Original URL: http://www.theregister.co.uk/2005/01/19/bt_kingston_probe/

BT, Kingston face EC illegal state aid probe

BT says £12bn tax break allegation 'groundless'

By Tim Richardson

Posted in Broadband, 19th January 2005 17:17 GMT

BT and Kingston Communications are facing an European Commission (EC) investigation over allegations that they may have benefited from illegal state aid.

The investigation centres on a property tax relating to the telecoms infrastructure of both companies. The base of the business rates tax is worked out for each telco by the UK's Valuation Office Agency (VOA), which applies various valuation methods to assess the economic value of telecoms networks. The EC wants to find out why different valuation methods are used compared to other telcos.

Said the EC in a statement today: "The VOA applies a certain asset valuation method to BT and Kingston, while it applies other methods to their competitors. The application of different methods may favour BT and Kingston resulting in a disproportionate tax burden for other companies competing in the market for electronic communications services."

The European inquiry is to run alongside a similar investigation by UK's Department of Trade and Industry (DTI).

The investigation was prompted by optical network company Vtesse Networks which claims that BT has benefited from a whopping £12bn in tax relief since 1995.

In an outspoken attack Vtesse Networks chief exec Aidan Paul said: "Why does BT pay tax equivalent to a rental value of £16 per annum per local loop line, but has subsequently charged other operators a rental of £122 per annum for the same line, when both rentals should have been based on fair market values? By our calculations, this amounts to a tax disparity of up to £12bn.

"Did BT lie to the Government when setting the original rental tax, or did it lie to [former telecoms regulator] Oftel when setting local loop 'unbundling' prices during the deregulation process? If it didn't lie to either, then why are these two numbers so different? Was this a deliberate tactic to keep competitors out whilst minimising its tax bill, or just gross incompetence in the finance department? And why did neither the Inland Revenue, the or Oftel spot this disparity? Did it never occur to either group of civil servants to check with the other?

"We want the answers to these questions, and so wholeheartedly welcome today's announcement by the European Commission. This action is the culmination of over a year's work with the Commission relating to what we maintain is the illegal and discriminatory application by the Inland Revenue, the VOA and the Office of the Deputy Prime Minister of non-domestic business rates to the telecommunications sector. This results in BT not only paying the lowest level of taxation in relation to its business than any other telecoms operator, but also having a higher level of assets...than any other operator."

Paul reckons the situation has arisen because of the "difficulties of ensuring transparency within a large vertically integrated company" - something that could have been avoided if BT had been split.

"We now therefore call on the Government to work towards splitting BT up, as it is clear that neither BT nor the Government can be trusted to properly police and regulate a company of this size and power," he said, calling on rivals including Cable & Wireless, Easynet, Energis and Your Communications, among others, to help the EC in its investigation.

BT said in a statement: "BT is surprised that the European Commission is to investigate the UK government over the property rates that BT has been paying. In BT's view, any allegation of state aid would be groundless as BT has received no benefit from the UK government. BT is confident that the UK government will demonstrate the fairness of the UK ratings system."

BT is already facing a shake-up of its business following a wide-ranging telecoms review by regulator Ofcom.

A spokeswoman for Kingston said: "Until we know the outcome of the investigation we cannot comment further." ®

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