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A no-deal Brexit could create yet another headache for the European Union as it prepares to hand dozens of UK-based companies a tax bill that is expected to top $1.5 billion.
With just over two months left until Britain’s scheduled departure date of March 29, time is running out for the European Commission to order the UK to recoup money from companies granted illegal tax breaks. A decision is likely just before Brexit, people familiar with the case have said. But how the EU could ensure UK compliance with any order is not clear.
“The issue is not the chance of an appeal,” and which court would hear it, “but how to actually enforce a decision taken just before the Brexit date,” said Raymond Luja, tax professor at Maastricht University in the Netherlands, and also counsel to law firm Loyens & Loeff in Amsterdam. “What if the UK would simply ignore it?”
A no-deal Brexit would mean the withdrawal agreement and transition period negotiated for months toward an orderly EU exit, wouldn’t apply anymore. The UK and its two EU judges would also cease to be part of the European Court of Justice in Luxembourg, leading to the question of how the EU could enforce court decisions on a country that’s left the bloc.
Biggest Firms
Fifty-three companies, including Diageo, Pearson and Compass Group, have warned of potential costs arising from the EU probe, according to data compiled by Bloomberg Tax. Twenty-three of those, among the UK’s 250 largest firms, have disclosed potential tax repayments amounting to about $1.5 billion.
Amid a crackdown on fiscal loopholes designed to help big companies, the EU’s competition commissioner Margrethe Vestager opened an in-depth investigation in October 2017 to uncover whether firms unfairly profited from a UK tax break introduced by the previous government. Like Ireland’s battle over whether Apple owes unpaid taxes, the commission could force the UK to recover the relief businesses have gained.
The probe is one of the EU’s last to target the UK before it is due to leave the bloc. The EU in December concluded a separate probe into corporate tax deals in the British territory of Gibraltar, with an order to reclaim some 100 million euros ($113 million) in tax breaks.
Normal Circumstances
Under normal circumstances, the UK would have two months and 10 days to appeal any decision at the EU courts. An EU antitrust order taken before the end of March would remain valid and the UK will likely be able to appeal it at at the bloc’s courts, even as a non-EU member, lawyers said.
But these are not normal circumstances.
“The UK might indeed just ignore the whole thing,” said Howard Liebman, a tax partner at law firm Jones Day in Brussels. Given the uncertainty around Brexit, he said he can only speculate at this stage. “It may decide, depending on what happens to the UK government itself, not to lodge an appeal and simply say, we’re out, and this decision doesn’t impact us. Then what would happen?”
Ignoring an EU ruling might be counter-productive in the long-run, especially if the UK wants agreements on possible future trade deals.
‘In Step’
“Keeping UK and EU competition rules ‘in step’ is, in any case, generally seen as a prerequisite of a future trading agreement,” in either scenario, said Jeremy Cape, a partner at law firm Squire Patton Boggs in London.
The commission has to revert to the EU courts when a government fails to comply with a decision or a previous court ruling. Such disputes can drag out over years. How that will work in case of a former EU member nation isn’t clear.
“After the UK leaves, and if the EU wins before the court and then wins again as part of any appeals, what can the EU or the European Courts actually do to force the UK to comply with those judgments?” said Liebman. “I do not believe there is any enforcement mechanism available, regardless of the outcome.”
No Deal
The Brussels-based commission said it wouldn’t speculate on the UK case or the situation following no-deal.
The UK Department for Business, Energy and Industrial Strategy referred to August guidance, which confirms that the Competition and Markets Authority will take over from the commission in case there’s no deal, while existing approvals of state aid will remain valid and “carried over into UK law”.
The CMA set out last week how it plans to take over as state aid enforcement authority in case of a no-deal Brexit. This would also mean that UK courts would then rule on disputes concerning UK-based companies.
The CMA said it aims to follow a similar state aid framework to the EU’s, so its decisions “in theory” could be in line, said Nicole Robins, a partner specialising in governmental aid at economics consultancy Oxera in Brussels.
The UK case tops the previous EU record, an investigation into a Belgian tax plan that benefited 35 businesses and led to a 2016 order to the government to recover about 800 million euros in back-taxes. The EU’s UK probe looks at an exemption that enabled parent companies to pay little or no tax on certain intra-group financing between two units based outside the country.
While several fora could come into play, such as UK courts or even the International Court of Justice in The Hague, to sort out disputes over non-compliance with an EU order, “the bottom line will remain enforcement,” said Luja.
