Taxation of Multinationals: Winter th Edition

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1 Taxation of Multinationals: Winter Arguably enjoys the best contentious tax capability in the city Ranked Top for Tax Litigation Legal 500, 2009 & 2010 Winner: European Tax Litigation Firm of the Year, 2009 and 2007 Winner: European Court of Justice Firm of the Year, 2008 Winner: Editor s Award, 2006 Phenomenal EU litigation expertise. Ranked Top for Contentious Tax 2008, 2009 & 2010 Tax Team of the Year, 2006 Legal Business Awards Simply, Dorsey & Whitney s tax team is the biggest advantage UK corporates currently have when disputing harmful tax legislation. Paul Farmer, Tax Lawyer of the Year 2006 LexisNexis

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3 Taxation of Multinationals: Winter Table of Contents Introduction 1 Michael Anderson Articles The Marks & Spencer Group Relief Litigation: The No Possibilities Test 3 Paul Farmer and Alison Last Recent EU law challenges to dividend taxation in the Court of Justice of the European Union 12 Philippe Freund Analysis: Capital Air Services and Tax Tribunal costs 17 Simon Whitehead New rules for US tax credits affect multinationals with a US parent 20 Nathan Simmons European Challenges Update 21 Michael Anderson Inside Counsel and Legal Professional Privilege 24 Nathan Simmons Updates Vodafone 2 settles 30 Michael Anderson VAT and Compound Interest Update 30 Robert Waterson Astra Zeneca UK C-40/09 Retail Vouchers Scheme Judgment 30 Robert Waterson MJP Media Services Limited Partial loan waivers between connected companies not deductible for tax purposes 31 Robert Waterson Wilkins Compound interest in VAT claims- Court of Appeal judgment 31 Nathan Simmons Akzo Nobel Chemicals & Akcros Chemicals C-550/07: Limitations on Legal Professional Privilege for In-House Counsel 32 Alexander Steyne European Limitations on Attorney-Client Privilege for Inside Counsel Akzo Nobel Chemicals & Akcros Chemicals ECJ Case C-550/07 P 32 Paul Farmer, Michael A. Lindsay, and Nathan Simmons Commission formally requests that the UK change s.107 FA07 34 Kelly Stricklin-Coutinho C-173/09 Elchinov: Lower courts not bound by incompatible national precedents 34 Philippe Freund and Oliver Neil Dividend taxation: ECJ hearing C-436/08 Haribo & C-437/08 Österreichische Salinen AG 34 Philippe Freund ECJ Hearing in C-262/09 Meilicke II and C-310/09 Accor on 27 October Philippe Freund Capital Air Services v HMRC: the Complex Track and Tribunal Costs Regime 35 Robert Waterson C-175/09 AXA UK Plc.: ECJ Reverses Position on BACS Charges 35 Robert Waterson

4 Table of Contents Taxation of Multinationals: Winter FII Group litigation: Leave to Appeal to the Supreme Court 36 Philippe Freund CFC & Dividend GLO High Court Judgment Adjourned 36 Robert Waterson Dividend Taxation: Advocate General s Opinion in Haribo and Salinen (C-436/08 and C-437/08) 36 Philippe Freund Littlewoods, Compound Interest 36 Robert Waterson Wilkins Compound Interest Supreme Court refuses HMRC permission to appeal 37 Nathan Simmons Denmark, Netherlands and Spain Exit Taxes ECJ infringement proceedings commenced 37 Nathan Simmons Belgium Withholding Taxes Reasoned Opinion given 37 Nathan Simmons Authors 38

5 Taxation of Multinationals: Winter Introduction Michael Anderson Welcome to our of Taxation of Multinationals, summarising the latest developments during the second half of 2010 As we enter the holiday period, Mr Justice Henderson in the High Court has just agreed the terms of a second reference to the ECJ in the FII GLO and this should now be winging its way to Luxembourg. The Court of Appeal judgment in February 2010 was not good news for the taxpayer but the Supreme Court recently granted the test claimants permission to appeal on a number of the issues, while ordering that several other issues should be referred back to the ECJ. The reference essentially seeks further clarification of various elements of the ECJ s original judgment of December It seems likely that the ECJ will require a hearing and so their judgment may not be seen for at least 18 months. The Supreme Court will move more quickly and we should have a final determination on many of the domestic law remedies issues that arise by this time next year. Many of those issues have broader relevance across various other GLOs, including for example the legality of section 320 of the Finance Act 2004 and section 107 of the Finance Act 2007, which greatly limited taxpayers ability to bring claims for historic breaches of Community law. Those provisions were introduced with retrospective effect from the dates of their announcement, without any transition period. Section 107 is of course also now the subject of infringement proceedings by the European Commission. In other cases, we are currently awaiting a number of significant judgments. In October, the test cases in the Thin Cap GLO came before the Court of Appeal. Following the ECJ and High Court judgments in Thin Cap, the ECJ had given a further ruling in the SGI case (C-311/08). At the hearing in the Court of Appeal, HMRC argued that the SGI decision supports their position and should therefore swing things in their favour. Also before the Court of Appeal is the issue of whether any infringement by the UK amounted to a sufficiently serious breach to entitle the test claimants to damages, in addition to the more limited remedy of restitution. We expect a judgment early in the New Year In November 2010, the Court of Appeal also heard the appeal by the test claimants in Classes 2 and 4 of the ACT GLO, against Henderson J s judgment in favour of HMRC. This is the third time that some of these test cases have been before the Court of Appeal in this GLO and there could yet be a further reference to the ECJ. The issues arising are described in some further detail in my article on page 21. The portfolio dividends case in the CFC & Dividend GLO raises a number of issues similar to some of those being taken in the FII GLO. The High Court trial took place before Mr Justice Henderson in November 2009 and May Given that the Supreme Court has now granted permission to appeal in FII, Mr Justice Henderson informed us in early November that he will await the Supreme Court s ruling before giving his substantive judgment in this case. Finally, a number of our clients with cross border group relief claims now wish for some of their substantive issues, which do not arise in the M&S case, to be determined as preliminary issues. These issues essentially boil down to several group structures which HMRC consider an absolute bar to group relief. HMRC are resisting this preliminary issue approach and the Tax Chamber of the First-tier Tribunal should shortly let us know whether or not we are able to proceed as we and our clients wish. We therefore enter 2011 in anticipation of reaching a final resolution during the coming year of some of the

6 2 Taxation of Multinationals: Winter Introduction fundamental issues arising in many of the GLOs. As ever, we thank our clients for their continued support and on behalf of the partners I thank our excellent team for their hard work in another busy six months. n

7 Taxation of Multinationals: Winter The Marks & Spencer Group Relief Litigation: The No Possibilities Test Paul Farmer and Alison Last Introduction Since the decision of the ECJ in the Marks and Spencer ( M&S ) group relief litigation, how has the no possibilities test formulated by that court developed and did it provide the necessary answers in the M&S case? Background Most readers will be familiar with the basic facts of the M&S case. M&S is one of the leading general retailers in the United Kingdom specialising in clothing, food and homewares. Between 1975 and 1995, M&S expanded its operations into continental Europe by establishing subsidiaries in countries including France ( MSF ), Belgium ( MSB ) and Germany ( MSG ). Those subsidiaries thereafter operated stores for the purpose of carrying on the business of M&S in Europe. The subsidiaries were all indirectly owned by Marks and Spencer plc, a company resident in the UK. The subsidiaries, however, were persistently and chronically loss making and it is those losses that are the subject of the claims for cross border group relief. Eventually, on 29 March 2001, the Board of M&S announced that it would close its European stores. For the purpose of understanding the timing of claims for group relief made by M&S, it is necessary to go into a little more detail of the facts relating to the Belgian and German subsidiaries. The claims in respect of the losses of MSF were eventually withdrawn after it was discovered that they had been utilised by the third party purchaser of MSF. In the case of MSB, its stores were profitable at first, but made no profits in the four years prior to cessation of trade in December MSB entered into liquidation in October 2006 and was dissolved in December Its assets had been distributed by March On the other hand, MSG was never profitable before it ceased trading in August That company entered into liquidation in October 2006 and was dissolved in December M&S made claims for group relief in respect of the losses of MSB, MSG and MSF. Those claims were refused by the Revenue. Group Relief Provisions In UK Prior to analysis of the claims for group relief made by M&S, it is necessary to provide further background as to the way the group relief provisions operate in the UK. A preliminary point to make is that the United Kingdom system of group relief, unlike, for example, the Dutch system, is not a system of fiscal consolidation. The criticism levelled at the decision of the ECJ in X Holding 1 by other contributors, namely that the ECJ focused exclusively on losses to the exclusion of other elements of fiscal consolidation, therefore, has no application to the UK system. The United Kingdom rules provide for the surrender of current year trading losses and certain other items for set off against profits of other group members. The function of the arrangements is primarily to give groups the cash flow benefit of obtaining relief for losses in the current year rather than in future years by carrying forward the losses. It can however lead to a permanent benefit where a group member makes terminal losses (i.e. losses that can never be used by way of carry forward relief). Sections 402 and 403 of the Income and Corporation Taxes Act 1988 ( ICTA ) provide as follows: 402. Surrender of relief between members of groups and consortia (1) (...) (a) relief for trading losses and other amounts eligible for relief from corporation tax, or (b) losses and other amounts not eligible for relief from corporation tax, may (...) be surrendered by a company ( the surrendering company ) and, on the making of a claim by another company ( the claimant company ) may be allowed to the claimant company by way of a relief from corporation tax called group relief Amounts which may be surrendered by way of group relief (1) If in an accounting period ( the surrender period ) the surrendering company has - (a) trading losses, excess capital allowances or a non-trading deficit on its loan relationships, or

8 4 Taxation of Multinationals: Winter The Marks & Spencer Group Relief Litigation: The No Possibilities Test (b) charges on income, UK property business losses, management expenses or a non-trading loss on intangible fixed assets available for group relief, the amount may, subject to the provisions of this Chapter, be set off for the purposes of corporation tax against the total profits of the claimant company for its corresponding accounting periods. Another feature of the UK s group relief rules is that for accounting periods ending on or before 31 March 2000, it was necessary that both the surrendering company and the claimant company should be resident in the United Kingdom (section 413(5) ICTA). For later periods (following an amendment introduced by Finance Act 2000, in the wake of Imperial Chemical Industries plc v Colmer (HMIT) 2, group relief could be claimed where the surrendering and claimant companies were either resident in the UK or non-resident but carrying on a trade in the UK through a branch or an agency (section 402(2)(b)). The distinction in the two sets of rules is not relevant for the purposes of M&S. What is relevant, however, and therefore more important to note, is that the claims for group relief made by M&S span two different corporation tax systems: pay and file and corporation tax self assessment ( CTSA ). The way in which the pay and file system worked was that the Revenue was responsible for making an assessment to tax based on the information provided by the taxpayer in the tax return. CTSA was introduced for accounting periods ending after 1 July As the name suggests it is a system for companies to self assess their own liability to corporation tax. The new regime provided a process now, check later system for the Revenue to enquire later into tax returns to check for their accuracy and completeness. This meant that the Revenue had a 12 month window from the date of the return to address any specific concerns they had with a return. In the absence of such an enquiry the return was considered final. It is also necessary to explain the statutory provisions as regards the timing of any claims for group relief under both corporation tax systems, which are of particular importance in the context of this case. In particular the UK s legislation provides as follows: For pay and file periods, paragraphs 2 to 5 of Schedule 17A to ICTA provide: 2. (1) No claim for an accounting period of a company may be made if - (a) the company has been assessed to corporation tax for the period, and (b) the assessment has become final and conclusive. (2) Sub-paragraph (1) above shall not apply in the case of a claim made before the end of 2 years from the end of the period. (3) This paragraph applies to the withdrawal of a claim as it applies to the making of a claim. 3. (1) No claim for an accounting period of a company shall be made after the end of 6 years from the end of the period, except under paragraph 5 below. (2) This paragraph applies to the withdrawal of a claim as it applies to the making of a claim. 4. Where under paragraph 2 or 3 above a claim must not be made after a certain time, it may be made within such further time as the Board may allow. 5. (1) A claim for an accounting period of a company may be made after the end of 6 years from the end of the period if- (a) the company has been assessed to corporation tax before the end of 6 years from the end of the period, (b) the company has appealed against the assessment, and (c) the assessment has not become final and conclusive. (2) No claim for an accounting period of a company may be made... after the end of 6 years and 3 months from the end of the period. For the CTSA periods, i.e. for claims in the period ended 31 March 2000 and beyond, Schedule 18 to the Finance Act 1998 provide as follows: 73.(1) A claim for group relief may be withdrawn by the claimant company only by amending its company tax return. (2) A claim for group relief may not be amended, but must be withdrawn and replaced by another claim.

9 Taxation of Multinationals: Winter The Marks & Spencer Group Relief Litigation: The No Possibilities Test 74. (1) A claim for group relief may be made or withdrawn at any time up to whichever is the last of the following dates- (a) the first anniversary of the filing date for the company tax return of the claimant company for the accounting period for which the claim is made; (b) if notice of enquiry is given into that return, 30 days after the enquiry is completed; (c) if after such an enquiry the Inland Revenue amend the return under paragraph 34(2), 30 days after notice of the amendment is issued; (d) if an appeal is brought against such an amendment, 30 days after the date on which the appeal is finally determined. (2) A claim for group relief may be made or withdrawn at a later time if the Inland Revenue allow it. (3) The time limits otherwise applicable to amendment of a company tax return do not apply to an amendment to the extent that it makes or withdraws a claim for group relief within the time allowed by or under this paragraph. (4) The references in sub-paragraph 1 to an enquiry into a company tax return do not include an enquiry restricted to a previous amendment making or withdrawing a claim for group relief. An enquiry is so restricted if- (a)the scope of the enquiry is limited as mentioned in paragraph 25(2), and (b)the amendment giving rise to the enquiry consisted of the making or withdrawing of a claim for group relief. The UK legislation accordingly provides that in the case of pay and file periods, any claims for group relief are required to be made, at the latest, within 6 years and 3 months of the end of the accounting period to which the claim relates. The claims made by M&S (for the losses of MSB and MSG) are described in more detail below. It is not necessary in this paper to make a distinction between the claims of the different subsidiaries or identify which subsidiaries had claims in a particular period. That is a matter of record. However, it is necessary to note here that in respect of the periods ended 31 March 1998 and 31 March 1999, claims were made within two years of the end of the accounting period and were accordingly in time. Certain claims for group relief for the periods ended 31 March 1996 and 31 March 1997 were not made until 20 March 2007 and were therefore beyond the last time limit noted in paragraph 5(2) of Schedule 17A to ICTA. For CTSA periods, i.e. claims made for the periods ended 31 March 2001 to 31 March 2002, the claims for group relief made by M&S fell within the statutory time limits because enquiries were still open in respect of those periods (section 74(1)(d) ICTA). The Claims for Group Relief The claims for group relief made by M&S relate to the periods ended 31 March 1996 to 31 March 2002 (i.e. for both pay and file and corporation tax self assessment (CTSA) years). It is important to note that there are essentially three groups of claims (leaving aside the distinction between pay and file and CTSA claims): The original claims made between 31 March 2000 to 17 February 2003, which were made in the run up to or after cessation of trade; Post-Court of Appeal claims dated 20 March 2007 and 27 June 2007 were made during the liquidations of MSB and MSG; The latest claims were made on 12 December 2007 and 11 June 2008 during the final stages of liquidation or after dissolution of MSB and MSG. The timing of the claims for group relief is significant and it is important to note that the dates of the later claims were not chosen arbitrarily. The decision of the Court of Appeal was handed down on 20 February at which time Chadwick LJ concluded that the time to make claims for group relief should be extended to allow claims within a reasonable period of the decision of the ECJ 4. M&S therefore made further claims for group relief on 20 March The claims made on 12 December 2007 were made after the liquidation of MSG was completed (it was dissolved on 27 December 2007). That date was also within two years of the decision of the ECJ. Further claims for group relief were made by MSB on 11 June 2008 after that company had been dissolved.

10 6 Taxation of Multinationals: Winter The Marks & Spencer Group Relief Litigation: The No Possibilities Test The first claims for cross border group relief were refused by the Revenue on the grounds that group relief could only be given for losses arising in a UK resident group company. That decision was accordingly appealed by M&S to the Special Commissioners, who heard the appeal in November The taxpayer was unsuccessful in its appeals 5. The Special Commissioners concluded that the failure of the UK to allow claims for group relief for the losses of a non-uk resident subsidiary company was not contrary to the principle of freedom of establishment enshrined by article 43 EC. The Special Commissioners also determined that any obstacle to the freedom of establishment caused by the denial of group relief would be justifiable for the purpose of maintaining the coherence of the UK s tax system. The decision of the Special Commissioners was therefore appealed to the High Court. It was at this stage that Park J determined that it would be necessary to seek guidance from the ECJ by way of a preliminary ruling under article 234 EC. The ECJ S Decision Broadly, the principal question that the ECJ was required to answer can be summarised as follows: did the denial of group relief in respect of the losses of a non-uk resident subsidiary amount to a restriction under article 43 EC and was that restriction justified under Community law? The ECJ also had to consider the impact of possible use of the losses in the local jurisdiction and, indeed, it is that latter issue which has given rise to much of the subsequent litigation described later in this paper. In its preliminary ruling the ECJ had to answer the referred questions and address, according to Advocate General Poaires Maduro at paragraph 6 of his Opinion, the conflict between the power conferred on the member states to tax income arising in their territory and the freedom conferred on Community nationals to establish themselves within the Community. In his opinion, Advocate General Maduro bemoaned the lack of Community legislation dealing with questions on direct taxation matters such as those which arose in M&S and a number of preceding cases, including ICI v Colmer and others, and confirmed: the need to establish an equilibrium in the allocation of competencies between the member states and the Community. Advocate General Maduro closely examined the long line of ECJ case law dealing with instances of discrimination, freedom of establishment and the justifications of territoriality and fiscal cohesion. He concluded that it was unlawful for the UK to refuse claims for cross border group relief and that the UK s rules were in breach of the fundamental freedom of establishment. He further opined that the justification of coherence is only available where the losses can be afforded equivalent treatment in the state in which they arise (paragraph 76). That was not the case with the UK s system of group relief. Thereafter, in its judgment of 13 December 2005 the ECJ held that the territorial restriction was justified by a combination of three factors: 1. balanced allocation of taxing powers, namely the interest in symmetry between taxation of profits and deductions; 2. preventing double use of losses; and 3. tax avoidance, meaning in this context, jurisdiction shopping. However, while the restriction was, in principle, justified by the above three interests, the application of the restriction was disproportionate where there was no possibility of local use of the loss. The no possibilities test was accordingly met where: (a) the non resident subsidiary had exhausted the possibilities available in its state of residence of having the losses taken into account for the accounting period concerned and also for previous accounting periods; and (b) there was no possibility for the subsidiary s losses to be taken into account in its state of residence for future periods, either by the subsidiary itself or by a third party, in particular where the subsidiary had been sold to that third party. The ECJ s concern seems to have been to prevent the balanced allocation of taxing powers from being

11 Taxation of Multinationals: Winter The Marks & Spencer Group Relief Litigation: The No Possibilities Test undermined by allowing a breach of symmetry between taxation and deductions to be aggravated either by jurisdiction shopping or double dipping. That the requirement of symmetry is not absolute is clear from the fact that giving relief for final losses is actually more detrimental to symmetry than giving relief for temporary losses. On the M&S facts, provided that it could be established that there was no possibility of use, there were no aggravating factors further undermining the balanced allocation of taxing powers. There was no scope for manipulation by the taxpayer. The ECJ s reasoning seems to have been that the restriction was disproportionate in such circumstances. The potential for a breach of symmetry combined with the possibility of manipulation by the taxpayer (with the risk to the balanced allocation of taxing powers) is a theme which the ECJ continues in X Holding. Application of the Judgment of the ECJ After the judgment of the ECJ, there were three key issues for the English courts to consider in the light of the ECJ s ruling: In what circumstances is the no possibilities test met? When does it have to be met: at the end of the accounting period or at the date of the claim (and, if so, which claim)? How is the amount of the losses available for surrender and the amount of losses utilised to be computed? High Court The matter returned first to Park J in the High Court who had earlier referred the matter to the ECJ. He handed down a relatively short judgment in April to apply the decision of the ECJ to the facts of M&S. One issue that arose was whether following the ECJ s judgment the restriction on cross border group relief was simply to be disapplied in favour of M&S or whether M&S had to show that it met the no possibilities test. He ruled that M&S was required to show that it met the test. M&S did not push the claim for the losses of MSF very hard before Park J as by this stage it was known that the third party purchaser of MSF, Galeries Lafayette, either had or was in a position to use the losses later. Park J held that these losses did not satisfy the no possibilities test set down by the ECJ. As for MSB and MSG, the question was whether the losses could still be used and whether therefore the claims for group relief fell within the conditions in paragraph 55 of the judgment of the ECJ. In his examination of the no possibilities test, Park J held that no possibilities meant no recognised possibilities legally available given the objective facts of the company s situation at the relevant time. The judge considered that if a subsidiary was no longer trading and that there was no way in which the tax laws of the country in which the losses arose would permit utilisation of the losses, then the no possibilities test would be satisfied. Park J did not consider that there was sufficient evidence before him, especially in respect of the tax laws of Belgium and Germany, to be able to apply the no possibilities test to the facts of M&S. He did, however, hold further that the facts did not include the degree of probability or improbability of returning to profitability in the future. He accordingly ruled that the matter would have to return to the Special Commissioners for further submissions and evidence to determine the appeals against the refusal of claims for group relief in the light of the judgments of the ECJ and the High Court. In respect of the date upon which the no possibilities test had to be met, he ruled that it should be at the date of the claim for group relief. He also considered whether it should be at the end of the accounting period in which the losses arose but that, he determined, would be too short a period for the claimants and would rule out a claim for group relief in virtually all cases. Court of Appeal In the event, both parties appealed the judgment of the High Court to the Court of Appeal. There was no appeal by M&S in respect of the denial of group relief of the losses of MSF. That aspect of the litigation had therefore concluded. M&S had appealed the direction of Park J that the appeals should be remitted to the Special Commissioners to be determined in the light of the ECJ judgment and his decision in the High Court. It was argued that the Special Commissioners were not in a position to rule on whether MSB and MSG had satisfied the no possibilities test and that the

12 8 Taxation of Multinationals: Winter The Marks & Spencer Group Relief Litigation: The No Possibilities Test Special Commissioners were bound to follow Park J s interpretation of the test. On appeal, the Court of Appeal 7 held that the judge was correct in his interpretation of the ECJ s judgment in the sense that it was insufficient to show little or no real likelihood of utilisation of losses. However, there was a risk that the judge s remarks might be misunderstood. The Court of Appeal therefore went on to state itself what was meant by there being no possibility of use. That was that no possibility meant no real possibility in the sense that a real possibility is one which cannot be dismissed as fanciful. As regards the moment when the no possibilities test had to be met, Park J had held that this had to be the date of the claim. The Court of Appeal upheld that finding. It was clear to the Court of Appeal that the correct moment was the date of the claim for group relief even though the Revenue had argued that the appropriate time was at the end of the accounting period in which the losses arose. The Court of Appeal also stated that it would be reasonable for the Revenue to expect, along with the claim for group relief, some evidence that the claims satisfied the no possibilities test. It was suggested that some kind of certificate from the local tax authority that there was no possibility of utilising the losses would be sufficient, although it would be open to the claimant to provide some other form of objective evidence in this regard. M&S had also argued that the principle of effectiveness required that it should be allowed to make claims for group relief within a reasonable time period following the date on which is Community law rights were established, i.e. it was argued that M&S should be allowed a reasonable amount of time from the date of the judgment of the ECJ to make new claims for group relief. The Court of Appeal, relying on its own decision in Condé Nast 8, commented that it should. This was significant because M&S was already out of time to make group relief claims in respect of certain of the pay and file accounting periods. This explains why M&S made claims for group relief in March First-tier Tribunal By this stage the parties had firm guidance on what the ECJ meant when it adumbrated the no possibilities test. The Revenue had sought leave to appeal the decision of the Court of Appeal to the House of Lords. That application was refused. The matter therefore came next before the FTT 9, composed of Tribunal Judges John Avery Jones CBE and Malcolm Gammie QC (who heard the case originally in the Special Commissioners as it then was). The role of the FTT was to apply the relevant principles to the facts of M&S. The Revenue s case before the FTT was as follows: The no possibilities test could not be met until such time as liquidation of the subsidiaries had been fully completed. The no possibilities test was not met at the date of the first claims. The later claims were not valid as the first claims had not been withdrawn by M&S. Even if the later claims for group relief were valid, the no possibilities test was not satisfied until such time as liquidation of the subsidiaries was concluded. The claims for group relief made post-liquidation of the subsidiaries were not valid claims as the purported surrender of losses after liquidation was a nullity. If some losses could be used then the no possibilities test was not met for any of the losses. Before the FTT, M&S advanced expert evidence that the expansion into Germany was doomed from the start and that the stores opened in Germany could never have made a profit. This was dismissed by the FTT as being simple opinion and not evidence of objective facts as required for the no possibilities test. It added that in so far as such evidence was relevant, then it was not sufficient as the witnesses for M&S could not rule out the possibility that profits would arise in the future, either by a change of business (e.g. to group lending) or by a change in the commercial environment. The FTT then went on to consider how much of the losses qualified for group relief. It held that at one extreme if a company was still trading (or had ceased trading) but losses could still be carried forward, the question as to whether or not it was possible to use them depended on the likelihood of making profits. In such circumstances none of the losses qualified.

13 Taxation of Multinationals: Winter The Marks & Spencer Group Relief Litigation: The No Possibilities Test At the other extreme, if (as here) a company was in liquidation and could not start any new business but held some cash on which interest was earned, the estimated income during liquidation was an objective fact and losses had to be split between those which on the balance of probabilities could be used and those which could not. The suggestion that the liquidator could make profitable investments that used more losses or that liquidation could be terminated and the business re-launched were fanciful in the circumstances. The FTT went on to apply those criteria to the various claims. It held that the first claims were made preliquidation and therefore the test was not met. All the later claims, however, made during liquidation or after dissolution of companies were valid because the test was met. Moving on to quantum, the FTT held that the no possibilities test could only be applied to losses as computed under local law. Local law had to determine whether any particular amount of loss could be used. The balance of losses meeting the no possibilities test had then to be converted into sterling and recomputed according to UK tax principles. One consequence that was not considered by the FTT in its decision was that the effect of converting the losses to comply with UK tax principles, was to move certain of the losses from one year to the next. In other words, in addition to permanent differences between the local and UK tax bases, there were also simple timing differences, owing to the years in which profits and losses were recognised under the two sets of rules. The issue arose therefore as to whether the losses for which M&S could claim relief were to be reduced by such timing differences. Following a further hearing, the FTT 10 decided that M&S could have the benefit of such timing differences and rejected the Revenue s view that M&S could only group relieve the lowest of local and UK losses in any particular year. In a seemingly endless series of hearings the case went next on appeal to the Upper Tribunal. Upper Tribunal Decision The Upper Tribunal ( UT ) handed down its decision on 21 June The UT largely followed the decision of the FTT save in one significant area: the validity of the claims made in respect of pay and file periods. The issues to be determined by the UT on appeal were: whether M&S had made valid group relief claims and, if the claims had been made out of time, should M&S be entitled to make late claims; whether the losses which were the subject of the group relief claims satisfied the no possibilities test; and how should those losses be computed for the purpose of the group relief claims. The UT firstly examined the no possibilities test. The Revenue again had argued that if there was a possibility that part of the losses in an accounting period might be used in the future, then the no possibilities test should not be satisfied as against any of the losses accrued in the period. The UT did not accept that there was any rational basis for that argument. In its analysis of the no possibilities test the UT considered that there were two limbs to the test: 53. (...) (a) The first limb looks backwards and asks, for the relevant accounting period and earlier periods, whether the surrendering company has exhausted its opportunities for using the losses. (...) (b) The second limb looks forward, referring to future periods which one might think was a reference to any period after the accounting period in question. In other words, it is any period after [the end of the accounting period in which the losses accrue]. In its analysis of the two-limb test, the UT concluded that it had to be the case that the ECJ intended that the conditions of its judgment had to be satisfied at the date of the claim. Accordingly, the UT rejected the submissions of the Revenue and found in favour of M&S on this issue. The UT also addressed the issue of whether the first claims for group relief were valid (namely, those claims which were made by M&S prior to the decision of ECJ). Although the UT agreed with the FTT that the first claims failed, it reached its determination on a different basis. The FTT had found that the claims were invalid because the amount claimed exceeded the amount available for surrender. There were no

14 10 Taxation of Multinationals: Winter The Marks & Spencer Group Relief Litigation: The No Possibilities Test amounts available for surrender as none of the losses satisfied the no possibilities test. As a consequence the claims were excessive and accordingly failed under paragraph 69(2) of Schedule 18 to ICTA. The UT took a slightly different approach. Its analysis was that the claims were for the amount of nil losses because none of the losses could at that point meet the no possibilities test and could not therefore be surrendered. The UT also found that there was nothing to prevent a claimant company from making a series of claims in respect of the losses of the same surrendering company. This was an important finding. The first claims still failed but because they were for nil losses, they did not impede the subsequent claims and there was no need to withdraw the first claims prior to making further claims for group relief. Where the UT has significantly differed from the FTT is that it does not extend to M&S the ability to make further claims for group relief in respect of pay and file accounting periods where the statutory time period to make claims had long expired. It will be recalled that the statutory provisions in the UK s group relief rules set the latest possible deadline to make claims for group relief in respect of claims for group relief in pay and file years at 6 years and 3 months from the end of the accounting period. M&S did not make claims in respect of certain pay and file periods until March 2007, which was significantly more than 6 years and 3 months from the end of the relevant accounting periods. Moreover, at the date of the in-time claims it made, the no possibilities test was not met because the companies had not yet entered liquidation. At the time, however, M&S did not know the requirements for meeting the no possibilities test or even that it had to meet such a test (the test was not set down by the ECJ until December 2005). M&S accordingly argued that the principle of effectiveness required the time limit to make the group relief claims should be disapplied and that M&S should be entitled to make new claims for group relief within a reasonable time after the judgment in the ECJ or indeed after it became clear that the companies had to be liquidated. Had M&S known what was required it would have had ample time to begin liquidation - indeed the companies had been kept alive solely for the purposes of the litigation. However, the UT was not impressed by this line of argument. It concluded that the FTT was incorrect, as its decision effectively led to an extension of the application of the principle of effectiveness that was not justified by the case law. The argument that M&S should have been afforded an opportunity to make claims for group relief after the judgment of the ECJ, even where the statutory time limit had expired, accordingly failed. The UT also rejected the argument that M&S should be permitted some special transitional period to make claims on the basis that the Revenue had not sought to withdraw the right to make a claim. On an application of the no possibilities test to the facts of M&S, the UT agreed with the FTT that the no possibilities test could not be satisfied until such time as the liquidation of the subsidiaries had commenced. Accordingly, the UT held that the no possibilities test was satisfied at the date of the second and third rounds of claims for group relief made by M&S. On the final issue, the calculation of the amount of losses available for group relief, the UT supported the decision of the FTT. Thus, in summary the UT found in favour M&S for the self assessment years, which represent the bulk of the claims. Conclusions and Comments The question posed at the outset of this paper was whether the no possibilities test has been met. As things stand, M&S met the no possibilities test for MSG and MSB when the subsidiaries entered liquidation, the relevant date for applying the test being the date of the claim. However, despite the fact that M&S has been substantially successful in five different courts, including the ECJ, and at every level since the initial hearing in the Special Commissioners in 2003, the litigation continues. The decision of the UT looks set to be appealed to the Court of Appeal, which will be hearing an appeal in this litigation for the second time. Is X Holding likely to have any impact on M&S claims? The short answer is No. In X Holding the ECJ was responding to a general inquiry about the refusal of admission to the Netherlands fiscal consolidation regime and was not confronted with a particular fact pattern involving terminal losses. Interestingly, however,

15 Taxation of Multinationals: Winter The Marks & Spencer Group Relief Litigation: The No Possibilities Test the ECJ s decision in X Holding borrows heavily from that in M&S, the ECJ s concern again being a breach of symmetry exacerbated by the possibility of jurisdiction shopping. It may be that the UK courts have adopted an unduly narrow approach to the no possibilities test. The ECJ s concern about manipulation would equally be met if it could be shown that a subsidiary had no practical possibility of using the losses locally (without entering liquidation). 9 [2009] UKFTT 64 (TC) 10 [2009] UKFTT 231 (TC) 11 [2010] UKUT 213 (TCC) At the same time X Holding confirms the ECJ s decision to allow Member States to operate systems of consolidation or loss relief which reserve the significant advantage of temporary loss relief to domestic groups; and this despite the fact that more proportionate solutions are not only conceivable but have commonly been applied in practice. The explanation that such a solution is required in the interests of a balanced allocation of taxing powers or integrity of Member States tax systems does not really withstand scrutiny; and it is hard therefore to resist the conclusion that the ECJ has sacrificed the interests of the single market (and the longer term benefits which it brings for the Member States) for the short-term fiscal interests of Member States. Other papers, however, address the X Holding decision in more detail. Perhaps the main point of general significance to be made about the UK s experience with the ECJ s judgment in M&S and in particular with the no possibilities test is that, in common with many ECJ rulings, the guidance is not sufficiently precise to allow final resolution of the case by the referring UK court, with the result that the ECJ decision is just one step in the litigation. A better dialogue between judges is required if the cooperation between the ECJ and national courts is to be improved. n 1 Case C-337/08 X Holding BV v Staatssecretaris van Financiën, Judgment of 25 February Case C-264/96 [1998] ECR I [2007] EWCA Civ 117; [2008] STC Case C-446/03 Marks & Spencer plc v Halsey (HM Inspector of Taxes) [2005] ECR I [2003] STC (SCD) 70 6 [2006] EWHC 811 Ch; [2006] STC [2007 EWCA Civ 117; [2008] STC Condé Nast Publications Limited v Customs and Excise Commissioners [2006] EWCA Civ 976; [2006] STC 1721

16 12 Taxation of Multinationals: Winter Recent EU law challenges to dividend taxation in the Court of Justice of the European Union Philippe Freund Introduction The last few months have seen a number of EU law challenges to dividend tax regimes of member states in the European Court of Justice. For example, the Advocate General s opinion in the joint cases of Haribo (C-436/08) and Österreichische Salinen AG (C-437/08) was published on October 11 and the cases of Meilicke II (C-262/09) and Accor (C-310/09) were heard by the court s first chamber on October 27. Haribo and Salinen Background Austrian provisions exempt domestic dividend income regardless of the size of the holding but only give an unconditional exemption in cross border situations if the holding is at least 10%. Below that level dividends from EU/EEA Member States portfolio holdings can still qualify for an exemption if the shareholder could show that the foreign income has been subject to a comparable tax at a comparable rate and that it was not exempt in the other member/eea State. In the case of non-eu EEA member states a further requirement is the existence of wide ranging exchange of information and enforcement provision. If the shareholder cannot fulfil these requirements the portfolio income is eligible for a tax credit for underlying tax subject to proving a number of facts, such as the corporation tax rate, the corporation tax actually paid and the amount of corporation tax that should be credited in Austria. Third country non-eea income cannot qualify for exemption at all. In the Haribo case 4 the parent company had received income from a domestic investment fund which comprised dividends from EU member states and from third countries. Haribo applied for these profits to be exempt from tax. In the Salinen case 5, the taxpayer contended that a tax credit for portfolio income could never alleviate double taxation in the circumstances of its claim because the parent company which received the credit was loss making. As tax credits cannot be carried forward in Austria, this method would only serve to reduce the losses in the year of the receipt of the dividend income (thus leading to a higher tax charge in future years) without the benefit of the tax credit being claimable when the parent company comes back into profit. As a result the national court decided to stay the proceedings and to refer a number of preliminary questions to the European Court. Unconditional Exemption In Haribo, the Advocate General recognised that the main issue in the joint reference lay in the second question which asked whether the unconditional exemption system for domestic dividends was equivalent to the conditional exemption system/credit system for foreign dividends in situations where the grant of a tax exemption and/or of a tax credit was subject to requirements which were impossible or excessively difficult for the taxpayer to obtain. As a preliminary issue the Advocate General examined the European Court s case law to determine whether the fact that a member state uses an exemption system domestically and a credit system cross-border can ever constitute a restriction in breach of community law. The starting point was the judgment in FII 6 in which the European Court held that if a member state alleviated economic double taxation domestically it also needed to do so cross-border but that it was free to chose the method by which it did so. The mere fact that, by imposing a requirement to prove underlying tax, an imputation system imposed a higher administrative burden on the taxpayer than an exemption system could not in itself constitute a restriction in breach of community law. The question the Advocate General asked herself was at what level the Court had come to that conclusion: Was it that the use of different systems to alleviate double taxation could never lead to a restriction? Was it that the situations were not comparable or was it simply that the European Court had found that such a restriction was justified by compelling considerations of public interest? She concluded that to exclude a restrictions in all cases would lead to ignoring the consequences of the application of different systems to foreign dividends. In the present case for instance, the referring court had found that it was impossible or excessively difficult for a portfolio shareholder to fulfil the conditions for an exemption or even a credit.

17 Taxation of Multinationals: Winter Recent EU law challenges to dividend taxation in the Court of Justice of the European Union Having reached that conclusion the Advocate General found that the Austrian law constituted a restriction to the free movement of capital. Justification The Advocate General then considered whether the restriction was justified. She concluded that it could be, because even though the European Court had consistently held that shareholders with domestic holdings and those with cross border holdings were, in principle, in comparable situations when it came to the danger of economic double taxation 7 they were not necessarily in comparable situations when it came to the method to be applied to eliminate economic double taxation. A member state which exempts domestic dividends did so because it knew that the required level of tax has been levied at the level of the distributing company. This interrelation may not be present in all circumstances, for instance in cases where the distributing company enjoys certain tax reliefs or exemptions, but it would be wrong to consider individual cases rather than the system as a whole. In the context of cross border situations that interrelation was not a given. The Advocate General based that assessment on the European Court s findings in paragraphs 43 to 57 of its FII judgment. In that case the Test Claimants had submitted that under UK law a nationally sourced dividend is exempt irrespective of the tax paid by the distributing company, that is, also where that company had not paid any tax due to the use of reliefs 8. The European Court held that it was for the national court to determine whether the tax rates applying to the distributing and receiving companies were indeed the same and whether different levels of taxation occurred only as a result of certain exceptional reliefs 9. Incompatibility The Advocate General concluded that this meant that the European Court did not want to declare the imputation and exemption methods as incompatible simply because in isolated cases domestic dividends were exempt, even though the profits out of which they were paid had not suffered tax at the full rate applying to them. Even though the national court had indicated that in the case of Austria the actual tax paid could be lower than the corporation tax rate in more than exceptional circumstances due to the use of commonly available reliefs such as loss relief, the Advocate General considered that this did not necessarily dissolve the close interrelation between exemption and taxation which formed the basis of any exemption system. Only where it was clear from a overall view of the tax system that that interrelation between taxation and exemption only ostensibly existed or patently did not exist should the conclusion be reached that such a system was not designed to eliminate economic double taxation. It would be for the national court to determine whether overall such an interrelation did exist. If this was not the case it would clearly be unlawful to deny a full exemption to cross border dividends. Highly Exceptional If upheld by the European Court this is an important clarification of its jurisprudence. In FII the UK revenue contended that in interrogating the national court whether different tax rates and levels of taxation only occurred in highly exceptional circumstances it was in fact referring to the small companies rate which, admittedly, only applies in highly exceptional circumstances. The Test Claimants consistently submitted that whilst the rate was only different in highly exceptional circumstances, such as when a company is subject to the small companies rate, paying tax at a level of taxation which is lower than the nominal rate was, far from being exceptional, actually the case in the majority of circumstances. Applying the Advocate General s reasoning this would lead to the conclusion that the interrelation between taxation and exemption was patently absent from the UK s system of dividend taxation and that therefore it would be illegal not to extend a full exemption to cross border dividends. Because the referring court may decide that on an overall view such an interrelation existed in the Austrian dividend taxation system, the Advocate General continued her examination of whether domestic and cross-border holdings were in comparable situations when it came to the method to be applied to eliminate economic double taxation. She came to the view that

18 14 Taxation of Multinationals: Winter Recent EU law challenges to dividend taxation in the Court of Justice of the European Union because a member state could not be sure whether and to what extent foreign profits had been subject to tax the situations would not be comparable. Within the Bounds As to proportionality the Advocate General, perhaps surprisingly, found that the Austrian law did not go beyond what was necessary to achieve the goal, despite the referring court s finding of fact that the conditions it imposed on the grant of a tax credit could not or only with excessive difficulty be met by portfolio shareholders. The Advocate General considered that the real question to ask was who had to carry the risk that the required information could not be obtained, the shareholder or the member state? She considered that a member state was entitled to know to what extent tax had already been paid on the distributed profits and could require a taxpayer to provide reasonable proof of that. If the shareholder could not provide this information this was the risk he took in investing in foreign portfolio holdings. In circumstances such as Haribo s it would be in the interest of both the domestic investment fund and the non-resident companies to make available to the shareholders any information they may require in order to obtain relief from economic double taxation. The fact that this information was not provided could not be seen as a problem Austria needed to address. Information Exchange and Enforcement The first question asked whether that for third country dividends no exchange of information and enforcement provisions were required in order to obtain an exemption whereas the existence of such provisions was a prerequisite for non-eu EEA sourced portfolio dividends to qualify for an exemption was contrary to community law. The Advocate General first of all held that a comparison between third country dividends and EEA-sourced portfolio dividends was irrelevant in order to determine whether there was a restriction of a treaty freedom, as for that one had to compare a domestic situation to a cross border situation. She did however consider that such a comparison may be relevant when it came to the issue of proportionality. Having found that a restriction existed (as the Austrian DTCs with Lichtenstein and Iceland did not incorporate such provisions, the rule made it less attractive for a domestic shareholder to invest in those countries) the Advocate General then considered, based on the assumption in question two, that domestic and EEA-sourced portfolio dividends were not in comparable situations. A restriction could therefore in principle be justified if it was proportionate. In relation to the enforcement provision the Advocate General sided with the claimants and the EC Commission in holding that such a requirement could never be justified as it did not assist in the stated goal, which was to assess accurately a domestic tax payer s liability to tax. She held that while the exchange of information provisions could in principle be justified they were not in the present case. As the same exchange of information provisions were not required for thirdcountry holdings the goal of fiscal supervision could not be pursued in a systematic and coherent way and was therefore disproportionate. Exclusion The third question which considered the fact that under Austrian law third country portfolio holdings were excluded from both the exemption and the imputation systems whereas domestic portfolio dividends were always tax exempt, the Advocate General unequivocally held that this breached the free movement of capital. Neither the balanced allocation of taxing powers, nor the fact that there was no reciprocity requirement in relation to third countries, nor the need for fiscal supervision could justify such a breach. The referring court s fourth question asked whether in relation to third country portfolio holdings the double imposition in breach of article 56 EC should be alleviated by applying the exemption method used in domestic situations or whether the imputation of underlying foreign tax was sufficient. It further asked whether, whatever the method used to avoid economic double taxation, the availability of that relief could be made subject to exchange of information and enforcement provisions whilst no such requirement existed in domestic circumstances. The Advocate General took the view that it would be contrary to community law to limit third country portfolio dividends to the imputation system when in relation to EU/EEA portfolio holdings both the exemption and the imputation systems were in theory available. To

19 Taxation of Multinationals: Winter Recent EU law challenges to dividend taxation in the Court of Justice of the European Union impose an exchange of information and enforcement requirement was contrary to community law for the reasons already set out in the answer to the first question. Salinen In relation to the Salinen case the referring court had asked whether it was contrary to the free movement of capital if in situations where the imputation method was applied, a company with foreign portfolio income still suffered double imposition in years in which it was loss making because that income reduced the losses which could be carried forward whereas a credit for withholding tax or underlying corporation tax could not be carried forward, whilst domestic dividend income was always tax exempt. In relation to withholding tax the Advocate General took the view that this could only lead to juridical double taxation which member states were not required to eliminate 10. As far as corporation tax was concerned the Austrian government had submitted that paragraph 52 of the FII judgment 11 meant that a tax credit only needed to be given up to the limit of the national corporation tax liability. As no corporation tax liability existed in the year in which the dividend was received no credit or voucher needed to be given in relation to foreign corporation tax. The Advocate General disagreed. She confirmed that that paragraph only signified that if the foreign corporation tax paid exceeded the domestic corporation tax liability the Member State of the receiving company did not need to repay the difference. The Advocate General relied on the Court s judgments in Cobelfret 12 and FCE Bank 13. In those cases the Court had decided that legislation under which dividends were taken into account to reduce losses in year one but were indirectly taxed in the hands of the parent company once it came back into profits could not be considered to follow the aim of avoiding economic double taxation. Whilst the taxpayers may therefore have been at first dissatisfied with the Advocate General s opinion in the Haribo case a closer inspection shows that, even if the European Court followed her opinion on every point, the taxpayers should still win on all points as long as they can demonstrate that their national dividend exemption system was, if at all, then only ostensibly based on a relationship between the tax being paid on the one hand and exemption on the other. It is however difficult to see how a national law aimed at avoiding double taxation which in cross border situations makes the grant of an exemption or the availability of a tax credit subject to requirements which are in effect impossible for the taxpayer to fulfil can be seen to be compatible with community law. One hopes that the European Court will decide not to follow the Advocate General on this point. Meilicke II The taxpayers in the Haribo case may receive some support from Advocate General Trstenjak s opinion in the case of Meilicke II which is due to be published on 13 January This case challenges German dividend taxation provisions which make the grant of a tax credit subject to the taxpayer providing a corporation tax certificate in the form required by the German corporation tax code. The taxpayer submitted that it is factually impossible to provide such a certificate and that some of the information required by the German legislation simply does not exist cross border. The juge rapporteur seemed to have some sympathy for the taxpayer s conundrum and asked the German government what alternatives could satisfy the Government s legitimate request for information on underlying tax paid, given that the proof requested was clearly not available. Accor This case deals with the French system of dividend taxation as it was in place until 2005, under which dividends received by a French parent company from its subsidiaries resident in France or elsewhere were exempt from tax. However, when the parent company decided to pay on such a dividend to its shareholders it had to pay an amount of advance corporation tax (précompte) of 50% of the net dividend. In so far as the parent had received a dividend from its subsidiary resident in France that dividend came with a tax credit (avoir fiscal) of 50% of the net dividend which corresponds to the nominal tax rate due on the subsidiaries profits of 33.3%. This credit was creditable against the précompte, thereby effectively cancelling out the advance tax payment of the parent. No such

20 16 Taxation of Multinationals: Winter Recent EU law challenges to dividend taxation in the Court of Justice of the European Union credit was given for underlying tax paid by a subsidiary resident in another member state. As in Haribo, the question arises whether a tax credit needs to be extended in situations where no tax becomes payable upon receipt of the dividend but only at a later stage (in the case of Accor where the recipient company decides to distribute the profits) and if such a credit needs to be extended, whether it should be a credit for the underlying tax actually paid or whether a credit needs to be given at the nominal underlying corporation tax rate. Advocate General Mengozzi s opinion is due to be delivered on 22 December and may also inform the decision of the European Court in the Haribo case. n 1 Joint cases Haribo Lakritzen Hans Riegel BetriebsgmbH v Finanzamt Linz (C-436/08) and Österreichische Salinen AG v Finanzamt Linz (C-437/08 ) 2 Wienand Meilicke, Heidi Christa Weyde, Marina Stöffler v Finanzamt Bonn- Innenstadt (C-262/09) 3 Ministre du budget, des comptes publics et de la fonction publique v Société Accor (C-310/09) 4 Haribo Lakritzen Hans Riegel BetriebsgmbH v Finanzamt Linz (C-436/08) 5 Österreichische Salinen AG v Finanzamt Linz (C-437/08 ) 6 Case C-446/04 Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue 7 cf. Cases C-315/02 Lenz at paragraph 31 and following, C-319/02 Manninen at paragraphs 34 to 36 as well as C-446/04 FII at paragraph cf. C-446/04 FII paragraph 54 9 Ibid. paragraph Cf. for instance Case C-128/08 Damseaux at paragraphs 25 and following. 11 Supra 12 Case C-138/07 Cobelfret at paragraphs 37 to Order in cases C-439/07 and 499/07 at paragraphs 39 and following

21 Taxation of Multinationals: Winter Analysis: Capital Air Services and Tax Tribunal costs Simon Whitehead Originally published in Tax Journal, 1 November The new tribunal rules introduced in April 2009, were designed in the main to draw together into a unified structure, the myriad of tribunals which had emerged over time all with their own practices and rules. In the tax sphere it of course meant the combination of the VAT and Duties Tribunals with the General and the Special Commissioners into the Tax Chamber of the First-tier Tribunal (FTT). An area of obvious difference between those previous tribunals had been their powers to award the recovery of their costs to successful litigants. The VAT and Duties Tribunals could and would award costs to the successful. The Commissioners powers in this area were in contrast extremely tightly restricted. The new unified regime introduced its own costs rules. However the manner in which the Upper Tribunal has indicated that those rules should be applied in its decision of 12 October in Capital Air Services Ltd v HMRC [2010] UKUT 373 (TCC), highlights a possible problem: can the new costs provisions be applied to EU law claims, in the way the tribunal anticipates? If not, a divergence in the newly unified tribunal system might begin to emerge. VAT claims are by their nature EU law claims. Direct tax claims need not be. A system where broader rights to the recovery of costs exist for EU law claims would return us to the bifurcated practice where successful VAT claimants got a better deal than that available to those with normal direct tax claims. This is an outcome the new system was designed to avoid. The new costs rules Prior to the commencement of the new tribunal system, the VAT and Duties Tribunal were given a general discretion to award costs (VAT Tribunals Rules, SI 1986/590, rule 29) which was exercised much in the same way as a Court. Barring the exceptional, the winning party would receive a reasonable portion of its costs from the losing party. This was modified by a policy of Customs not to seek costs when successful unless the case was substantial and complex or involved misconduct by the taxpayer (based on a written answer to parliament Hansard vol July 1986 cols ). Before the Special Commissioners however neither party was entitled to recover its costs from the other save where the other party had acted unreasonably and even then only if that unreasonable conduct was in connection with the actual hearing (The Special Commissioners (Jurisdiction and Procedure) Regulations, SI 1994/1811, reg 21). Unreasonable conduct for instance in an investigation or enquiry from which the proceedings derived would not be good enough. It would take then quite an extreme case to engage their costs jurisdiction (e.g. Carvill v Frost [2005] STC (SCD) 208). The General Commissioners had no power to award costs at all. The new rules seem a hybrid of those two legacy regimes (The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules, SI 2009/283, rule 10). Thus, in common with the position before the Special Commissioners, the general rule restricts the availability of costs orders to unreasonable conduct although perhaps beyond that just related to the hearing itself. It now applies to conduct in bringing, defending or conducting the proceedings (rule 10(1)(b)). Also, that general rule will not apply in cases allocated to the complex category (rule 10(1)(c)(i)) where, it then follows, the Tribunal has a more general discretion to award costs. Keep in mind that in the ordinary scheme of things even if a case proceeds on appeal, it is the FTT where facts must be found and hence where most of the costs tend to fall. Getting into the complex category would therefore seem the key to an entitlement for a successful litigant to recover its costs of the tribunal proceedings from the other party. The interpretation in Capital Air Services Capital Air Services Ltd v HMRC deals primarily with the issue of the criteria for entry into the complex category. In general the Upper Tribunal s guidance indicates that the club is not nearly as exclusive as the first instance decision of Dr Avery-Jones had concluded. However, the decision has a sting in the tail for those thinking that once through that door an entitlement to costs would follow: don t think that the tribunal will award costs to winning parties as freely as might a Court: It does not, we wish to make clear, follow that the Tribunal must, at the end of the case, make a costs

22 18 Taxation of Multinationals: Winter Analysis: Capital Air Services and Tax Tribunal costs award in favour of the successful party. Such an order does, we appreciate, normally follow in proceedings in court. But that is because the Civil Procedure Rules (reflecting the practice before their adoption) provides expressly at Part 44.3(2) that, where the court decides to make an order about costs, the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party. There is, however, no similar rule in the Tax Chamber Rules. This seems a more restrictive reading of the entitlement to recover costs than was employed by the former VAT and Duties Tribunals. Even though reg 29 of those rules also lacked the express statement in CPR 44.3(2) they nevertheless borrowed from Court practice in exercising their discretion (Nader v C&E Comrs [1993] STC 806; Mahindra Dave v C&E Comrs E00182). Assume though that this remains a correct statement of the law. A successful taxpayer will only be able to recover its costs of the FTT from HMRC if the case enters the complex category and then not in all cases. The tribunal will still be entitled in the exercise of its discretion to deny any recovery of costs even if, had the matter been in a Court, costs would usually have followed. The issue that arises then is does EU law have anything to say about this? EU law EU law will be engaged when a taxpayer seeks to enforce its EU rights, namely, in VAT matters or direct tax cases invoking EU treaty freedoms or Directives. The basic rule is that it is for the national law in such cases to lay down the procedural system regulating claims but critically, subject to the EU principles of equivalence and effectiveness (C-446/04 FII paragraph 220). Effectiveness prohibits national procedural rules which render the enforcement of EU rights impossible or excessively difficult (C-397/98 and C-410/98 Metallgesellachaft, paras ). Thus national procedural rules which create a considerable delay in producing a result could offend the principle of effectiveness because they might render enforcement excessively difficult by deterring litigants from enforcing their rights. But what about the inability to recover costs? The issue arose as a subsidiary point in two cases concerning a change in the Dutch procedural rules. Before the change the position at Dutch law had been that a successful litigant was able to recover its actual costs of proceedings against the tax authority - and not just its reasonable costs as would apply before a Court in the UK. This was perceived to have led to a practice among tax advisers of very high contingent fee arrangements on the understanding that, if the scheme they were promoting succeeded, it would be the revenue which carried this cost in any event. The rule change put a cap on the fees recoverable by a successful taxpayer at a modest level and below the normal charges a taxpayer could expect to incur particularly in complex cases. Both Advocates-General who considered the point (AG Colomer in C376/03 D and AG Kokott in C-470/04 N) concluded that such a provision would offend EU law: If recovery of tax wrongly assessed and paid involves a large financial outlay by taxpayers, they may be deterred and the exercise of their rights may be improperly thwarted. An expensive procedural system is, in the same way as a slow system, incompatible with the right to an effective remedy. (AG Colomer in C-376/03 D at para 110) Unfortunately in neither case was the Court called upon to decide the point. In D, the Court found that the taxpayer lost so the issue did not arise. In N the Court concluded that the question had not been properly put. It follows however, if these Advocates-General properly put their fingers on the answer, that a national procedural system will offend EU law if it does not provide an entitlement for a successful taxpayer enforcing its EU rights to recover at least its reasonable costs to offset the expense of the system. If the Upper Tribunal is correct in Capital Air Services on their interpretation of the costs provisions before the tribunals this would not be the case. But of course the tribunals are also subject to the EU law obligation to interpret national legislation where

23 Taxation of Multinationals: Winter Analysis: Capital Air Services and Tax Tribunal costs possible in a manner which would conform with EU law. This would clearly be possible here. The existence of an EU law element need only be factored into account in addressing entry to the complex category and in then exercising a discretion to award costs to produce a wholly compliant regime. But what for those litigants who cannot invoke the protection of EU law? If the Upper Tribunal s restrictive understanding of the costs jurisdiction holds, they could well get a much rawer deal. n

24 20 Taxation of Multinationals: Winter New rules for US tax credits affect multinationals with a US parent Nathan Simmons Originally published in Tax Journal, 11 October The Educations Jobs and Medicaid Assistance Act 2010 was signed into US law on 10 August The Act amends several provisions of the Internal Revenue Code to restrict tax credits, and increase tax receipts. The following is a summary of several of the changes relating to foreign tax credits. Foreign tax credit splitting: The Act restricts the ability of US taxpayers to recognise a credit for foreign underlying tax prior to recognising the income from receipt of the dividend. For taxable years commencing after 31 December 2010, where a foreign tax credit splitting event occurs, the foreign credit is not available until the tax year in which the dividend income is brought to account. This measure appears aimed at companies taking advantage of the disregarded entity regime, whereby the US parent can make an election to treat itself and the foreign entity as a single company for US tax purposes. In Guardian Industries Corp & Subsidiaries v United States ((2007) 477 F.3d 1368), credit was allowed for foreign taxes paid by a disregarded local parent of a Luxembourgian group, although the income was never paid up by the subsidiaries. The credit could thus be recognised, although the income was deferred. Under the new rule, until the income was recognised in the US parent s earnings, the credit could not be recognised. a blended rate. This had the effect of maximising the foreign tax credit available. Under the Act, the allowable foreign tax credit will be limited to the amount of tax credit that would have been available had an actual dividend been paid through the chain. n Tax credits limitation on items resourced under treaties: The Act also restricts the ability of US taxpaying corporations to benefit from foreign tax credits where ownership in income-generating assets is transferred to lightly taxed foreign branches. Under US double tax treaties, the taxpayer may be granted an election to treat the income as foreign-source, and thereby apply foreign tax credits against the income. Under the Act, US-source income which a treaty allows to be treated as foreign-source, will be segregated from other foreign source income against which tax credits can be applied. This provision has immediate effect for taxable years commencing after 10 August CFC tax credit limitations: Where a US taxpaying corporation owns a chain of foreign CFCs, any dividends distributed upwards through the chain would receive a blended tax credit whenever the distribution passes through a lower-taxed regime. Prior to the introduction of the Act, the US parent could elect for the income to hopscotch over the lower-tax jurisdictions to avoid

25 Taxation of Multinationals: Winter European Challenges Update Michael Anderson Originally published in Tax Journal Online, 9 December 2010 Executive Summary A number of important decisions are awaited in several of the cases challenging various aspects of the UK s tax legislation on the basis that it is in breach of European law. UK tax legislation affected includes the following: thin capitalisation (the Court of Appeal s judgment is awaited in the thin cap GLO); ACT (judgment in Pirelli is expected in early 2011); loss relief (a Tribunal decision is expected shortly); portfolio dividends (the decision is adjourned pending the ruling of the Supreme Court in the FII case); and franked investment income (the Supreme Court hearing is expected to take place in mid-2011). Thin Cap In October this year the Thin Cap GLO (Test Claimants in the Thin Cap GLO v HMRC) reached the Court of Appeal. The litigation, on appeal from the judgment of Henderson J in the High Court last year, challenges the UK s thin capitalisation provisions as they existed prior to the amendments to the transfer pricing legislation that took effect from April 2004 on the basis that those provisions were incompatible with Community law. The UK provisions were introduced in response to the potential tax avoidance opportunities that could arise when companies make intra-group cross border loans. The ECJ gave its ruling in the case in March 2007 and Mr Justice Henderson interpreted that ruling as clearly establishing that, where such transactions were for genuinely commercial purposes, the thin cap rules should be disapplied. The High Court decision was also important because it awarded damages to the test claimants on the basis that the UK was in sufficiently serious breach of Community law by failing to amend its legislation following an earlier ECJ judgment in the case of Lankhorst-Hohorst in December In this case, the ECJ ruled that the German thin cap provisions, on which the United Kingdom s provisions post-1995 were modelled, were unlawful. The Court of Appeal s judgment on these issues is awaited. ACT Pirelli returned to the Court of Appeal (Test Claimants in ACT Group Litigation (Classes 2 & 4) v HMRC) in November as test claim for a number of issues in the ACT GLO. Advance Corporation Tax ( ACT ) was (up to 5 April 1999) paid by any UK company on a distribution to its shareholders. If the shareholder was resident in the UK and owned at least 50% of the distributing company, a group income election could be made and no ACT was payable. If the ACT was paid by the subsidiary (i.e. outside a group income election), the parent company received a credit for the full amount of the ACT paid, which it could deduct from its ACT liability on the onward distribution of profits, and so on up the chain until individual shareholders received the dividend with a credit equal to the basic rate of tax. Where a distribution was made to a parent company in France or Germany, no credit in respect of the ACT was payable, nor could the subsidiary enter into a group income election. In joined cases C-397/98 Metallgesellschaft and C-410/98 Hoechst, the ECJ held that this was unlawful. Where, however, the parent was resident in another Member State of the EU the UK s double taxation conventions with those countries allowed for the payment of a partial credit to the parent. In addition, the dividend was subject to Schedule F income tax in the UK. The test claimants in the current case seek either the return of the Schedule F tax or the difference between the ACT paid and the credit received. As a further element to the case, the House of Lords had previously held that if a company group could prove that it would have made a group income election had one been available, then it should be entitled to compensation. The test claimants failed in the High Court to satisfy Mr Justice Henderson that they would have made the election but argue that to require them to have to enter into such a detailed fact-finding exercise in respect of periods so long ago is itself a breach of the Community law principle of effectiveness. It should be enough that the UK was in breach of Community law as a demonstrable result of which the claimants are out of pocket. Judgment in the appeal was again reserved and is expected early next year.

26 22 Taxation of Multinationals: Winter European Challenges Update Loss Relief In the long running Marks & Spencer ( M&S ) group relief case, it was established by the ECJ that a UK group can claim relief for the losses of its EU subsidiaries, but only where there is no possibility of those losses being used elsewhere. HMRC have maintained open enquiries in a very large number of claims for group relief by other taxpayers whilst the M&S case progresses through the courts. However, a number of issues of principle that arise in many of those claims cannot be determined in the M&S case, most notably where the claimant s group structure differs from that in M&S case. HMRC will not, for example, accept group relief claims where the losses are being claimed by the profitable UK subsidiary of a loss making EU/EEA parent company, or where the UK claimant company and the loss making EU/ EEA company are commonly held by, for example, a US parent company. In order to bring these issues to a head, a number of taxpayers have applied for closure notices of their open enquiries and have asked the First-tier Tribunal either to determine the issues in the context of the closure notice applications, or to order that the enquiry be closed so that appeals can be launched against HMRC s inevitable refusal of the claim. The issues of principle can then be determined in parallel with the final stages of the M&S case to reduce the delays in obtaining determinations in the other claims once that case has come to an end. The Tribunal s decision is expected in the coming weeks. Portfolio Dividends This case relates to the taxability of dividends received from holdings of less than 10% in non-uk resident companies. Prior to Finance Act 2009, portfolio dividends received by UK companies from other UK companies were exempt from tax while portfolio dividends received from foreign companies were taxable, with credit given only for withholding tax (but not for underlying tax). HMRC has accepted that the ECJ in the Franked Investment Income Group Litigation decision of December 2006 held such treatment to be discriminatory in relation to dividends from companies in other Member States and indeed, such dividends are now largely exempt from tax. The central issue between the parties is whether restitution should be calculated on the basis that the dividend income should have been exempt from tax (as the Claimants argue) or whether (as HMRC maintain) that income should have carried a tax credit for the underlying tax paid in the other jurisdiction. In response to HMRC s position, the Claimants argue that establishing the level of underlying tax (in respect of dividends up to 20 years old) is practically impossible or excessively difficult and requiring them to do so would therefore itself be contrary to community law. HMRC have also never conceded liability in relation to portfolio dividends received from countries outside the EU. After hearings in November 2009 and May 2010, Mr Justice Henderson delivered his ruling on 5 November In essence, the judge has decided not to give a substantive judgment on the issues at this stage but has instead adjourned making a decision until after the Supreme Court has given its ruling in the FII case, in which many overlapping issues arise. Were Mr Justice Henderson to make a decision now, he would of course be constrained by the Court of Appeal s currently prevailing view of the law on the relevant issues and he appears not to relish that prospect. FII Turning to the FII case itself, permission has now been granted to appeal the judgment of the Court of Appeal to the Supreme Court. The FII case concerns franked investment income, the term given to the dividend income a company would have received where ACT had been paid on that dividend at a lower level. As with the Pirelli case, one of the main issues in FII is the compatibility of the old ACT regime with Community law in cross border situations. While Pirelli deals with payments out of the UK, however, the FII case deals with payments into the UK. Several important points of law rest on the outcome of FII, in which some 23 separate issues, relating to both liability and remedies, are in dispute. As well as an appeal to the Supreme Court, a number of those issues will be referred back to the ECJ (the second reference in this case) for further clarification. The ultimate decision in this case will be of great importance not just to the test claimants but also to many claimants in other GLOs, in which similar points arise. Not least of the issues

27 Taxation of Multinationals: Winter European Challenges Update being determined in this case is the legality of section 320 of the Finance Act 2004 and section 107 of the Finance Act 2007, which curtailed the limitation periods applicable to tax claims with no transitional provisions. It is notable in this context that section 107 is the subject of infringement proceedings brought by the European Commission. If the claimants are successful on that issue, their claims can potentially go back to 1973 and so there are very significant sums at stake. No date for the Supreme Court hearing has yet been set but it is expected to take place in mid n

28 24 Taxation of Multinationals: Winter Inside Counsel and Legal Professional Privilege Nathan Simmons Legal professional privilege the principle that communications passing between lawyer and client are absolutely confidential is generally considered a cornerstone of the modern legal system. The privilege applies in both civil and criminal proceedings and is fundamental to providing a fair trial, which itself is a fundamental human right within EU law. 1 It is also a feature of the modern business landscape that lawyers are increasingly employed as in-house counsel. This no doubt has many advantages for both the individual lawyer and the business concerned. The recent European Court of Justice case of Akzo Nobel Chemicals Ltd & Akcros Chemicals Ltd v European Commission 2 ( Akzo ) however, further highlights an important consideration for companies with a presence in the European Union who use in-house counsel: communications between a company and its in-house counsel are not always privileged, at least from the point of view of EU law. In particular, the ECJ found that the key feature of the solicitor-client relationship was one of independence: It follows that the requirement of independence means the absence of any employment relationship between the lawyer and his client, so that legal professional privilege does not cover exchanges within a company or group with in-house lawyers. Although the principle in this case is not new from a European perspective (it merely reaffirms the position stated by the ECJ in 1982), there is a tension between this principle and the same principle under national laws (for instance, UK law), which does recognise legal professional privilege for in-house lawyers: 3 They are, no doubt, servants or agents of the employer. For that reason the judge thought that they were in a different position from other legal advisers who are in private practice. I do not think this is correct. They are regarded by the law as in every respect in the same position as those who practise on their own account. The only difference is that they act for one client only, and not for several clients. They must uphold the same standards of honour and of etiquette. They are subject to the same duties to their client and to the court. They must respect the same confidences. They and their clients have the same privileges. In order to determine whether in-house counsel should be concerned by Akzo, it is worth looking at the context of the case, and the arguments raised. Akzo Nobel Chemicals Ltd & Akcros Chemicals Ltd v European Commission A Summary Akzo and Akcros were the targets of a competition law investigation by the European competition regulator. As part of that investigation, Akzo and Akcros were required to produce various documents including communications with the companies in-house counsel over which privilege was asserted. In particular, there were several s between company officials and the company s co-ordinator for competition law, who was a registered Advocaat of the Netherlands Bar and a member of Akzo s legal department. In addition to arguments made by the companies involved, the case attracted a number of submissions by intervening legal associations: the Council of Bars and Law Societies of Europe, Algemene Raad van de Nederlandse Orde van Advocaten (the Dutch Bar Association), the European Company Lawyers Association, the American Corporate Counsel Association (European Charter), and the International Bar Association. These associations all supported the companies appeal, arguing for enhanced privilege over communications with in-house counsel. Several member states (the UK, Ireland and Netherlands) also supported the companies appeal. The ECJ s decision broadly follows the earlier ECJ decision in Australian Mining & Smelting (Europe) Ltd v Commission of the European Communities, 4 ( AM & S Europe ) which held that in-house lawyers cannot claim legal professional privilege. In AM & S Europe, the Commission had (again) sought communications between a company and its in-house counsel in a competition law investigation. The ECJ there found that across the national laws of the member states of the EU, the common element of legal professional privilege was that it was a privilege between a client and an independent legal advisor. 5 Similarly in Akzo, the ECJ found that the Akzo coordinator for competition law was bound to his client by an employment relationship and was therefore not capable of exercising strict legal independence from his client s commercial interests. At paragraph 48:

29 Taxation of Multinationals: Winter Inside Counsel and Legal Professional Privilege [48]...[U]nder the terms of his contract of employment, an in-house lawyer may be required to carry out other tasks, namely, as in the present case, the task of competition law coordinator, which may have an effect on the commercial policy of the undertaking. Such functions cannot but reinforce the close ties between the lawyer and employer. [49] It follows, both from the in-house lawyer s economic dependence and the close ties with his employer, that he does not enjoy a level of professional independence comparable to that of an external lawyer. This was despite arguments by the companies and interveners that in-house lawyers, and in particular Dutch in-house lawyers, had professional obligations of independence equivalent to that of external lawyers. The facts of Akzo s case provided a good illustration of this argument, as the co-ordinator of competition law was a Dutch Advocaat, and was authorised by his employment contract to comply with all professional obligations imposed by the Netherlands Bar. Nevertheless, the ECJ found he was not sufficiently independent: it is difficult to see how any in-house lawyer could fulfil the ECJ s narrow definition of independence if an in-house counsel admitted to a profession, with appropriate contractual guarantees, could not. The necessary conclusion is that, for the purposes of a European Commission investigation at least, in-house counsel are no different to any other company employee. Their files and communications can be required to be produced. A number of other arguments by the companies were also rejected, including arguments that under EU law that in-house lawyers must be given equal treatment to external lawyers. The Court dealt with these arguments rather briefly, again on the basis that in-house lawyers and external lawyers were not sufficiently comparable that the guarantee of equal treatment applied. 6 It had been argued by the legal associations and supporting member states that the ECJ should overturn the decision in AM & S Europe on the basis that the in-house lawyer role had evolved since AM & S Europe was decided. It was argued that there was a trend towards Member States providing greater protection for communications between a company and its in-house lawyers. The ECJ rejected this argument, finding there was no identifiable overall trend towards such protection within the EU. Although individual member states might have increased the scope of privilege to in-house lawyers, there was no common trend that justified restricting the Commission s investigation in that way. Since the ECJ was the top-level appellate court in this instance, it is unlikely the decision will be revisited for some time. In-house lawyers are therefore faced with the difficulty of how to minimise the risk that otherwise privileged advice or communications are disclosable to European Commission investigators. We think Akzo raises a number of issues that in-house lawyers should be aware of, although these points will probably require further development of EU case law to properly determine. Until the position is properly clarified (which may yet take some time), in-house counsel should consider whether the risks of internal advices or communications becoming disclosable outweighs any costs of taking a safety-first approch. Issues we see arising include: 1. Whether national regulatory investigations can access communications between the in-house counsel and employees/officers in the corporate group; 2. Whether privilege can be asserted over in-house comment on advices received from external lawyers, or advices prepared jointly between in-house and external lawyers; 3. Whether an in-house lawyer in a quasi-connected entity could assert the privilege. 4. Whether communications between EU-based officers/employees and non-eu in-house counsel (for instance where the in-house legal team is based in the US) are privileged. We will look at each of these issues below, and offer some general comments on how in-house lawyers might reduce the risk that documents become disclosable to the Commission.

30 26 Taxation of Multinationals: Winter Inside Counsel and Legal Professional Privilege The EU Aspect The obvious application of the Akzo case is to European Commission competition investigations: it is clear that in-house counsel cannot rely on an assertion of privilege to avoid disclosing documents to an EC investigation into competition matters. It is less clear how far the ramifications of the decision extend. Besides the broad competition field, the Commission s investigative remit extends to a large number of other EU law areas: breaches of EU law relating to state aid, agricultural policy and VAT would all (potentially) be the subject of investigation by the Commission. There is no reason that in-house counsel should assume the principles in Akzo are limited to the competition sphere. It would be prudent to assume that any Commission investigation could potentially access communications between in-house counsel and other employees of the company. Where the Commission has the jurisdiction to investigate a matter (whether competition or otherwise), the principles in the Akzo case will almost certainly apply to the Commission s investigation. Where a company director (for instance) has taken advice from in-house counsel about alleged breaches of EU competition law (as was the case in AM & S Europe), the advice will be both highly relevant to the Commission and potentially prejudicial to the company. If the Commission determines there has been a breach, it may levy a fine which the company must then appeal if it disputes the Commission s findings. However, Akzo emphasises further risks even in relation to national investigations of breaches of EU-based law. Whilst it might initially be thought that an investigation by the UK competition body (the Office of Fair Trading) of a breach of UK competition law would allow the greater protection afforded to in-house counsel by UK case law, this should not automatically be assumed to be the case given the supremacy of EU law. Whilst AG Kokott was of the view that national laws would apply to an investigation by the national competition authority, 7 the national authority is still bound to apply EU law. 8 Looking forward, the risk is that jurisdictions with a strong privilege tradition may see that eroded at least so far as investigations with an EU element are concerned. The question of whether an exchange of information provision (such as Article 12 of Regulation 1/2003) could be used by a national authority was only tentatively answered by AG Kokott and not addressed by the ECJ at all. So what can an in-house lawyer do to minimise the company s exposure to advices or communications being disclosed to the Commission? For the privilege to be successfully asserted over advice or communications, there are two conditions which must be met. The documents must be brought into existence: 1. by an independent legal advisor; and 2. for the purposes of exercising the client s right of defence. The first condition is that an independent legal advisor is providing advice. This is likely to be an issue for many companies, who have built up internal expertise rather than use external advisors. Although there is likely to be a cost consideration to using external advisors, it is clear from Akzo that internal advisors are not sufficiently independent to meet this criteria. However, it may well be that in-house advisors can produce a comprehensive set of factual instructions for an external advisor, and for instance ask a series of questions as to the company s liability. This would obviously depend on the advice being sought, but would appear to leave a role for the in-house lawyer s expertise whilst minimising the time spent by (and therefore cost of) the external lawyer. The extent to which an in-house advisor can then comment on the advice is considered below. The second condition is that the documents in relation to which privilege is claimed must be brought into existence for the purpose of exercising the client s rights of defence. Rights of defence are a fundamental right within EU law, 9 and apply to any proceedings in which sanctions (including fines or pecuniary penalties) can be imposed. This right is broad ranging, and provided covers all written communications exchanged after the intiation of the administrative procedure which may lead to a decision...imposing a pecuniary sanction as well as earlier written communications which have a relationship to the subject matter of that procedure. 10 This means that broadly, provided advice is sought from an independent advisor and relates to subject matter

31 Taxation of Multinationals: Winter Inside Counsel and Legal Professional Privilege which could give rise to a penalty being imposed, it should be possible to assert the privilege over any communications between the company and its external lawyers. Internal comment and joint advices The second issue is how Akzo applies to internal communications discussing advice received from an independent lawyer. In respect of internal comments made by in-house counsel on advice received from an independent lawyer, the position is relatively clear. Provided privilege can be asserted over the advice (i.e. it meets the two conditions referred to above), the privilege will extend to documents which merely summarises the advice: Hilti v Commission. 11 In Hilti (again a competition case) several documents were located which summarised advice received from external lawyers. They were intended for distribution to managerial staff. The ECJ held: 12...[T]he principle of the protection of written comminucations between lawyer and client must, in view of its purpose, be regarded as extending also to the internal notes which are confined to reporting the text or the content of those communications. It follows that the request for confidential treatment made by the applicant must be allowed in so far as it refers to those documents. This again relies on the assertion of a valid privilege claim. Internal communications which lead to advice being sought from external lawyers would appear to be privileged as part of the earlier written communications relating to the subject matter. There is some risk however, that where the in-house counsel (or any other employee) takes a more substantial role in commenting on the relevance of evidence being gathered, or other legal opinion, that it may start to fall outside the privilege. The broad policy in Akzo will no doubt require further refinement to determine the scope of privilege. The situation is less clear where in-house advisors prepare an advice, which is then referred to an external lawyer for a second opinion. This perhaps runs a greater risk since the in-house lawyer is substantially the one giving the advice, and the external lawyer is merely confirming it. Again, as above, the safest method is probably to prepare a comprehensive set of instructions to an external advisor. Similar concerns arise where in-house counsel takes an advice received, and expands on the scope of the advice by, for instance, applying the principles to other business areas the advice did not specifically cover. This may well be considered a separate communication to which privilege does not attach. Again, this is reinforced by the recent UK Court of Appeal decision in Prudential 13 which suggests that communications between an accountant and client are not protected by legal professional privilege, even under the greater protections available in the UK. Quasi-connected entities Given the judgment in Akzo relies heavily on its reasoning relating to the independence of legal advisors, it might be suggested that in-house teams could be converted to a stand-alone entity in order to gain at least notional independence. Whilst this may at first glance appear a cost-effective way for companies to retain in-house expertise and still benefit from privilege on communications with its (former) in-house team, there is a significant risk on the basis of Akzo that such teams would not be sufficiently independent to meet the first criteria above. Aside from the regulatory necessity of running the legal team as an independent legal practice (including meeting any local practicing requirements), careful consideration would need to be given as to how the legal team will provide services to the company. If the legal team was not free to determine whether to continue providing legal service to the company (and the terms), it is likely a court would find that the legal team is subject to the same pressures to pursue the company s commercial strategies referred to by the ECJ in Akzo. 14 Third Country lawyers Given in-house lawyers operating within the EU are not protected from EC investigations, it might appear attractive to companies to base their legal teams outside the EU. However, in AM & S Europe the ECJ at least impliedly excluded privilege claims by non-eu lawyers:

32 28 Taxation of Multinationals: Winter Inside Counsel and Legal Professional Privilege [The privilege] must apply without distinction to any lawyer entitled to practise his profession in one of the member states, regardless of the member state in which the client lives. This statement must be read in the context of any lawyer meaning only those lawyers with an independent relationship to their client (i.e. excluding in-house lawyers). This point was picked up by Advocate General Kokott in her opinion on the Akzo case (the opinions of Advocates-General are not binding on the ECJ but are highly persuasive, and often followed). There, A-G Kokott said: [188] Secondly, ACCA submits that EU law must extend the protection afforded by legal professional privilege even to communications with in-house lawyers who are members of a Bar or Law Society in a third country. [189] That claim must be rejected. Even if - contrary to the solution which I have proposed - legal professional privilege were to be extended to internal company or group communications with in-house lawyers who are members of a Bar or Law Society within the European Economic Area, the inclusion, in addition, of lawyers from third countries would not under any circumstances be justified. [190] For, unlike in the relationship between the Member States, in the relationship with third countries there is, generally speaking, no adequate basis for the mutual recognition of legal qualifications and professional ethical obligations to which lawyers are subject in the exercise of their profession. In many cases, it would not even be possible to ensure that the third country in question has a sufficiently established rule-of-law tradition which would enable lawyers to exercise their profession in the independent manner required and thus to perform their role as collaborators in the administration of justice. It cannot be the task of the Commission or the Courts of the European Union to verify, at considerable expense, that this is the case on each occasion by reference to the rules and practices in force in the third country concerned, particularly since there is no guarantee that there will be an efficient system of administrative cooperation with the authorities of the third country on every occasion. The ECJ did not comment on this submission (as it was not strictly in issue), however given the judgment in Akzo broadly followed A-G Kokott s opinion, it is reasonable to assume that the court would also have followed A-G Kokott on this issue as well, had it arisen. The sweeping nature of this statement is potentially troubling: it appears to exclude privilege for communications between a company and any lawyer not entitled to practice within a member state of the EU. As well as (for instance) a US lawyer acting as in-house counsel for a EU firm, it would appear to apply to an EU firm taking external advice from an independent US solicitors firm. Whilst Kokott s opinion on this aspect is not binding, a future case before the ECJ may well take it into consideration. That raises a difficult prospect for legal advisors (both in-house and independent) who are practicing outside the EU, and who advise clients within the EU on matters with an EU law aspect. This category is concerningly broad for obvious reasons. Any s or documents sent or received by the EUbased company will potentially be recoverable from that company s EU premises (including any servers or desktop computers at those premises), whether as part of a Commission investigation, a national authority investigation (where located in a jurisdiction which does not provide protection for in-house lawyers), or even a production order in a private action relating to EU law. Until further caselaw from the ECJ clarifies the scope of privilege, and its interaction with national law, in-house counsel should be justifiably concerned about whether privilege can be claimed over anything aside from direct communications with independent legal advisors. Conclusion The decision in Akzo confirms that in-house lawyers should exercise caution in relation to communications. Although the principle in Akzo is not new, there are a range of issues that the case highlights, several of which have been discussed. No doubt there are many more, which will require clarifying caselaw by the ECJ in order to properly determine. Until then, in-house counsel would be wise to adopt a safety-first approach to the sending of internal advice or communications which

33 Taxation of Multinationals: Winter Inside Counsel and Legal Professional Privilege could potentially be used against the company in the event of a dispute. n 1 Art 7-10 United Nations Universal Declaration of Human Rights and Art 6 European Convention on Human Rights 2 Case C-550/07 P 3 Alfred Crompton Amusement Machines Ltd v Customs and Excise Comrs (No 2) [1972] 2 All ER 353 per Lord Denning MR at [1982] ECR ibid, paragraph 21 6 Indeed, from this perspective, the UK Court of Appeal has recently confirmed that accountants cannot claim legal professional privilege over communications with clients, even where advice on legal points was being provided: R oao Prudential Plc & Anor v Special Commissioner of Income Tax & Philip Pandolfo [2010] EWCA Civ 1094 (13 October 2010) 7 Opinion of AG Kokott, paragraphs 127 to Article 3, Regulation 2001/03 9 Article 48(2) of the Charter of Fundamental Rights of the European Union 10 Hilti v Commission [1990] ECR II-163 at 169 paragraph [13] 11 Note Note 10 at 170, paragraph [18] 13 Footnote 6 14 See also Opinion of AG Kokott, paragraphs 62, 67 and 68

34 30 Taxation of Multinationals: Winter Updates Originally sent via July 2010 Vodafone 2 settles Michael Anderson Vodafone 2 was refused leave to appeal to the Supreme Court in their CFC case. The Court of Appeal had held unanimously that the CFC rules can and should be interpreted consistently with EU law. The case was remitted back to the tax tribunal (the FTT) for Vodafone to demonstrate that the CFC was genuinely established. The lack of a listing for a hearing since that stage was reached in January of this year certainly implied that negotiations were taking place and it came as little surprise, therefore, when Vodafone announced on 23 July that it had settled its CFC case. The announcement states that the settlement was for 1.25 billion. Vodafone s accounts had previously made a provision of 2.2 billion against this liability. n Guidance on what will amount to a genuine commercial arrangement therefore falls to the following market of cases. We will keep you informed as this develops. VAT and Compound Interest Update Robert Waterson Several cases now take the issue of whether or not EU law requires compound interest upon VAT repayment claims. In the vanguard was the Chalke and Barnes cases (the VIC GLO) which failed for procedural reasons in the Court of Appeal in March The Littlewoods case has been delayed and a further hearing has been set for November to determined the questions to be referred to the ECJ. As the issue of appeals does not seem to have been addressed, it is possible that the Wilkins case might precede it to the ECJ. n Astra Zeneca UK C-40/09 Retail Vouchers Scheme Judgment Robert Waterson Astra Zeneca argued that costs associated with the acquiring of retail vouchers for their employees (in lieu of cash remuneration) was a business overhead on which it should be able to deduct input tax. It also argued that the vouchers were being provided to its employees for no consideration and it should be permitted not to charge output tax for them. The ECJ, agreeing with the Advocate-General, found that the vouchers included VAT when being redeemed with the retailer, and that consideration for the vouchers was the foregoing of employee remuneration. The supply thus fell under the Principal VAT Directive, and attracted VAT. This case has significant implications for employers who have claimed input VAT on their voucher schemes, but have not accounted for the corresponding output VAT on the supply. Where VAT has been accounted for on the supply to employees, those complications should not arise. n The Wilkins case considers whether compound interest can be claimed as part of standard VAT repayment claims via the tribunal. The argument (successful before the Upper Tribunal) that these claims were all out of time was heard by the Court of Appeal in June and judgment is awaited. If the Court of Appeal finds the claims were within time then, given developments in other cases, they may well wish to refer the underlying issue of the availability of compound interest to the ECJ. The Claimants ran an argument in that case, similar to the approach which was successful in M&S, that the rules do not prohibit making more than one claim for interest. Claims were issued within time of the refused claims for compound interest. It should not therefore matter that there were earlier claims for simple interest.

35 Taxation of Multinationals: Winter Updates August 2010 MJP Media Services Limited Partial loan waivers between connected companies not deductible for tax purposes Robert Waterson In a recent decision of the First-Tier Tax Tribunal, it was held that a debt held by MJP to its ultimate parent did not amount to a loan for the purposes of s.81 FA Although MJP s accounts showed a debt owing, they were unable to demonstrate that the relevant payments had taken place and that a transaction for the lending of money existed. The Revenue s refusal to allow a deduction to corporation tax was therefore valid. The Tribunal went on to find that, in circumstances where a company had released a connected company from a loan owing to it, it was not possible to divert from the assumption that loans would be paid in full when they fall due for the purposes of the annual return. The waiver could therefore not give rise to a credit or debit under the loan relationship provisions of the Finance Act The Court of Appeal judgment (30 July 2010) dealt only with the time limit issue overruling the Upper Tribunal by a majority of two to one. It has held that there was no provision in the statute to restrict successive claims being made under s.78 of the VAT Act However, if a successive claim is made without any new factual or legal issues it is liable to be dismissed for being abusive. In this case the basis for a successive claim was the judgment in Sempra. The later claim for compound interest under s.78 was therefore properly made and it was HMRC s letter of refusal in response to that claim which amounted to the decision in dispute. As the appeals were made within 30 days of that decision, they were in time. A further hearing will be necessary to determine the substantive issue, namely whether s.78 VAT Act 1994 can be construed in a manner that requires payment of compound interest. Given other developments the Court of Appeal may well decide to refer the question to the ECJ. n The question of whether a company could apply the literal interpretation of the statute taken by MJP and many other companies has been open for some time. The Tribunal has rejected that approach. The results of any appeals are awaited. n Wilkins Compound interest in VAT claims Court of Appeal judgment Nathan Simmons Claims for interest had been made under s.78 VAT Act 1994 and the taxpayers had received simple interest. Following the decision of the Court of Appeal in Sempra further claims for compound interest were made between ten months and two years after the initial claims for interest. These claims were refused. The Upper Tribunal decided the claims were out of time. The claimants should have appealed the receipt of only simple interest within 30 days rather than bring second claims for compound interest. The tribunal also concluded that s.78 VAT Act 1994 could not be interpreted so as to require the payment of compound interest anyway.

36 32 Taxation of Multinationals: Winter Updates September 2010 Akzo Nobel Chemicals & Akcros Chemicals C-550/07: Limitations on Legal Professional Privilege for In-House Counsel Alexander Steyne A decision by the ECJ has confirmed that privilege cannot be claimed over communications between company employees and in-house lawyers. Akzo and Akcros argued that some communications between solicitor and client were privileged. In particular, privilege was asserted over s passing between company officials and Akzo s coordinator for competition law, who was a registered Advocaat of the Netherlands Bar and a member of Akzo s legal department. The ECJ found that the Akzo coordinator was bound to his client by an employment relationship and was therefore not capable of exercising strict legal independence from his client s commercial interests. Legal professional privilege therefore did not apply. Similar arguments based on equal treatment between in-house and external lawyers were rejected by the ECJ on the same basis. Companies operating in the EU taking in-house legal advice must continue to exercise caution over communications with in-house lawyers, because a claim for privilege cannot be successfully asserted. Indeed, the decision may well encourage regulators to seek production of these types of communications from inhouse legal departments. Further issues may also arise involving advices or communications prepared jointly between in-house lawyers and external legal advisors. n European Limitations on Attorney- Client Privilege for Inside Counsel Akzo Nobel Chemicals & Akcros Chemicals ECJCase C-550/07 P Paul Farmer, Michael A. Lindsay, and Nathan Simmons A September 14 decision from the European Court of Justice (ECJ) has confirmed the rule that privilege cannot be claimed over communications between company employees and in-house lawyers. Akzo and Akcros were ordered, as part of a competition law investigation, to allow European Commission officials access to various documents. The companies argued that some of those documents were privileged because they were communications between solicitor and client. In particular, privilege was asserted over s passing between company officials and Akzo s coordinator for competition law, who was a registered Advocaat of the Netherlands Bar and a member of Akzo s legal department. The ECJ s decision broadly follows an earlier ECJ decision from 1982 (AM & S Europe v Commission [1982] ECR 1575) that in-house lawyers cannot claim legal professional privilege. Legal associations (including the American Corporate Counsel Association and the International Bar Association) had intervened in the case, arguing that the ECJ should overturn the previous decision. The argument was based on the evolution of the role of in-house lawyer in the decades since AM & S Europe, with a trend towards Member States providing greater protection for communications from in-house lawyers. The ECJ rejected this argument, finding there was no identifiable overall trend towards such protection within the EU. The ECJ found that the Akzo coordinator for competition law was bound to his client by an employment relationship and was therefore not capable of exercising strict legal independence from his client s commercial interests. Legal professional privilege therefore did not apply. Specifically, at paragraph 44: It follows that the requirement of independence means the absence of any employment relationship between the lawyer and his client, so that legal professional privilege does not cover exchanges within a company or group with inhouse lawyers. Similar arguments based on equal treatment between in-house and external lawyers were rejected by the ECJ on the same basis. Again, this follows the decision in AM & S Europe. Companies operating in the EU taking in-house legal advice must continue to exercise caution over communications with in-house lawyers, because a claim for privilege cannot be successfully asserted. Indeed, the decision may well encourage regulators to seek production of these types of communications from inhouse legal departments. Further issues may also arise

37 Taxation of Multinationals: Winter Updates involving advices or communications prepared jointly between in-house lawyers and external legal advisors. Because the ECJ is the highest-level appellate court in this sphere, the unambiguous decision in Akzo is now unlikely to be revisited for some time. n

38 34 Taxation of Multinationals: Winter Updates October 2010 Commission formally requests that the UK change s.107 FA07 Kelly Stricklin-Coutinho The European Commission has issued a reasoned opinion to the UK requesting that it remove section 107 Finance Act The Commission argues that s.107, which imposes a retroactive limitation period on claims for taxes paid under a mistake of law, exceeds the limits of national procedural autonomy and, in the absence of transitional rules, renders virtually impossible or excessively difficult the exercise of Community rights, infringing the principles of effectiveness and legitimate expectation. The UK has until the end of November 2010 to reply to the Commission after which the matter may be referred to the ECJ. C-173/09 Elchinov: Lower courts not bound by incompatible national precedents Philippe Freund, Oliver Neil The ECJ has held that national courts are not bound by precedents established by superior courts in circumstances where those precedents are incompatible with EU Law. Almost four decades ago, in Rheinmülen-Düsseldorf, the ECJ ruled that national procedures could not prevent lower courts from making further preliminary references to the ECJ. In Elchinov the ECJ has gone much further. The Bulgarian Supreme Court had overturned a decision of a lower court and remitted the case back for rehearing. The lower court, however, found itself unable to reach a decision compatible both with EU Law and the binding ruling of the superior national court. The ECJ held that the lower court must depart from national court procedure and precedent to ensure compatibility with EU Law. n Dividend taxation: ECJ hearing C-436/08 Haribo & C-437/08 Österreichische Salinen AG Philippe Freund On 15 September 2010 the ECJ heard oral submissions in the joint cases of Haribo and Österreichische Salinen AG. In essence these Austrian references ask whether national law, which applies a credit system to foreign portfolio holdings whilst exempting nationally sourced portfolio income, is contrary to the free movement of capital. The taxpayers argued that in portfolio situations it is, in practice, impossible to show underlying tax for the purpose of obtaining a credit and that the imposition of such a burden discourages foreign investments since there is no equivalent requirement for domestic companies. Advocate General Kokott is expected to publish her opinion on 11 November n ECJ Hearing in C-262/09 Meilicke II and C-310/09 Accor on 27 October 2010 Philippe Freund Meilicke is similar to Haribo save that in Meilicke the questions referred explicitly state the impossibility of showing underlying tax in portfolio situations. The Accor case asks whether the French précompte system, which had some similarities to ACT, is contrary to Community Law. When distributing a dividend, the précompte allows a company to deduct from its advance tax payment the tax paid by its subsidiary only if that subsidiary is resident in France. The reference also asks if it would be contrary to EU Law to make a credit or repayment of tax subject to proof of the underlying foreign tax actually paid. n

39 Taxation of Multinationals: Winter Updates Capital Air Services v HMRC: the Complex Track and Tribunal Costs Regime Robert Waterson The taxpayer appealed against a decision of the First Tier Tribunal not to allocate its appeal to the Complex Track. The material difference, so far as the taxpayer is concerned, between complex and other tracks is that the complex track has a costs-recovery regime. The others generally do not. The UT confirmed that it is a matter for the Tribunal to decide, with reference to the likely length, complexity, financial sum and/or whether the case involved an important issue of principle, whether a case is to be Complex or not. Further, the availability of the costs regime in the Complex Track is not, of itself, a directly relevant factor in making that decision. Curiously, the UT went on to say that, even within the Complex Track, the Tribunal was not bound to apply the costs rules which are generally applicable in civil law matters, and that the cost shifting power does not always result in the winner obtaining costs. It is likely that this view will be tested in the higher courts in the future however, for the time being at least, the victor s right to recover its costs in the Upper Tribunal is currently uncertain. n C-175/09 AXA UK Plc.: ECJ Reverses Position on BACS Charges Robert Waterson The ECJ has ruled that the processing of payments between, in this case, a patient s account and their dentist through BACS is akin to a debt collection service and that the fees charged in relation to which are subject to VAT. AXA had argued that the fees it charged were for a financial service and exempt. This surprise ruling has wide ranging repercussions beyond the realm of private dental insurance to the VAT treatment of any fee charged by firms for the processing of credit or debit card transactions as well as BACS payments. n

40 36 Taxation of Multinationals: Winter Updates November 2010 FII Group litigation: Leave to Appeal to the Supreme Court Philippe Freund The Supreme Court have now issued their Order on the applications to appeal the Court of Appeal s judgment in February The Supreme Court has decided that it will hear now the appeals in relation to retrospective restriction of the limitation period (s107 FA 07 and 1320 of FA 04) and whether statutory error or mistake claims (s33 TMA) can be reconstructed to exclude restitution claims. All matters concerning the lawfulness of the DV Charge and aspects relating to the level at which tax is paid in a corporate group are to be referred now to the ECJ for a second ruling. n CFC & Dividend GLO High Court Judgment Adjourned Robert Waterson The judge adjourned making a decision in Prudential until after Supreme Court has given its ruling in the FII case. The judge has decided that there was sufficient uncertainty about the issues involved in this case, following the Court of Appeal s decision in the FII case, to wait until the Supreme Court has clarified the law in that case. n Dividend Taxation: Advocate General s Opinion in Haribo and Salinen (C-436/08 and C-437/08) Philippe Freund Austrian provisions exempted domestic dividend income regardless of the size of the holding but only give an unconditional exemption in cross border situations if the holding was at least 10%. Below that level dividends from EU/EEA portfolio holdings could still qualify for an exemption if the shareholder could show that the foreign income has been subject to a comparable tax at a comparable rate and that it was not exempt in the other Member State. Otherwise the portfolio income was eligible for a tax credit for underlying tax subject to proving a number of facts, such as the corporation tax rate, the corporation tax actually paid and the amount of corporation tax that should be credited in Austria. Haribo, who held portfolio holdings through a domestic investment fund, submitted that it was impossible or unduly difficult for it to provide this information and that the Austrian law therefore breached the free movement of capital provisions in article 56 EC. In her opinion AG Kokott encourages the court to reject that argument. A Member State is entitled to request all the necessary proof and if the taxpayer cannot adduce the proof, it is just tough luck, even where it was in fact impossible to obtain the information. In her view it should be in the interest of foreign companies and of domestic investment funds to make all the necessary information available to the tax payer in order to encourage investment in their companies. Such an approach would not seem consistent with the Court s reliance on the Mutual Assistance Directives in the Marks and Spencer case and others. However in relation to the dividend taxation issues referred back to the ECJ in the FII case, her opinion is supportive of the taxpayer. In her opinion while an exemption and an imputation system are in principle equivalent, it would be unlawful to impose the credit method on inbound dividend income where in domestic situations there is no real link between the amount of tax actually paid by the subsidiary and exempting its dividends from tax in the hands of the parent. This accords with the taxpayers construction of the relevant sections of the FII judgment and which would lead to the conclusion that taxing DV income under the previous UK system was contrary to community law. n Littlewoods, Compound Interest Robert Waterson The High Court has handed down its order for reference to the ECJ. In essence, the referral asks if compound interest is the appropriate remedy for repayments of unlawfully levied VAT in EC Law. It is anticipated that the reference will take between two to three years to be heard by the ECJ and for judgment to be handed down. In the mean time it is anticipated that all other VAT litigation involving compound interest will be stayed pending this judgment. n

41 Taxation of Multinationals: Winter Updates December 2010 Wilkins Compound Interest Supreme Court refuses HMRC permission to appeal Nathan Simmons In Wilkins, the Court of Appeal had decided that it was permissible to make more than one application for interest, and that therefore the taxpayers appeals were within time. HMRC appealed this as a preliminary point. The Supreme Court has now refused HMRC permission to appeal. The matter now returns to the Court of Appeal on the issue of whether compound interest should be paid on VAT repayments to taxpayers. HMRC argues that simple interest on VAT repayments is adequate. Belgium Withholding Taxes Reasoned Opinion given Nathan Simmons The Commission has also requested that Belgium amend its withholding tax rules in relation to foreignsource dividends received by Belgian residents. Domestic-source dividends do not attract withholding tax. The Commission has sent a reasoned opinion to Belgium, alleging an infringement of the free movement of capital (Article 63 of the TFUE and Article 40 of the EEA Agreement). Because the withholding tax can be avoided through the use of a Belgian intermediary, the Commission also considers this an infringement of the freedom to provide services (Article 56 TFUE). n As we reported in our last newsletter, Littlewoods has recently been referred to the ECJ for determination. The Court of Appeal may await the outcome of that reference before determining the substantive issue in Wilkins, meaning it is likely to be some time before a decision on that issue is forthcoming. n Denmark, Netherlands and Spain Exit Taxes ECJ infringement proceedings commenced Nathan Simmons The European Commission has referred Denmark, the Netherlands and Spain to the ECJ in relation to exit tax provisions on unrealised capital gains. The exit charge only arises where a company changes residence, moves permanent establishment or transfers assets to another Member State. Domestic operations do not attract the charge. In March 2010, the Commission sent a reasoned opinion to each of Denmark, the Netherlands and Spain, stating that these rules were a breach of the right of freedom of establishment, and an infringement of Article 49 TFUE. n

42 38 Taxation of Multinationals: Winter Authors Simon Whitehead +44 (0) Wilson Street London EC2M 2TD Tel +44 (0) Fax +44 (0) Dr. Simon Whitehead is Partner-in-Charge of Dorsey s international practice. He specialises in claims by companies against the UK Revenue for the recovery of damages and the repayment of taxes levied in breach of community law. He has practiced in the UK since 1991 and is also a qualified solicitor in Australia. He writes and speaks widely on UK & EU tax and litigation issues. Paul Farmer farmer.paul@dorsey.com +44 (0) Paul Farmer is a Barrister and Head of Dorsey & Whitney s EU Law Practice Group. Previously employed as Head of Tax Policy at the European Commission and Référendaire in the Chambers of Advocate General Jacobs at the ECJ, he also spent nearly 5 years in practice as a Barrister at Pump Court Tax Chambers. He was LexisNexis Tax Lawyer of the Year in Michael Anderson anderson.michael@dorsey.com +44 (0) A Partner in the Tax Litigation Group, Michael has a wide variety of experience of contentious tax matters (in both direct and indirect tax) including enquiries, investigations and appeals to and from the Special Commissioners and VAT and Duties Tribunal. He currently works on several of the Group Litigation Orders that Dorsey & Whitney is conducting on behalf of a large number of multinational companies. Philippe Freund freund.phillipe@dorsey.com +44 (0) Philippe Freund is a Barrister in the Tax Litigation Group. His work is mainly focused on contentious tax matters, including the Group Litigation Orders Dorsey & Whitney is conducting on behalf of a large number of multinational companies throughout the English and European Courts. He also advises on non-contentious and commercial matters. Mr. Freund read law in Germany, France and England and is fluent in all three languages. Alison Last last.alison@dorsey.com +44 (0) Alison Last is an Associate with commercial and tax litigation experience. She has been involved with hearings on tax matters from the First-Tier Tribunal to the European Court of Justice, including the Court of Session in Scotland. Her notable cases include work on the ACT GLO and the prominent Marks and Spencer direct tax case. Alison s commercial litigation experience includes work on professional negligence cases and a variety of contractual disputes. Nathan Simmons simmons.nathan@dorsey.com +44 (0) Nathan Simmons has previously worked for HMRC in its Missing Trader Intra-Community (MTIC) fraud unit, and before that as a solicitor in Australia working in contentious tax matters before the High and Federal Courts, as well as other contentious litigation and non-contentious commercial matters. Since starting at Dorsey, he has been involved in the Group Litigation Order cases as well as assisting in various indirect tax matters. Robert Waterson waterson.robert@dorsey.com +44 (0) Robert Waterson previously worked within the litigation arm of HMRC where he was involved in a multiplicity of contentious tax matters ranging from the tribunals to the House of Lords and regularly appeared on behalf of the Commissioners at the VAT and Duties Tribunal. Now at Dorsey, Robert brings strong tax litigation experience and is engaged on both direct and indirect tax matters. Michael Lindsay lindsay.michael@dorsey.com Michael Lindsay is chair of the firm s Antitrust Practice Group. His practice focuses on competition and antitrust matters, including distribution counseling, merger investigations, and private antitrust and other commercial litigation. He serves on the board of editors of the American Bar Association s Antitrust magazine.

43 Taxation of Multinationals: Winter Dorsey & Whitney UK Litigation Team 21 Wilson Street London EC2M 2TD Tel +44 (0) Fax +44 (0) Michael Anderson Matthew Blower Nicholas Burkill Kieran Dignan Paul Farmer Philippe Freund Savina Kanagasabay Paul Klaas Alison Last Tim Maloney Joanne McGilloway Oliver Neil Richard Proctor Nathan Simmons Kelly Stricklin-Coutinho Alexander Steyne Peter Tannion Robert Waterson Simon Whitehead