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EC opens in-depth investigation into UK tax scheme for multinationals

Staff Writer |
The European Commission (EC) has opened an in-depth probe into a UK scheme that exempts certain transactions by multinational groups from the application of UK rules targeting tax avoidance.

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It will investigate if the scheme allows these multinationals to pay less UK tax, in breach of EU State aid rules.

Commissioner Margrethe Vestager in charge of competition policy said: "All companies must pay their fair share of tax. Anti-tax avoidance rules play an important role to achieve this goal.

But rules targeting tax avoidance cannot go against their purpose and treat some companies better than others.

This is why we will carefully look at an exemption to the UK's anti–tax avoidance rules for certain transactions by multinationals, to make sure it does not breach EU State aid rules."

The general purpose of the UK's Controlled Foreign Company (CFC) rules is to prevent UK companies from using a subsidiary, based in a low or no tax jurisdiction, to avoid taxation in the UK.

In particular, they allow the UK tax authorities to reallocate all profits artificially shifted to an offshore subsidiary back to the UK parent company, where it can be taxed accordingly.

CFC rules in general are an effective and important feature of many tax systems to address tax avoidance.

However, since 2013, the UK's CFC rules include an exception for certain financing income (i.e. interest payments received from loans) of multinational groups active in the UK – the Group Financing Exemption.

Generally speaking, financing income is often used as a channel for profit shifting by multinationals, given the mobility of capital.

The UK's Group Financing Exemption exempts from reallocation to the UK, and hence UK taxation, financing income received by the offshore subsidiary from another foreign group company.

Thus, a multinational active in the UK can provide financing to a foreign group company via an offshore subsidiary.

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