EU Ministers Consider Corporate Tax Defences

by Jason Gorringe, Tax-News.com, London

13 June 2005

German Finance Minister Hans Eichel has proposed the setting up of a high level committee of European tax experts to examine how EU governments can defend themselves against attacks to their revenue bases by multinational corporations in the European Court of Justice.

Eichel's proposal at a recent meeting of EU finance ministers reflects the concern of national governments after a preliminary ECJ hearing on a case brought by UK-based retailer Marks and Spencer found that British tax rules on company losses breached EU law.

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 Advocate General Mr Poiares Maduro agreed.

The UK's tax laws are also under attack in the confectionery firm Cadbury-Schweppes case, which is contesting UK 'controlled foreign company' legislation in a reference due to be heard by the ECJ this year. This legislation ensures that profits from subsidiaries in certain low-tax countries are taxed irrespective of whether they are distributed back into the UK as dividends.

A decision in favour of Cadbury-Schweppes would have major ramifications for many EU member states, not just the UK, and experts have suggested that the Treasury may retaliate by restricting the ability of firms to offset the cost of borrowing to buy shares against tax.

Tax experts however point out that this could create opportunities for firms to avoid taxation by seeking to borrow in trading subsidiaries rather than in holding companies, distancing the borrowing from its intended object.

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