U.K. Companies’ Potential Tax Bill From EU Probe Nears $1 Billion

Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.

By Ben Stupples

The pre-Brexit tax bill that British companies may face from a European Union investigation is approaching $1 billion amid escalating tension between the U.K. and the trading bloc.

In regulatory filings, 19 British multinational businesses have flagged total tax charges of 741 million pounds ($970.7 million) that may arise from the European Commission’s government-aid probe, according to data compiled by Bloomberg Tax.

Overall, 52 U.K. companies have said they are exposed to the investigation, more than in any prior state-aid probe from the commission.

Launched in October, the European Commission’s state aid 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.EU officials have said they weren’t aware of how many British companies would be affected by the latest state aid probe, according to a person with knowledge of the matter. Instead, “they’ve said they were just focusing on the CFC laws as a point of principle, without thinking about the potential money at stake,” the person said, who asked not to be identified as the discussions were private.

The latest figures on the growing potential cost of the commission’s state aid probe comes after the EU rejected a key part of U.K. Prime Minister Theresa May’s proposals for a post-Brexit trade deal with the bloc. From August, fewer than nine months remain before the U.K. is set to leave the EU, with the commission expected to deliver its final ruling on the CFC investigation before then.

Putting further pressure on the U.K., the European Commission ordered Britain on July 19 to amend three of its tax laws. With one demand, relating to value-added tax, the commission stressed it may decide to take the case to the EU’s top court if the U.K. doesn’t “act within the next two months.”

Exposure Estimates

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

Diageo Plc, the maker of Johnnie Walker whiskey, has so far disclosed the largest possible exposure to the CFC regime investigation, citing Jan. 25 a maximum potential liability of 250 million pounds.

More recently, education publisher Pearson Plc updated the potential tax charges it may face from the probe. In February, the London-based company highlighted a 90 million-pound charge. On July 27, Pearson then increased the figure in its 2018 half-year results to 103 million pounds.

As the European Commission’s state aid probe focuses on the U.K.'s tax system, none of the affected companies are accused of any wrongdoing. In addition, none of the 19 businesses that have cited a possible impact of the investigation have made any actual cash provision to cover their exposure.

In a July 27 email, a European Commission spokesman declined to comment on the potential cost of the U.K. probe. A Treasury spokeswoman didn’t respond to Bloomberg Tax’s request for comment.

Group Financing

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 through 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.

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

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax