The EU is to launch an investigation into a British government scheme that may help multinational firms pay less tax, reports The Guardian.
Margrethe Vestager, the EU competition commissioner, will announce on Thursday that she is opening an in-depth investigation into a UK tax scheme that exempts multinationals from anti-tax avoidance measures. Officials think the special exemption for multinationals may break EU competition rules by allowing them to pay less tax than domestic-only rivals.
The inquiry centres on a change to the UK’s “controlled foreign company” rules announced by the then chancellor, George Osborne, in 2011. The new rules were described by one expert at the time as a huge change, which meant companies could assume they were exempt from the anti-avoidance rules unless specifically caught.
The rule change, which came into force in 2013, means a multinational company resident in the UK can lower its tax bill by shifting some taxable income to an offshore corporation, known as a “controlled foreign company”. CFCs are offshore subsidiaries that multinationals use to move capital around their global operations.
CFCs are not illegal, but the commission believes the UK setup breaks EU competition rules, by giving an unfair advantage to multinationals, compared with British companies without foreign subsidiaries.
EU investigators do not have an estimate of how much tax may have been lost to the UK exchequer, but when the measures were introduced, HMRC calculated that all changes to CFC rules would reduce the tax take by £805m a year by 2016.
HMRC revealed on Wednesday that multinationals avoided paying £5.8bn in taxes in 2016, some 50% more than government forecasts. This figure, which was reported by the Financial Times, does not include losses from changes to the CFC rules that are now being investigated by the European commission.
EU officials do not yet know which companies have benefited from the scheme, but any firm deemed to have gained an unfair advantage would be told to pay money back to the UK Treasury.
The UK scheme is seen as unique, but the commission has already acted against other member states deemed to have cooked up illegal state aid benefits. In 2016 the commission ordered Belgium to recoup €700m (£623m) from 35 companies that had unfairly benefited from a generous “excess profit” scheme.
The investigation underscores how the commission is using its powerful competition rules to clamp down on cosy deals between governments and some multinationals. Amazon was recently ordered to repay €250m as the commission sought to unwind a sweetheart deal with Luxembourg. Apple has been told to hand back €13bn in unpaid taxes to Ireland. Both technology companies and governments have rejected the commission’s findings.
Officials do not know whether the investigation will be complete before the UK leaves the EU on 29 March 2019. Ongoing state aid investigations and pending European court cases are on the long list of “other” issues to be settled in the UK’s exit agreement, as well as the divorce issues of the Brexit bill, Irish border and citizens’ rights. The commission wants all outstanding investigations to be completed under EU law, even if the UK has already left.
If the UK remains in the EU during a transition period, it would have to sign up to all EU rules, including state aid policy and anti-tax avoidance rules. From January 2019, all member states will be required to have anti-tax avoidance rules governing CFCs on the statute book.
A Treasury spokesperson said: “We do not believe these rules are incompatible with EU law but will cooperate with the European commission’s investigation.
“We are clear that all multinationals must pay tax on any profits they make in the UK, and our rules prevent these profits from being artificially diverted overseas.”
Margaret Thatcher’s government introduced the UK’s controlled foreign company rules in 1984, in a bid to clamp down on firms using artificial schemes to divert profits from the UK. Osborne claimed the rules were stopping companies from coming to Britain and launched his changes as part of a wider overhaul of corporation tax.
Vestager has previously cast doubt on suggestions the UK would seek to capitalise on Brexit by turning itself into a tax haven.