Thursday, 17 April 2008

Harmonizing Company taxes in the EU – The Lisbon Treaty amendment to Article 113: a significant and virtually ignored amendment affecting Ireland's company tax

The Lisbon Treaty amendment on EU harmonized taxes which has not been publicly mentioned so far in Ireland’s referendum debate.

Article 2.79 of the Lisbon Treaty would insert a six-word amendment -”and to avoid distorton of competition” – into the Article of the existing European Treaties dealing with harmonising indirect taxes. The full amended Article would then read as follows:

Article 113
“The Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition.”
(The Lisbon Treaty amendment is underlined) . . .Treaty on the Functioning of the European Union

The significance of this short but important amendment is that it would enable the European Court of Justice, which adjudicates on competition matters, to decide that Ireland’s 12.5% rate of corporation tax as against Britain’s 28% rate and Germany’s 30% is a distortion of competition which breaches the Treaty Articles dealing with the internal market – Art. 26 and Arts.101-9 TFEU – in relation to which qualified majority voting on the Council of Ministers applies. The Irish Government’s veto under Article 113 would be irrelevant there.

The Commission, whose job it is to police the internal market, need only point out that these big disparities in tax rates and Ireland’s reluctance to accept a Common Consolidated Tax base which would tax company profits on the basis of their sales in different EU countries, at the tax rates prevailing in those countries, constitutes a prima facie “distortion of competition” under Articles 101-109.

If Ireland refused to cooperate with what the Commission wanted, the Commision could bring it before the Court of Justice – or another country or firm could institute proceedings against it – and the Court could declare the Irish Government’s tax policy to be unlawful as in breach of the EU’s internal market provisions.

Unanimity under Article 113 would certainly be required to introduce any joint rates of company tax, but this Lisbon Treaty amendment would give the EU Commission and Court of Justice ample extra powers to erode Ireland’s low rate of corporation profits tax, whether we liked it or not. There is no other possible reason for inserting this hitherto virtually unnoticed six-word amendment by means of the Lisbon Treaty.

If an Irish-based company had 10% of its sales or turnover in Ireland and 90% in, say, Britain, its profits from its Irish sales could be taxed at 12.5% and from its British sales at 28%, under the scheme the Commission has been mooting. We might even be allowed to keep our 12.5% company tax indefinitely, but its practical benefit would be hugely eroded by proposals such as this, which this six-word Lisbon Treaty amendment is designed to facilitate.

By refusing to agree to this Lisbon amendment we refuse to hand over to the EU Commission and Court of Justice these new mechanisms to undermine the principal incentive attracting foreign companies to Ireland and keeping many of them in th country. Of course Ireland’s low corporation tax rate benefits Irish indigenous companies also.

By rejecting Lisbon and insisting on a Protocol in any new Treaty that would protect the principle of tax-competition between countries, we make a stand for economic freedom and reject the attempt to impose an economic straitjacket on the EU Member States in the interests of Germany, France and Britain, with their high company tax rates.
Anthony Coughlan

N.B. Note that harmonizing laws on indirect taxes is mandatory under Article 113: “The Council SHALL…”
See also: Ireland in tailspin over EU tax pledge

Libertas, a new group that is arguing that the treaty will lead to Ireland being worse off with the Lisbon treaty, also reacted to Ms Lagarde’s statement.
“A common corporate tax base would destroy the Irish economy. In a challenging economic environment, the stakes could not be higher,” said Libertas chair Declan Ganley.
“Why would we vote for a treaty that weakens Ireland’s voice at the table at a time when there is a huge army of special interests lining up to try and deprive us of the one economic tool that we still have?” he argued.