As published on sharecast.com, Tuesday 2nd April, 2019.
The UK has given certain multinationals illegal tax advantages and must claw back the cash, the European Commission ruled on Tuesday.
The UK’s Controlled Foreign Company rules were introduced to prevent British companies using a subsidiary based in a low or no-tax jurisdiction to avoid paying tax in the UK.
Under the rules, HM Revenue and Customs is allowed to relocate profits that have been artificially diverted back to the UK parent company, where they can be taxed accordingly.
The Commission found that the scheme was “partly justified” and did not constitute state aid as it ensured the “proper functioning and effectiveness of the relevant tax rules”.
But it also ruled that the scheme “unduly exempted certain multinational groups”, which was illegal under the European Union’s rules on state aid. It particular, between 2013 and 2018, the scheme allowed for an exemption for interest payments on loans received by an offshore subsidiary from another group company based outside the UK.
The Commission said this was only justified if the finance profits did not come from British activities. If they had been, the exemption was not justified and therefore qualified as state aid.
“The UK must now recover the illegal state aid from the multinational companies that benefited from it,” the Commission said.
Margrethe Vestager, commissioner in charge of competition policy, said: “Anti-tax avoidance rules are important to ensure that all companies pay their fair share of tax. But they must apply equally to all taxpayers. The UK gave certain multinationals a selective advantage by granting them an unjustified exemption from UK anti-tax avoidance rules. This is illegal under EU state aid rules. The UK must now recover the undue tax benefits.”
An HM Treasury spokesperson said: “We are clear that all multinationals operating in the UK must pay their fair share of tax. Our Controlled Foreign Company rules are part of a robust package of anti-avoidance measures that prevents UK profits from being artificially diverted overseas. We will carefully consider the Commission’s decision.”
The Commission did not say which companies were involved, nor how much money the UK would need to recover. However, according to Bloomberg, 52 companies have come forward since the EU started its probe in October 2017 to their tax liabilities amounting to £1.19bn.
The Commission is responsible for competition across all 28 member states, and its rulings continue to apply to the UK until it has formally left the EU.