EU’s U.K. Tax Probe May Hit Unprecedented Number of Companies (1)

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By Ben Stupples

The European Commission’s probe into a U.K. tax scheme may hit an unprecedented number of companies for its investigations on governments’ specialized treatment of global businesses.

A total of 38 public U.K. businesses have cited the government aid probe in their accounts, according to data compiled by Bloomberg Tax. That total beats the 35 businesses, the highest existing number, that the European Union’s executive arm cited in a similar investigation into Belgium’s tax laws.

“It would be interesting to see if these companies sit back and let the government appeal” if the commission says the U.K. is giving local multinationals unfair benefits, Dan Neidle, partner at global law firm Clifford Chance, told Bloomberg Tax. Instead, “they could take on the fight themselves.”

Launched in October, the European Commission’s state aid probe into tax relief provided through the U.K.’s controlled foreign company rules (CFC) comes as part of its efforts to target member nations giving global companies what it sees as illegal tax breaks. Previously, the commission has largely targeted the tax treatment of U.S. multinationals, including Amazon.com Inc. and Apple Inc.

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.”

Potential Impact

Like Ireland’s battle over whether Apple Inc. owes it 13 billion euros ($15.3 billion) in unpaid tax, the EU may force the U.K. to recover the relief companies have gained through the exemption.

While most of the 38 U.K.-based multinationals simply say the commission’s investigation may affect them, some have provided details of their financial exposure to a negative verdict.

So far, nine companies have disclosed these details, with a total potential cost of 511 million pounds ($686.8 million), according to data compiled by Bloomberg Tax. Five companies listed on the U.K.’s benchmark FTSE 100 stock index make up 92 percent of this current figure, including drinks-maker Diageo Plc, education publisher Pearson Plc, and catering business Compass Group Plc.

In their filings, none of the companies have set aside any cash yet to cover the potential liability that would arise if the European Commission rules against the U.K. In the event of a negative verdict, the U.K. will have up to four months to recover the tax relief that companies have received so far.

“Companies affected by the decision can normally appeal, but the most logical thing for them to do is go hand in hand with the country,” said Aitor Ortiz, a Bloomberg Intelligence EU antitrust litigation analyst, told Bloomberg Tax. This is because “it’s the member state, not the company, that is the addressee of the commission’s recovering order.”

Anti-Avoidance

Da’s CFC rules aim to stop businesses from using overseas subsidiaries to reduce 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 multinational 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.

Belgium Case

Most of the commission’s state aid investigations focus on countries’ tax treatment of one or two specific companies. In February 2015, though, the Brussels-based organization launched a probe into a Belgian scheme that it claimed reduced multinational companies’ taxes by as much as 90 percent.

In a January 2016 news release, the commission ruled that the scheme was illegal and identified 35 companies that benefited from it. At the time, the commission ordered Belgium to recover the total benefits that it had granted to the companies, calculated to be worth around 700 million euros.

In July 2016, Belgium lost its appeal against the commission’s ruling at the EU’s top court.

Ruling Timetable

The U.K. may have to wait a number of years, meanwhile, before it reaches similar proceedings.

“The commission has a load of other state aid cases, launched before the U.K.’s, and those will probably come first,” Neidle said. “A ruling could come well after the U.K. leaves the EU.”

At a forum last month hosted by the American Bar Association’s Section of Antitrust Law in Washington, D.C., Vestager couldn’t say when to expect a final ruling for the U.K. probe.

“It’s difficult for me to give a precise timing, and that has to do with the way that we work,” she told Bloomberg Tax. “Sometimes, we think we’re approaching a decision, but then we get new information. I cannot give you a timing” of when the commission will publish its decision.”

Companies’ Stance

A Confederation of British Industry spokesperson was unavailable to comment on the U.K. case.

Some of the U.K. multinationals potentially affected by the investigation, meanwhile, are confident the commission will find that the companies’ tax relief from the CFC regime is not illegal state aid.

“The Group and its advisors consider that it is unlikely that a finding of State Aid will ultimately be upheld,” InterContinental Hotels Group Plc said in its 2017 full-year results, filed Feb. 20.Spectris Plc, a maker of specialized measuring instruments, believes “it is more than likely than not that no additional tax will ultimately be due,” the company said in its 2017 annual report.

With assistance from Kaustuv Basu in Washington

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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