Chancellor Gordon Brown has never been very keen on Europe. Not only has he resisted the charms of the euro, he has also fought off repeated attempts by the European Union to create a unified European tax system.

But some things remain beyond Brown’s iron grip. The tax cases brought by European companies over the last ten years have seen power over UK corporate tax law ebb away from the Treasury. The legal challenges, upheld on the basis that the UK tax regime breaks rules, guaranteed by European treaty, on the freedom of establishment or freedom of the movement of capital, have forced the UK into retreat.

But while the satisfaction of seeing Brown lose hundreds of millions in tax Revenues may please some FDs, others will be nervously anticipating the fall-out. After all, with some predicting that the Treasury coffers could lose between £10bn and £20bn from these cases, the government has to make up the likely shortfall somewhere. So at what stage are the group litigation orders (GLOs), the six major cases causing the trouble, and what is likely to be the consequence of the UK government losing the cases?

1 Loss relief

The loss relief GLO is the best known, relating to the ability of companies to claim losses incurred elsewhere in Europe against their UK profits. The action has been brought by around 70 companies, although Marks & Spencer is trailblazing on the issue in a separate case. The European Court of Justice gave its verdict on M&S in December last year, ruling that corporate losses incurred in France or Germany, as in the case of M&S, could be offset against UK profits. But the ECJ also ruled that such losses could only be used if there was no possibility of them being used elsewhere.

That, in itself, is the subject of further action. M&S has since dropped its French claim, since the losses could have been used by Galerie Lafayette, but the retailer is pursuing its German and Belgian claims. Those claims are now going through The UK courts, and at the last count, M&S had won in the Court of Appeal, with the government refused leave to appeal. The court said losses could be used where there was ‘no real possibility’ of them being used elsewhere, narrowing down the claim requirements.

The actual GLO that awaits the claim will be heard when the M&S case has been resolved, which may or may not be imminent. And the GLO itself has various permutations that mean it will probably have to go to the ECJ.

The UK has responded to the action, accepting it will have to pay out some, it thinks modest, claims. And it says that companies can claim relief only on what they could have claimed abroad, or here, whichever is the smaller. That interpretation too may be challenged.

2 Controlled foreign companies

The controlled foreign companies (CFCs) challenge is similar, in that one company, Cadbury Schweppes, is pursuing the arguments. Cadbury had set up an Irish treasury function that was taxed at the 10% Irish tax rate.

Controlled foreign companies rules dictate that any company set up in a foreign jurisdiction just to obtain a lower tax rate is treated as forming part of the UK’s group profits, and taxed as such. Cadbury and others are arguing that the rules themselves contradict EU rules on freedom of establishment. The courts ruled last September that CFC rules were fine in principle, as long as they were only used to rule out ‘artificial arrangements’.

Cadbury and HM Revenue & Customs are now set to return to the special commissioners in the UK so that they can argue over whether the company’s arrangements were ‘artificial’.

The GLO case relating to Cadbury is still waiting for a hearing, but it expected that, like M&S, it will return to the ECJ once it has been worked through. There has also been a government response on the issue, the UK opting to fight the issue of CFCs. It said in a consultation in last year’s Pre-Budget Report that it wanted to draw a new distinction for offshore companies. Either they make money from labour, which is fine, or they make money from capital, which will be taxed at UK rates. As part of its attempt to take on the ECJ challenge, and accept that dividend taxation will have to go, the UK wants to stamp out CFC abuse, but it may not be as simple as that. Advisers are fighting the new distinction tooth and nail.

3 Franked investment income

The franked investment income case came before the ECJ early in 2006, with the court ruling earlier this year. Franked investment income rules apply an effective tax credit when a subsidiary pays a dividend to a group, where the credit is not available, or available to a lesser extent, to foreign parents.

The UK had said that a decision against it, brought by British American Tobacco, among others, would cost £7bn,a figure disputed by claimants, who said it would be between £200m and £2bn. But no-one really has any idea whether that is likely, after the ECJ released one of its most complicated judgments. Deloitte called it ‘poorly drafted’ and its corporate tax specialist Bill Dodwell termed it ‘Delphic’.

The ruling attempted to force a difference between ‘equivalent’ treatment and ‘parity’, essentially looking for some way of saying UK law created parity if not exactly equal treatment. The case returns to the High Court, but the ECJ ruling has posed more questions than it has solved.

4 Thin capitalisation

The ECJ has ruled on the thin cap GLO, as it is known. Thin capitalisation is all about debt levels, and loading subsidiaries with debt profit from interest relief in low-tax jurisdictions. The UK applied broad rules of thumb to such transactions, meaning many companies were caught unfairly. Challenges came from Lafarge, Pepsi, Volvo and Caterpillar (as test claimants), and the ECJ decided that the rules stood or fell on the issue of ‘commerciality’– in plain English, whether or not the debt being shifted around was done for legitimate commercial purposes. It too returns to the UK courts.

5 Advanced Corporation Tax

The advanced corporation tax challenge comes in four parts. In essence, the case is about whether foreign parent companies receiving UK dividends should get the same tax credits that UK parents get. The ECJ ruled a long time ago that they should, leading to various disputes over which circumstances apply. The Deutsche Morgan Grenfell case establishes how far back claims can go, ideally (for taxpayers) all the way back to 1973, when the UK joined the EU.

The House of Lords ruled in Deutsche’s favour in October by a majority of four to one, but don’t get your hopes up yet. ‘All is not lost for HMRC,’ Rupert Shiers Of McGrigors says. ‘The multinationals will Now have to prove that they were indeed operating under a mistake, rather than acknowledging that there was doubt as to whether the tax was due but deciding nonetheless not to challenge HMRC, when paying the overpaid tax in question.’

The Sempra Metals case determines whether or not claims should attract compound interest or simple interest. The Class 2ACT case determines the situation where other countries gave some tax credits. The Class 3 case is about parent companies not resident in the EU, and the Class 4 case concerns whether foreign parents can receive partial or whole credits according to what is available to them in their and other jurisdictions.

The ACT case is in various respects paying out, with the only issues then being how much and who can properly claim. The government has already admitted it has paid out hundreds of millions of pounds here, and will be wondering how much more it has to pay.

6 Foreign income dividends

The foreign income dividends GLO is currently waiting on the outcome of other GLOs. Brought by pension funds, it essentially claims discrimination on the basis of discriminatory provisions relating to the GLOs as a whole. It is still at a largely administrative stage, discussing how claims ought to be made and whether or not they will be time-barred.