European Court Decisions Go Largely Ignored By Multinationals

by Robert Lee, Tax-News.com, London

23 November 2005

The growing influence of European Court of Justice decisions on shaping tax policy for multinationals has yet to hit home with the majority of companies, according to recent research by the accounting firm Ernst & Young.

The survey, carried out between April and June 2005, involved telephone interviews with 400 tax directors and CFOs in Australia, Belgium, Canada, China/Hong Kong, France, Germany, Italy, Japan, South Korea, the Nordic countries, The Netherlands, Spain, Switzerland, United Kingdom and United States.

According to the survey's key findings, one in five of the respondents said that they viewed monitoring the decisions of the ECJ as either a critical or high priority for their companies. However, about 40% reported that they viewed monitoring the Court as either a medium or low priority for them, while the remainder said that they didn’t trade with or within the European Union.

Just 13% of the 265 companies which said that they did monitor the judgments of the ECJ proactively tracked and reserved their positions with tax authorities ahead of a decision by the Court. One in five of the respondents said that they did track cases but only took action after Court decisions, while nearly 60 per cent said that they only reacted to the decisions of the Court on an ad hoc basis when they were advised to do so.

Commenting on the findings, Ernst & Young observed that:

“Companies say that the Court is important to them but very few are then prepared to act ahead of a judgment and reserve their positions with their national tax authorities. Instead, they prefer to wait until after the Court has reached a judgment. This creates a real danger of failing to manage their tax risks, since by the time the ECJ has ruled on the facts of a particular case, the deadline for filing similar tax claims might already have passed. This leads to the uncomfortable conclusion that for many businesses their approach towards the Court is likely to be ‘too little, too late'."

"Bearing in mind that the ECJ has found in favour of the taxpayer in the vast majority of cases, it makes economic sense for companies to keep a close eye on developments and take the necessary steps to ensure that they are not exposed to more tax risk than strictly necessary."

“Tax directors and chief financial officers, already burdened with new challenges such as International Financial Reporting Standards (IFRS) and closer public scrutiny of tax planning, somehow have to find the resources to deal with the issues created by ECJ case law."

“The freedom of establishment and the free movement of capital are the subject of the most important ECJ cases involving corporate taxation. Potential infringements can take numerous forms, such as governments having a dividend withholding tax that is withheld on dividends paid to non-residents and not on dividends paid to residents or permitting interest deductions that are allowed only if paid to resident creditors and not to non-resident creditors"

“Tax directors and CFOs need to be alive to the rapidly changing tax environment in Europe and the emergence of the ECJ as a policy making forum through its case law decisions should not be underestimated.”

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