I wrote earlier this week that George Osborne's domicile plan could be illegal. I happen to think that right, but some have objected that Parliament can legislate that black is white if it wants and there's nothing we can do about it.
Not true. We're in the EU and the European Court of Justice has a massive influence on domestic tax policy.
Under an EU Directive (alright on Business Taxation - but these things are still influential) it's been ruled that harmful tax practices include:
1. An effective level of taxation which is significantly lower than the general level of taxation in the country concerned;
2. Tax benefits reserved for non-residents;
3. Tax incentives for activities which are isolated from the domestic economy and therefore have no impact on the national tax base;
4. Granting of tax advantages even in the absence of any real economic activity;
5. The basis of profit determination for companies in a multinational group departs from internationally accepted rules, in particular those approved by the OECD;
6. Lack of transparency.
Think about this for a moment. The planned domicile rule from George Osborne breaches 1, 3, 4, and 5. Those claiming to be non-domiciled claim a form of non-residence, so this also breaches 2. And Osborne promises not to make enquiries about non-doms offshore affairs as a result of his new status, so meaning these will be opaque, breaching 6.
It doesn't look good does it?
And don't think it won't happen. It was only in August that the Italians suggested a challenge might be on the cards for the UK's domicile laws. As the Guardian reported:
Italy could turn to the European Union to try to strike down British law under which "a more or less fictitious residence in London allows you not to pay taxes in your own country", said Vincenzo Visco, the government's tax chief.
If I was the Tories I wouldn't be hanging my hat on this plan.
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two flaws with your argument –
1) The EU is not able to legislate on UK taxation, that is something that is properly the jurisdiction of the UK,
and
2) the “Italy could turn to the European Union to try to strike down British law under which “a more or less fictitious residence in London allows you not to pay taxes in your own country”, said Vincenzo Visco, the government’s tax chief.” quote is flawed logic if you accept that Americans who choose to live in UK still have to pay tax in America on their world wide income (or so I am told).
I wonder if your flawed logic arises because over the past 10 years the Labour Government has over applied EU directives with misplaced enthusiasm.
Not only has this nothing to do with personal tax, as you acknowledge, it is not a directive, and points out at the start that it is not legally binding.
I think you are clutching at quite a few straws with this document.
Tell that to Jersey
Or the Isle of Man
They won’t believe you
This thing has teeth
It’s you who is clutching at straws
Richard
Alastair
Sorry to put up your comment after I’d already replied to Richardr
I’m afraid like him you’re living in a fantasy land if you ignore the impact of the EU on tax law.
Richard
hi Richard. I would acknowledge the impact of EU law on UK law, but perhaps you can identify how much of current UK tax law is impacted by EU? I have no direct evidence, but would suspect it is not much. I was also under the impression that tax law was something that EU members had made efforts to keep local.
Alastair
ECJ rulings have forced enormous changes in domestic tax laws over the last few years
This is the big topic of discussion at all tax policy debates these days
The answer is most technical tax changes are EU driven right now, bar those aimed at avoidance, and all EU countries are doing them anyway
Richard
Of course the EU has a huge impact on tax law.
The point being though is that that particular document is not a directive, it is a code of conduct and as such, as it states, is not legally binding. It also states itself that “the code of conduct is a political commitment and does not affect the Member States’ rights and obligations.”
It is also a code re business taxation.
Richardr
I reiterate – you may believe that. The fact is that it has been enforced as law. And personal taxes have been affected.
In that case it is powerful as a precedent
Richard
It seems to me that if this does apply to the Tory proposals then it applies even more strongly to the existing domicile situation. And since it would mean Gordon Brown admitting that the European Union’s rules trumped British rules on Tax law just as he is facing the problem of how to get the Consitution treaty through, I will be ver surprised if he wants to use this particular double edged sword against the Conservatives.
Anne
You’re right. Except that the current rule pre-dates the EU. Any change of it wouyld fall foul where keeping what we have does not.
But Brown is a defender of the status quo in this area – a conservative (small c)
Richard
Looking again at the “harm” tests, even if they do apply, simply charging 25k would not fall foul of any of them – all the “harm” arises from the existing domicile law, not the 25k charge. Remember, the Tories are not proposing to change domicile law (whose “harmful” effects you argue are exempt because they are of longstanding). Under their approach the existing law would stand and no one who would not previously have benefitted from non domicile status would do so in future. The charge would be akin to an administrative charge which, if anything, would make it less attractive to benefit from the domicile rules, so making them less harmful, not more.
But my original point was a political one. It would be political suicide for Labour to argue that a domestic tax proposal was untenable because of EU regulations.
In contrast to the HRA, where grandfathering of pre 2000 UK legislation is reserved (witness the recent botching of the ITA 2007 rewrite for personal allowances, as a result), there is no grandfathering for pre ECA 1972 legislation; the UK was, at the time of succession to the, then EEC, in no position to negotiate such a clause. (From what I recall of my legal studies, France had us by the proverbials at the time, and the UK’s hearts and minds followed !.)
What is more relevant is that the European Commission is on record, as recently as March 2007, in saying that whilst the commission does not condone the remittance basis, it must, however, be applied in a non discriminatory matter. This was in the context of a review of Ireland’s remittance basis for its non-doms, which led to the commission requesting that Ireland abolish its discriminatory policy towards UK sourced income. It was also requested of the Uk that it abolish its mirror policy as regards Irish source income (at section 831(5) ITTOIA), and amending legislation this effect was announced yesterday.
Whilst not conclusive beyond absolutely all doubt, and EC jurisprudence remains far more flexible than than our own, it is not unreasonable for people to to use this recent opinion to say that the remittance basis will withstand EC challenge for the foreseeable future.
[…] The issue will not go away. Expect an attack from Europe now. It is very obvious now that the UK is operating a harmful tax practice. […]
Andrew
Fairly argued.
But I am expecting a government challenge on the basis of harmful practice – and that was not considered by the announcement in question
Richard
I take the point and, indeed, do not dispute that it was not recorded in the opinion, but that is not to say that it was not considered. I should stres that I am not saying it was but, rather, that we would not know for sure given the manner in which the commission reviews and records these matters.
I have not read the referenced Italian complaint but would venture, in the loosest sense, that there will be a reticence in finding on the basis a harmful practice because of the far reaching ramifications to other members’ domestic systems.