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Another March, another Budget – part 1

As March moves into its second half and spring is getting into full swing, it is that time of the year again when we have to endure the voice coached tones of George Osborne uttering a number of familiar refrains: ‘all in it together’, ‘cutting the deficit’, ‘fixing the roof while the sun is shining’ etc, etc, all accompanying a fresh round of micro-measures to buy off different voting constituencies and pressure groups. All wrapped up in a wrong growth forecast! Cue more scrabbling around for public spending cuts.

The elephant in the room

One of the many familiar refrains to be found in the annual Budget speech these days is the announcement of technical changes to the tax regime to clampdown on tax avoidance and evasion. While measures in this direction are always welcome, there is an often unmentioned elephant in the room on this issue.

Well, that is not entirely true. It was mentioned in the Chancellor’s Budget speech but not in relation to tax issues. It was mentioned in the context of the Chancellor attempting to make cheap political points (what other kind are there?) about leaving the EU and the Office of Budget Responsibility’s (OBR) growth forecast being based on a ‘remain scenario’. Nudge, nudge, wink, wink...leaving will inevitably see the arrival of the four horsemen of the apocalypse. On BBC Newsnight OBR Director Robert Chote was very clear the OBR has not made any forecasts about ‘Brexit’ scenarios or taken any position on the EU issue. But even if they had made calculations about the impact of ‘Brexit’, the fact that the OBR had got its forecast for the economy wrong again, was hardly a vote of confidence in its ability to forecast anything. Maybe the OBR should swap with the Met Office?! The former may have more luck predicting the weather and the latter predicting the economy than they both do in their respective areas of expertise at the moment.

The elephant is a blue and yellow starred one called the EU. You might be thinking - I don’t see the link. The EU is a club for Government’s to come together and tackle undesirable activities like corporate tax avoidance...isn’t it? After all it’s got that Social Europe thingy going on, right, where ‘business’ is constrained by strong regulations?! Alas not.

The EU and ‘Big Capital’

Many on the left seem to think that the cross-border casino that is the international economy can only be regulated by supra-national entities like the EU. At this point the spirit of enquiry seems to dissipate, conclusions are swiftly reached – no further thinking required here...move along, move along. Why is that? DLN has no idea why. But one suspicion is that it sounds intuitively right. We’re told by the media and business (forgive DLN if we aren’t entirely convinced there is a clear separation of interests here) that capital has lost connection with territory and exists in an ethereal world beyond the reach of ordinary citizens and regulators. If those who stick with this intuitive sounding point fail to investigate further however (and admittedly we’re all busy people) they’re going to miss some pretty hard truths about supra-national institutions and their close relationship with ‘Big Capital’. In an earlier blog post DLN highlighted some of the lobbying resources that ‘Big Capital’ has at its disposal, their levels of access to the EU institutions and the kinds of disasters such access has delivered for ordinary consumers and citizens in the Member States.

Another example of the EU’s close relationship and sympathy with ‘Big Capital’ is on the issue of tax. The EU regulates taxation issues through two articles in the Treaty of Functioning of the European Union (TFEU). Articles 63 and 49 respectively not only permit but encourage the free movement of capital and the freedom of establishment for business. Using these articles the EU and the Court of Justice in particular have established a set of rules which direct and restrict the ability of Member State Governments to take action against tax avoidance. Perhaps the most concerning aspect of this issue however, is that the steady accretion of legal supremacy by EU law since 1963 means that, in the words of Lord Justice Hoffman, in the UK for example:

The EC Treaty is the supreme law of the UK taking precedence over Acts of Parliament’.

As a result of EU membership, the free circulation of capital is now effectively a constitutional principle of the United Kingdom!

Looking beyond the rhetoric

When talking about so-called Social Europe commentators and analysts miss (to use that handy old cliché) the ‘wood for the trees’. Social Europe is essentially ephemera at best. It is part of the bait and switch by the EU used to gain the support of the workers and citizens of the Member States. The EU looks to buy-off workers and citizens with some minor ‘pork’ while in reality the EU Treaties constitutionalise neo-liberal political economy. Is it no wonder that big corporations like the EU?! They like the implementation of policies which enable the ever speedier circulation of capital. They like even more legal frameworks which privilege neo-liberal policies as fundamental and immutable principles of a governing order.

For those willing to look beyond the rhetoric, the EU is pretty blatant about the agenda. Its latest incarnation is the so-called Capital Markets Union (CMU) – a range of measures designed to ensure the ever greater free-flow of capital around the Member States. The CMU follows the previous Financial Services Action Plan. Both designed to drive a coach and horses (another useful cliché) through real constraints on capital. But more on these at a later date.

In short, the EU might be better described as an institution for ‘Big Capital’ to regulate Governments rather than a method for Governments to regulate capital.

Tax ‘efficiency’ and the EU

Because of the principles of the free movement of capital and freedom of establishment, EU law (interpreted and developed by the unaccountable Court of Justice) has played and continues to play a prominent role in enabling extensive tax avoidance by companies operating in the EU. The principles in the Treaties and the Court of Justice’s case law give significant freedom to businesses to move their assets around the EU and structure themselves so as to minimise their tax liabilities. As the legal scholar Tom O’Shea has observed:

The Court’s jurisprudence plays a crucial role in the interpretation of the concepts of ‘tax avoidance’, ‘circumvention’ of national rules and regulations, and ‘abuse’ of EU freedoms’.

A number of seminal court cases, which have Articles 63 and 49 at their heart, have enabled this situation to develop. For example:

In the Cadbury Schweppes case the Court of Justice stated that:

‘...the fact that a Community national, whether a natural or a legal person, sought to profit from tax advantages in force in a Member State other than his State of residence cannot in itself deprive him of the right to rely on the provisions of the Treaty...the fact that the company was established in a Member State for the purpose of benefiting from more favourable legislation does not in itself suffice to constitute abuse of that freedom’.

In Thin Cap GLO, the Court of Justice gave it’s OK to tactics such as intra-company loans as a way of minimising tax liability:

‘...a resident company is granted a loan by a related company which is established in another Member State cannot be the basis of a general presumption of abusive practices and justify a measure which compromises the exercise of a fundamental freedom guaranteed by the Treaty’.

In RBC Deutschland the Court of Justice gave the green light to businesses that choose to undertake certain types of economic transactions or adapt their business structure to profit from tax advantages:

‘...taxable persons are generally free to choose the organisational structures and the form of transactions which they consider to be most appropriate for their economic activities and for the purposes of limiting their tax burdens...a trader’s choice between exempt transactions and taxable transactions may be based on a range of factors...where it is possible for the taxable person to choose from among a number of transactions, he may choose to structure his business in such a way as to limit his tax liability’.

This situation is a clear example of the policy ‘trap’ that the EU often is for Member States. The only way these rules can be undone is either by the Court of Justice choosing to unravel its extensive jurisprudence or for the Member States to change the Treaties specifically to unravel the Court of Justice’s case law on this issue. Even the keenest observer will struggle to find examples of either of these happening, especially the latter. In other words, neither of these are likely possibilities in the next...err...millennium.

The issue of taxation and freedom of movement of capital and establishment along with the EU’s recent proposals on dealing with tax avoidance are, collectively, a classic example of the neo-functionalist method of integration in action. In other words, integration at one level (the freedom of movement of capital for example) creates negative results or ‘spill-overs’ (tax liability avoidance) which then require the EU to take further action to deal with the negative outcomes it has helped create. Consequently, the EU moves one step further towards its ultimate goal.

Part 2

Part 2 of this blog (forthcoming) will:

  • Discuss the EU’s proposed actions to tackle the ‘problem’ that the EU has exacerbated.

  • Describe why many of the proposals are, in fact, not EU in origin but international and thus why it is something of a misrepresentation to suggest (as many do) that the EU is taking ‘unique’ action to tackle avoidance that could not be taken if the UK were outside the EU.

  • Argue why the EU is not best placed to deal with the fundamental problems of international tax avoidance.


Stoke-on-Trent City Council v B&Q PLC [1990] 3 CMLR 897.

European Commission (2015). ‘Action plan on Building a Capital Markets Union’, can be accessed at:

Richard, P (2003). ‘Financial Services Action Plan: a guide’, can be accessed at:

O’Shea, T (2010-11). ‘Tax Avoidance and the Abuse of EU Law’, The EC Tax Journal, Volume 11.

Case C-196/04 Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue [2006] ECR I7995, cited in O’Shea, T (2012). ‘CFC Reforms in the UK – Some EU Law Comments’, paper for the 7th Annual Avoir Fiscal EU Tax Conference, Institute of Advanced Legal Studies.

Case C-524/04 Test Claimants in the Thin Cap Group Litigation v Commissioners of Inland Revenue [2007] ECR I-2107, cited in O’Shea, T (2012). ‘CFC Reforms in the UK – Some EU Law Comments’, paper for the 7th Annual Avoir Fiscal EU Tax Conference, Institute of Advanced Legal Studies.

Case C-277/09 The Commissioners for Her Majesty’s Revenue & Customs v RBS Deutschland Holdings GmbH (RBS Deutschland) [2010] ECR I-0000, cited in O’Shea, T (2012). ‘CFC Reforms in the UK – Some EU Law Comments’, paper for the 7th Annual Avoir Fiscal EU Tax Conference, Institute of Advanced Legal Studies.

Neo-functionalism describes a theory on integration first enunciated by Ernst Hass. It states that integration is achieved through the slow steady integration of one or two policy areas at a time. Each initial integration creates spill-overs which drive further integration. Part of this ‘drive’ for integration comes from supra-national level interest groups and the standing bureaucracy of the supra-national institutions who, by pursuing their own ends, end-up furthering integration.

‘Spillovers’ describes a ratchet effect, whereby integration in one policy area generates a further round of integration in other related policy areas.

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