Court case threatens investment

A LANDMARK European court case could greatly reduce Ireland’s ability to attract foreign direct investment.

The European Court of Justice will next week adjudicate on a dispute between Cadbury Schweppes and the British Inland Revenue on whether the company can avail of a lower tax rate on profits in Ireland.

According to the Inland Revenue, the confectionery giant set up two subsidiaries in Ireland purely to avail of the lower corporation rate.

The case, which is scheduled to be heard next Tuesday, could have huge implications for Ireland. The low corporation tax rate has not only attracted a large number of multinational companies setting up in Ireland creating jobs, but also in the development of the International Financial Services Centre in Dublin.

Many foreign subsidiaries are set up in Ireland, and the IFSC in particular, to provide finance operations to their parent companies. This allows them to avail of the low corporate tax.

However, other countries with higher tax rates have moved to clamp down on this perceived disadvantage by introducing laws to ensure that companies are liable to pay tax on the difference.

Cadbury Schweppes set up to subsidiaries in the IFSC Cadbury Schweppes Treasury Services (CSTS) and Cadbury Schweppes Treasury International (CSTI) to provide intra-group finance to the companies various operations. These were subject to the then Irish corporation tax rate of 10% (now 12.5%) and not the 30% in Britain.

Some years ago Britain decided to close down loopholes in its tax code and ensure that companies were not using low tax countries.

The British Inland Revenue went after Cadbury Schweppes for the tax, worth around 13 million in 2000. Cadburys appealed this to the Special Commissioners (which presides over tax disputes). The Special Commissioners determined that the reason for incorporating CSTS and CSTI as tax resident indirect subsidiaries in Ireland was solely for the purpose of ensuring that the profits arising from their intra-group lending treasury activities could benefit from the International Financial Services Centre tax regime for group treasury companies in Ireland and would not be taxed in Britain.

The case was then referred to the European Court of Justice (ECJ), which will have to decide whether the Special Commissioners' decision breached EU guideline's on freedom of establishment.

If the ECJ decides that the Inland Revenue were right in pursuing Cadbury, the case could have major ramifications for Ireland. It would mean that many hundreds of companies here could face similar claims, and hitting the attractiveness of Ireland as a place to do business.