The European Union declared this week that sections of the UK’s Controlled Foreign Company (CFC) rules provided illegal state aid to large multinational companies.
In a press release, the European Commission announced, “the scheme unduly exempted certain multinational groups from these UK rules targeting tax avoidance,” something that is “illegal under EU State aid rules.”
More specifically, the European Commission looked at the CFC rule’s Group Financing Exemption, a mechanism designed to “partially (75%) or fully [exempt] from taxation in the UK financing income received by an offshore subsidiary from another foreign group company, even if this income is derived from UK activities or the capital being used is UK connected.”
As revealed following the investigation, the Commission determined that the Group Financing Exemption was only “partially justified,” as it “found that when financing income from a foreign group company, channelled through an offshore subsidiary, derives from UK activities,” the mechanism violated EU rules on State aid.
Source: European Commission
The investigation concluded, “the exercise required to assess to what extent the financing income of a company derives from UK activities is not particularly burdensome or complex,” which, in turn, means, “the use of a proxy rule in these cases is not justified.”
Furthermore, the Commission added, “the Group Financing Exemption does not seek to address any possible complexity related to the allocation of financing income to UK activities nor has the UK claimed it does.”
Margrethe Vestager, who serves as the European Commissioner for Competition, 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."
Regarding the EU’s decision, an HMRC 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.”
UK to Recover Illegal State Aid from Multinationals
According to the European Commission, “the UK must now recover the illegal State aid from the multinational companies that benefitted from it.”
The Commission explains: “As a matter of principle, EU State aid rules require that illegal State aid is recovered in order to remove the distortion of competition created by the aid. There are no fines under EU State aid rules and recovery does not penalise the companies in question. It simply restores equal treatment with other companies.”
So far, as reported by Bloomberg Tax, “at least 56 companies have come forward since the probe started in 2017” and have “estimated their tax liabilities at about 1.35 billion pounds ($1.76 billion).”
These include BBA Aviation, Chemring, Daily Mail & General, Diageo, Euromoney, Inchcape, London Stock Exchange, Meggitt, Smith & Nephew and WPP, all companies that have referred to this case in their accounts.
What are your thoughts on this decision by the EU? Is this yet another political move as a result of Brexit? Let us know in the comments section!