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No tax refund flood seen after key EU ruling

Posted on: Tuesday, 13 December 2005, 06:25 CST

By Jan Strupczewski and Michele Sinner

BRUSSELS/LUXEMBROUG (Reuters) - A landmark ruling on corporate tax by the European Union's top court on Tuesday gave British retailer Marks & Spencer conditional rights to relief on overseas losses but limited the financial impact on governments.

The European Court of Justice ruled that Marks & Spencer can claim tax relief on losses incurred outside its home market but only when all possibilities of relief in the countries where its subsidiaries trade have been exhausted.

A senior tax expert said the ruling was likely to cost European treasuries hundreds of millions of euros rather than the feared billions in refunds.

"It is quite narrow in its impact and implication, so I think that at the moment the floodgates will not be opening," said Chas Roy-Chowdhury, Head of Taxation, at the Glasgow based Association of Chartered Certified Accountants (ACCA).

The English High Court asked the ECJ for guidance after the British government said Marks & Spencer could not offset losses of its subsidiaries in other EU countries, even though it would be allowed to do so if the subsidiaries were based in Britain.

The company said this was discriminatory and went against its freedom to set up shop across the 25-nation bloc.

The keenly awaited judgment said the British provisions did indeed constitute a restriction on the EU treaty right of freedom to establish a business throughout the Union.

"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 court said in a statement.

TAX COORDINATION?

Both M&S and the British Treasury said they needed more time to study the complex ruling.

The executive European Commission said the ruling showed the need for a coordination of EU corporate tax systems that it has long advocated against strong opposition from countries such as Britain and Ireland.

In Germany, where officials had feared the ruling could cost them tens of billions of euros, there was a sigh of relief.

"The judgment is in line with expectations...There are no grounds for budget experts to be worried," said Alfons Kuhn, tax expert of Germany's chambers of commerce and industry (DIHK).

He said he did not expect it to trigger change in the way multinationals in Europe arrange themselves for tax purposes.

One EU diplomat called the ruling a "score draw."

Scores of other British companies have claimed similar relief to the M&S case but their hopes of a windfall from the M&S precedent looked uncertain.

However, in a condition that may limit the impact of the ruling on national treasuries, the Court said a company cannot claim tax relief twice on the same losses -- as a group across the EU and within individual member states.

"Although this might be quite a good result for M&S, I don't think you can read a broad principle this will lead to taxpayer success across the board. Each claimant is now having to go back and look at its individual circumstances before it can assess its prospects of success," said Mark Persoff, senior tax lawyer at Clifford Chance in London.

** For text of ECJ tax ruling, double click on

(Additional reporting by Huw Jones in Strasbourg, Elaine Hardcastle in London, Nicholas Antonovics in Berlin and Paul Taylor in Brussels)

Source: REUTERS

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