M&S case opens way to other tax claims

THE Irish exchequer could find itself paying out millions of euro for loss-making subsidiaries to companies registered in the country based elsewhere in the EU.

This is following a landmark ruling yesterday by the European Court of Justice.

But governments generally were relieved with the outcome as they feared the Marks & Spencer decision could cost them billions of euro. The Department of Finance was still studying the ruling to assess what its likely liability will be and will also study if it needs to change company tax rules in the future.

"The decision is a complex one and we are studying its implications carefully", said a spokesperson.

The ruling will put pressure on Ireland and Britain to agree to a consolidated tax base that covers all the EU member states, something those two countries, in particular, have been resisting.

Marks & Spencer, which is registered in Britain, claimed group relief and a tax rebate of e44m on losses from ventures by its subsidiaries in Belgium, Germany and France.

Under current British regulations, the resident companies in a group may offset their profits and losses, but not when the losses are incurred by subsidiaries which have no establishment in Britain and do not trade there.

When the firm was refused a rebate because the subsidiaries were not based in Britain, it took the case to the courts on the basis that this went against EU law on the right to establish a company anywhere within the union.

The Luxembourg-based court said: "In effect, the United Kingdom rules apply different treatment for tax purposes incurred by a non-resident subsidiary. They therefore discourage undertakings from setting up subsidiaries in other member states."

But countries are entitled to enforce rules designed to prevent companies circumventing or escaping national tax law, the court said.

Mary Walsh, tax partner with PricewaterhouseCoopers in Ireland, described the ruling as the "low-cost solution for tax authorities." Had the court ruled that there were no restrictions to transferring losses cross-border, then it would have cost states huge amounts of money.

However since it is restricted to a "last resort" it has a narrow relevancy, she said. The ruling is quite specific to the M&S situation and companies with similar claims will have to take their individual cases to the courts.

The implications for M&S are not clear yet.

Ireland and six other countries supported the British government in court as they had the most to lose in such a ruling. Three countries - Denmark, Austria and Italy - already allow the kind of write-offs M&S was claiming.

In a related corporate tax case before the Luxembourg Court yesterday, the British company Cadbury Schweppes, which set up subsidiaries in Ireland to avail of a lower tax on profits, is contesting a top-up tax imposed by the British revenue authorities.

The Irish authorities are watching this closely as a decision against Cadbury Schweppes would make Ireland and other low tax countries less attractive for foreign companies.