Wednesday, December 14, 2005

Could have been worse

Despite predictions of meltdown, the consensus on the implications of the Marks & Spencer ECJ judgement – delivered yesterday – seems to be that it could have been a lot worse for the Treasury.

According to The Telegraph business section, the judgement "spared the taxman the prospect of having to pay billions to other businesses," by deciding that a parent company could only adopt losses where it had "exhausted possibilities" of offsetting them in the subsidiary's country.

On this basis, we are told that M&S will claw back most of the £30m refund from its Belgian and German operations, despite having argued that it should be allowed to offset losses incurred in the 1990s from now-defunct German, Belgium and French subsidiaries against profits from businesses in Britain.

The broad range of possibilities, including carrying losses forward when a subsidiary is sold, means the Treasury is unlikely to have to give companies relief except in specific circumstances.

The Telegraph reports that Treasury officials are understood to be working on the assumption that tax refunds following the judgement could be as little as £50m. But Guy Brannan of Linklaters estimates the figure is closer to £100m. Others say it could be higher.

The general view of the judgement is shared by the International Herald Tribune which also reports that the ECJ has insisted that the tax relief would only be extended once a company had exhausted all the possibilities on relief in the countries where its subsidiaries reside.

IHT also cites Guy Brannan, head of the tax department at Linklaters, this time saying that, "The strings attached to this ruling mean that the financial cost to the UK Treasury is less than expected, though the ruling does offer greater scope for tax relief to companies and it could still mean losses for governments across the EU."

Nevertheless, the EU commission is still seeking to exploit the ruling, declaring that the case showed the need for a co-ordinated EU framework for corporate tax. And the IHT says that the ruling will intensify the growing battle between those countries like France that want greater uniformity in tax policies and those like Britain that insist fiscal policy should remain firmly under the control of national governments.

The EU tax commissioner, Laszlo Kovacs, has argued that unless EU governments yield some sovereignty over corporate taxes, the European court would push tax harmonization through its rulings. Legal experts contend the European Court of Justice has become increasingly activist in recent years and that a broadening swath of its rulings on EU corporate law has gradually introduced unification of tax policies through the back door.

Brannan of Linklaters said the Marks & Spencer case was important but not an isolated indicator of the court's direction. "The court became more assertive in the mid-1990s on personal taxation issues and it has recently become more activist on regulations affecting companies," he said.

British officials are adamant that the EU should not strengthen its powers over taxation at the expense of national governments. "We want tax competition, but we do not want tax harmonisation which is not what is needed in a flexible economy," said a Treasury official.

Because of the complexity of the decision, M&S are studying it carefully before making a detailed statement, and more details may emerge once the experts have picked over the bones. One thing for sure, though, this is not the end of the matter, and we are going to see a continuation of pressure from both the ECJ and the commission, seeking to bring member state tax laws into line.

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