by Jerome a Paris
Tue Dec 13th, 2005 at 05:28:06 AM EST
EU court backs M&S in landmark tax case
The European Court of Justice on Tuesday ruled that Marks and Spencer can claim tax relief on losses overseas, with certain conditions, in a landmark case which could cost European exchequers billions of euros if they are forced to refund tax to other multinationals.
A statement from the court in Luxembourg said: “Where in one member state the resident parent company demonstrates to the tax authorities that those conditions are fulfilled, it is contrary to freedom of establishment to preclude the possibility for the parent company to deduct from its taxable profits in that member state the losses incurred by its non-resident subsidiary”.
The UK retailer wants to reclaim £30m ($52.92m) in back taxes claiming the British government has infringed European Union law by refusing to allow tax losses from its overseas subsidiaries to be offset against its UK profits.
M&S suffered serious losses in its German and French subsidiaries in the late 1990s, and the company, resident for tax purposes in the UK, sought “group relief” under UK tax laws. But a British court rejected the claim on the grounds that “group relief only applied to losses incurred in the UK”.
Lawyers for Marks & Spencer argued in court that differences in tax treatment between domestic and foreign branches of the same company violate EU laws on “freedom of establishment’’.
What this could mean is that companies will be authorised to centralise their profits in an affiliate in European country with the lowest tax rates, and pay taxes only there, by creating losses (fairly easy with smart transfer pricing when you have subsidiaries all over the place) in high tax jurisdictions and profit in others.
The race to the bottom is on.