Financial secretary Dawn Primarolo has been challenged to justify UK government backing for European Union plans to eliminate source country taxes on interest and royalties.
The Commons European Legislation Committee was ‘rather surprised the government supported proposals for a directive limited to cross-border payments between associated companies’.
Primarolo said the government favoured the idea from the Council of Finance Ministers’ Taxation Policy Group, which was set up last year to propose measures against ‘harmful tax competition.’
She said that, while direct taxation was primarily a prerogative of member states, this ‘would eliminate withholding taxes between companies in different member states and thereby benefit UK businesses’.
But MPs refused to give the proposal clearance in a report to the Commons, and called on Primarolo to separate the legal implications of this proposal from its political desirability.
They said: ‘It might create an embarrassing precedent if other Community proposals relating to the harmonisation of direct taxation which could arise be disadvantageous to commerce or industry in the UK.’
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