Advocate General Backs M&S Over Tax Losses In Other EU Member States

by Ulrika Lomas, for LawAndTax-News.com, Brussels

08 April 2005

Delivering his opinion on the tax dispute between UK retailer, Marks & Spencer and the Inland Revenue, Advocate General, Poiares Maduro announced on Thursday that the UK authorities had unfairly discriminated against the firm.

Marks & Spencer had argued that UK provisions on group tax relief were in breach of European law, as they prevent an EU-based parent company from offsetting losses incurred by subsidiary companies in other member states, thus violating the principle of freedom of establishment, a reading of the situation with which Mr Maduro agreed.

In a statement released to accompany the opinion, the European Court of Justice (which is thought likely to support the decision) explained that:

"First, the Advocate General rejects the German Government's argument that the taking into account of foreign losses by the State concerned could not be permitted because it would lead to a reduction in tax revenue, and thus to major budgetary difficulties for the Member State concerned."

"Secondly, as regards justification under the territorial principle, Mr Poiares Maduro explains that that principle does not require that the conferral of a tax advantage be subject to a corresponding power of taxation. It is important merely to inquire whether the grant of that advantage is such as to compromise the enjoyment of sovereignty in tax matters by all the Member States. There is nothing to prevent the United Kingdom from extending the relief to parent companies with nonresident subsidiaries. The parent company resident in the United Kingdom is subject to unlimited fiscal obligations in that country. Accordingly, the principle of territoriality can not justify the current restriction."

"Finally, the Advocate General states that the need to preserve the coherence of a tax system has to be verified in light of the aim pursued by the tax legislation in question. In other words, there has to be a direct connection between the grant of a fiscal advantage and the offsetting of that advantage by a specific charge to tax."

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