Advocate General Recommends Rejection Of UK ACT Case

by Ulrika Lomas, Tax-News.com, Brussels

27 February 2006

An opinion by an Advocate General to the European Court of Justice appears to have backed a House of Lords ruling in a group litigation brought by dozens of European companies by arguing that they are not entitled to claim an advanced corporation tax refund.

The group litigation, led by Pirelli, the Italian tyre manufacturer is being fought by more than 60 companies from France, Germany and Italy.

Pirelli is arguing that the obligation to pay advanced corporation tax (ACT) in the UK on dividends it paid to its Dutch parent is in breach of European Union law concerning taxes levied on dividends.

Introduced in 1973, Advanced Corporation Tax was levied on dividends paid by subsidiaries to their parent companies, being in effect an early payment of corporation tax, offset against the amount of corporation tax eventually payable, typically due nine months later. While firms based in the UK were entitled to an ACT refund via a tax credit, firms based elsewhere in the EU could not claim a refund, leading them to seek the repayment of millions they claim to have overpaid in tax.

ACT was abolished in 1999.

Although Pirelli's Dutch parent had received a repayment of 50% of the tax credit attached to the dividend under the tax treaty between the UK and the Netherlands, it claimed that the parent's right to receive the credit was legally separate from any obligation of the subsidiary to pay ACT.

However, in an opinion delivered last week, Advocate General Leendert Geelhoed stated that whilst the UK tax authorities were required to treat non-UK firms fairly, there was no pre-requisite for equal treatment. Consequently the UK was entitled to enter into different tax treaties with different countries and did not need to offer the same benefits to everyone.

In his opinion, Mr Geelhoed noted that this was an area where "predictability and legal certainty are crucially important, so that Member States can plan their budgets and design their corporate tax systems on the basis of relatively reliable revenue predictions.”

Bill Dodwell, tax partner at accounting firm Deloitte, observed that Mr Geelhoed's decision was another welcome opinion for EU Governments.

"It follows the trend over the last year, where few claimants have succeeded winning large tax refunds," Mr Dodwell noted.

"The claimants’ argument that full tax credits were due was breathtakingly optimistic," he remarked.

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