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Trending Towards the Europeanization of UK Finance: UK Tax Law is referred to the European Court of Justice

On 24^th October, the European Commission publicised its decision to refer the UK to the European Court of Justice over its policies governing the taxation of transfers of assets abroad. Pivotal to the referral is the distinction made within UK tax law between cross-border and domestic investment transactions.

Disputed Legislation: The Income Tax Act (2007)

The Income Tax Act (2007), which is soon to come under the scrutiny of the European Court of Justice, allows for a distinction in the taxation treatment of certain assets.  This distinction is dependent upon an asset’s status as either domestic or cross-border.

Should a UK resident choose to invest capital in a UK business, that business may use the investment for income generation, taxable only upon redistribution, for example, through the payment of dividends. If, however, a UK resident chooses to invest capital in a business which is registered in another European Member State, that investment becomes immediately liable to taxation on income generated, prior to redistribution.

According to the European Commission, this legislation breaches Articles 49 and 63 of the Treaty on the Functioning of the European Union (TFEU) and Articles 31 and 40 of the Agreement on the European Economic Area (EEA Agreement). These articles, cited by the Commission in its referral, prevent restrictions being placed on either the freedom of establishment or on the freedom of movement of capital.

Europeanization of Taxation: Predicting Trends in Fiscal Finance and Taxation

The news of the Commission’s referral of the Income Tax Act (2007) to the European Court of Justice is, perhaps, unsurprising. First, much European harmonisation over management of investments has already occurred and, second, the global financial crisis has provided impetus for Member States to harmonise taxation policies, in turn generating a renewed degree of confidence within the Commission to push tax harmonisation forward.

The global economic crisis exposed the extent to which discrepancy between levels of monetary union and levels of taxation union were problematic. Indeed, many began to argue that one of the greatest benefits that could be achieved from monetary union was greater economic integration which could, in turn, lead to higher levels of harmonisation across national taxation policies.

As the financial crisis and recession hit, the response of many European Member States was similar; they made adjustments to government spending and cut capital and labour taxes, in turn, establishing a Community wide trend for low tax ratios.

Further, whilst a certain degree of divergence within several national tax economies has, once again, occurred, European bailouts have, for the first time, led to the direct imposition of national taxes upon individual Member States. In setting a trend towards Europe specified taxation commitments, the EU has forced individual Member States to raise taxation so as to meet repayment conditions.

Beyond Taxation: Trending Towards Convergence of European Financial Sectors

While monetary and fiscal union can be linked, so too can monetary and banking union. Trending towards harmonisation of the banking sector, the European Union is implementing reforms across financial services, considering a European Transaction Tax and holding a public consultation on shadow banking (believed to account for approximately 25 – 30% of the financial system).

As banking policies converge, certain European banks and investors are beginning to develop and market products with European wide appeal. Certain unit trusts, for example, are being established specifically for investment to generate capital growth within European countries. Further, there has been a steady growth in the marketing of OEIC’s (open-ended investment companies). These investment instruments, which resemble unit trusts, though are structured as companies, have increased in popularity due to conformity with the European Union’s ‘Undertaking for Collective Investments in Transferable Securities’.

Insurance industries, too, are increasingly marketing policies which either support European industries, or conform to particular EU laws. With the European Commission expected to present its proposal for the Insurance Guarantee Schemes Directive (IGSD) next year, European insurance companies are developing their marketing of products which are likely to offer sufficient levels of consumer protection to be sold in European Market. The Commission proposes that schemes covered under its proposed IGSD should include life and non-life insurance policies. Schemes, it states, should be funded using anticipatory contributions from insurers which should be made in anticipation of potential future solvency.