The European Commission has launched an investigation into whether a British scheme that exempts multinational corporations from some tax avoidance rules breaks EU competition law, reports Global Government Forum.
The probe will focus on an exemption to the UK’s Controlled Foreign Company (CFC) rules, which are designed to prevent multinationals shifting profits to a foreign subsidiary as a means of avoiding paying tax in the UK.
The Group Financing Exemption (GFE), which was introduced in 2013 by then-Chancellor of the Exchequer George Osborne, exempts corporations from being taxed in the UK on interest received by foreign subsidiaries that provide finance to other foreign companies in the group.
Margrethe Vestager, European Commissioner for Competition, said last week: “All companies must pay their fair share of tax. Anti-tax avoidance rules play an important role to achieve this goal.
“But rules targeting tax avoidance cannot go against their purpose and treat some companies better than others. This is why we will carefully look at an exemption to the UK’s anti–tax avoidance rules for certain transactions by multi-nationals, to make sure it does not breach EU state aid rules.”
Under these rules, member states are required to treat companies equally in their tax regimes; preferential tax deals are banned on the grounds that they distort competition in the European Single Market.
Tax authorities use CFC rules to reallocate profits that have been shifted to a subsidiary in a tax haven back to the parent company in the home country, where they are taxed. But under the UK’s 2013 exemption, interest received by the offshore subsidiary is not reallocated.
The commission said in a statement that it “has doubts” at this stage whether the GFE complies with EU state aid rules and, in particular, is consistent with the overall objective of the UK’s CFC rules.
All member states were expected to introduce CFC legislation by 1 January 2019 under the EU’s 2016 Anti-Tax Avoidance Directive, which does not provide for specific exemptions such as the GFE, the commission said.
“As long as the UK is an EU Member State, it has all the rights and obligations of the membership,” it said. “In particular, EU competition law, including EU state aid rules, continue to apply in full to the United Kingdom and in the United Kingdom until it is no longer a member of the EU.”
A spokesperson for the UK Treasury said: “We do not believe these rules are incompatible with EU law, but will cooperate with the European Commission’s investigation.”
Vestager has mounted a series of high-profile crackdowns on multi-national corporations that avoid paying tax to member states. In January 2016, she ordered Belgium to recoup tax breaks totalling about €700m (US$814m) from 35 multi-nationals.
In October, the commission ordered Amazon to repay €250m (US$291m) in tax to Luxembourg and took Ireland to court for failing to collect a record €13bn (US$15bn) in taxes from Apple after ruling in August that the country’s sweetheart tax deal with the tech giant was illegal.
The investigation could continue beyond Britain’s exit from the EU, which is due to take place in March 2019.