It would be a brave gambler who bet against the taxpayer before the European Court of Justice these days. Not only have all recent ECJ corporation tax decisions gone in the taxpayer’s favour but the volume of decisions has been steadily increasing.
From the occasional case each decade we have more than 20 decisions or references since 2000. Even the waiting period to get before the ECJ with a corporation tax question is declining. The ECJ has taken the freedom of establishment article as the main battleground, extending it in ways which are bringing down principle aspects of corporation tax common to most developed economies and which have been with us since at least the 1980s.
In the last two months we have seen the Lankhorst-Hohorst case, among others, which showed it is illegal for repayments of loan capital to company members in other countries to be recharacterised as distributions of profits.
This challenges the UK thin cap rules as well. Indeed many corporations have already issued claims against the UK Revenue on the back of this.
This tide is not receding. Coming up is Oce van der Grinten (heard in October) which could declare the withholding of tax on treaty credits as illegal giving rise to claims for almost 6% of the value of dividends.
It is only a matter of time before the ECJ determines whether the denial of cross-border loss relief is illegal.
And what are governments doing? If the reaction to Lankhorst-Hohorst is an indication they will seek to remove from the challenged legislation the advantage given to domestic companies. Yet will this work? There will still remain a difference in treatment where the transaction is cross-border.
The EU right to freedom of establishment only exists if the business is established cross-border. If they then go down this route they could find the legislation remains invalid for foreign parented companies but bites on wholly domestic businesses. Treating nationals worse than foreign companies will not be an attractive outcome.
- Simon Whitehead is a partner at law firm Landwell.
On a collision course
by David Rae
There is no doubt the European Court of Justice is gaining more and more influence over the tax affairs of our country.
However, this is not to say all is lost, or that the ECJ has it all its own way in relation to cross-border corporation tax issues that affect the UK. True, the Lankhorst-Hohorst case, settled just before Christmas, showed that the ECJ is not afraid to put the proverbial cat among the pigeons.
But it also puts the court in a difficult position with another European body of significant influence, the Organisation for Economic Co-operation and Development.
Adam Craig, head of the EU tax group at Big Four firm, Deloitte & Touche, says that thin-capitalisation rules (those at the heart of the Lankhorst-Hohorst ruling) are a tried and tested part of the accepted international tax framework enshrined in the OECD model tax convention.
And by dismissing the OECD, the ECJ could be embarking on a collision course with other international rule makers. And here comes the crunch.
If similar principles are applied to other OECD guidelines, then the operation of the entire international tax treaty network could be thrown in doubt.
This could include such high-profile issues as the UK-US tax treaty.
The ECJ is concentrating on Article 43 of the EC Treaty which relates to freedom of establishment. It stipulates that member states have to operate on a level playing field, and domestic companies should not get any preferential treatment over foreign companies.
But part of the revised UK-US tax treaty stipulates that UK and US tax systems may treat hybrid debt/equity instruments differently. Does this render the whole agreement illegal?
The potential cost of the ECJ rulings to Gordon Brown, and his counterparts across the European Union, are substantial enough for intense political debate on a European level.
Experts are arguing that if it isn’t, then the ECJ, through cases such as those involving Lankhorst-Hohorst and Marks and Spencer (should that one make it to the EC), threaten to introduce effective direct tax harmonisation by the back door.
- David Rae writes on tax matters for Accountancy Age.
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