Political managers: Is tax harmonisation inevitable? - As the world gets smaller and currencies merge, buying habits are changing radically Governments need to realise that competitive tax rates are all.

Political managers: Is tax harmonisation inevitable? - As the world gets smaller and currencies merge, buying habits are changing radically Governments need to realise that competitive tax rates are all. - There are those who see bottles half-empty and th

by MICHAEL HESELTINE
Last Updated: 31 Aug 2010

There are those who see bottles half-empty and those who see them half-full. The object itself is unchanged. There are those who see the future as the closing of the night and those who welcome the approaching dawn. It's in the mind.

One thing is for sure - tax harmonisation is on its way. Is it an opportunity or a threat? Should a government grasp the nettle or apply appropriate medicine to the consequences of each sting?

The process of harmonisation will not be dictated by governments, it will be led by markets and governments will be pressured to respond.

We live in a world shrinking far faster than public and political perception has taken on board. The introduction of the euro will inject an unappreciated surge into an already unstoppable tide of activity. This and e.commerce will change buying habits. How long will governments be able to resist the complaints of their retail industry that they are losing market share not because they are price uncompetitive but because on top of their competitive prices they are forced to impose uncompetitive tax rates?

The excise duty differentials that now create a ludicrous situation to the huge benefit of the shops in Calais are sustainable because the UK Treasury makes such returns on excise duty generally they can tolerate the relatively small leakage. But across the retail market that will not prove sustainable. Look what is happening in the retail car market to understand how the UK customer is already becoming aware of what a single market means. This is not a tax differential issue but it illustrates the growing sophistication of the shopper increasingly prepared to look outside this country. The process will intensify and governments will have to make themselves competitive to preserve the competitive base of their retail economy.

But it doesn't stop with the retail economy. The shrinking world is peopled by footloose industries searching for the most sympathetic locations in which to invest.

Tax is a prime consideration. How long will governments watch industries relocate abroad and competitor nations attract growing inward investment by offering favourable tax regimes without responding?

Managers today at a senior level are rewarded by packages. Tax levels, stock options, incentive deals are all built into the arrangements. Every country needs to attract these people or retain them. To do so they have again to live in the real world of competitive tax rates.

It is easy to make forecasts. It is exactly the opposite to know how to cope with the problem in government. We have a relatively benign tax regime in the UK, although the hidden taxes introduced by the present Government have eaten into the validity of the claim as it stood two years ago. But in some cases, however, we have higher rates than our Continental competitors. Excise duty I have mentioned. We have no VAT on food or children's clothing - good news for the manufacturers and retailers but at 17.5%, VAT is higher than in some single-market countries on the broad range of products. Bad news for companies operating in the UK.

It is clear to me that this issue has legs. It is market-driven but governments seeking to protect their revenues - as with the withholding tax row where the Germans are losing tax revenue from their citizens who invest through London or Luxembourg - are bound to seek agreements to protect what they perceive to be national self-interest. Our Government is right to refuse to surrender a significant market where the City of London is so pre-eminent. The European Commission will seek to bring single-market regimes into place. I see no let up in this process. The dilemma I face without resolving is how to best preserve Britain's self-interest? We have a veto. We should unhesitatingly be prepared to use it. The threat of it may not prove quite the formidable weapon we believe.

Suppose the Europeans devise a process to make progress without us. There will be many who advocate such a strategy. It is a threat they carried out at Messina when we stood back and watched them devise the Common Agricultural Policy to suit them and not us. They threatened again over the creation of the single market in 1985 and we gave in.

Something of the same problem arises again this time. If the rest of Europe did find a way to harmonise its taxes and if we, at some future date, found that our exclusion worked to our disadvantage, then trying to change what had been fought over and agreed by the rest of Europe would be hard to achieve.

Is it possible that if, always aware that we have a veto, we were at the front of the process arguing that the harmonisation should be downwards and not upwards, we might secure a deal that brought Europe much closer to our regime than they presently practise? My own experience of government tells me that somewhere in some underground bunker such talks will have taken place, although I have no evidence of this.

As the saying goes: 'We shall see'. If there is a luxury in opposition, it is that it will be a spectator sport!

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