Galloping to the post

In the Observer on Sunday, a brief report recounted that the British government is facing demands from multinational companies totalling up to £20 billion "after the High Court allowed yet another legal challenge to the Inland Revenue's corporation tax rules".

It appears that more than 300 companies including BMW, Coca-Cola and Adidas have now filed legal actions in London, claiming that the government has taxed them on their UK earnings in ways that break European law. Siemens, Monsanto, AstraZeneca and Carlsberg are also among the corporate giants who are taking on the Inland Revenue.

The multinationals complain that, for much of the Nineties, their UK subsidiaries were forced to pay corporation tax to the Inland Revenue before they were able to transfer their UK profits to parent companies abroad.

The Observer is very thin on details but reports that basis of this case lies in a judgment made by the European Court of Justice in 2000, stating that "this rule broke EU agreements and discriminated against non-UK corporations".

From what detail is given, however, this seems to be a carry-over from ICI v Colman (Case C-264/96), where the ECJ ruled that tax relief for losses incurred by subsidiaries established in other EU member states could be set against profits from companies registered in the UK, a practice which had been prohibited by UK law. It may also relate to the Hoechst case (Case C-410/98), as this judgment was issued in 2000, concerning the payment of Advance Corporation Tax.

Either way. to get to this point, the ECJ has relied on Article 43 of the Maastricht Treaty, guaranteeing "freedom of establishment" which it has taken as over-riding Article 93 giving member states sole rights over their tax systems on the basis of "financial cohesion" – i.e., the right to implement measures necessary to maintain the coherence of their tax systems.

This is part of the continuing story of the gradual erosion of our tax sovereignty by the EU (see earlier Blog) where, over the years, Article 43 has been used by the ECJ as a Trojan horse to attack national tax laws, a horse which is now galloping to the finishing post. The final showdown is planned in the High Court next year, when the Inland Revenue will be making a last-ditch (and probably fruitless) attempt to stem the tide.

If it fails, judging from the number of companies are claiming more than £50 million each, experts believe that Gordon Brown could ultimately be faced with a bill of up to £20bn. No doubt, as one of Gordon's officials signs the cheques, Denis MacShame will be quick to claim his defeat as yet another benefit of our membership of the EU.