It is widely expected that the EU's Competition Commissioner, Margrethe Vestager, will announce an enquiry into UK taxation rules introduced by George Osborne in 2013 this morning.
The basis if the challenge is likely to be that under those rules UK parent companies of multinational groups were able from then on able to shift profits from the Uk to tax haven subsidiaries with very little risk of any effective challenge arising and could then repatriate them back to the UK with no risk of a tax charge at all because of the so-called territorial tax regime George Osborne had introduced. I took strong exception to this at the time, saying then that:
As many will know, the capture of the state, and our tax authority in particular, for the benefit of big business is a theme on this blog. Here we see it writ large: a nice cosy relationship between the two is all set to help business achieve its goal — the unwritten assumption being that paying less tax is the goal they are setting out to facilitate.
This morning I have been asked by journalists for comment on Margrethe Vestager's intentions. This is what I have said:
When George Osborne became Chancellor in 2010 he stated that he would use corporation tax policy to make 'Britain open for business'. He published his plan to do so in October 2010, and stuck to it.
The intention was clear. Light touch regulation and a reform of corporation tax were on offer to ensure that few, or no, questions were asked on the use of offshore controlled foreign companies that might be used to locate profits in tax havens, matched with a new territorial tax regime that ensured repatriated profits were never going to be subject to UK corporation tax. If the catchphrase had been 'Britain open for the business of profit-shifting' had been substituted for that actually used no-one could have complained, because this was the very obvious intention of the UK reforms, whatever lip service was simultaneously paid by David Cameron to the OECD BEPS process and the promotion of country-by-country reporting. The British approach might best be called 'constructive non-compliance'. All the noise was about making multinational corporations pay the tax they owed. All the practice was about not just reducing tax rates, but of also reducing that tax base of multinational corporations using the UK as their base.
But of course this was unfair competition: the evidence is very clear that increasing UK corporation tax yields come from smaller and nationally based companies whilst those with the greatest capacity to pay have seen their tax bills steadily fall. In that context the EU's Competition Commissioner is quite rightly suggesting that the UK may well have been giving state aid via its controlled foreign company rules to one sector of the economy with the aim of upsetting both domestic and international fair competition. For anyone who believes that tax requires that there be a level playing field for all businesses her move is to be warmly welcomed.
I welcome her move.
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Sounds good to me – public services in the UK are in dire need of those missing billions of tax. If EU rules can help in this, it’s yet another reason to remain part of the EU. Present UK government aims to increase inequality and reduce fairness. It’s not right.
Can you give a name of a company that’s benefiting from this – it would help to crystallise the argument with a tangible example imv.
Every UK based multinational with a controlled foreign subsidiary
Richard
I cannot believe you are defending this unwarranted intrusion by the EU Commission into domestic tax policy of the UK.
As you know full well the design of the revised CFC regime was to apply territoriality so that profits generated outside of the UK are exempt from UK tax. This is no different to the principles adopted by Ireland, Luxembourg, Netherlands and others in the EU over many years, except the UK goes further and applies additional taxation in two key areas. First it taxes any profits artificially diverted from the UK. Secondly because financing is easily moved it also apples further taxing rights in respect of loans to non-UK subsidiaries, subject to a partial exemption.
You may disagree with this policy (which would be a reasonable viewpoint) but it was decided on by elected UK politicians and consulted on at the time and indeed has been tightened further since the rules were introduced.
There is no disadvantage with respect to smaller domestic UK businesses as both are fully taxed on their UK profits. The UK rules are clearly less favourable compared to other EU countries.
This is a purely politically motivated act by the Commission to attempt to extend their jurisdiction over taxing rights of member states. Is it any wonder we have decided to leave the EU when they behave like this?
Do you always excuse abuse because someone else is also doing it?
If so what sort of justice do you believe in?
And what sort of competition come to that, barring the unfair sort?
Just because George Osborne created a blatantly rigged controlled foreign company regime (the OECD would agree) does not mean it is not beyond challenge
I am delighted it is
But I am also a European and the EU does great work challenging tax abuse
DblEntry,
Citing Ireland, the Netherlands and (of all places) Luxembourg as exemplars doesn’t really help your case.
I note that just prior to the introduction of Osborne’s initiatives, Ed Wright, Director in International Tax at Delloite LLP wrote a ‘briefing’ concluding that “Overall, the changes are welcome”. From his perspective, a multi-national corporate point of view, they were welcome. From a civil society perspective they are not.
https://www.uktaxmobile.com/tis/dtp.nsf/0/4A47C00268B766E280257A6E005D9D81/$file/Accountancy_CFC_Sep12.pdf
Respectfully, both, you are entitled to challenge the policy on political grounds. That is your democratic right.
However what we have here is the EU Commission attempting to subvert the will of UK parliament which decided on this policy and was transparently enacted in the relevant Finance Act.
The EU Commission has no authority to overturn this policy on the basis it is “abusive”. That is for national governments to decide except in limited circumstances where there is state aid. The EU Commission is abusing its own powers in trying to shoe horn its political objectives into a state aid investigation which has no merit for the reasons I explained above.
With respect, you are simply, wrong. We signed up to restrict our freedoms in this respect. Until (and if) we leave the EU that remains the case.
It helps if you get your facts right.
DblEntry
Once again you are getting it wrong like many do. We are part of a treaty.
We now have been caught out potentially not following an element of that treaty.
Those others in the treaty have every right to challenge what we have done because it may put them at a disadvantage. Treaties are meant to iron out such disadvantages so that everyone competes fairly. It looks like we’ve broken the rules.
The challenge from the commission has come from the treaty that all the sovereign nations involved agreed to. Not because the commission has sovereignty itself. The commission is just like a referee in a rugby match – ensuring that the rules are being adhered to.
[…] Read here […]
Let’s see if we can help DblEntry understand where their mistake was, shall we?
He/she/it started by stating;
” unwarranted intrusion by the EU Commission into domestic tax policy of the UK” and “This is a purely politically motivated act by the Commission to attempt to extend their jurisdiction over taxing rights of member states. Is it any wonder we have decided to leave the EU when they behave like this?”
Well, we’re all adult enough to recognise substanceless emotional rhetoric when it’s in front of us so we’ll politely walk on and refrain from making too much hay by pointing and laughing at this juvenile bluster.
The point is developed subsequently into;
” The EU Commission has no authority to overturn this policy on the basis it is “abusive”. That is for national governments to decide except in limited circumstances where there is state aid.”
Still quite waffly and flaccid but beginning to reach the nub of a purposeful argument. Any references for those of us hooked on, you know, facts or real things to be able to look things up, DblEntry? Of course not.
Still, things become clearer with the help of a few commenters and Richard;
“With respect, you are simply, wrong. We signed up to restrict our freedoms in this respect.” “We are part of a treaty. We now have been caught out potentially not following an element of that treaty. Those others in the treaty have every right to challenge what we have done because it may put them at a disadvantage. Treaties are meant to iron out such disadvantages so that everyone competes fairly. It looks like we’ve broken the rules.
The challenge from the commission has come from the treaty that all the sovereign nations involved agreed to.”
Here’s the EU press release from yesterday;
http://europa.eu/rapid/press-release_IP-17-4201_en.htm
I think the crux is expressed here;
” The Commission’s State aid investigation does not call into question the UK’s right to introduce CFC rules or to determine the appropriate level of taxation. The role of EU State aid control is to ensure Member States do not give some companies a better tax treatment than others. The case law of the EU Courts makes clear that an exemption from an anti-avoidance provision can amount to such a selective advantage.
At this stage, the Commission has doubts whether the Group Financing Exemption complies with EU State aid rules. In particular, the Commission has doubts whether this exemption is consistent with the overall objective of the UK CFC rules.”
In other words, they suspect UK government state aid to multinationals. In still other words, DblEntry is full of it.
From the press release, it looks like the investigation is focused only on the rather peculiar provision in the CFC rules that exempts 75% of the profits of a CFC from its “qualifying loan relationships” (see s.371ID TIOPA 2010) – that is lending to connected companies under common control. It does not appear to be touching the more explicitly territorial aspects of the corporation tax regime, such as the UK’s foreign branch exemption.
There was never any clear explanation for why CFC lenders should only pay (now) 4.75% tax on profits from intragroup lending, when a full deduction would normally be available for the borrower (the rationale was apparently that a debt to equity ratio of 3:1 would be ok, but in that scenario the lender would normally be paying tax on the 75%). The BEPS corporate interest restriction should go some way to limiting the effect of this sort of thing.
I agree: the enquiry is in fact narrower than the initial reports suggested
I attacked this bizarre proposal from the outset: it never made an iota of sense and requires zero rate locations to work, which always suggested it was intended to favour the UK’s tax havens
Don’t member states consult with their EU law specialists about the likelihood of a successful challenge by the commission to what they want to do? Regardless of what the advice was in this situation, the government clearly decided to go ahead anyway.
I do not think anyone anticipated a competition challenge
Before 2014, I don’t think anyone expected the EU would attack such generalised features of a member state’s tax regime as state aid.
I agree