Brexit will leave Brussels €10 billion a year poorer: that makes the divorce bill a critical issue in the negotiations

In the end, it will all come down to the money. The UK might not be paying £350 million a week to Brussels, as Vote Leave claimed, but our contributions to the EU do come to over €10 billion a year. That is a substantial fiscal hole for the European Commission to plug after we leave. The Commission would prefer not to reduce expenditure since the structural funds and agricultural subsidies it distributes help to justify the EU’s existence. Besides, any new budget needs unanimous agreement, and Eastern European countries can be relied on to block cuts in their grants as surely as France will veto reducing farmers’ subsidies.

If reducing the budget is out of the question, the EU will have to increase its revenue. A recent ‘reflection paper’ issued by the European Commission presented a number of ways that it could do this. The Commission takes it for granted that countries won’t increase the amounts they pay to Brussels under the current funding system. The EU needs new sources of money.

Top of the wish list are Europe-wide green taxes. Climate change has long been a favourite cause in Brussels because it lends itself to supranational action. If the member states could agree a new energy or environmental tax, it would be easy to divert some the revenue towards the EU’s coffers. While such a tax would only have a trivial effect on Europe’s ability to meet its commitments under the Paris Agreement, greenery does provide useful political cover for a tax increase. Imposing the tax over the whole of the EU would also assuage competitiveness concerns to some extent. And, given the preponderance of its manufacturing sector, it would hit Germany disproportionately hard. If Angela Merkel gets behind the tax, she might convince other countries to go along. But the German industrial lobby is strong and won’t accept an increase in its costs without a fight. In any case, no strategic decisions can be expected of Germany until the after the September general election, when Mrs Merkel is seeking another term.

Another possibility floated by the Commission’s reflection paper is a share of a new EU corporate tax. Brussels has been pushing for what it calls a ‘common consolidated corporate tax base’ since 2011. The idea is that multinationals use a single method to calculate their total European taxable profits. These profits are then allocated to the individual countries in which the multinational operates. The proposal was shelved five years ago when it became clear that many member states were opposed. The Commission has since repackaged its plan, with the enthusiastic support of the European Parliament, but badged it as an anti-tax avoidance measure. In the current environment, where tax avoiders are the new bête noire, ‘anti-avoidance’ is as effective as ‘climate change’ as a justification for bad policies. Nonetheless, several governments, including Ireland’s and the Dutch, are still raising strenuous objections. So would the British, if anyone bothered to ask them.

Far from preventing avoidance, a common consolidated corporate tax base would increase tax competition within the EU. Because taxable profits would be calculated in the same way everywhere, the only difference between countries would be the actual rate of corporate tax. Companies would be keen to base themselves in the member state with the lowest tax, and there would be relentless downward pressure on rates. Despite this, the French and German finance ministers, Bruno Le Maire and Wolfgang Schäuble, are actively working on harmonising corporate taxes with effect from next year. If the Franco-German integration engine really has restarted, the European Commission’s aspiration to slice off a portion of the cake from the new tax may still come to fruition.

If the common corporate tax doesn’t work out, the European Commission hopes it might get a share of a new European financial transaction tax. However, plans for a ‘Robin Hood’ tax across the EU, to be paid by banks when they buy and sell shares, bonds and derivatives, have also hit the sand. When agreement couldn’t be reached among all 28 EU members, ten of them decided to press ahead anyway under the enhanced cooperation procedures. But these ten enthusiasts have been unable to close the deal either and a crunch meeting scheduled for this month was postponed until the end of the year by France. There is a good deal of suspicion that the French, keen to attract banking business from London after Brexit, are getting cold feet about the financial transaction tax.

The conclusion of the reflection paper is that the Commission doesn’t really know where its new money will come from. So, with a €10 billion pit to fill, it is not surprising that the Brexit divorce bill is a central preoccupation of the European Commission’s chief negotiator, Michel Barnier. If the amount is big enough, it could tide the EU over for a few years. In Brussels, a problem kicked down the road is treated as a problem solved. This gives the British some leverage because it is most unlikely that the Commission will have lined up any new sources of funding, or agreed what it can cut, before 29 March 2019, when negotiations have to be completed. With no deal, the EU might end up with nothing at all.

 

With the British gone, can the EU push on towards tax integration?

What do you mean, you’ve never heard of the common consolidated corporate tax base? It’s all the rage in Brussels, and represents a typical example of how Eurocrats are still increasing centralisation of the EU. Public concern about multinational companies avoiding tax has provided the cover to resurrect a plan for a Europe-wide corporate tax system. It was originally booted into the long grass in 2011, but Eurocrats are a patient lot and have been waiting for an opportunity to bring it back.

At the moment, companies operating in Britain calculate their taxes according to legislation introduced by the British Parliament. Likewise, German companies have to follow the rules from the Bundestag, and Irish companies the laws passed by the Dáil. Under the Eurocrats’ plan, all multinationals operating in the EU will have to calculate their taxable profits according to rules set centrally by the European Commission. The profits would then be divided up between the countries in which the multinational operates and subject to those countries’ corporate tax rates. Corporate groups would also be allowed to set off their losses in one European country against their profits in another country, depriving the country with the profitable business of tax revenues.

EU member states would be allowed to continue setting their own corporate tax rates. But in practice, the ability to do this also requires control over the tax base, which Brussels would determine. In any case, tax rates would be the next item on the agenda for centralisation. As far as Eurocrats are concerned, tax competition between member states is an unacceptable distortion of the single market.

The British Government has consistently stated that it would block the plans and does have a veto over corporate tax measures. However, Brexit has put paid to this obstacle. Eurocrats have also split their proposals into two parts. They will first try to get agreement on an common corporate tax base (CCTB) harmonising the rules under which multinationals operating in the EU have to calculate their taxable profits. Only then, when the same corporate tax rules have been imposed by Brussels on all member states, will the common consolidated corporate tax base (CCCTB) be launched. This will effectively treat the EU as a single country for company tax purposes.

Eurocrats are hopeful that by dressing the plans up as a way to combat tax avoidance by multinationals, they can exert political pressure on unwilling EU member states to swallow the pill. It is true that the measures would help prevent multinationals from using differences in the tax systems of various countries to reduce their tax bills. However, those differences are the product of decisions by sovereign Parliaments trying to ensure their tax systems are competitive and well-adapted to local circumstances. Even with the British out of the picture, expect strong resistance from smaller countries like Ireland and the Baltic States, which have used tax policy as a central plank of their economic offering to foreign investors.

In the interim, the European Commission is pushing forward with a directive specifically on corporate tax avoidance, which obliges member states to bring in a raft of measures that would previously have been the preserve of national Parliaments. Again, public concern about the activities of multinationals has provided the excuse for this power-grab. In this case, even the UK is on board, in large part because we are introducing most of the rules ourselves in any case.

Under the EU treaties, direct tax has been a matter for national Parliaments. However, if they can achieve unanimity in the Council of Ministers, Eurocrats can still extend their competence into this area. In that case, they don’t need treaty change with the attendant risks of triggering referendums. And once Brussels has the powers it wants, the ratchet has turned and member states can never get them back. The European Court is then be able to further erode national sovereignty through its programme of judicial activism. Already, it has decided old UK rules on taxing dividends and foreign subsidiaries are incompatible with the single market. This has left the British taxpayer with a bill for billions of pounds in compensation payable to the businesses that had suffered the taxes in question. Brexit is unlikely to mean these refunds can be cancelled.

Like many of the machinations in Brussels, the common consolidated corporate tax base is probably too obtuse to be easily understood by European voters. But it shows that the European Commission’s hunger for centralisation is as sharp as ever, especially now that the UK has left the building.

In praise of the Remain campaign: Europhiles should accept they gave it their best shot

Originally published at Brexit Central.

In the aftermath of the referendum, two myths have quickly taken root: that David Cameron made a reckless gamble when he called a vote on the EU and that Britain Stronger in Europe was a disunited rabble that fought a dreadful campaign.

These myths are dangerous because they fuel the calls for a second referendum. Europhiles tell themselves that if the vote was a gamble, another throw of the dice might produce a different result. And they imagine that a more focused and positive campaign for Remain could win the day.

Let me address these two myths in turn.

In his Bloomberg speech of January 2013, Mr Cameron promised a renegotiation with Brussels followed by an In/Out referendum. Commentators rushed to tell us that the speech was a reaction to the rise of UKIP and a way to plaster over the cracks in Tory unity. This confused the symptoms of Euroscepticism with the cause.

UKIP’s success reflected widespread anxiety in the country about the EU, while Conservative divisions had been opened by the refusal of successive British Governments to seek consent for the transfers of sovereignty to the EU by the treaties of Maastricht, Nice and Lisbon. Mr Cameron himself had reneged on his ‘cast iron guarantee’ of a referendum on Lisbon.

It’s also been suggested that he intended to drop the referendum pledge in any coalition negotiations with the Liberal Democrats after the 2015 general election. However, an analysis of Mr Cameron’s statements in the run up to the election shows that this is not true. The referendum was a red line for any coalition agreement. In any case, if he’d tried to ditch it, half the Conservative Party would have spontaneously combusted, including myself.

Far from being a short-term fix for his European troubles, Mr Cameron was thinking strategically. He realised that there had to be a reckoning to settle the question of Britain’s EU membership. And it would be far better for Europhiles if this reckoning took place at a time of his choosing and on his terms. The alternative was a referendum down the line under a Brexiteer Conservative leader using all the advantages of Government to ensure a vote for Leave.

Although the Cameron plan was a sound one for Europhiles, events got in the way. The Prime Minister assumed the EU would need a treaty to solve the Euro-crisis rather than kick the can down the road and condemn tens of millions to unemployment. He hoped Britain’s veto would strengthen his negotiating position. He also underestimated the pig-headedness of his fellow heads of Government in February 2016 when they scuppered his efforts to get a deal he could sell to the British people.

But I would argue that the failure of the renegotiation was a mistake by the EU rather than Mr Cameron, whose only error was to misjudge the EU’s capacity for self-harm.

The second myth concerns the referendum campaign itself. Brussels had dealt Europhiles a very weak hand, but I believe they played it as effectively as they could. For all the criticism of Project Fear, Remain had no choice but to ramp up the scare tactics. Europhiles like former Education Secretary Nicky Morgan might wistfully write that they should have fought a more positive campaign.

But, honestly, what was the optimistic message about the EU supposed to be? Lauding the alleged benefits of immigration was never going to work and Remain knew it was essential to keep the European Commission’s ambitions for more integration under wraps. When the EU took credit for peace in Europe or increasing prosperity, the British just chuckled at its lack of self-awareness.

So Project Fear was Remain’s only viable strategy, and if it was to work, it had to be full-on. One advantage for Remain was that it didn’t need to make any predictions about what would happen if it won. Unlike a political party promising the earth at an election, Remain’s warnings would only be tested if they lost, so they could really push the boat out on the doom-mongering. Of course, Leave won and all those predictions are coming home to roost for the likes of the OECD and HM Treasury. However, I doubt either Mr Cameron or even George Osborne are very bothered about that.

That is not to say Matthew Elliott’s fantastic Vote Leave didn’t matter. The point of a political campaign is not really to win the argument. Rather, it must identify its supporters and motivate them to get to the polling station on the big day. Vote Leave did that brilliantly.

The important point is that the referendum was not won because of narrow tactical concerns, mistakes made by Mr Cameron or Britain Stronger in Europe, or even because Leave voters were just protesting and didn’t mean to win. All these erroneous excuses have been made by Europhiles since 23rd June.

Leave triumphed because it is the settled will of the British people that they do not wish their country to be part of the European Union. Given that fact, Remain did as well as they could have done by pushing us so close. David Cameron deserves credit from Europhiles for giving Remain the best possible chance.

The Panama Papers aftermath: it’s time to abolish the withholding tax.

Originally published on Conservative Home.

When the Panama Papers were splashed back in April 2016 with breathless excitement by the Guardian and the BBC, it looked as though we might get to enjoy some juicy scandals. But now, after a few months of gestation, the leaked documents are, from a UK point of view, a damp squib. Admittedly, the name of David Cameron’s father was unfairly dragged through the mud. However, it eventually dawned on people that neither he, nor his son, had done anything remotely untoward. Other than the Cameron non-story, the 11.5 million files in the Panama Papers don’t appear to tell us much about the tax affairs of UK residents.

In any case, when it comes to tax evasion, the Government has been on the case for some time. From June, all UK companies have to publicly register their owners, while an international treaty to share information on offshore bank accounts has been agreed by over 130 countries. A string of new offences is included in this year’s Finance Bill against enabling and engaging in offshore evasion. All this was in train well before the Panama Papers hit the newsstands. Admittedly, no one will be convicted for any of these new crimes. They are intended to ensure that financial institutions stop turning a blind eye to possible cases of tax evasion. The banks themselves will enforce the new rules through enhanced compliance procedures.

With all this activity, it is worth asking how serious the problem of evasion is. Wealthy British people do indeed have billions stashed offshore, and not all of them come clean with the taxman. But, perhaps surprisingly, the vast majority of them do. For example, when HM Revenue and Customs (HMRC) obtained account details from the notorious Geneva branch of HSBC in 2011, they found information on about 7,000 British-held accounts holding in the region of £13 billion. Yet, it turned out that over 80 per cent of these didn’t owe a penny extra in UK tax.

From those that did, HMRC recovered £135 million of back taxes, interest and penalties. A significant haul, to be sure, but only enough to pay our dues to the European Union for a few days. In only one case did HMRC and the Crown Prosecution Service adjudge that the evidence of criminality was sufficiently strong for a prosecution. No doubt, the Panama Papers will reveal some more tax evaders, although the scale of wrongdoing is likely to be more modest than the trillion pounds suggested by Labour MP Dan Jarvis in the New Statesman. Nonetheless, we must be close to the point at which the myriad of new regulations and offences introduced by the former Chancellor, George Osborne, end up costing innocent taxpayers more than the Exchequer recovers from the miscreants.

Turning to legal tax avoidance and planning, the Government is implementing a series of international agreements to restrict the tax deductions that companies can enjoy for cross-border financing and has introduced a general anti-abuse rule. Perhaps more importantly, the courts have stopped finding that tax avoidance schemes work, even when the scheme follows the letter of the law.

In this new era of transparency, the Government should now start to dismantle the tax barriers that distort international commerce. Just as Nigel Lawson removed exchange controls, Philip Hammond should abolish the nineteenth-century throwback called withholding tax. This is a tax that countries levy on money paid abroad. For example, the UK charges a tax of 20 per cent on payments of interest to many non-resident recipients even though the recipients will also pay tax on the money in their own country. That’s double taxation and completely unfair.

Unfortunately, sorting this double taxation out gives rise to all sorts of administrative problems. So, if you want to set up a fund that caters for international clients, you can’t do it in the UK because of the withholding tax. That’s why Ian Cameron set up his trust abroad and why so many European funds, holding €3.5 trillion in 2015, are actually situated in Luxembourg, which doesn’t withhold tax. The vast majority of money held in countries like Switzerland, Luxembourg and elsewhere is kept there specifically so that it is taxed once, but no more often than that. Abolishing withholding tax would see some of that money returning in the UK. And much of the business of law firms like the Panama Paper’s Mossack Fonseca would dry up.

Brexit: What on Earth Happened?

People around the world may have heard some surprising tidings from the United Kingdom over the last few weeks. As some international news reporting has painted events here as either a revolt by xenophobic peasants or just complete chaos, I thought it was worth setting down what has really happened and the reasons behind it.

First, some history: back in 1975, the British overwhelmingly endorsed their membership of the European Economic Community or EEC, the predecessor organisation of the European Union (EU). On balance, the British decided that membership of a huge market on their doorstep was worth sacrificing some of their self-rule for. Besides, back in the 1970s, the UK was in a bad way, with widespread labour disputes, high inflation and shaky Government finances.

In 1992, the EEC was turned into the EU by the Maastricht Treaty, which was intended to be the first step towards a federal United States of Europe. The British Prime Minister at the time, John Major, declined to obtain a democratic mandate for this. The previous Prime Minister, Margaret Thatcher, had been deposed a couple of years before when she had effectively threatened to veto the plans for a federal Europe. In the same year, on 16 September 1992, ‘black Wednesday’, the German central bank provoked the markets to devalue the British pound against the will of the British Government, causing it to fall out of the exchange rate mechanism. The combination of Maastricht and black Wednesday turned the majority of the Conservative Party against the EU. These events also destroyed the credibility of Mr Major and his Government, which lost the 1997 election by a landslide.

From 1997 to 2010, Tony Blair’s Labour Party was in government and was determined that the UK would play a full part in the EU. In 2005, in an effort to increase the democratic legitimacy of the EU, a series of countries held referendums on its new constitutional treaty, which was a further step towards a federal Europe. However, when the EU lost the votes in France and the Netherlands, the results were ignored and the constitutional treaty was pushed through anyway with a different name. Both Mr Blair and the new Conservative leader, David Cameron, also promised a referendum on the constitutional treaty but both reneged when it became politically inconvenient to give the people a say. The grand plan to provide the EU with democratic legitimacy ended up destroying its credibility because the people declined to give the answer they were required to.

In 2013, now in government, Mr Cameron again promised a referendum. He said he would renegotiate the UK’s relationship with the EU before the referendum and then ask the people if they wanted to Leave or Remain, based on the new terms. He hinted that, if the negotiation didn’t go his way, he might campaign to Leave. But when his negotiations duly failed to achieve anything of substance in February 2016, he announced he would, after all, campaign to Remain. His credibility as honest broker was instantly destroyed and British voters stopped listening to a word he said. They also got sick of every international bigwig, from President Obama downwards, telling the UK was doomed if it voted to Leave.

On 23 June, we voted 17 million to 15 million to Leave the EU. Everything about the vote was a surprise. No one thought Leave would win. Even after the polls closed, the betting markets implied a 90% chance of a Remain vote. Turnout was 73%, the highest in a national vote for 25 years. In short, more of the British voted to Leave the EU than have ever voted for anything else in our history.

So what happened and what happens next? The Leave vote was a coalition of three disparate groups. The campaign was led by a relatively small group of internationalist libertarians, including Boris Johnson, Michael Gove and Daniel Hannan. They saw the EU as an anti-democratic and corporatist racket that was immune to reform, as the failure of Mr Cameron’s renegotiation had shown. The shock troops for Leave were supporters of Nigel Farage and the UK Independence Party: mainly paleo-conservatives who objected to uncontrolled immigration (the UK must accept unlimited numbers of immigrants from the EU).

The third element of the coalition for Leave was one whose participation nobody could predict in advance. This final group consisted of working class people who nominally supported the Labour Party, but in practice rarely voted at all. Sick and tired of being ignored, and not seeing the benefits of globalisation, they came out to vote on 23 June and delivered the verdict of Brexit.

Now the UK embarks on an exciting journey. We want to continue to trade freely with the EU, but also sign free trade deals with the rest of the world as fast as we can. We’ll still welcome many new immigrants to the UK, but they won’t all have an automatic right to reside here. And the democratic control of farm subsidies, fisheries and taxation (the UK currently can’t even abolish the tax on sanitary towels) will return to Westminster. Of course, plenty of people have valid concerns about the effects of Brexit. And it is to be expected that many individuals will have invested in the status quo of EU membership, especially if the status quo has lasted for over 40 years. That does not make it a good thing. Indeed, institutional inertia and the fear of short-term consequences over long-term benefits are among the most damaging of political motivations.

As for the rest of the EU, it needs to reform quickly to gain democratic legitimacy while also, somehow, undoing the immense damage done by the single currency. Is that possible? Either way, we British wish the EU well. With Brexit, we cease to be a truculent tenant and become a friendly neighbour.