UK Tries To Maintain Corporate Fiscal Ring Fence

by Jason Gorringe, Tax-News.com, London

02 January 2003

In spite of several recent European Court of Justice rulings against discriminatory Member State tax practices, the UK's Inland Revenue has denied international retailer Marks and Spencer the ability to set losses in its continental subsidiaries off against its UK profits.

This has been the law in the UK for many years, so the Inland Revenue is hardly breaking new ground; but the ECJ in its present mood would be most unlikely to support its attempt to retain the ring-fence around domestic profits.

M&S argues that under article 43 of the European Union Treaty, it should be allowed to offset losses of about Euros 160 million made by its French, Belgian and German subsidiaries between 1997 and 2001 against UK profits, claiming a tax refund of GB£30m.

A Revenue panel of two special commissioners dismissed the claim, hardly surprisingly, saying: "Even if the UK group relief rules in this respect create an obstacle to the exercise by the appellant of its right to establishment in other member states . . . the denial of UK relief for losses on activities the profits of which are not subject to UK tax can be justified as being for the maintainance of the coherence of the UK tax system."

The 'coherence' of the UK's tax system is not a concept that is well designed to appeal to their lordships in Luxembourg; but M&S's first step has to be to appeal against the Revenue's ruling in the English courts, which will presumably support the Revenue even if only as a nationalist gesture. Or they could duck the issue and refer it to Luxembourg, where it will presumably end up in any case.

Peter Cussons, international corporate tax partner at PwC, said the conclusion was unsound: "Not all the relevant case law was considered and some of the case law considered was arguably misconstrued," he said. "We strongly believe if the M&S case can be referred to the ECJ, it will ultimately rule in favour of the taxpayer."

If the ECJ knocks down the fence, it will cost the Treasury many billions of pounds. Another 2 pence on income tax?

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