The EU Commission Can Mean Big Payouts for Taxpayers14th June 2022
If it weren’t hard enough to worry about scrutiny from tax authorities, taxpayers also have to watch out for the EU Commission. The Commission has put tireless efforts into identifying—and eliminating—illegal forms of state aid, which can mean a huge back-tax bill for taxpayers. If the Commission believes that an EU country is granting a taxpayer an unfair competitive advantage, be through a tax break or a preferential rate, it can order the country to collect the rightful amount of back taxes from a taxpayer. For various reasons, jurisdictions can protest those hefty tax collections and, like taxpayers, take the EU Commission to court—which is exactly what happened in the cases of the U.K. vs the European Commission and ITV PLC vs European Commission.
The backstory? The U.K. granted tax breaks to the British television network, ITV, on income earned from interest on loans ITV granted to its controlled foreign corporations, from pre-Brexit years 2013 through 2018. In 2019, the EU Commission launched an investigation and found that the set-up violated the U.K.’s controlled foreign company rules, which allows British tax authority, HMRC, to allocate profits that were wrongfully diverted to an overseas subsidiary back to the British parent company. Between 2013 and 2018, however, the U.K. offered an exemption to ITV for interest payments on loans between the companies, and the Commission found the exemption violated state-aid rules. The U.K. disagreed, and instead of collecting millions of euros in back taxes, took the EU Commission to court. ITV, the multinational taxpayer, did the same.
Last week, the verdict came in: The court agreed with the EU, claiming that favorable treatment on revenue loaned from the U.K. parent to a cross-border related party, provided unfair advantages to those companies that received the tax breaks. What happens next? The U.K. and ITV can accept the decision (separately), and the U.K. can recover millions in back taxes. Or, each can appeal to the EU Court of Justice. Either way, the cases prove that the EU Commission is yet another force that taxpayers have to worry about.