UK Treasury Faces £20bn Tax Refund Bill From Deutsche Bank Tax Case

by Robert Lee, Tax-News.com, London

23 June 2005

The United Kingdom's Treasury may have to pay out corporate tax refunds of as much as £20 billion should the House of Lords decide in favour of Germany's Deutsche Bank in a key tax case, according to a report in The Times.

Deutsche Bank is currently fighting the UK tax department, Revenue and Customs as a result of a landmark ruling in 2001 by the European Court of Justice in favour of Metallgesellschaft, a German technology-based engineering and chemicals group, which claimed that the now defunct advanced corporation tax was against the principle of 'freedom of establishment' enshrined in the Treaty of Amsterdam (formerly Rome).

The ECJ agreed, opening the way for firms to claim back tax paid on dividends. Under normal circumstances, this would allow firms to claim back tax payments going back six years. However, Deutsche is pressing for a ruling that will allow it to claim refunds back to the UK's 1973 entry into the former European Economic Community (EEC).

Advanced corporation tax, or ACT, was introduced in 1973 to safeguard the government's income against other changes to the tax system taking place at the time. In part, the tax was designed to help the Revenue cope with situations in which companies made a profit but paid no corporation tax because they took advantage of tax allowances on items such as capital expenditure.

Businesses were taxed on the dividends they paid out of their profits and companies were able to reclaim the money once they had made corporation tax payments equivalent to what they had paid in ACT.

The Revenue is also contesting claims from around 70 mainly US-based multinationals, which are also arguing that they have been illegally charged advanced corporation tax since 1973. Non-European firms were initially barred by High Court from seeking refunds.

A ruling in favour of Deutsche could inflict heavy losses on the Treasury's coffers. Some tax experts predict that refunds could total between £10 billion and £20 billion. Others contend that the actual figure is, at the moment, unquantifiable.

The Lords hearing is expected to commence later in 2005, or early in 2006, according to The Times.

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