U.K. Companies’ Possible Bill From EU Tax Probe Passes $1 Billion

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By Hamza Ali (Bloomberg Tax) and Ben Stupples (Bloomberg)

U.K. multinationals have revealed a possible $1.1 billion tax bill resulting from an EU state aid probe into a U.K. tax relief, just months before the island nation exits the bloc.

The figure is a landmark in the fallout of the European Commission’s investigation, demonstrating its potential impact across a range of sectors. A final ruling is expected near the end of the year. After that, companies or the British government can appeal the ruling, making it likely that the eventual outcome may last beyond the U.K.'s EU exit.

So far 21 companies have revealed, in regulatory filings, 877 million pounds ($1.1 billion) in potential tax liabilities from the investigation, according to data compiled by Bloomberg Tax.

This figure could rise higher still, as less than half of 52 companies that say they have some exposure to the investigation have published their estimates of its impact, citing uncertainties about the investigation outcomes.

EU Crackdown

Launched in October, the European Commission’s probe into tax relief provided through the U.K.’s controlled foreign company (CFC) rules is 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, such as Amazon.com Inc. and Apple Inc. The commission in 2016 ordered Apple to pay Ireland 13 billion euros in unpaid tax. In 2017, it ordered Amazon to pay 250 million euros stemming from illegal government aid from Luxembourg.

The investigation centers around tax relief that controlled foreign companies enjoy under the U.K. rules, which the commission considers to be a breach of EU state aid rules.

Dating to the 1980s, the U.K.’s CFC rules aim to stop businesses from using overseas subsidiaries to cut their tax bills through shifting profits to low-tax jurisdictions. When the U.K. last changed its CFC rules in January 2013 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—where little or no tax is due—or if the financing income isn’t reallocated to the U.K., it added.

Widespread Impact

The investigation is the largest of its kind, involving 53 U.K. companies, and overtaking the probe into Belgium’s “Excess Profit” tax scheme, which concluded in 2016 and involved 35 multinational corporations in January 2016.

The companies revealing they could be swept up into the investigation range from some of the largest multinationals in the world such as Diageo Plc and Rio Tinto Plc.

Other companies that have recently revealed their potential tax bill include aircraft services company BBA Aviation Plc, and Cobham Plc, an equipment manufacturer. The two companies estimate their exposure at $100 million and 60 million pounds, respectively.

Meanwhile, Pearson Plc, which publishes educational content, pushed its initial estimate to 103 million pounds in July, from it’s earlier 90 million pound estimate, made in February.

Intercontinental Hotels Group said that “the Group no longer considers itself at risk of exposure to the outcome of the EU’s State Aid investigation into the U.K.'s Controlled Foreign Company rules.” in an Aug. 7 filing.

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