BRUSSELS – The European Commission opened on Thursday an in-depth investigation into whether a United Kingdom tax rule that unfairly benefits multinationals by letting them avoid tax on certain transactions is in breach of European Union state-aid laws.
Commissioner for competition Margrethe Vestagar announced the probe into the Controlled Foreign Company rules, a system introduced in 2013 that includes an exemption that protects UK resident multinationals from tax-avoidance measures on income shifted to offshore subsidiaries, in order to analyze whether the scheme unfairly benefits multinationals over domestic companies, which would be in breach of EU law.
“All companies must pay their fair share of tax. Anti-tax avoidance rules play an important role to achieve this goal. But rules targeting tax avoidance cannot go against their purpose and treat some companies better than others,” said Vestager, the former finance minister for Denmark, adding that the probe would serve to make sure the exemption was in compliance with state-aid rules.
The CFC exemption, which was drafted by former Chancellor of the Exchequer George Osborne, means that multinational companies avoid paying tax on interest payments received from loans to an offshore subsidiary.
This means a multinational based in the UK could theoretically shift income to an offshore subsidiary – as is common in the movement of capital – which would then pay out a loan to a foreign group belonging to the parent company, which would in turn return an interest payment to the offshore subsidiary, which upon its return to the UK would be tax-exempt within current CFC rules.
Without the CFC exemption, which is called Group Financing Exemption, UK authorities would tax the interest as it would ignore the existence of the subsidiary and attribute the income to the parent company.
“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,” the statement said.
The probe will not call into question the UK’s right to implement such a tax exemption rule, insisting that the investigation served only to study whether the loophole gave unfair preference to multinationals anchored in the UK.
The Commission’s investigation is the latest in a string of high-level tax probes into EU member states, including a recent case that found Ireland’s arrangements with Apple allowed the software giant to save up to $13 billion in tax benefits.