Mr. Philip Kermode:

In my opening statement, I will speak a little about the European Union and taxation in general. I will put the matter in context so that when we discuss individual questions later, we will see the limits of what the Union does and the constraints that apply to it, in addition to the possibilities for making progress.

Within the European Union, we are constrained by the legal bases that are provided for under the treaties. In practical terms, this means that the sort of work we do in the department I represent is on customs, indirect tax and direct tax. I mention this because it gives an indication of the degree to which the European Union has advanced towards greater integration, bearing in mind the different elements of these taxes. The customs union, for instance, is a customs union in the sense that it is entirely an EU competence. It is ruled by regulations agreed by all member states in Brussels and which are directly applicable. In the case of indirect taxation, we have a treaty basis which provides specifically for the harmonisation of indirect taxation and particularly value-added tax on the basis of the need to ensure the functioning of the internal market, which is the EU's internal market without borders, and taking into account the need to avoid distortions of competition.

Direct taxation is in a different category because there is no formal legal basis for binding legislation other than the general mechanism providing for the approximation of laws dealing with the functioning of the internal market. That is an important context into which to put any proposal of the Commission because it puts a framework around what the Commission can propose and what is likely to be agreed by the member states. The other point is that, for binding legislation, we require unanimity among all member states. A particular piece of binding legislation - on direct taxation - cannot be passed without the agreement of all.

Within the area of direct taxation, corporate taxation in particular, which I understand is the subject of the committee's discussions, there is an amount of already-existing EU legislation, but it is quite small. It relates largely to the issue of avoiding double taxation. In particular, there is a directive on cross-border mergers, one on parent subsidiaries and one on interest and royalties, the idea being to simplify transactions within the Union.

The area that may have been subject to the most progress in recent years has, in fact, concerned co-operation between tax administrations. There is a quite developed corpus of legislation on how tax administrations can help each other in ensuring their tax laws are respected. This extends from the extreme of automatic exchange of information on investor income for individuals to the area of assistance in the recovery of taxes between different jurisdictions in the Union.

One of the driving forces in the work that takes place in the European Union relates to the treaties themselves. The treaties provide, among other things, for the internal market, which is based on the four freedoms.

Over the years, a substantial jurisprudence has evolved at the Court of Justice, which has been based on the court striking down provisions which are effectively discriminatory between member states. It is largely because many of these tax systems were built up at a time when the treaty considerations were not important or even relevant.

On top of that, within the Union we have an exercise of what we call co-ordination which has been ongoing for a number of years. In the Commission, we have been trying to encourage member states to take common positions on interpretation of EU law so that they apply similar provisions without necessarily having binding legislation. It is a question of general co-operation. This has a number of practical aspects that I will not go into at the moment.

As it is topical, I should mention that there is an issue about state aid concerning taxation as well. The EU rules on state aid apply to taxation as they apply to other activities within the Union.

I want to mention two other things briefly. One is the code of conduct on business taxation, which falls outside the sort of framework I have been talking about. This entails EU member states meeting together in the Council to discuss tax competition and to examine individual tax regimes in member states to see if they fulfil the criteria already agreed between all member states and, on that basis, to remove those that are deemed to be harmful. This is probably the most important policy discussion that takes place in the Union concerning the question of tax competition. It has been ongoing for 12 or 13 years.

The final point concerning the framework is the European semester. The European semester exercise concerns the co-ordination of macro-economic policies in the Union. The Commission makes recommendations under this, some of which now concern taxation, but these tend to be broader in scope and are part of an overall attempt to help to rebalance the different economies.

In general, we do not make specific recommendations on detailed points under this, but it is good to know that it is there.