Compass Warns of $121 Million Hit From EU’s Tax Probe Into U.K.

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By Ben Stupples

Compass Group Plc has warned the European Union investigation into a U.K. tax scheme may cost it as much $121 million, adding to the list of FTSE 100 companies citing the probe’s possible impact.

“We have calculated our maximum potential liability to be some £89 million” ($121 million), the world’s largest caterer said in its half-year results, filed May 9. “We do not consider that any provision is required in respect of this amount based on our current assessment of the issue.”

Launched in October, the European Commission’s government aid probe into tax relief provided through the U.K.'s controlled foreign company rules comes as part of its efforts to target member nations giving global companies what it sees as illegal tax breaks.

Previously, the commission has cited Luxembourg’s treatment of U.S. multinationals McDonald’s Corp. and Amazon.com Inc., along with Italian car-maker Fiat Chrysler Automobiles NV. In October 2015, it also identified the Netherlands’s tax affairs with Starbucks Corp. as illegal state aid.

Laws “targeting tax avoidance cannot go against their purpose and treat some companies better than others,” the EU’s competition commissioner, Margrethe Vestager, said in an Oct. 26 statement. “This is why we will carefully look at an exemption to the U.K.'s anti–tax avoidance rules for certain transactions by multinationals, to make sure it does not breach EU State aid rules.”

FTSE 100 Cost

Compass Group’s disclosure brings the total potential bill from the government aid investigation for the U.K.’s largest public companies to $636 million, according to data compiled by Bloomberg Tax.

Last month, Bloomberg Tax revealed that Diageo Plc, Associated British Foods Plc, Smiths Group Plc, and Pearson Plc together have potential liabilities of 379 million pounds from the probe. Like Compass, the London-based companies are all listed on the U.K.’s benchmark FTSE 100 index.In an April 18 email, a Pearson spokesman said the company and the U.K. government believe the tax arrangements under EU scrutiny were, and still are, in compliance with state aid rules.

If the European Commission rules against the U.K. government, it “will be required to collect payments within four months of the decision, even if it decides to dispute the decision,” he told Bloomberg Tax. “The timing of any decision is unclear and we are monitoring developments.”

U.K.’s CFC Rules

The commission’s state aid investigation into the U.K.’s tax system focuses on whether the country has given multinational businesses unfair relief through its controlled foreign company rules.

Dating to the 1980s, the U.K.’s controlled foreign company (CFC) rules aim to stop businesses from using overseas subsidiaries to cut their tax bills by shifting profits to low-tax jurisdictions.

When the U.K. last changed its CFC rules in January 2013, however, it included a U.K. tax exemption for certain intra-group financing between two subsidiaries based outside the country.

As a result of this change, a global business active in the U.K. can finance a foreign group company through an overseas subsidiary, the European Commission said in October. The exemption allows the parent company to avoid U.K. tax if the subsidiary receiving interest payments via the financing is in a tax haven, or if the financing income isn’t reallocated to the U.K., it added.

The U.K. government changed its CFC rules to make it more attractive to multinationals, relying “heavily” on OECD principles for the updated laws, said Isaac Zailer, a London-based partner and global head of the tax at international law firm Herbert Smith Freehills.

The new rules, including the exemption, were part of a “carefully thought out fiscal strategy,” he told Bloomberg Tax April 20. “For any company that took steps to adapt to the regime, it’s probably frustrating and disappointing that this is where it’s ended up.”

To contact the reporter on this story: Ben Stupples in London at bstupples@bloombergtax.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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