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The death of fiscal sovereignty

Posted by Richard Monday, December 06, 2004

"We are winning the argument on the harmonisation of tax rates", said Gordon Brown in May 2003. "Federalist ambitions are giving way to inter-governmental realities," he said.

That was, of course, in relation to the question of including taxation powers in the EU constitution but, as we remarked in October of this year, who needs the constitution? The EU is going ahead with taxation laws anyway, under the existing treaties.

This we have pointed out in several of our postings, see for instance here and here, with the legal adventurism of the ECJ paving the way for increased control over member state tax systems, using existing treaty provisions.

So active has the court been that, over the past ten years, it has ruled against member states in 85 out of 87 cases relating to discriminatory tax legislation – coincidentally in favour of the taxpayer.

And so it came to pass that today that The Financial Times reports the government is discussing changes to the corporate tax system, in order to protecting the UK's tax revenues from being undermined by future ECJ rulings.

Those cases present "potentially the greatest threat to UK and other EU states' tax revenues in the medium term", according to Ernst & Young, the professional services firm, with the Inland Revenue estimating that £10bn-£20bn of tax revenue is at risk.

Brown is being forced to choose between removing tax privileges from UK-based organisations, or granting them to non-UK companies, a move that could cost the exchequer a fortune. Thus, the preferred option is to remove the privilege altogether in order not to discriminate against companies in other EU member states.

Thus, having seen the government resist harmonisation of direct tax regimes through the constitution, we now see that the EU is succeeding in achieving this objective by the back door – driving a cart and horse through the idea of fiscal sovereignty.