Unfair attitude of UK taxman slammed by advocate general

The fall-out from the European advocate general’s comment last week that the
UK’s approach to the taxation of EU subsidiaries was unfair, could prove very
expensive for the taxman.

The government itself has estimated the potential hit from a European Court
of Justice ruling that accepts Leendert Geelhoed’s view, and fully extends the
‘franked investment’ rules to EU subsidiaries, would be £7bn.

This is a figure disputed in the evidence, submitted by the parties under the
group litigation banner, which maintains the total is much lower at around £100m
to £2bn.

The advocate general said that, where a group was receiving dividends from a
foreign subsidiary, those dividends should be taxed in the same way as they
would be from a UK subsidiary.

In this case, the treatment of such income from UK subsidiaries as franked
investment income had not been extended to EU subsidiaries, increasing
substantially the tax bill on the dividends paid.

Such a rule limited the free movement of capital and the establishment of
subsidiaries elsewhere in the EU, the companies argued.

The case may be particularly significant in part because Geelhoed rejected a
temporal limitation proposed by the UK. Such a limitation had been imposed in
the recent IRAP case, where a potential 120bn euros (£83.5bn) bill for the
Italian government might have caused a fiscal meltdown.

Chris Morgan, head of the European tax group at KPMG, said the advocate
general’s findings were very significant and could, if endorsed by the ECJ, open
the doors for companies to move tens of billions of pounds currently stored
offshore into the UK tax free.

He believes the government will vigorously fight any attempt by the European
court to lift the taxes on franked investment income. It could even decide to
tax all dividends, including those from UK subsidiaries, which would represent a
major blow to UK profits.

If the government jumped the other way and lifted all taxes on dividends, it
would bring the UK into line with France and Germany.

Morgan called on the government to open discussions so a fairer system can be
found that doesn’t damage UK competitiveness.

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