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.

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.