ECJ Tax Rulings Pose Greatest Threat To Domestic Tax Revenues

by Robert Lee, Tax-News.com, London

07 December 2004

In his recent pre-Budget report, Chancellor of the Exchequer Gordon Brown failed to adequately address the growing tendency of the European Court of Justice to overrule national tax authorities in cases where there is a conflict with European tax law, an issue seen by accounting firm Ernst & Young as the greatest threat to domestic tax revenues across the EU.

“The European Court of Justice has driven a gaping hole in the British tax system as it has challenged UK rules and this has put the Chancellor in a very difficult position. I am surprised that he found nothing to say about it in this pre-Budget report,” commented David Nickson, tax partner at E&Y.

Over the last ten years, the ECJ has found in favour of the taxpayer in 85 out of 87 cases, and there is now widespread concern that the European Union has the ability to rewrite domestic tax by stealth, via legal rulings from the Brussels court.

However, a recent Financial Times report suggested that the problem is especially thorny for the UK. This is because its tax system differs from most EU members, as it compensates for double taxation through the use of tax credits which discriminate between resident and non-resident tax payers, and domestic and foreign sources of income. This system leaves the UK much more vulnerable to breaches of European law, which generally seeks to eliminate discriminatory tax treatment of residents and non-residents in EU member states.

Moreover, rewriting UK tax legislation to make it more harmonious with European norms may have serious implications for tax revenues, the report suggested.

“Business is having to grapple with increasing uncertainty and increases in regulatory burdens because the Government has simply extended its cross-border taxation rules to the UK domestic scene. This is a problem which is not going to go away. How much account has the Chancellor taken of this issue in his sums?” Nickson asked.

A recent study by accounting firm PricewaterhouseCoopers revealed that all member states of the enlarged European Union have at least one piece of tax legislation that is in contravention of EU law. However, the UK was identified as by far the worst culprit, with eight areas of its tax law potentially in breach of EU rules.

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