The European Commission decided on Thursday (26 October) to open an in-depth investigation into the UK exemptions granted to multinationals to protect them from tax avoidance rules.
This is the latest effort by Competition Commissioner Margrethe Vestager against tax base erosion and tax avoidance practices, one of the Commission’s top priorities since 2014.
The executive will look into whether the UK allowed corporations to pay less tax in their territory by protecting them from anti-tax avoidance rules.
“Rules targeting tax avoidance cannot go against their purpose and treat some companies better than others,” 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,” she added in a statement.
Around 19 member states have Controlled Foreign Company (CFC) rules, which allow authorities to prevent companies from using subsidiaries in tax havens to avoid paying taxes in their territory.
In the UK, the rules permit the tax authorities to reallocate all profits shifted to these offshore jurisdictions back to their UK parent company to comply with the tax regime.
All member states are expected to introduce CFC rules by 1 January, as stipulated by the Anti-Tax Avoidance Directive.
But the British government introduced in 2013 the Group Financing Exemption. This exempted interest payments received from loans within multinational groups (often used for profit shifting) from reallocation to the UK.
As a result, the companies pay little or no tax on the profits from the exemption.
The Commission “has doubts whether this exemption is consistent with the overall objective of the UK CFC rules”, it said in a statement.
The Commission stressed that it is not questioning the CFC rules. But it added that the EU Court of Justice had ruled that exemptions from anti-avoidance provisions could amount to selective advantage and therefore constitute a breach of EU state aid rules.
The UK will have now the opportunity to argue that its tax system does not represent illegal state aid to certain companies.
The conclusion of the case may come after the UK exits the EU in May 2019 and the Commission warned that the country would still have to apply the decision, but it remains to be seen how it would enforce the ruling.
This case adds to a long list of investigations launched by Vestager since it was revealed by a consortium of journalists in November 2014 that Luxemburg had offered hundreds of sweetheart deals to multinationals to pay almost no taxes.
The Luxleaks scandal was followed by similar revelations in Panama and Bahamas. The Commission has already fined Apple, Starbucks, Fiat, Amazon and a Belgian tax scheme.
The Commission has two ongoing in-depth investigations into tax rulings issued by Luxembourg to McDonald’s and GDF Suez.