Corporates win moral victory in tax battle

Multinationals challenging historic rules on dividend taxation won a moral
victory this week in their battle to have millions of tax repaid.

The Court of Appeal ruled that advanced corporation tax rules discriminated
against companies with foreign parents.

The tax was paid on dividends, and companies could elect to pay it either
when they paid a UK parent, or later when the parents themselves paid a

The option was not open to foreign subsidiaries, with companies from Gallaher
to NEC Semiconductors challenging that the rules created a cashflow disadvantage
for them.

The Court of Appeal ruled that they were suffering a disadvantage, but added
that the rules meant the UK had not in fact incorporated relevant treaties so as
to include the advanced corporation tax.

The problem means that companies will not get the repayments unless the House
of Lords rules otherwise on appeal, or a separate argument goes the
multinationals way.

European rules stipulate that there should be no hindrance to the movement of
capital into and outside of the EU, unless rules that do hinder movement were in
place before 1994.

The question as to how those rules apply in the case is likely to go to the
European Court of Justice.

Chris Morgan, head of the EU tax group at KPMG, said: ‘The court of appeal
has said this is a point that ought to be decided by the ECJ, and that if they
were the final court they would refer it.’

Morgan added that if the case was successful on the second point, there would
be a likelihood of further litigation from those paying dividends into the UK
that were taxed.

The case, known as ACT class 3, is itself likely to go to the House of Lords
to decide the issues under UK law before an ECJ reference is sought.

It is not known exactly how much is at stake in the case. ACT paid could be
offset against other tax liabilities, meaning the issue revolves in some cases
purely around cashflow issues. NEC itself had a £6m liability that could not be
offset. There are around 50 cases in the class.

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