Can the EU stamp out the 66 tax havens operating within its borders? Jules Stewart finds that not all of them are prepared to go quietly.

It is difficult to see who stands to benefit from the European Union’s initiative on what it deems to be “harmful tax regimes”. Brussels has targeted 66 regimes operating in a handful of EU member states, which under its Code of Conduct were deemed to distort corporate behaviour about where to locate and make investments.

Contrary to the spirit of liberal compromise, the countries in question were told to dismantle these regimes by the end of 2005. One could be forgiven for wondering where the EU draws the line on what constitutes unfair competition, as these regimes are not operated as a cartel or monopoly by any countries to the exclusion of others.

“The offensive regime is defined as a little haven in a higher tax regime,” explains Peter Cussons, international tax partner at PriceWaterhouse-Coopers (PwC). “It attracts mobile capital to a geographical area in the EU. For instance, Belgium levies a 40.17% corporate tax, while the Belgian Co-ordination Centre’s rate is 1%. The EU is launching proceedings against Belgium as it deems attracting mobile treasury activity poses an unfair advantage over other member states, such as Germany. These [regimes] entail more than treasury operations. Austria has a holding company regime, Belgium has distribution and services, there is a royalty regime in France and re-insurance in Luxembourg. They are not brass-plate operations and 99% of them conduct their business properly.”

Major players

The ruling to roll back these regimes is not going to win the EU any friends among multinational investors or the targeted countries. Corporates taking advantage of these tax regimes include the top FTSE 100 and Fortune companies. As regards the hard-line approach, the EU has made it clear that it is empowered to require the Belgian government to claw back and assess corporates using its Co-ordination Centre regime for the missing 39% in unpaid tax.

Political initiative

The original Code of Conduct initiative had no basis in law and was merely a political initiative, says Ron Haigh, international tax partner at Deloitte Consulting. “The regimes in question are mobile activities that multinational companies can locate anywhere,” he says. “The betting industry of Gibraltar is an example. They are mostly concerned with international financing activities, such as French regimes for treasury centres, the Belgian Co-ordination Centre and so on. The EU says tax competition is healthy in some respects to ensure that companies can make economic choices. But tax can distort economic behaviour. This includes attracting mobile capital to these regimes. Some regimes offer a nil rate of tax compared with rates in the 30% and 40% range for most countries.”

Defining what constitutes a “harmful regime” can get a bit sticky. Ireland, for instance, is gradually coming down to a 12.5% rate of corporate tax, so clearly there are borderline cases of state tax regimes.

The European Commission got in on the act not long ago, and the original political issue has now been endowed with legal teeth. The EC instigated action against some of these schemes, which it has divided into two sets. There is a group of four (including Belgium) that are being asked to give a legal commitment to unwind their regimes by 2005. Thus they are required to commit legally as well as politically. Then there is political action in relation to 11 other tax schemes in EU member countries, including Gibraltar, where the Commission has tagged two of the 11 schemes, requiring a commitment to bring them to an end. This could become a test case, for Gibraltar is trying to get an injunction to stop the EC action.

Code complexities

Not surprisingly, things are not so simple as that. The EU Code of Conduct, apart from setting a date to terminate the schemes, also told member countries to cease clearing new regimes by last year. In fact, many countries are still issuing rulings arguing that the current basis of their regimes is different from the ones the EU found offensive. At the same time, the OECD’s Towards Global Co-operation Initiative, which signifies anti-preferential tax regimes, has drawn up a list of 47 anti-competitive tax centres that create a raft of overlap with the EU’s 66 targeted regimes.

As one tax consultant says: “At least 20% of the EU’s current member state tax regimes are contrary to the Treaty of Rome. Chopping off the tip of the iceberg is little more than a cosmetic exercise.”