LDN - Business

EU opens state aid probe into UK tax scheme for multinationals

[October 26, 2017] By Julia Fioretti

BRUSSELS (Reuters) - The European Commission is investigating whether a British scheme exempting certain transactions by multinational companies from British measures targeting tax avoidance amounts to illegal state aid, the EU's competition commissioner said.

At stake is an exemption introduced in 2013 to the British Controlled Foreign Company (CFC) rules which exempts interest payments received from loans of multinational groups active in Britain from tax.

"Rules targeting tax avoidance cannot go against their purpose and treat some companies better than others," EU Competition Commissioner Margrethe Vestager said.

"This is why we will carefully look at an exemption to the UK's anti–tax avoidance rules for certain transactions by multinationals, to make sure it does not breach EU state aid rules," she said in a statement.

Vestager has crusaded against what she calls unfair tax benefits granted to some firms in EU countries, notably ordering Ireland to recover up to 13 billion euros from Apple.

CFC rules aim to prevent British companies avoiding British taxation through use of subsidiaries based in a low- or no-tax jurisdictions by allowing British tax authorities to reallocate back to the British parent company all profits that were artificially shifted to the offshore subsidiary.

But the so-called Group Financing Exemption means that financing income received by the offshore subsidiary from another foreign group company will not be reallocated to the British parent, shielding it from Britain's tax.

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European Competition Commissioner Margrethe Vestager holds a news conference at the EU Commission's headquarters in Brussels, Belgium October 4, 2017. REUTERS/Francois Lenoir

The Commission said it had doubts whether the exemption complies with EU state aid rules forbidding preferential treatment of some companies over others.

A spokeswoman for UK Prime Minister Theresa May said Britain does not believe its tax laws are incompatible with EU rules, but would cooperate with the Commission.

A Commission spokesman said it was too early to say how much Britain might be asked to recover from the companies benefiting from the exemption, and would not be drawn in on the possible impact of Brexit on the investigation.

The state aid investigation could drag on past the day Britain will exit the EU in March 2019, but Alexander Winterstein said that as long as the UK remained part of the EU it had to abide by the rules.

"As long as a member state is a member of the single market, it is subject to EU competition rules including those on state aid, and everything else will be part of the negotiations which are ongoing so I will not enter into speculation on this," he said at a daily briefing.

(Reporting by Julia Fioretti; editing by Mark Heinrich)

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