Gordon Brown, Chancellor of the Exchequer, has made it clear in speeches and newspaper articles that the UK will resist proposals to harmonize direct tax regimes across the EU. The UK will also resist any attempt to introduce majority voting on tax issues, insisting on retaining its veto.
He wrote in one newspaper: "Europe...must explicitly reject grandiose schemes for harmonizing corporate and other taxes and support British proposals for tax competition." This appears to be aimed at the European Commission, which is promoting a common consolidated tax base as one means of removing tax obstacles to cross-border trade within the EU.
What is not clear is how Gordon Brown intends to resist the growing number of ECJ decisions dismantling domestic tax laws that conflict with the EU Treaty. The ECJ is not a political body - the way the ECJ applies the EU Treaty to member states' tax law is not subject to negotiation and comment by the member states in the same way as EU source legislation.
Five group litigation orders have now been made in the UK in relation to claims that various aspects of UK tax law are incompatible with EU law. Group litigation orders (GLOs) were introduced recently into the UK court system and are a means of managing large numbers of similar cases. The most recent GLO (issued on October 8 2003) concerns the UK's franked investment income rules. This concerns claims that the payment of advance corporation tax (ACT) by company groups parented in the UK on the distribution of dividend receipts sourced from companies resident outside the UK are contrary to the EU Treaty, the Parent-Subsidiary Directive or relevant double taxation treaties. The UK's franked investment income rules meant that, until ACT was abolished in 1999, companies receiving dividends from UK resident companies were able to use those dividends to reduce the ACT payable by the parent company on a distribution of profits to its shareholders. The rules did not extend to dividends received from non-UK subsidiaries and it is now claimed under the GLO that this is a breach of EU law.
At present, the UK seems intent on taking a piecemeal approach to EU law challenges to UK tax law, such as the recent proposals to extend the transfer pricing rules to domestic transactions after the ECJ decision in Lankhorst-Hohorst. Gordon Brown's recent public remarks appear to indicate that the UK will resist attempts to agree an EU-wide solution to the issue of the interaction of domestic tax law with the EC Treaty.
Emma Nendick (Emma.nendick@herbertsmith.com), London
