EU Delivers U.K. Tax Bill as Brexit Deal Eludes Parliament

(Bloomberg) --

The European Union ordered the U.K. to claw back illegal tax breaks designed to lure multinationals in a timely reminder that the EU still calls the shots on competition rules until Britain leaves the bloc.

The European Commission said the British gave certain multinationals a selective advantage by granting them an unjustified exemption from U.K. anti–tax avoidance rules.

“This is illegal under EU state aid rules,” Margrethe Vestager, the EU’s antitrust chief, said in an emailed statement. “The U.K. must now recover the undue tax benefits.”

While the commission said the exemption was partly justified and didn’t specify which firms unduly benefited from it, at least 56 companies have come forward since the probe started in 2017. They estimated their tax liabilities at about 1.35 billion pounds ($1.76 billion) according to data compiled by Bloomberg Tax. The final bills may now be much lower because the EU didn’t outlaw the entire program.

The decision comes as British Prime Minister Theresa May is expected to confront her top ministers with the potentially explosive option of delaying Brexit by months, as the U.K. and its Parliament struggle to find a plan for leaving the 28-nation bloc.

EU Order

Vestager expects the U.K. will abide by the EU order to recover the unpaid tax, she told reporters after a Brussels event on Tuesday.

“Of course we think they will do it, they are a member of the union,” she said. The decision is timely coming “before the Brexit date, but how they will do the recovery, that of course still remains to be seen.”

The U.K.’s group financing exemption, introduced in 2013, allowed companies active in the country to pay little or no tax on financing income received from a foreign unit via an offshore subsidiary. The EU regulator said in an emailed statement that it considered the derogation illegal when such financing income stemmed from U.K. activities.

The exemption was modified at the end of last year in a way that no longer raises concerns, the EU said.

“We are clear that all multinationals operating in the U.K. must pay their fair share of tax,” the U.K. Treasury said in an emailed statement. “Our Controlled Foreign Company rules are part of a robust package of anti-avoidance measures that prevents U.K. profits from being artificially diverted overseas. We will carefully consider the commission’s decision.”

Big Corporations

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 has been looking at tax rules in several countries that affect a group of firms in addition to how a single company is taxed.

Part of the U.K. group financing exemption wasn’t seen as problematic. The EU said it had no qualms about applying the derogation to loans financed with funds or assets derived from U.K. capital contributions and where there are no British activities involved in generating the finance profits.

Ireland, Luxembourg, Belgium and the Netherlands have already tried to battle the EU’s powerful antitrust regulator over tax incentives that attract big companies. Inc. was ordered to pay 250 million euros ($280 million) in back taxes to Luxembourg, while Ireland is facing a request to recoup some 13 billion euros from Apple Inc.

However Belgium won a bid to overturn an order to claw back about 800 million euros from 35 companies, including Anheuser-Busch InBev NV.

©2019 Bloomberg L.P.