, that sort of thing. Now I know better. Now I know that the word "aids" can mean anything that the Luxembourg Court decides it means. I fear it could mean our entire direct taxation system, including personal tax, if the Court agreed that that was causing distortion to the single market, perhaps by enticing a larger share of inward investment into this country, or by making the UK a more attractive place for the very rich to live in, with consequent advantage to our economy.

As I said at the beginning, I do not pretend that Brussels will consummate this power in the near future. I merely suggest that the corrupt octopus already has a tentacle around our entire taxation system, which it will tighten when the victim can no longer escape.

I end where I started. These decisions are not taken by the House of Commons, by those whom the British people can elect and dismiss. They are taken in Brussels and Luxembourg, and this Parliament must rubber stamp them on pain of unlimited fines. And worse is surely to come.

I do not know how the people will react when they discover that this vital part of their democracy—of their sovereignty—has been taken from them. But I imagine they will want to know how the Government intend to give it back to them.

I look forward to the noble Lord's enlightenment in that regard.

8.17 p.m.

Lord Newby

My Lords, I hope that the House will forgive me if I do not spend the bulk of my speech commenting directly on the speech given by noble Lord, Lord Pearson of Rannoch, but I will make one or two comments about it.

First, the idea that there is a hidden clause in any EU treaty is, frankly, risible. The whole EU spends its Lime looking through the treaties. There are copies of them in our Library. I do not believe that there is anything hidden.

As for the language in which they are written, we have just had a debate on regulation. Does anyone argue that EU regulation is somehow more difficult to understand than the extraordinary language in which all parliamentary drafting takes place? This is another fear that the noble Lord seeks to raise and it is completely unjustified.

The noble Lord referred to Article 93, and pointed out that as far as indirect taxation was concerned, changes require unanimity. He then said that there was no such article relating to direct taxation. Direct taxation is not covered by the treaty, so there is no Community competence in it. It is therefore hardly surprising that there is no equivalent article to Article 93.

The points that he made about the long-term consequences of Articles 43 and 44 were overdone. Major degrees of harmonisation of direct taxation within the EU will happen only if there is a political will for it within the EU—if a large majority of member states wish it to happen. There is no sign that this is the view across the EU, leaving aside the view of this country. The noble Lord raises fears that are completely unjustified.

My final point—and it is a point that has been made before in response to the noble Lord's comments—is that many of us find his reference to EU high officials as commissars offensive. Personally I find that description of Frits Bolkestein, a free-market liberal, both offensive and ridiculous. It does nothing to the level of our debates when the noble Lord continues to use that kind of language.

What is worthwhile discussing in your Lordships' House as a serious economic issue is how far tax levels and structures within a single market can diverge and should be encouraged to do so without jeopardising the free movement of goods, labour and capital, and without causing serious market distortions. The noble Lord referred briefly to indirect taxes, in particular excise duties. At present, the extremely disparate rates of indirect excise duties in the UK and much of continental Europe, particularly in wines, spirits and cigarettes, have led to levels of smuggling into this country not seen for more than 250 years. That has been extremely damaging to UK businesses. It is now decreasing somewhat as duties rise on the Continent, most notably with the French decision to make very significant increases in tobacco duty. But in the absence of such voluntary coming-together of duties, there is a strong argument from the viewpoint of UK domestic industry for at least greater European co-ordination of indirect tax levels, even if there are no formal harmonisation plans, which I do not support.

EU decisions on direct taxes have already had extremely significant consequences. For example, the decision to allow the Irish, particularly the International Finance Centre in Dublin, a zero corporation tax rate, a derogation that they were given for a short period, had a very big impact in attracting financial services investment to Dublin. The impact was such that prosperity in Ireland has allowed the Irish to reduce corporation tax to a very low level so that it is still worthwhile for all the footloose companies that moved into Dublin to remain there.

That single tax change, more than any other single change, except possibly the common agricultural policy, has led to an extraordinary level of growth in the Irish economy, which, for good or ill from our point of view—it has taken investment and activity away from the UK—has happened under existing EU legislation. I wonder whether the noble Lord, Lord Pearson, thinks that that has been a positive development, and whether, had there been greater co-ordination on corporation tax matters across the EU, that change might not have happened and a single corporation tax decision would not have had such a big impact.

I had thought that the noble Lord would talk to a greater extent—although he referred to it in passing—about the alleged suggestion that some member states would move to harmonise the base of corporation tax, not the rate. That issue was covered in an article in the Financial Times on 21 and 22 of this month. Frits Bolkestein, in an interview to Le Monde, said that the Commission sought to draw up proposals under the in-house corporation rules for a group of countries to harmonise the bases on which corporation tax was charged.

That potentially significant development is worth discussing rationally to see how it might affect UK business. To a certain extent, international harmonisation of accounting standards means that the way in which companies will report their activities will be more closely aligned. From that it is a relatively small step to have a harmonised base of corporation tax. That would bring with it some benefit to business, because it would mean that companies operating across all EU countries would not need to establish subsidiaries in each single one for corporation tax purposes. There would be significant benefit for large companies. I am not saying that that is an overriding argument but it is one worth having.

The point that Bolkestein makes on the consequence of such a move for tax rates is valid. He argues that the first consequence of such a change might well be that a common system by making the system more transparent would reveal hidden disparities in the way in which the tax base was currently calculated. He argued that in a second period thanks to tax competition, tax rates would move close to each other once again. What we have seen in any event in the EU is that corporation tax rates have been lowered, because member states have realised that it is to the advantage of their industries not to overtax them against other member states. There has been something of a common movement in the EU without any new powers going to the Commission, the European Court, or to anybody else.

As far as income tax is concerned, there is no serious politician in Europe who is now arguing, or has argued recently, that income tax should be levied on a harmonised basis. That being the case, while, as always, there is merit and interest in discussing some of these issues on a theoretical basis, we should not believe that there is any movement, pressure, impetus, or push in Europe to see a harmonised income tax base or any suggestion that the Commission, the Parliament, the member states, the Council or anybody else wishes to see this in the foreseeable future.

8.26 p.m.

Baroness Noakes

My Lords, my noble friend Lord Pearson of Rannoch has raised an important issue with his Question this evening. I am sure that the Minister will say later this evening that direct taxation has not been ceded to the EU, and that was the burden of the speech made by the noble Lord, Lord Newby. In a narrow, technical sense, that may well be correct. However, I believe, like my noble friend, that the substantive position is that direct taxation, or elements of direct taxation, have already been ceded. The position is now getting serious, and we are already part-way down a slippery slope. Unless the Government act with some determination, of which we have seen no sign yet, we will end up with UK taxation becoming subsumed more and more in the tentacles of the EU. That could well harm British taxpayers.

It might seem something of a surprise that the Chancellor of the Exchequer, a veritable master of the stealth tax, has failed to spot the arrival of the even more deadly EU taxation by stealth. The truth is that despite the rhetoric of not ceding sovereignty over direct taxation—I will leave the Minister to wheel out the standard government quotes—the Chancellor has already accepted that EU control over at least part of our direct taxation is a fact of life. There is no other explanation for his Pre-Budget Report announcement that in response to the Lankhorst case in Europe, legislation will be introduced from April this year to require arms-length pricing arrangements within groups of companies.

Let me digress for a short while on this proposed legislation, because it can be portrayed as a minor adjustment to our tax rules, but that is simply not true. All of the companies that I am involved in are now embarked on expensive exercises to identify and price all of their UK intra-group transactions. Tens of thousands of pounds are being spent on advisory fees. That just establishes the base line; tens of thousands more pounds will be spent every year by many companies in changing arrangements, changing systems and implementing new record-keeping requirements. I hate to think what that will add up to across the corporate sector. It will be yet another regulatory burden imposed by the Government, and the UK economy will benefit not one iota. We should not be beguiled by the Government's assertion that only the largest companies will be affected by the new tax law. In practice, only the smallest will escape the net.

The purpose of the debate is to consider not the specifics of our latest submission to EU control but the principles. For a long time, there have been good reasons to be afraid of the EU's designs on the tax systems of member states. An excellent pamphlet of 2001 entitled European Tax Harmonisation by Theresa Villiers, a Member of the European Parliament, has a seven-page annex of quotations that should chill the heart of all but the most extreme Europhile. States that have chosen to join in economic and monetary union will face the biggest challenge. For example, Commissioner Solbes put it succinctly when he said: Member states cannot be allowed to pursue whatever tax and spending policies they want after joining the euro". That is another good reason for staying out of the euro.

Keeping our monetary policy independence will not guarantee fiscal independence. For example, in 2001, the Commission said: It remains the Commission's view that a move to qualified majority voting at least for certain tax issues is indispensable". The Commission repeated that view last year in its formal opinion on the proposed constitution. As has already been said this evening, Frits Bolkestein is pursuing another approach to harmonisation. Last week, he was quoted as saying, "The moment is right". The "moment" in this case being right for the harmonisation of several countries. I disagree with the noble Lord, Lord Newby, who said that, following the move to some form of accounting harmonisation, it is only a small step to harmonising the tax base. It is a big step, and we should want no part of it.

Ms Villiers's pamphlet does not simply repeat quotations from the usual suspects at the Commission. She includes politicians from France and Germany, the very countries to which our Prime Minister is now trying to get close in Europe. Do we know what game they are playing? Back in 1997, France's Europe Minister, Pierre Moscovici, said: we need to move towards fiscal harmonisation. It won't happen immediately but we are talking 5 or 10 years' time". They are playing a long game. I am not convinced that our Prime Minister has a long game in him.

Ms Villiers also notes how spin has been allowed to mask the real agenda. In 1998, Oskar Lafontaine, then German Finance Minister, said: our English friends have asked us not to use the word 'harmonisation' and instead use the word 'co-ordination' ". I wonder which English friends those were—almost certainly the Prime Minister and possibly even the Chancellor. I hope that, when the Minister replies this evening, he will confirm that, if he uses the word "co-ordination", it is not euro-code for "harmonisation" or something worse.

There are significant threats. We have had a reprieve—perhaps only temporary—from the proposed European constitution. I will not delve into the dangers that lurk there. Even the Prime Minister has said that tax harmonisation would be a "fundamental change". Will the Minister confirm this evening that, if tax harmonisation were suddenly to appear in some resuscitated European constitution, there would be no question but that the constitution would be put to a vote by way of referendum in this country?

There are threats beyond the constitution. The most important is that posed by the European Court of Justice, using the treaty provisions, as my noble friend Lord Pearson of Rannoch pointed out. The European Court of Justice does not directly impose fiscal policies, but, under the guise of enforcing the fundamental freedoms in the treaty about which my noble friend spoke, the court has steadily achieved the ability to interfere in the tax policies of nation states. I do not believe that any signatory to the treaty would have anticipated Article 43 which prohibits restrictions of the freedom of establishment could have been used as a Trojan horse to attack the autonomy of member states in relation to tax. The noble Lord, Lord Newby, said that the language of the treaties has not been hidden: that is indeed the case. But I do not believe that the way in which the language could he used was appreciated until relatively recently. Over the past 10 years or so, we have seen a number of cases, starting with the ICI-Colmer case—I declare an interest as a director of ICI—which have started the process of moving into member state autonomy.

In 1999 the Select Committee of your Lordships' House on European Communities reported on taxes in the EU. In that report a single paragraph of analysis related to the possible role of the European Court of Justice. That did not identify the grave danger to the UK which is now posed. I wonder whether that committee would be so unconcerned today, given the more recent cases. I venture to suggest that the committee might like to revisit the issue.

The Government seem not to regard the territorial ambitions of the ECJ as a big issue. We have already seen the introduction of transfer pricing rules following the Lankhorst case even though there is a patent detriment to British companies. Accountancy firms have identified a raft of other UK tax rules which now look vulnerable. It could be only a matter of time before the European Court of Justice catches up with them too.

My question to the Minister is this: do the Government care whether or not the ECJ slowly eats away at our tax competence? We may not be faced with full blown tax harmonisation which the Prime Minister has declared a fundamental issue. But the list of tax arrangements which could fall foul of the ECJ is very long indeed. At what point would the Government regard the loss of our tax autonomy as fundamental? Will the Government stand by and let the Court increasingly dictate our tax rules?

There are other threats to our freedom to devise our tax system. In particular, the Code of Conduct on Business Taxation, drawn up in secret proceedings, represents a cause for concern. This is not for any attacks to date on our tax system but because our active participation in the code is predicated on tax competition between member states being harmful. We on these Benches do not accept that proposition and believe that it is only a matter of time before the code is taken in more ambitious directions which could well harm the UK. The Government have not even called for the group which produced the code to be dismantled. Instead, the Paymaster General, who chaired the group, told your Lordships' Select Committee in 1999 that "its work will never be finished".

We should be afraid; we should be very afraid. We are well on the way to losing control of direct taxation. If the Government do not act decisively and quickly, our valued national freedom of control over our own direct taxes will disappear. I hope that the Minister will be able to tell us that decisive action is indeed on its way.

8.38 p.m.

Lord Davies of Oldham

My Lords, it has been a stimulating debate introduced with his usual panache by the noble Lord, Lord Pearson, to whom we are grateful. There were relatively few participants. Nevertheless, important issues have been covered. I shall concentrate overwhelmingly on the issues which have been raised with regard to direct tax matters, the subject of the debate.

In passing, I must say that I find it a little difficult to take from an Opposition spokesman the concept that the Prime Minister, the Government and the Chancellor of the Exchequer have no long game in them; that, from a party involved in boom and bust during the years it was in government. When we produce an economy with some solidity of achievements in terms of low interest rates, low unemployment, significant consistent and economic growth over years, to say that this Government are not capable of a long game seems to have an element of effrontery about it. But we are not here to mix issues of general economic policy. We are here to talk about the issues that exercise the noble Lord with regard to direct taxation.

The noble Lord, Lord Pearson, asked whether direct taxation has been ceded to the European Union under the existing EU treaties. The implication of the question is that direct tax policy is an important part of national sovereignty. It has a vital role to play in our social and economic well being. Of course, I agree with him.

It is precisely because of the importance of tax issues that the Government are committed to a modern and fair tax system that encourages work, saving and investment, keeps pace with developments in business practice and the global economy, and raises sufficient revenue to fund the Government's objective to build world-class public services. Those are ambitious objectives, but through the changes and reforms that we have introduced we are achieving them.

We are making significant progress with regard to cardinal points in the economy. We compare well with our European neighbours and other significant countries. It is clear that power over direct taxation has not been ceded to the European Union. The Government are using their authority to deliver radical reform within the framework of their participation in the European Community.

Maintaining control over our own tax system is, in particular, key to pursuing the kind of tax competition between states that globalisation demands, and which is an essential element of the Government's economic reform agenda. Such tax competition can encourage innovation and thus make more efficient ways of raising revenues. It can help to cut through bureaucracy and reduce compliance costs.

Competition between states, each controlling their own tax policy, recognises that countries have different preferences for how to structure their tax system; preferences that often reflect long-standing national values. Clearly, we fit into exactly that pattern. That is why the Government are quite clear—as repeated on many occasions—that they are not prepared to see tax harmonisation with regard to direct taxation.

We reject direct taxation harmonisation. The one-size-fits-all solutions are a barrier rather than a spur to global competitiveness. The global flow of capital, and the global sourcing of goods, are fatally undermining the old flawed assumptions that a European single market must be followed by European tax harmonisation.

In relation to a harmonised tax on savings, the Government took action two years ago and succeeded in ensuring that we protect our very important position with regard to saving. When recognising the importance of investment strategies in the City, the Government took action to protect them, clearly using their willingness to operate a veto in that area and to achieve a solution based on agreement that protected our essential interests.

It is right that the Government continue to resist any schemes for harmonised direct tax and right that they have made a manifesto commitment to maintain the UK's tax veto in the European Union. Taxation is, and will remain, a key component of national sovereignty. We are at one with the noble Lord when he stresses the importance of that. But national sovereignty on direct tax is not entirely unconstrained, and nor should it be.

The Government recognise that in some areas we need international standards. Such standards ensure that British businesses can trade freely across borders without facing unfair discrimination or the risk of double taxation. They ensure that tax competition is fair and above hoard. That is why Ministers from OECD member countries first agreed in May 1996 to co-operate to combat harmful tax practices. The UK has been closely involved in the OECD's work in that area ever since, helping to produce recommendations and guidelines that identify potentially harmful practices and encourage their "rollback". I am surprised that the noble Baroness, Lady Noakes, suggested, I think, that there was something remiss about that behaviour.

The issue developed with regard to the code was one that was chaired by a British Minister, the Paymaster General. Over a number of years it has been involved in making significant progress towards reducing unfair practices that inhibit growth and the development of fair competition.

All markets, and particularly those operating across borders, need some rules if they are to deliver the benefits that we know competition can bring. As in trade policy or competition policy, so too in the field of taxation, some international standards and co-operation are needed if we are to achieve the full benefits of liberalisation. So whereas I accept entirely the importance of the issue that the noble Lord raised, I disagree that our national objectives and the enhancement of our national sovereignty can be delivered on the basis of unilateral isolated "little Englander" action. Not so.

We need an international framework in which to play our part, in which to influence from a position of considerable authority. We need to work with our international partners within the OECD and the European Community. This is surely unsurprising in a successful single market. After all, this is a market, as the noble Lord will recognise, where 3 million jobs are at stake in terms of the UK's relationship to the market. It is a market in which 55 per cent of our trade is with the European Community. Millions of British consumers benefit from lower prices and more choice as a result of us being members. For this single market to function, and for UK business and consumers to benefit, it must be based on rules and the impartial application of certain fundamental freedoms set out in the treaty.

As the noble Lord, Lord Newby, clarified for me, the position is one in which although there are European rules necessary in the treaty, there is no explicit competence to legislate on direct taxes, nor is there any serious political intent to produce harmonisation with regard to income tax. I do not need to go into this issue further because I am grateful to the noble Lord for having clarified those issues successfully earlier in the debate.

However, there are a number of issues which we need to look at with care. I want to comment on the question of legal judgments. The noble Lord, Lord Pearson, identified legal judgments that have significant financial implications for this country. I did not recognise the global figure which he presented, which ran, as I recall it, into billions; it may have been 2 billions. That figure is more than 1 billion so I am entitled to add the plural "s" to billion! As far as our figures are able to identify the issues now, we have settled claims from a number of companies related to judgments from the European Court of Justice to a value of £183 million. There are unsettled claims estimated in the region of £250 million.

I am not in a position to do what the noble Lord, Lord Pearson, can do. His representation today was even more far-sighted than we are used to from him. Mini caveats introduced into his speech were about his talking about not the "here and now" or even the immediate future but about that which might be implicit in the treaty over a very long period. I can respond by saying only that I would put his figure of £2 billion into that category. I am not able to predict how costly judgments might be in the future and I certainly cannot quantify them.

I turn to the particular cases that were identified. The noble Baroness, Lady Noakes, referred to the Hoechst/Metallgesellschaft judgment. The decision in that case was reached subsequent to our own decision to abolish advance corporation tax. I cannot enter into discussion on the particular case because some claims are still outstanding, but it is clear that we were bent upon reforming and changing the position with regard to ACT. In fact, the decision from the European Court of Justice produced some costs against past practice.

The European Court of Justice has a certain role to play in determining when and how the law governing the concept of the single market should be applied and interpreted. Some noble Lords have suggested that the power of the ECJ to consider aspects of direct tax policy in and of itself presents proof that we have ceded sovereignty in this area. I do not agree with that interpretation. The primacy of Community law over national law in the areas covered by the treaty is a well-established and necessary principle of the European Union and is integral to its operation. The alternative, in which presumably we would have a Union with member states free to choose not to apply the rules, would destroy the whole concept of the single market.

However, that does not mean that we cede to the European Court of Justice primacy over our national taxation. Let me make the most obvious point. All cases appearing before the European Court of Justice are brought by national organisations. The European Court of Justice does not originate the cases, they come from within nation states. So it is national courts that create the problem by referring to the ECJ. Despite our limited time, I shall give way to the noble Lord.

Lord Pearson of Rannoch

My Lords, we have several minutes were we to need them. Does the Minister agree that the Commission itself can bring cases in the European Court of Justice?

Lord Davies of Oldham

My Lords, that is true, but the cases quoted this evening were all referred by national courts. The noble Lord cannot make the bogey look too great in circumstances where all the instances quoted were reflections of national will.

The noble Lord raised the issue of problems regarding state aid. Let me say that I do not think that the UK has been prevented from doing what it wants to do on taxation as a result of these matters. When we set out to reform stamp duty there was a delay because we wanted to be reassured that there were no implications concerning the definition of the use of state aid. But the Government introduced stamp duty reforms on the basis of their own principles, and that is reflected in our present position.

This has been a stimulating debate, as are all debates originated by the noble Lord, Lord Pearson of Rannoch. I am grateful to him. However, let me make it absolutely clear once again that we do not believe that we have ceded control over direct taxation to the European Union. The position is governed by the veto. We do not hesitate to say that we are committed to that position. We shall continue to insist on tax unanimity and we shall argue both in the EU and internationally for fair tax competition and against damaging harmonisation. But we shall also continue to co-operate with others where it is in the best interests of this country to do so. In a global economy it is essential that we have a framework for co-operation as well as competition. To refuse to co-operate, to opt out and to leave others to dictate the international agenda would be to sell short the world economy and, much more crucially, would adversely affect Britain's economic interests. We do not intend to do that.