UK Politics

Second Time Around: EU Membership for Scotland is More Difficult, Not Less

And so here we are again. A second independence referendum now seems more likely a question of when, and not if. Those of us who fed into the debate in 2014 are already preparing to do so again. And while the issues remain remarkably the same, the context has changed entirely.

I did not involve myself in the politics of the 2014 referendum at all. In part because I genuinely didn’t make up my mind until the month before. However, as I also contributed towards the academic debate surrounding independence I did not want to appear too partisan.

In 2014, Dr. Daniel Kenealy and I wrote a paper in the European Law Journal, considering the issues surrounding an independent Scotland’s prospective European Union membership. We argued that, although Scotland’s continued membership of the European Union would not be automatic, it was highly likely that it would continue without interruption.

However, that was then, and this is now. And while the issue of EU membership is likely to feature heavily in the debate on Scottish independence once again, the context has changed considerably.

Timing

Nicola Sturgeon wants to time a referendum such that it will be held towards the end of the UK’s Brexit negotiations, but before the expiration of the two year time limit. This is, purportedly, so that Scotland can have a “genuine” choice between independence with EU membership, or union without.

However, this makes little sense for a number of reasons.  Much has been made of the length of time these negotiations might take. Such negotiations almost always go down to the wire, and Article 50 TEU allows for the possibility of seemingly-indefinite extension.

A cynic might take the view that the real reason behind the proposed timing is to ensure the referendum takes place before people acclimatise to Brexit and realise that the sky hasn’t actually fallen in. It is notable that the proposed timeframe is far shorter than the SNP felt necessary in 2011 to conduct a campaign that fully explored the issues.

Furthermore, the timing makes even less sense if the object of the referendum is to allow voters a “genuine choice”, because no such choice will exist. Unless the First Minister seriously proposes that a new state could be set up and continued membership of the EU negotiated within the space of a month, Scotland WILL be leaving the EU one way or the other. The choice on offer will be between Brexit inside the union and Brexit outside of the union, with potential for EU membership further down the line. This, of itself, poses a whole host of new issues that did not exist in 2014.

Sincere Co-operation

The position of a territory seceding from a state that itself is seceding from the EU is vastly different from a territory seceding from a fully-fledged Member State. In the latter circumstance, that secession would result in a considerable dislocation in the EU’s single market, which its institutions, and the Member States, would be legally obliged to seek to avoid. As Dr. Kenealy and I argued in 2014

“[t]he need to avoid such a dislocation represents not merely a pragmatic reason for the EU to enter negotiations with Scotland immediately following a ‘Yes’ vote but also a legal reason. Article 4 makes clear that if such negative externalities, as would be created by Scottish expulsion, threaten to compromise the attainment of the EU’s goals, then steps must be taken to avoid them. The task of ensuring that the Single Market does not suffer any sudden, sharp dislocation is one that flows from the Treaties. To allow the EU to stumble, unprepared, into such a scenario by refusing to address the issue of an independent Scotland until Independence Day, would be a violation of the principle of sincere cooperation, bordering on a dereliction of duty by the Commission and the Member States.”

This statement, however, clearly does not apply mutatis mutandis to a post-Brexit scenario. The unavoidable dislocation has already taken place. There is no impending hole in the EU’s single market that the institutions, or the Member States are obliged to seek to avoid.

This does not mean that there is no chance that institutions and Member States will not seek to make and independent Scotland’s transition into the EU as smooth as possible. Certainly, post-Brexit, some within the EU – most notably, Guy Verhofstadt – have made such overtones, seemingly to spite the UK. While a desire to stick-it to the UK among officials may well work to Scotland’s advantage, it doesn’t come close to the EU-wide legal obligation to work co-operatively with a seceding Scotland that previously existed.

Good Will

You wouldn’t have thought it by the end of the campaign, but the first independence referendum actually came about in a spirit of remarkably good will. The SNP, to everyone’s surprise, won a majority in the Scottish Parliament elections with a clear manifesto commitment that an SNP majority in the Scottish Parliament would mean an independence referendum. This, of itself, is at odds with the more equivocal commitment contained within the SNP’s 2016 manifesto.

The year following the referendum, the UK Government and the Scottish Government signed the Edinburgh Agreement, under which the Secretary of State would make an order under s.30 of the Scotland Act 1998 to grant Holyrood the legislative competence to hold a referendum that would “deliver a fair test and a decisive expression of the views of people in Scotland and a result that everyone will respect.”

The present circumstances could hardly contrast more starkly. The First Minister and the Prime Minister appear to be engaged in a game of constitutional “chicken”, and it’s not clear which party, if either, will blink first.

In 2014 I argued, quite sincerely, that from the moment Scotland voted ‘Yes’ its closest ally would be the rest of the United Kingdom. This was not out of some misplaced belief in David Cameron’s (or, more likely, his successor’s) magnanimity; but quite simply because it would be in the UK’s interests. With a similar outlook and so many shared interests, Scotland would likely be a close ally of the UK in the European Council and Council of Ministers, much like Ireland. I have little doubt that the UK Government would have gone to bat for Scotland’s continued membership of the EU. In the present circumstances such good will seems unlikely, and insofar is the EU is concerned, utterly fruitless in any event.

Currency

In 2014 I did not think it was at all likely that Scotland would be compelled to join the Euro. This was not  because I believed that Scotland would inherit the UK’s opt-out, but because the SNP had been explicit in their intention to continue using the Pound Sterling, whether in a formal currency union or not. As Scotland would have not have had an independent currency it would not have been possible for Scotland to join the Euro.

However, having been the Yes campaign’s key weakness in 2014, it is now clear that the “use the Pound, one way or the other” approach is unlikely to be used again. Any plans for independence would likely have to include a plan for an independent currency and central bank. Consequently, the main barrier to Scotland’s being compelled to join the Euro evaporates. All new members of the EU (and make no mistake, Scotland will be a new member) are obliged to eventually join the Euro.

While it is the case that it is possible to contrive to not join, by keeping your currency out of ERM II, as Sweden does, it is unlikely that Scotland would be able to get away with this for too long. The SNP may have to prepare itself to be able to sell the prospect of Scotland using three different currencies within the space of a decade.

Conclusion

The First Minister wishes to present the choice she wishes to put before the Scottish people as between independence within in the EU, or Brexit within the UK. Scotland’s continued membership of the EU was one of the key issues of the 2014 independence referendum, and it is likely that it will be once again. However, while the issues may well be the same, the context is vastly different; and this changed context turns Scotland’s continued membership of the EU from likely in 2014, to nearly impossible in 2019.

Scotland will be leaving the EU. The reality is that the only choice on offer is between Brexit within the UK, or without it. Whether we like it or not, this is the new reality to which Scots voters need to become accustomed, and about which the First Minister needs to be honest. Only then will we have a rational debate about Scotland’s future.

Brexit Opportunities for Combating Tax Avoidance

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.

De-bundling Free Movement: an acceptable solution for all sides?

BL61540The question of free movement was undoubtedly the central issue of the European Union referendum debate, and it will, surely, be the central question surrounding Britain’s future relationship with the EU. While Leave campaigners repeatedly assured us that access to the EU’s single market (presumably through the EEA) is quite possible without accepting free movement, the early rumblings from the EU institutions and Member States do not sound too promising.

There are, of course, numerous free movement rights within the EU: free movement of goods, of services, of capital, to name but a few. However, the contentious free movement is that of persons. However, the broad term “free movement of persons” is a relative neologism, bundling the long-standing right of free movement of workers with the more recent right granted to all citizens of the EU to move reside freely within the territory of the Union.

Contrary to the rhetoric that we have heard, it is in fact entirely possible to participate in some aspects of the single market without accepting the free movement of persons. This is the case, for example, in the Channel Islands, and the Isle of Man, which participate in the free movement of goods, but not people, services, or capital. However, while the idea of the “Channel Islands Model” sounds attractive to many, it is probably even less likely than Scotland doing a “reverse Greenland”. The Crown Dependencies are considered by Article 355 of the Treaty on the Functioning of the European Union (TFEU) as special cases, along with various other overseas territories and dependencies of the Member States. While they might demonstrate that it is at least possible to selectively participate in the internal market, they also demonstrate that you have to be a territory or dependency to do it – not a state.

The right of free movement for workers is intrinsically tied up with the internal market, being one of the “four freedoms” that has existed since the inception of the European Economic Community (EEC, or “the Common Market”).

Free movement of workers is provided for by what is now Article 45 TFEU. It provides that:

  1. Freedom of movement for workers shall be secured within the Union.
  2. Such freedom of movement shall entail the abolition of any discrimination based on nationality between workers of the Member States as regards employment, remuneration and other conditions of work and employment.
  3. It shall entail the right, subject to limitations justified on grounds of public policy, public security or public health:
    • to accept offers of employment actually made;
    • to move freely within the territory of Member States for this purpose;
    • to stay in a Member State for the purpose of employment in accordance with the provisions governing the employment of nationals of that State laid down by law, regulation or administrative action;
    • to remain in the territory of a Member State after having been employed in that State, subject to conditions which shall be embodied in regulations to be drawn up by the Commission.

Paragraph 4 provides the sole exception, which applies to employment in the public service (though not, according to the ECJ, all employment in the public service, see Commission v. Belgium). The right was held to cover not only workers, but also those seeking work, by the ECJ in Antonissen, although in an inventive piece of jurisprudence the court held that the rights of jobseekers were subject to limitations.

The right of citizens to move and reside freely provided for by Article 21 TFEU is of more recent genesis. A product of the Treaty of Maastricht, free movement for citizens is a right that is applicable far more broadly than simply the economically active migrants to whom Article 45 TFEU applies. Article 21(1) TFEU provides that

Every citizen of the Union shall have the right to move and reside freely within the territory of the Member States, subject to the limitations and conditions laid down in the Treaties and by the measures adopted to give them effect.

It should be immediately apparent to even the casual reader that this right of free movement, though broader in scope, is much more circumspect than the free movement of workers.

The rights attaching to free movement of workers were expanded upon by Council Regulation (EEC) No 1612/68, and subsequently entangled with the rights of free movement of citizens by Directive 2004/38/EC.

The 1968 Regulation is comprehensive. Article 7 provides that

  1. A worker who is a national of a Member State, may not, in the territory of another Member State, be treated differently form national workers by reason of his nationality in respect of any conditions of employment and work, in particular as regards remuneration, dismissal, and should he become unemployed, reinstatement or re-employment.
  2. He shall enjoy the same social and tax advantages as national workers.

The Directive further provides for equal treatment with respect to trade union membership and housing. It also extends this treatment to spouses and dependents.

The 2004 Directive provides for far more limited rights for citizens than the 1968 Regulation. For example, Article 6 of the Directive provides that the right to move and reside in another Member State is only without restriction for the first three months. Thereafter, Article 7 provides that such migrants must

have sufficient resources for themselves and their family members not to become a burden on the social assistance system of the host Member State during their period of residence and have comprehensive sickness insurance cover in the host Member State.

However, despite the clear intention of the legislating institutions to severely curtail the burden that such migrants may place on the social assistance system of the host Member State, this has not stopped the ECJ from granting entitlements to non-economically active EU citizens which any plain-text reading of both the treaties and the Directive would surely proscribe. The only recent example of the ECJ declining to extend a state benefit payment to a non-economic migrant is the 2014 Dano decision.

Could it be, therefore, that de-bundling the free movement of workers from the free movement rights of Union citizens is the compromise that would be most acceptable to all parties? It certainly has a number of advantages.

First of all, it would allow the EU to maintain that it has preserved the free movement of workers that is so intrinsic to the internal market. Meanwhile, the UK could claim a victory in having ended the absolute right of union citizens to move and reside freely, restricting the right solely to economic migrants.

It might also be a politically acceptable compromise, as it wouldn’t involve reviewing any of the treaty provisions regarding the internal market. Rather, it would merely involve reviewing the 2007 Decision of the EEA Joint Committee to adopt the 2004 Directive in full. No treaty change means there is no need for ratification, which would keep the debate surrounding it largely out of the domestic spheres of other EU Member States.

What this amounts to in reality is largely symbolic. As the definition of “workers” includes jobseekers, those looking for work will still be able to travel to and reside freely in the UK, at least until the UK Government can demonstrate that their job search is hopeless. In reality, the majority of non-economic migrants are retirees, and there are a far greater number of British pensioners in Europe than there are European pensioners in the UK. It may well be that when the Tory-voting Daily Mail readers of the Costa Del Sol discover that, in fact, they’re the only migrants who are about to be kicked-out of anywhere, our new government decides that the full free movement of persons principle is a price worth paying for market access after all.