The European Commission today launched an investigation into whether a British scheme shielding multinational companies from tax avoidance rule breaks EU competition law.
Brussels is cracking down on national governments bending state aid rules to give multinationals, such as US tech giants Apple and Google, unfair tax breaks and an advantage over other companies.
“We will carefully look at an exemption to the UK’s anti-tax avoidance rules for certain transactions by multinationals,” competition commissioner Margrethe Vestager said. “All companies must pay their fair share of tax.”
With state aid investigations typically lasting more than 18 months, there is a possibility that a decision would only come after Brexit in March 2019.
“One thing is clear – as long as a member state is a member of the single market, it remains subject to European competition rules, including rules on state aid and everything else,” said Alexander Winterstein, a Commission spokesman.
Leading tax lawyers warned the probe would probably cost more than any money it recovered. Britain said it would co-operate with the investigation but believed the scheme complied with EU law.
Michel Barnier, the EU’s chief Brexit negotiator, warned in July that the bloc would not sign a trade deal with Britain if it turns itself into a low tax jurisdiction in a “race to the bottom” after it leaves the EU.
The Commission’s powerful competition department has the power to raid and levy huge fines on companies but if it finds a breach of EU law in this case, it is likely to order the multinationals to pay Britain back taxes to restore fair competition.
Earlier this month, the EU ordered Amazon to repay Luxembourg €250m (£222m) in back taxes and took Ireland to court for failing to collect €13bn in back taxes from Apple.
Officials will scrutinise an exception to Britain’s “controlled foreign companies” rule, which was brought in to stop multinationals moving profits to offshore subsidiaries to avoid paying tax.
The “group financing exception” introduced in 2013 exempts from British taxation interest received by a parent company’s offshore subsidiary from another foreign subsidiary.
“Financing income is often used as a channel for profit shifting by multinationals, given the mobility of capital,” the Commission said.
A Treasury spokesman said its rules prevented profits from being artificially diverted overseas to avoid tax and defended the financing exception, which was introduced under George Osborne’s chancellorship.
“We do not believe these rules are incompatible with EU law but will co-operate with the European Commission’s investigation,” the spokesman said.
Zoe Wyatt, partner at Milestone International Tax Partners, warned: “It is quite possible that the cost of the EC investigation will far outweigh any additional tax that may have to be paid to HMRC.
“The CFC finance company exemption is hardly akin to the European Commission’s recent ruling against Amazon’s sweetheart deal with the Luxembourg tax office,” she said.
Tove Maria Ryding, tax campaigner at the European Network on Debt and Development, said: “It’s well known that multinational corporations dodge taxes through internal loans between subsidiaries, which is what lies at the heart of this case.
“What we really need is for governments to agree to stop protecting tax-dodging corporations and put an end to all these tax games once and for all,” she said.
“Tax avoidance is one of the most persistent barriers to eradicating poverty,” said Oxfam’s Aurore Chardonnet, “EU member states must not grant automatic tax exemptions to companies shifting profits to tax havens or to countries with harmfully low tax rates.”
The EU tax crackdown was given impetus by the Luxleaks scandal in November 2014. Luxleaks was particularly embarrassing for the Commission as its president Jean-Claude Juncker was prime minister and finance minister of Luxembourg when some sweetheart tax deals were struck.