Pepsi and Volvo lead thin cap charge

Multinational corporates launched their latest attack on what they regard as
an unlawful UK tax system under EU rules this week.

On Tuesday, the so-called ‘thin cap’ group litigation order was heard in the
European Courts of Justice. The thin cap rules prevent multinationals piling
debt into UK subsidiaries to offset against profits. Leading the action are the
four test cases, involving French building giant Lafarge, Volvo, Pepsi and

Graham Aaronson, the barrister leading the action, told Accountancy
that the basis for the case was not that the anti-avoidance rules were
inappropriate per se. Some of the companies had breached the rules, not through
an attempt to avoid tax, but because they were loaded up with debt relating to a
major transaction. ‘The idea might be OK, but the rules go too far,’ he said.

The fundamental basis of the claim is that a UK company could have made loans
to UK subsidiaries, in the way that a European subsidiary could not. Thin cap
rules stipulate that the gearing of the UK company must be equivalent to that of
the group as a whole.

Peter Cussons, tax partner at PricewaterhouseCoopers, said that few people
were hit by the rules: ‘Most people used to plan around them so not to be caught
by them.’

Cussons added that there were not as many companies involved with this group
litigation as with others. But the number of claims would change if the ECJ gave
a favourable ruling on the case.

The action follows another case decided at the ECJ several years ago, where
the court ruled that the German rules on thin capitalisation were

Aaronson said that the case would also see the emergence of two new key
judges as far as the GLOs are concerned. Leendeert Geelhoed from Belgium is the
advocate-general in the case, who will deliver an opinion, often followed by the
judges. Koen Laenaerts is the key judge for the final decision, who will read
all of the documents and write the judgment.

Geelhoed has heard two other GLOs as advocate general, but it is not clear
what his instincts on the cases will be. Anti-avoidance campaigner Richard
Murphy said that thin cap rules will become more important in future as
international governments address the issue of capital flight. ‘The thin cap
rules are not as effective as they could be. It requires a degree of
international co-operation.’

The UK, he said, was particularly generous in the amount of interest that is
deductible against corporation tax. ‘There is a general rule in tax systems
across the world that an expense is deductible if it relates to trade

undertaken. Tax relief in the UK for borrowings is not related to companies’
activities in this country,’ he said.

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