The left just doesn’t know what it wants from Brexit. Some have accepted Brexit as a fait accompli – and their approach now appears to be limiting the damage. Others appear to be dead-set on overturning the result of last year’s referendum at the earliest opportunity. Both approaches are politically risky. The former is wishy-washy, satisfying neither the hard-core Remainers nor the devout Brexiteers; while the latter smacks of elitism and disrespect for democracy.
While “third way” approaches may have fallen out of favour with the left, there is an alternative – and that is to embrace the opportunities that Brexit brings to tackle many of the grave injustices imposed by EU law.
One of the most notable of these injustices is tax avoidance. While the European Commission may be the latest passenger on the tax-justice bandwagon, the reality is that it’s EU treaties that make tax avoidance so particularly easy in Europe. Consequently, the ECJ has a long history of striking down national laws designed to combat tax avoidance.
The Chancellor’s Autumn Statement revealed that his predecessor’s much touted Diverted Profits Tax (the so-called “Google Tax”) – designed to stop companies from limiting their tax liabilities by shifting profits to low-tax jurisdictions (like Ireland) – hasn’t yet raised a penny in revenue. I recently revealed in an article in the leading tax journal “InterTax” that this is because EU law means the tax will almost never work.
Article 49 of the Treaty on the Functioning of the European Union (TFEU) prohibits restrictions upon freedom of establishment of nationals of Member States in the territory of another Member State including establishment of companies. Article 58 TFEU further prohibits any restrictions on the free movement of capital. National laws, including tax laws, which infringe upon those rights are, in almost all circumstances, not permitted. This has resulted in many laws designed to clampdown on tax avoidance being struck down by the ECJ.
The case of Sandoz concerned a provision designed to prevent the arrangement of loans outside of Austria to avoid paying tax. In his opinion on the case, the Advocate General took the view that “[t]he principle of the free movement of capital was introduced inter alia in order to enable Community nationals to enjoy the most favourable conditions for investing their capital available to them in any of the States which make up the Community.”
The Court agreed with the Advocate General’s position, ruling that the measure “deprives residents of a Member State of the possibility of benefiting from the absence of taxation which may be associated with loans obtained outside the national territory. Accordingly, such a measure is likely to deter such residents from obtaining loans from persons established in other Member States.”
If the very purpose of free movement is to ensure the allocation of resources to their most efficient location, it logically follows that “shopping around” for the most favourable environment for those resources is perfectly lawful.
Of even greater relevance is the decision of the ECJ in Cadbury Schweppes. At issue in the case was the UK’s rules designed to prevent companies from shifting profits to related companies outside of the UK to avoid tax. The Court in Cadbury Schweppes reiterated its earlier judgement in Barbier that “a Community national cannot be deprived of the right to rely on the provisions of the Treaty on the ground that he is profiting from tax advantages which are legally provided by the rules in force in a Member State other than his State of residence.”
In other words, under EU Law the fact that a company shifts its operations to another EU state (such as Ireland or the Netherlands) to take advantage of more favourable tax treatment cannot be prohibited. Anti-avoidance rules may not be applied, even where there is an explicit intention to avoid tax, where the taxpayer nonetheless carries on genuine economic activities. Anti-avoidance rules, such as George Osborne’s Google Tax, can only work where arrangements are wholly artificial and have tax avoidance as their sole purpose.
And herein lies the problem. The reality is that these arrangements are almost never wholly artificial, with a reduction in their tax bill seemingly being a happy coincidence. At time of writing Google has over 5,000 employees in Ireland, and Apple approximately 4,000. Under EU law any attempts at taxing profits shifted to these jurisdictions is illegal – notwithstanding the fact that they likely would never have located so many employees there but for their 12.5% corporate tax rate.
Freedom from the application of EU rules on free movement of capital and freedom of establishment would allow the UK to enact a genuinely effective anti-avoidance rule. Rather than being limited to a rule that applies only to arrangements the sole purpose of which is to avoid tax, the UK could adopt a rule that clamp down on arrangements which have as their main purpose the minimisation of tax liabilities.
A favourite method of profit shifting by large multinationals is to make royalty and interest payments from subsidiaries in high-tax jurisdictions to subsidiaries in tax havens. A withholding tax on such payments would seriously clamp-down on this prolific method of tax avoidance, but such a tax is prohibited by a 2003 EU Directive.
Combating tax avoidance is just one opportunity presented by Brexit. There are plenty of others.
The left is undoubtedly suffering from an ideological crisis. Many of the left’s assumptions have been challenged by the discovery that its core vote isn’t what it used to be. But if the left decides to embrace Brexit then there are plenty of opportunities. Ending EU-sanctioned tax avoidance would be a good start.