For those who have seen the film Pirates of the Caribbean, or have a passing interest in 17th century buccaneers, the term ‘Living by the Code’ should be reasonably familiar. I am of course referring to the Pirate Code, or the code of conduct invented for governing pirates. One of the best known examples of the Pirate Code was set down by the famous Welsh pirate Bartholomew Roberts, otherwise known as ‘Black Bart’ in 1720, whose version of the articles included such sensible measures as the allocation of a pension based on “severity of wounds”. Roberts was a protégé of Henry Morgan, and both were involved in the famous Brethren Court, where many details of the Pirate Code were laid down and agreed upon.
When recently reading around the subject of the EU Code of Conduct on Business taxation I was struck by a number of parallels between the two codes. Both have a set of rules and principles but have no legal force, both are dependent on the shared need of common parties, whose collective self interest is served by its observation, and for those who don’t comply there is always the sanction of condemnation and retribution.
The EU code of conduct was first introduced in 1997 and set out to do two things. Firstly to tackle harmful tax competition (my emphasis)through the introduction of standstill and rollback measures, and secondly to ensure no new measures of a ‘harmful’ nature are introduced. Member States were and are expected to adopt these goals themselves and to encourage their adoption in third countries, although so far they have only been taken up in EU States and their associated and dependent territories. Interestingly steps are now being taken to encourage Switzerland and Lichtenstein down this route.
So what are the EU Code of Conduct ‘rules of the road’? In the EU’s own words the Code was specifically designed to detect only such measures which unduly affect the location of business activity in the Community by being targeted merely at non-residents and by providing them with a more favourable tax treatment than that which is generally available in the Member State concerned. The criteria for identifying potentially harmful measures include:
- an effective level of taxation which is significantly lower than the general level of taxation in the country concerned;
- tax benefits reserved for non-residents;
- tax incentives for activities which are isolated from the domestic economy and therefore have no impact on the national tax base;
- granting of tax advantages even in the absence of any real economic activity;
- the basis of profit determination for companies in a multinational group departs from internationally accepted rules, in particular those approved by the OECD;
- lack of transparency.
Clearly, there is a fair amount of scope for interpretation! But where I find the most difficulty, is with the term “harmful tax competition” which seems to me to be something of a contradiction – is competition intrinsically harmful? And I am not alone, as the following extract from a commentary by Dr Philip Booth of the Institute of Economic Affairs explains:-
“Apparently without irony, politicians promote ‘cooperation not competition’ in the provision of government-provided services and regard ‘tax competition’ as harmful. Tax competition involves allowing sovereign nations, and dependencies with tax-setting powers, to set their own tax rates and rules. Impeding tax competition, through the operation of a cartel of governments that sets tax rates and/or rules, is an abuse of power by government, much more serious than any abuse by monopolies acting in private markets. It is more serious because governments have a monopoly of coercion and, if tax competition is prevented, individuals will be unable to choose the kind of governments under which they live or the kind of countries in which they invest on the basis of their preferences….”
Is he right? Well clearly a group of countries which engage in international trade have some interest in avoiding monopoly of power, or market distortions, which impair economic efficiency and there are a myriad of state aid measures of a regulatory, economic or tax nature in the EU. The Common Agricultural Policy is one example. Created with the good aim of providing farmers with a good standard of living, and quality, reasonably priced food to consumers, many critics now believe the policy to be anti-development, to create artificially high prices, oversupply and wastage and to be economically unsustainable.
The response of the Crown dependencies to the EU Code of Conduct when it was first introduced was to engage in a spirit of cooperation, with the aim of maintaining good relationships with the EU and the UK. The Isle of Man was the first to respond introducing a tax framework which became known as 0/10. In order to preserve a competitive level playing field Jersey and Guernsey quickly followed suit. The introduction of these tax frameworks was done openly, and transparently, and after only 18 months or so of implementing the scheme in all three Crown dependencies, it is a curious state of affairs to find that ECOFIN now question the ‘spirit’ of these schemes, which probably means they comply with the code but some EU member states don’t like them.
Jersey Finance welcomed the news that a review and formal assessment by the Code Group is due to take place in September, as the uncertainty created by ECOFIN’s comments could be damaging to businesses. Isle of Man seem to be taking a similar approach to Jersey, seeking clarity and understanding, while Guernsey are not being assessed, presumably because their commitment to change is seen as stronger than either of the other two Crown Dependencies.
Meanwhile, Jersey has launched a Business Taxation Review and interestingly it provides clear evidence of the previously agreed position and understanding with the EU on the 0/10frameworks:-
‘It should be noted that in 2003 and 2006, assurance had been given to the Crown Dependencies that the proposed 0/10 regimes were not considered to be harmful. In June 2003 ECOFIN issued a press release confirming that the Code Group had found that none of the replacement measures proposed by the Crown Dependencies were considered to be harmful and that ECOFIN agreed that the proposed replacement measures were adequate to achieve rollback of all of the harmful features previously identified by the Code Group. Further, in its report to ECOFIN dated 28 November 2006, the Code Group stated:’
“The UK delegation, recalling the Code Group report dated 26 November 2002, explained that with the introduction of a standard rate of tax for all Isle of Man companies of 0% and a higher rate of 10% on two closely defined types of business…the Isle of Man’s six harmful measures were all repealed or revoked. This was accepted as constituting the rollback of the harmful regimes.”
So, to return to the concept of ‘the Code’. I do wonder at times if we are regarded by some EU nations as ‘pirates’