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By Ben Stupples
British businesses are disclosing details of their financing structures targeted through a European Union probe into a U.K. tax scheme, shedding light on global companies’ offshore planning.
In regulatory filings, both FTSE 100 telecommunications business Vodafone Group Plc and media company Daily Mail and General Trust Plc have identified the location of their inter-group financing structures affected through the European Commission’s government-aid investigation.
“DMGT finances its U.S. operations through a Luxembourg resident finance company,” the London-based business, publisher of the Daily Mail newspaper, said May 24 in its half-year results.
Similarly, Vodafone has “Luxembourg financing activities” in scope from the state aid investigation, the Newbury, England-based company said its 2018 annual report, published June 2.
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.
The companies’ comments mark the most detailed insight so far on how U.K. multinationals have received tax relief under the CFC rules through offshore structures, a focus of the probe.
“Pretty much every large group is going to want to have a financial subsidiary as they will have complex financing needs,” Dan Neidle, partner at global law firm Clifford Chance, told Bloomberg Tax. “Different parts of the group will have different financing needs, so it makes sense to have one entity supply the cash,” he said.
A Vodafone spokesman declined June 28 to add further comment, while a DMGT spokesman didn’t respond to Bloomberg Tax’s request for comment. As the European Commission’s state aid probe focuses on the U.K. government’s tax system, neither company is accused of wrongdoing.
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.
The financial sector is the largest contributor to Luxembourg’s economy, where DMGT and Vodafone have their financing entities. Its central Europe location, strong legal system, and attractive tax framework have made Luxembourg a financial hub, according to a report from global accounting firm Deloitte LLP.
Out of Luxembourg, Vodafone runs some of its “most important” activity to its global operations, including “financing and roaming,” according to the company’s 2017 tax transparency report.
Most recently, the European Commission ruled June 20 that Luxembourg should recoup 120 million euros ($139.8 million) in tax relief from French energy utility company Engie SA following a 21-month investigation.
If the European Commission also finds that the U.K. government has given illegal tax relief, DMGT said last month it faces a potential liability of as much as 6 million pounds.
Since the investigation’s launch, 15 British companies have estimated a potential liability for a negative ruling, valued overall at more than 500 million pounds ($658 million), according to data compiled by Bloomberg Tax. In total, 49 U.K. multinationals have said they may face potential costs from the probe, making it likely that the total cost for businesses would exceed 1 billion pounds.
So far, none of these 15 businesses have set aside actual cash to cover the probe, including DMGT.
The company “received clearance” from the U.K. government over the tax relief, it said in its half-year results.
Vodafone, meanwhile, said it made claims for tax relief under the CFC regime “for practical reasons.”
The group’s Luxembourg financing activities operate in line with local and EU law, as well as the OECD’s guidelines for intra-group transactions, Vodafone said June 1. The company does “not anticipate any significant impact should a finding of unlawful State Aid be ultimately upheld.”
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