Boffins befuddled over EU probe into UK's tax rules for multinationals

Experts are mystified as to why the European Commission has launched a probe into the UK tax arrangements of multinationals.

Last week the commission opened an investigation into a UK government scheme it claims exempts large companies from anti-tax avoidance measures, believing the dispensation may break EU competition rules by allowing multinationals to pay less tax than domestic-only rivals.

The inquiry centres on a change to the UK's "controlled foreign company" rules, which came into place in 2013.

The EU probe comes shortly after the commission ruled that Apple must pay Ireland €13bn (£11bn) in back taxes – against the wishes of the Irish government. It also recently ordered Amazon to repay €250m as the commission sought to unwind a sweetheart deal with Luxembourg.

Margrethe Vestager, the European Commissioner for Competition, said of the investigation: "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.

"This is why we will carefully look at an exemption to the UK's anti-tax avoidance rules for certain transactions by multinationals, to make sure it does not breach EU state-aid rules."

However, George Bull, senior tax partner at consultancy RSM, said he was surprised by the announcement as the UK government isn't known for giving companies an easy ride for compared with other countries.

"That is why [a lot of technology firms] have set up their headquarters in Ireland instead," he said. "It strikes me this is pure politics, as the UK is not being taken to court by the EU over allegations of state aid."

Judith Freeman, professor of tax law at Oxford University, agreed that the action taken by Europe seemed "bizarre".

In fact, it was the European Court of Justice (ECJ) that ruled UK tax on foreign subsidiaries of British companies was too restrictive in 2006, following the case brought by Cadbury Schweppes. That resulted in a change in legislation in 2013. "I think we drafted the legislation the way we did because that was how we understood European law," Freeman said.

She pointed out that greater transparency generally is needed as to how tax rules are applied to large multinationals. The most notorious case was the agreement with Google and the Treasury when it finally agreed to pay £130m in back taxes – with that deal taking fire from the Public Accounts Committee. "I don't think we should have a full breakdown of confidentiality. But I do think we need to have the National Audit Office scrutinising [these arrangements] more often."

Philip Baker QC, who specialises primarily in international aspects of taxation at Field Court Chambers, said the UK responded with major reforms in 2013 as a direct result of the ECJ ruling.

"And when they reformed the legislation they introduced this exception. And it appears it is that special lower-rate regime [is what the commission has taken issue with]. So it could argue the UK misunderstood or misconstrued [the ruling]."

For Baker, the bigger issue is the timing of the probe, which will be made redundant when the UK leaves Europe in March 2019. "It defies understanding," he said. "Margrethe Vestager is the commissioner responsible, and I'm not entirely certain who she talks to about these things, apart from God! So I don't know what her thinking was." ®