AG's Cadbury Schweppes Decision A Victory For Common Sense?

by Ulrika Lomas, Tax-News.com, Brussels

04 May 2006

A landmark ruling by an Advocate General of the European Court of Justice in the “Cadbury Schweppes case” appears to have dealt another blow to the tax raising powers of the UK government, although accountants believe that the ruling could represent a rare "win win" situation for companies and the tax authorities.

In an opinion delivered on Tuesday, Advocate General M. Leger stated that United Kingdom legislation on Controlled Foreign Corporations (CFCs) goes beyond what is necessary to counteract wholly artificial tax avoidance.

According to Leger, a low tax rate is as legitimate a factor in a company’s decision as to where to establish a subsidiary as other business considerations such as cost of labour, and infrastructure.

Cadbury Schweppes is arguing that the UK's CFC legislation infringes European law by penalising companies that take advantage of low tax rates in other EU countries. Specifically, Cadbury is challenging the UK government's decision to tax profits earned by Cadbury Schweppes Treasury Services (CSTS) and Cadbury Schweppes Treasury International (CSTI), based in Ireland, which levies one of the lowest rates of corporate tax in Europe at 12.5%.

However, while Leger's opinion appears to support the company's position, he also acknowledged that it was reasonable for EU member states to introduce a presumption of tax avoidance in certain circumstances given widely differing tax rates across the union, and the ease with which companies can relocate across national boundaries.

Leger believes that the burden of proof must fall on the parent company to show that it has legitimate operations when establishing in a low tax jurisdiction, as opposed to merely setting up what he termed "letter-box" companies.

Commenting on the AG's decision, Chris Morgan, Head of the EU Law Group at KPMG noted that the opinion could represent "a rare win-win situation for both revenue authorities and taxpayers".

"(Leger's) Opinion is hugely significant for the way business operates in the EU," Mr Morgan observed.

"Assuming that the ECJ follows this Opinion, companies will be able to enjoy far more freedom in establishing commercial operations in low tax jurisdictions. Whilst the Advocate General made clear that setting the tax rate is a decision to be taken by the individual Member States, there is likely to be increased downward pressure on rates as a result of this pronouncement," he added.

A survey conducted on behalf of KPMG earlier this year found that CFC rules were "hugely unpopular" with firms operating in the UK, with two-thirds of respondents saying that UK tax rules had hindered cross-border investment for their groups. The CFC regime was the most commonly cited problem, because it was deemed unfair and complex, and made normal business transactions difficult.

Recommended