On the road to tax harmonisation

Maintaining its reputation for being the grown-up part of the newspaper, The Daily Telegraph business section deals at length with the Marks & Spencer decision, trailed yesterday.

Under the headline, "Losses made abroad do count in UK, rules Euro court", Ambrose Evans-Pritchard reports that "the Treasury could lose billions of pounds in tax revenue" following the ECJ opinion, and he also notes – as we have done before – that this "strikes a blow against the fiscal sovereignty of EU states."

That is based on the opinion of the advocate general, Portugal's Miguel Poiares Maduro, who declares that national control over tax had its limits. "Under Community law," he says, "fiscal sovereignty cannot be construed as meaning 'fiscal autarchy'. By subscribing to the treaty the member states agreed to submit to the regime of freedom of movement of persons; this gives rise to specific constraints." He said Britain's treatment of M&S breached EU single market law by creating a cross-border barrier.

It is The Scotsman, however, that paints the most lurid picture, its headline claiming "EU loss ruling leaves Government facing £20bn bill", making an interesting contrast with The Guardian which tells us that the ruling could (only) cost the Treasury £1bn.

Playing down the implications definitely seems to be a trend in the Europhile media because The Independent does not even go that far. Acknowledging that the "tax victory" could “open floodgates for claims”, it simply states that "a host of British businesses could be in line for a multi-million pound tax windfall".

Bucking this trend, though, the BBC website comes clean and admits that "the decision could cost the UK Treasury billions in taxes" and cites Sean Finn, a tax partner at law firm Lovells, stating that "The Treasury hasn't issued any official figures, but it's safe to say that the sums involved are really in the billions rather than the hundreds of millions."

That matches the The Times report, which suggests that the case could lead to an avalanche of tax demands and call into question the Chancellor's long-term budget forecasts. This paper cites Nick Farmer, a tax partner at Menzies chartered accountants, saying: "The amount of tax at stake in the UK is in the billions. It could amount to anywhere from £5 billion to £20 billion."

Adding to the confusion, though, The Telegraph also cites Sean Finn, only this time it has him saying that "This opinion raises lots of questions without giving any answers, though it will inevitably create more litigation.” In the small print, it seems there is a question of "retroactivity", which means that the ECJ has the option to waive backdated liabilities, in which case the net loss to the Treasury could be very small.

However, that aside, it is the Telegraph's City Comment which takes the most trenchant view, arguing that the decision is "the stuff of nightmares for the eurocrats."

"Whatever the Advocate General, Miguel Poiares Maduro, opined it was going to cause trouble", it says, "and his recommendation that the court find for M&S has opened a box which many would have preferred to see stay closed."

As it stands, the decision suits the agenda of the integrationists just fine with Poiares stating that fiscal sovereignty among EU members has its limits. In his eyes, "setting your own tax rules is a sovereign claim too far." The problem, though, is that this communautaire argument opens the door to what europhiles might describe as unfair tax competition. If a company can aggregate its EU income for tax purposes, it's likely to choose to do so in a country where the rates are low, even if he appears to limit their right to go "loss-shopping" in high tax countries.

The net result would be a massive transfer of wealth from national exchequers to corporate coffers, says the Telegraph. There's much to be said for such an outcome - it would do wonders for European company competitiveness, and force governments to tax consumers rather than producers - but it could destroy delicately balanced budget calculations.

The Germans are already flapping that tens of billions of euros of their revenue is at stake, and even our own dear Gordon cannot be viewing the prospect with equanimity. Against such opposition, the court is in a real quandary. It will be fascinating, says The Telegraph, to see how it resolves things without causing a fiscal euro-earthquake.

The Reuters newsagency confirms that any earthquake – if it happens – will not be confined to the UK. It points out that the case is worrying many other EU countries, reporting that most or all of the member state governments risk losing potentially billions of euros in tax income.

But the last word should perhaps go to Mr Finn, cited by the BBC, who suggests that member states might have to "bite the bullet" and embrace the possibility of having cross-border taxes. So much for Mr Blair’s "red lines" on taxation. We are on the road to tax harmonisation.