M&S tax victory could cost EU governments billions

Marks & Spencer should be allowed to deduct some of its foreign losses from its British tax bill, a senior EU court adviser said today in a legal opinion that could cost European governments billions of pounds.

Advocate General Miguel Poiares Maduro of the European Court of Justice in Luxembourg said the British retailer was justified in asking to have the deduction under EU law, citing EU internal market rules.

It said British refusal of the tax advantage “might be regarded as a restriction contrary to the (EU) treaty".

“The principle of territoriality cannot justify the current restriction,” he said.

He said, however, that companies established in the 25 nation bloc should not see the ruling as a way to shop around for the best tax rates to avoid taxes in their home country.

His opinion is not binding to the European Court, which will make its final decision on the case sometime later this year. The court, however, follows the advocate general’s view in about 80% of cases.

Far more is at stake than the £30 million pounds in taxes Marks & Spencer said it paid unfairly in Britain while its subsidiaries in France, Germany, and Belgium were losing money.

German Finance Minister Hans Eichel in February said his government could eventually have to repay up to E50bn to German companies if the court sets a precedent by finding in favour of Marks & Spencer.

Britain could also be forced to pay back billions of pounds to other companies, including some who have already launched similar cases.

Germany, Greece, France, Ireland, the Netherlands, Finland and Sweden all have backed Britain’s government in the court, fearing they could lose out if Marks & Spencer wins and their companies demand repayment of overpaid taxes.

The ruling could also undermine national governments’ stubborn resistance to handing over tax powers to the EU by forcing them to harmonise policy in such cross-border business cases.

Britain’s High Court referred the Marks & Spencer case to the European Court of Justice in 2003. The retailer claims British tax law violates EU single market regulations by prohibiting companies from writing-off losses abroad against domestic profits.

Some EU countries, including Italy, Denmark and Austria, already allow foreign losses to be deducted.