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European Governments Prepare For Assault On Corporate Tax Base

by Ulrika Lomas,, Brussels

13 December 2005

With the European Court of Justice due to begin today deliberating a major tax case involving Cadbury Schweppes, and also to deliver a judgment in the Marks & Spencer tax case, European governments are bracing themselves for decisions that could lead to tax revenue losses totalling hundreds of millions of euros.

Cadbury is contesting the UK's 'controlled foreign company' legislation, which the company argues infringes European law by penalising companies that take advantage of low tax rates in other EU countries. Specifically, Cadbury is challenging the UK government's decision to tax profits earned by Cadbury's Treasury subsidiaries based in Ireland, which levies one of the lowest rates of corporate tax in Europe at 12.5%.

A decision in favour of Cadbury-Schweppes would have major ramifications for many EU member states, not just the UK, and it is estimated that European governments could stand to lose in the region of EUR400 million to EUR500 million in annual tax revenues. However, experts have suggested that the UK Treasury may retaliate by restricting the ability of firms to offset the cost of borrowing to buy shares against tax.

Also today, the ECJ will deliver its long anticipated decision in the case brought by UK retailer Marks & Spencer. M&S is arguing that UK provisions on group tax relief are 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.

An opinion by Advocate General Mr Poiares Maduro released earlier in the year supported M&S's view, and a judgment in favour of the company could lead to a further depletion of state coffers in many EU members to the tune of hundreds of millions, although the ECJ could impose a limit on the amount of retrospective claims.

However, the governments themselves have been busy formulating ways in which their tax income protected, and in June, former German Finance Minister Hans Eichel 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 ECJ.

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