I am the assistant secretary dealing with tax policy in the budget and economic division, including domestic tax policy issues in the context of the budget and Finance Bill as well as EU and some OECD tax issues. I am accompanied by my colleagues, Mr. Michael McGrath and Ms Orlaith Gleeson, who work on some of the EU and OECD issues which come within my area of responsibility.
I understand the committee's interest lies within the general framework of proposals at EU level in the context of tax harmonisation. The note prepared by the Department and circulated to the committee outlines the basis for dealing with tax matters at EU level.
Under the current EU treaty, the majority of directives and regulations in the taxation area, both direct and indirect taxes, are adopted under Article 93 or Article 94 or, occasionally, both. Both Articles require decision-making by unanimity - they require the agreement of all member states for any change in the law. As the Chairman mentioned, they have been the subject of considerable debate in the Convention on the Future of Europe. On that topic, Deputy Carey was particularly involved in the economic governance committee. While some member states, including Ireland, do not wish to have the rule on unanimity changed, others have a very strong view that it should change to a considerably greater extent than that envisaged in the Convention proposals.
It may be helpful to outline the current broad EU framework in the main tax areas. There was an EC-wide legislative basis for VAT before Ireland joined the Community in 1973. Currently, the EU sixth VAT directive, adopted in 1977, is the key directive in this area. EU rules provide the framework and there is a degree of harmonisation of approach. However, there is still considerable autonomy with regard to the level of VAT rates applied. Over a number of years the Commission had plans in the context of the Single Market to switch to a more harmonised approach such as, for example, to apply VAT at point of origin of goods rather than at destination, as is currently the case, and to have a more harmonised system of rates. Many member states had difficulties with this for various reasons. Accordingly, the current focus is on dealing with particular problems such as e-commerce or cross-border issues.
In the case of excise tax there are three broad product groups covered by the current EU rules - alcohol, tobacco and mineral oil products. Under the EU energy tax directive currently being finalised, a wider range of energy products will be covered such as gas, electricity and coal. There is a basic structure in place governing the control and movement of goods across borders and a system of minimum rates which are relatively low on most products. In practice, there is a wide range of variation in excise duties applied by member states. This reflects various traditions and political and cultural choices. Northern European countries tend to have high rates of excise duty on alcohol and tobacco, whereas southern European countries have a tradition of much lower taxes. Accordingly, while there is a framework in existence, there is still a degree of autonomy.
The Chairman referred to the proposal for a fixed rate for road diesel fuel which was rejected by 14 of the 15 member states. It was a somewhat unusual proposal by the Commission whose general approach has been towards narrowing the gap between the rates applied in different countries with higher minimum rates. It would probably favour the application of maximum rates also but has not succeeded in making much progress in that area.
The main existing directives in the direct tax area deal with the cross-border treatment of companies under the parent-subsidiary companies directive and the mergers directive adopted in 1990 under the Irish Presidency. The details of a directive on the treatment of interest and royalties applying to cross-border cases have just been agreed by the Council of Finance Ministers, ECOFIN - on 3 June - as well as a directive on the treatment of cross-border savings which has received considerable publicity. This relates to giving information or introducing a withholding tax to deal with offshore savings. Related arrangements in that regard are in the process of being finalised with third countries such as Switzerland. Clearly, there is no point in having a system in place by the European Union if the only result is that savings move to other third countries.
Much of the current approach to direct tax issues at EU level can be linked to a report by Commissioner Mario Monti in the mid-1990s which set out the case for greater tax co-ordination in order to support the Single Market and EU employment policy. Work undertaken by the Commission since culminated in a Commission communication on company taxation in 2001 which set out the developments it would like to see. We provided an information note in this regard for circulation to the committee.
The Commission's proposal involved a twin track approach, targeting particular cross-border problems such as parent-subsidiary companies or mergers or issues with regard to common approaches to transfer pricing. We have no difficulty with taking a direct approach to particular obstacles and finding specific solutions. It has advantages for an economy as open as ours if such issues are tackled at European level with a view to removal of trade barriers. We are generally supportive of the work in progress in this area.
The Commission's other proposal was for a longer-term "big bang" approach for a common consolidated corporate tax base for companies for their EU-wide activities. We view this approach as going far beyond the idea of co-ordination of EU policy in the direct tax area, being a disproportionate approach to dealing with obstacles and interfering with member states' autonomy and sovereignty in tax matters. Given the difficulties in resolving such issues as treatment of cross-border losses on a targeted, individual basis, a "big bang" approach towards solving all problems at once is unlikely to be successful.
Another important EU factor in tax policy formulation and implementation is the general EU rules on state aids which apply to tax measures as well as grants and other expenditure measures. Any tax measures regarded as discriminatory are subject to state aid rules. Ireland's 10% tax rate for manufacturing and IFSC companies has to be phased out because of these rules which, to a certain extent, produce a common approach at EU level.
In addition to formal legislative changes, work is under way to tackle harmful tax practices. The EU code of conduct is a political agreement designed to curb harmful competition between member states in business taxation. It focuses on national tax measures which have the potential to have an effect on the location of business within the Community and provide for a significantly lower effective rate than that generally applying in the member state in question. This refers to specific niche regimes established to attract mobile investment as opposed to general policy choices about how a taxation system operates. Interestingly, when we started work on this issue, we found that many of the member states which had been complaining bitterly about Ireland's general taxation rate operated these kinds of niche regimes with low effective rates. While Ireland's system was criticised more than others - it is generally more transparent - in practice, it was found to be more acceptable than others from the point of view of harmful tax competition.
In addition, the OECD has been working on harmful tax competition during roughly the same period. Many of its measures are geared towards mobile investment and focus, therefore, on the issue of mobile financial services which cover a much wider range of countries than the European Union. Members will probably have seen references to tax havens which have been designated as unco-operative. This was done in the context of work carried out by the OECD which we supported.
While we are happy to take common approaches at EU level where they benefit Ireland, we regard unanimity as crucial. This brings us to the Convention on the Future of Europe in which there is pressure to move to qualified majority voting. As the Chairman stated, Articles 59.2 and 60 of the draft constitution propose the extension of qualified majority voting to issues of administrative co-operation and combating tax fraud for both indirect and company tax once the Council has unanimously agreed that the matter in question can be defined as such.
We oppose any change in the principle of unanimity in decision-making on taxation issues. The Government's position on the matter has been clear. I am aware that the Minister of State at the Department of the Taoiseach, Deputy Roche, has appeared before the committee to discuss this issue. The right to decide the level of public spending and how it will be funded is a basic function of the democratic process which touches directly on the relationship of the citizen to the State. We want to preserve this asset by retaining its use at national level.
In addition, the right of member states to decide upon taxation issues is a powerful economic tool which allows them to take into account their particular position in the economic and business cycle or their geographical position, whether on the periphery of Europe or elsewhere. Losing this right could severely impair the ability of each member state to manage its particular economic conditions. The use of qualified majority voting could result in taxation measures being imposed with which Ireland disagreed. This does not mean, in the context of the proposals before the Convention, that we are opposed to administrative co-operation in tackling fraud. Rather, our view is that this can be done under a unanimity system. If a proposal is a genuine measure to tackle fraud, all member states should be prepared to sign up to it and it should not be impeded by the unanimity requirement.
When one hears the term "administrative co-operation on tax fraud" one assumes it to be an area on which every state would want to work. When one considers, however, that the Commission's savings taxation proposals, probably one of the most controversial dossiers ever produced at EU level, were proposed as an anti-fraud measure, one could easily argue that a measure to harmonise the current differentials in excise rates across member states should also be described in such terms. We are concerned that tackling fraud could be used to cover a multitude of issues.
On the current proposals, some Convention members could argue that the Council requirement for unanimity offers a strong degree of protection. Given that a proposal can change considerably between the point at which it is made and the time it reaches the end of the process, any agreement at the outset that the area addressed by the proposal in question is covered by qualified majority voting would mean that all subsequent proposals in this area would automatically fall within QMV. Ultimately, therefore, what started out as an unproblematic proposal could eventually present problems.
Although, in practice, it would be possible for a Minister to adopt a position of not allowing any proposal through, I am not sure it would be feasible to do this in one Council meeting after another, once the provision proposed in the article had been accepted. If the principle is that unanimity should apply, it should not be breached, even in the narrow manner proposed in the current wording.
We are not alone in our view on the current Convention proposals. Ireland jointly submitted a paper with the United Kingdom, Poland, Latvia, Estonia, Sweden and Spain setting out concerns about the current Convention text. If members have questions or would like to raise issues, we will be happy to respond.
