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Brussels - As Brexit talks continue to founder, the European Union (EU) attacked a tax break designed to lure big companies to the UK in a clampdown that could trigger legal wrangling lasting long after the nation is scheduled to leave the EU.
The European Commission opened an in-depth probe into the UK’s group financing exemption which allows companies active in the country to pay little or no tax on financing income received from another foreign unit via an offshore subsidiary.
EU competition laws "continue to apply in full" until the UK is no longer a member of the bloc, it said in an emailed statement.
"Of course this was unfair competition," said Richard Murphy, a professor at City University, London.
"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."
EU officials have promised to expand action on illegal tax breaks, saying it’s a "very large priority" and there may be many more cases in the year to come.
Investigating how national tax breaks for big corporations may violate EU state aid rules has been a theme for regulators the last few years.
The watchdog has now been branching out and in addition to how a single company is taxed, it also has been looking at tax rules in several countries that affect a group of firms.
Ex-chancellor
The probe, which comes out of a sweeping EU inquiry started in December 2014, targets an exemption to controlled foreign companies rules introduced in 2013 by previous Chancellor of the Exchequer George Osborne that aimed to keep firms in Britain.
UK lawmakers criticised the tax break in 2013, saying "it has become easier for companies to avoid tax."
Osborne said a year earlier that the rules would "stop global firms leaving Britain as they were, and encourage them to start coming."
"Rules targeting tax avoidance cannot go against their purpose and treat some companies better than others," said EU Competition Commissioner Margrethe Vestager. "This is why we will carefully look at an exemption to the UK’s anti–tax avoidance rules for certain transactions by multinationals."
The UK Treasury said on Wednesday it planned to cooperate with the European Commission investigation and that it believed the rules weren’t incompatible with EU law.
"We are clear that all multinationals must pay tax on any profits they make in the UK, and our rules prevent these profits from being artificially diverted overseas," a Treasury spokesman said in a statement ahead of the EU announcement.
'Big favour'
George Turner, a researcher at the UK-based Tax Justice Network, said the EU is "doing us all a favour by taking this on."
"The government at the time estimated that the change in rules would lead to losses of €1bn a year in UK taxes, money that has to be raised from other sources, or cuts to public services,” he said.
Under EU rules, governments are forced to claw back from companies the money that they should have paid had unfair tax breaks not been in place. That means the UK could be forced to seek re-payments in the run up to Brexit - if the EU probe finds evidence of unfair state aid.
While decisions can be appealed at the EU’s courts, the process is likely to drag on beyond the UK’s March 2019 scheduled departure from the bloc.
Ireland, Luxembourg, Belgium and the Netherlands have already tried to battle the EU’s powerful antitrust regulator over tax incentives that attract big companies.
Amazon.com was ordered to pay €250m in back taxes to Luxembourg earlier this month.
The EU is also suing Ireland for failing to swiftly recoup some €13bn.
The EU probe comes as UK negotiations on exiting the bloc have failed to make progress. EU governments agreed Wednesday to begin planning in case the UK and the EU can’t manage to start talks on trade by the end of the year.
The case raises questions on whether the commission could finalize its investigation before the UK is due to quit the EU in March 2019, how it might rule on a member state’s non-compliance after a country has left and whether the UK could appeal a decision to the European Court of Justice.
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