Imperial Brands Wary of EU State Aid Probe on U.K. Tax Scheme

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By Ben Stupples

Imperial Brands Plc, the maker of JPS cigarettes, has become the first company to warn publicly over the European Union’s state aid investigation into a U.K. government tax scheme.

The Bristol, England-based company is “monitoring” the investigation, according to its Nov. 7 full-year results. Imperial doesn’t “currently consider” that an accounting provision is needed, it added.

Three weeks ago, the European Commission said it had opened an “in-depth” state aid probe over whether the U.K. gave multinational companies an unfair advantage over their local competitors through exempting the larger businesses from specific measures to target tax avoidance.

Like Ireland’s battle over whether Apple Inc. owes it 13 billion euros ($15.1 billion) in unpaid tax, the EU may force the U.K. to recover the relief companies have gained with the exemption.

In a Nov. 8 email, an Imperial Brands spokesman told Bloomberg Tax it is “too early” to comment on the possible effects of the probe as the commission hasn’t released its preliminary findings.

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.”

Shifting Profits Overseas

Dating to the 1980s, the U.K.’s controlled foreign company 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 2013, however, it included a U.K. tax exemption for certain intra-group financing between two subsidiaries based outside the country.

“Thus, a multinational active in the U.K. can provide financing to a foreign group company via an offshore subsidiary,” the European Commission said in its statement last month. 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 is not reallocated to the U.K., it added.

2010 Corporate Roadmap

Under former Chancellor George Osborne, the U.K. officially announced its intentions to change CFC rules seven years ago in the government’s Corporate Tax Roadmap.

After consulting on the changes during 2011, the Treasury said at the 2012 budget it would bring in the new laws in 2013, aiming to “better reflect” how modern businesses operate.

The changes included “a finance company partial exemption that in broad terms will result in an effective U.K. tax rate of one quarter of the main rate on profits derived from overseas group financing arrangements,” the 2012 budget said.

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

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

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