Press Release from www.brugesgroup.com
For Immediate Release
On Thursday, 6th April 2006 the Advocate General issued an opinion today, which if followed by the European Court of Justice, will poke another hole in British tax sovereignty. It will mean that dividends paid from EU companies to the UK should be exempt from tax, rather than taxed as they currently are under UK law.
The Advocate General criticised the British Government's defence, even though HM Treasury's estimates that £7 BILLION of tax is at stake, saying,
"I note that the UK government has not attempted to provide any justification for its failure to raise the temporal limitation plea in its written submissions, or for its failure to provide substantial argument on the issue during the procedure before the Court as a whole."
This is a shocking expose of the Government's lax attitude to protect British sovereignty on tax matters and a sharp contrast to Gordon Brown's proclaimed defiance.
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Notes for Editors
This case is another in the list of cases being brought predominantly by UK business arguing that certain provisions of the UK tax law is contrary to the Freedom of Capital and Freedom of Establishment Articles of the EU treaty, and hence should be disapplied.
Typically, dividends paid from companies resident in other EU countries to the UK are taxed in the UK, but with credit given for taxes suffered overseas. Therefore, there can be additional UK tax to pay on such dividends if not enough tax was paid overseas. Dividends paid from one UK company to another are in contrast tax-exempt.
UK business was arguing that dividends from their EU subsidiaries should be exempt so they are treated the same as UK dividends, and hence there is no discrimination.
UK business claim that the tax at stake is between £100m and £2 billion.
HM Treasury claimed that the tax at stake was up to £7 billion. According to Her Majesty's Customs and Revenue this is equivalent to increasing the basic rate of income tax by 2.33p for one year.
One variable as to how much was at stake is how far companies can go back in claiming that UK law was applied incorrectly. Arguably claims could be made back to 1973 when the UK joined the EU. The UK government sought to argue for a timelimit in order to protect UK tax revenues.
The Advocate General rejected the UK government's claims for a temporal limit, extracts from his opinion are shown below:
"144. In the present case, the plea of limitation of temporal effects was not raised by the UK government in its written submissions. Rather, it raised this plea at the oral hearing, without providing detailed substantive arguments or evidence on either of the two elements of which, by the consistent case law I set out above, the Court needs to be satisfied in order to limit the temporal effect of a judgment. As regards the first element - risk of serious financial repercussions owing to the large number of legal relationships entered into in good faith on the basis of rules considered to be validly in force - while the UK estimated the potential figure at stake as £ 7 billion, it gave no indication of how it arrived at this figure, or of the number of affected legal relationships upon which it was based. The UK government did not offer any more clarification on the issue in response to the Test Claimants' counter argument that the true amount at stake would be between £ 100 million and £ 2 billion."
"145. For these reasons, I am of the view that the Court should reject the UK government's plea of temporal limitation without more, on the basis of insufficient substantiation. I note that the UK government has not attempted to provide any justification for its failure to raise the temporal limitation plea in its written submissions, or for its failure to provide substantial argument on the issue during the procedure before the Court as a whole."