The European Commission is to launch an investigation into a loophole set up by the David Cameron government that allegedly provides tax avoidance opportunities to multinationals
According to the commission, the UK has omitted some multinationals’ financial transactions from parts of its tax avoidance program, a scheme which could be in contravention of EU state aid laws. The rules in question – the UK’s Controlled Foreign Companies (CFC) legislation – are in place to stop British firms from shifting capital to an international subsidiary, thus avoiding British taxes.
In 2013, under the chancellorship of George Osborne, the government changed the rules, meaning certain forms of income including interest payments would become exempt from CFC rules.
According to the EU commission, the rule allows companies to shift profits into tax havens, reducing or even entirely eliminating their British tax bill.
In a press release on the investigation, European Competition Commissioner Margrethe Vestager said: “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,” she added.
State aid rules are increasingly being used by the EU as a means to tackle tax avoidance. Similar investigations have been launched in the Netherlands and Luxembourg, the latter breaking state aid legislation in relation to a ‘sweetheart deal’ with Amazon. The US-based ecommerce site was ordered to pay Luxembourg back taxes of £221 million (US$290 million).
In August this year, the EU ordered Apple to pay Ireland some €13 billion (US$15.2 billion) in back taxes. The ruling came despite the objections of the Irish government, which wants to retain Apple’s European headquarters.
While an EU spokesperson dismissed that the probe had anything to do with Brexit, there have been consistent threats from the British government to turn the UK into a tax haven to compete with its future EU rivals.