As Brexit talks continue to founder, the EU attacked a tax break designed to lure big companies to Britain in a clampdown that could trigger legal wrangling lasting long after the UK is scheduled to leave the EU.
The European Commission opened an in-depth probe into Britain’s group financing exemption which allows companies active in the country to pay little or no tax on financing income received from another foreign unit via an offshore subsidiary. EU competition laws “continue to apply in full” until Britain is no longer a member of the bloc, it said.
“Of course this was unfair competition,” said Richard Murphy, a professor at City University, London.
“The evidence is very clear that increasing UK corporation tax yields come from smaller and nationally based companies whilst those with the greatest capacity to pay have seen their tax bills steadily fall.”
EU officials have promised to expand action on illegal tax breaks, saying it’s a “very large priority” and there may be many more cases in the year to come.
Investigating how national tax breaks for big corporations may violate EU state aid rules has been a theme for regulators the last few years. The watchdog has also been looking at tax rules in several countries that affect a group of firms.
The probe targets an exemption to controlled foreign companies rules introduced in 2013 by previous chancellor of the exchequer George Osborne that aimed to keep firms in Britain. However, MPs criticised the tax break in 2013, saying “it has become easier for companies to avoid tax”.
Mr Osborne said a year earlier that the rules would “stop global firms leaving Britain as they were, and encourage them to start coming”.
“Rules targeting tax avoidance cannot go against their purpose and treat some companies better than others,” said competition commissioner Margrethe Vestager. “This is why we will carefully look at an exemption to the UK’s anti–tax avoidance rules for certain transactions by multinationals.”
The British Treasury said it planned to cooperate with the investigation and that it believed the rules weren’t incompatible with EU law.
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