Death and taxes - as everyone knows, these are the only two things we can be sure of in life. They are also the two things that seem to be preoccupying the European Commission at present, though for completely different reasons.
Belgium, the core of the emerging European Superstate, is fast becoming a land littered with corpses. To the Dutroux charnel houses have now been added the graves of the victims of a Brussels' clergyman, and the inhabitants of a city that once danced the night away before the Battle of Waterloo are resigned to further grisly exhumations. Disgust with the ineffectiveness of the local investigative magistrates is compounded by sinister rumours of involvement reaching to the highest levels of the EU's institutions. Conspiracy theorists hint darkly that the very same forces which prevented a full exposure of the Avgusta helicopter bribes scandal are frustrating efforts to clear up the Dutroux case, and may well also be hampering disclosures in the latest murderous outrage.
Let us hope that such nebulous suspicions do not unsettle the European Commission and its senior mandarins, especially since they come at a time when some sensitive, but far-reaching decisions are being made about that other constant to affect our lives - taxes. The merest possibility that Hercule Poirot (rather than Hector the Inspector) might come bustling through the closed doors and into a planning session on the covert introduction of EU-wide mandatory tax rates and allowances is enough to ruffle the suavest of Europe's current administocrats.
Nevertheless, now that the Commission's remaining EMU mechanisms have irrevocably been set ticking, its attention has turned to tax as the next tool it will use to weld together a United States of Europe from its erstwhile disparate nation states. Since VAT is an EU tax, devised by the Commission and supervised by Commission directives and ECJ judgements, it has been in the past the Commission's favourite mechanism for the harmonisation of the Member States' tax laws.
The Commissioners are, in tax matters, gods as jealous as old Yahweh. The fundamental rule is that 'thou shalt have no other turnover tax but VAT'. VAT now supplies the Commission with the bulk of its budgetary funds and has been the subject of much attention from the Commission's DGXXI technical services experts since the main harmonising Directive 77/388, now more than 20 years old.
The efforts have gone into devising a common system of VAT which will sweep away the national anomalies and exceptions which are so detested by the Commission's unifying purists. The technical note published in 1996 [XXI/1156/96] laid down the features of the new system: a common standard rate of around 18%, an unspecified reduced rate, an end to the UK's (and other countries') 0% rates, and a central collection and enforcement administration, with a clearing house system sending funds to those areas of the EU which require them, perhaps under stabilisation or other subsidy arrangements yet to be determined.
Detailed discussion of this document has been confined to the VAT Committee of the EU, whose composition and minutes of proceedings are, as Philip Oppenheim stated in the House on 16 January 1997, in reply to a question from Nigel Spearing, "available only to the members of the Committee."
All the changes proposed in the Commission's technical note would appear to require unanimity among the fifteen Member States, and are recognised by the Commission itself as being controversial.
Though there are no public statements from the VAT Committee on record, enough has seeped out for tax practitioners to believe that, in the continuing absence of political agreement among the Member States for such a radical centralisation of VAT, the real harmonisation of Member States' VAT tax law is to proceed quietly under the auspices of the ECJ. This will avoid the difficulties that any frontal assault on the Member States' fiscal independence would encounter.
For example, in the UK case after case is being submitted from our VAT Tribunals and High Court to the ECJ for a ruling on matters which the tribunal chairmen or judges deem contentious. The ECJ is invited to rule on the crux, and then return the case back to the tribunal of origin for a nominally 'national' or 'local' decision to be announced to the parties. In the meantime, a further precedent has been set and incorporated into UK VAT law.
The First National Bank of Chicago case is a recent one in point. At issue was the status for VAT of FOREX trading. The High Court judge referred this question to the ECJ's Advocate General, whose 'opinion' will become law in the UK once it is returned to the High Court for the UK judge's 'decision' to be given. (This assumes, as is most likely, that the Advocate General's opinion is confirmed at a forthcoming sitting of the ECJ). The case bypassed the Court of Appeal and the House of Lords, thus rendering those courts irrelevant to the interpretation of core portions of our legislation. In this case the cost to HM Customs and Excise, and therefore the UK Treasury, is estimated to be in around £1m - minuscule when compared to the loss of revenue following the ECJ's rulings in the mail-order business, opticians' fees and the feared result of the challenge on VAT input tax on cars, but yet another illustration of the utter loss of the UK's legislative independence.
In addition to VAT, fiscal harmonisation across the EU is already taking giant strides forward. The Single Europe Act of 1986 and the 1991 Directive (91/680/EEC) abolished customs and excise tax frontiers throughout the EU from 1 January 1993, and tax advisers such as KPMG anticipate that there will be "a single territory for indirect tax purposes" before long [KPMG EU Tax Overview, p.49], based on the Commission's technical services paper of 1996 mentioned above. And most important of all, direct taxes have now come under the spotlight.
The Daily Telegraph reported on 22 October 1997 that the Commission has refurbished its old proposals, last aired in the Ruding Committee report of 1992, on the harmonisation of EU corporate tax rates. Mario Monti's new version, entitled Towards Tax Co-ordination in the European Union, embodies current Commission thinking, in that it proposes introducing harmonisation through the Single Market machinery. Since this machinery is governed by qualified majority voting rules and is an area in which the ECJ has established supreme and exclusive jurisdictional competence, the need for unanimity on tax matters among EU finance ministers in ECOFIN is once again avoided.
The recent attack on the tax status of Sark, published in September in both The Observer and The European, and the German Government's instructions to its fiscal police in Autumn 1996 to pursue those German individuals and companies which had moved funds from Germany to the Channel Islands to escape domestic withholding taxes (also reported at the time in The European), are harbingers of the concerted plan of attack on the Member States' national tax legislations, which will be strongly supported by the ECJ, when contentious cases begin to be fought through either the civil or criminal courts around the EU. These cases are likely to be dealt with under the rubric of 'fiscal degradation', as Professor Alex Easson, a noted pro-EU academic jurist of the type used by the ECJ, explained in his article in EC Tax Review 1996-3, pp. 112-113.
"Member States cannot alone protect their tax bases, and the apparent defence of national fiscal sovereignty has in reality brought about a real loss of sovereignty by virtue of tax erosion."
As the Monti plan makes plain, the long-term object is to review
"a member state's general business tax regime where the level of taxation is significantly lower than the Community average." [Daily Telegraph report]
In a press release on an earlier (1996) draft of the plan, taxation is regarded as "a key instrument to promote lasting and job-creating growth." [IP/96/949] The "internal" - that is, single EU-wide - market is, in turn, stated as making "an important contribution . . . . to promoting growth and employment." Thus taxation policy, Single Market procedures and employment have been skilfully tied together in an increasingly inextricable bundle, all subject to qualified majority voting with the Commission and the ECJ as joint legislative guardians.
Some idea of the practical results of such a policy can be seen tucked away in the Merger Directive (90/434/EEC) concerning the tax treatment applicable to cross-border mergers, divisions, transfers of assets and exchanges of shares between companies of different Member States. Article 11 of this Directive sets out anti-avoidance and evasion provisions which will allow a Member State to refuse to apply, or withdraw, the tax relief provided by the Directive. Commenting on these provisions, KPMG's EU Tax Overview warns,
"It is important to note that it is not necessary to have only a principal objective of tax avoidance or evasion. Where it has been considered that a re-organisation was undertaken for commercial purposes as well as for tax evasion/avoidance purposes, the provision would apply." [p. 25, 1995 edn.]
This goes far beyond present UK tax law, although the Government's threat to introduce a general anti-avoidance statute would bring the UK into line with German and ECJ approaches, and thereby render the Directive's legal thrust less obtrusive.
But it is in a further sanction contained in Article 11 that the true nature of the EU's tax laws can be discerned. Relief under the Directive may also be refused if, as a result of the transaction, one of the companies no longer meets its obligations regarding worker participation. KPMG elucidate this as follows:
"This refusal can also take place if the transaction had no intention whatsoever to violate such obligations. In other words, even if the transaction was not tax-motivated and had only legitimate business reasons, the relief could still be refused."
At present the Directive is ineffective because most Member States have not harmonised their company legislation to the Commission's EU Company standard sufficiently, to recognise the legal structures it envisages. Nevertheless, a principle of taxation has been introduced into EU law which will soon extinguish any last vestige of national fiscal independence, as well as abolish a cherished principle of Anglo-Saxon tax law theory - that of no taxation without representation. If the Merger Directive's tax relieving principles were to be extended to other EU taxes (as the ECJ could rule, at any time), a taxpayer's tax allowances will come to depend upon compliance with non-fiscal EU regulations such as whatever workers' rights, equal opportunities rules, no-smoking policies etc. will be in force at the time. Taxation will then become an instrument for the promulgation of the Commission's policies on 'social justice', as well as the means by which it funds its budget. No more absolute a death of a Briton's traditional freedom from the oppression of mighty princes can be imagined.
So Death and Taxes are not just little local difficulties for Belgian law enforcers. All EU Member States are in imminent danger of subjection to a form of fiscal control which will render their current democratic practices moribund. But the demise of a tax system that is subject to parliamentary scrutiny and control will be the more painful in the UK because we have been protected for three centuries from the state's arbitrary and uncontrollable exactions. That protection is rapidly disappearing.
It is hard to assess the effect of such changes in the UK. Large corporations will, of course, install compliance procedures to ensure that, as far as possible, they are not caught out by any new system. 'Worse-case scenarios' will be devised, costs measured and - where appropriate - passed on to consumers. Small companies, partnerships and individuals won't have such opportunities. They could easily find that their political attitudes will be affecting their tax bills. How much resentment this will cause is debatable, but a glance at Anglo-American history in the seventeenth and eighteenth centuries shows that ill-feelings could run rather high - just as, it might be noted, the tempers of the Belgians did when a million demonstrated their disgust with their state over the Dutroux affair.
Death and Taxes - the two constants of life; particularly, it seems, in the EU!