Taxation of Multinationals Autumn th Edition

Transcription

1 Taxation of Multinationals Autumn 2009 Ranked Top for Tax Litigation Chambers UK, 2008 & 2009 Legal 500, 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 Paul Farmer, Tax Lawyer of the Year 2006 LexisNexis

2

3 Taxation of Multinationals: Autumn Table of Contents Introduction 2 Simon Whitehead Articles UK Tribunal Issues Judgment in Marks & Spencer 4 Simon Whitehead FII GLO: Weighing Up The Impact 8 Kelly Coutinho and Zoë Hooper-Smith Artificiality or Commerciality? The Thin Cap GLO: Back in the UK 11 Robert Waterson and Kelly Coutinho Tribunal Clarifies Cross-Border Group Relief Claims 15 Alison Last GLO Verdict Produces Mixed Result for Taxpayers 19 Savina Kanagasabay Updates Truck Center SA: Withholding Tax on Interest Upheld (10 March 2009) 23 Michael Anderson Withholding Tax on French Dividends To Non-Resident Pension Funds Found Unlawful (10 March 2009) 24 Alex Steyne VAT: HMRC Drops Unjust Enrichment Defence for Periods Prior to May 05 (10 March 2009) 25 Robert Waterson Swedish Rules on Group Contributions are Contrary to EU Law (13 March 2009) 26 Paul Farmer VAT: Fleming Window Closes (31 March 2009) 27 Savina Kanagasabay VAT: AB SKF (AG s Opinion): VAT Reclaims for Disposals of Subsidiaries (31 March 2009) 28 Robert Waterson Planned Restrictions to Claims (Compound Interest) (22 April 2009) 29 Simon Whitehead Compound Interest Generally Available In Community Law Claims (14 May 2009) 30 Simon Whitehead Authors 32

4 2 Taxation of Multinationals: Autumn 2009 Introduction Simon Whitehead The eighth edition of our bi-annual report on developments in cross border taxation covers the first half of It is fair to say that there may have been no earth shattering new developments from the ECJ, but considerable activity at the level of the English courts in seeking to apply and understand their previous judgments. Back again to the courts was Marks and Spencer to establish whether following the judgment of the ECJ and subsequent appeals, it could succeed on its cross border group relief claims. The ECJ had concluded in 2005 that cross border group relief should be available whether the subject losses were incapable of local use. The repost of HMRC was that the losses had to be beyond local use at the end of the accounting period in which they arose, an impossible requirement to meet. HMRC concluded that even though M&S s losses represented terminal losses remaining on the cessation of trade as they were capable of carry forward at the end of each accounting period, they were still unavailable for cross border surrender. That argument was rejected by the Court of Appeal in 2007 who concluded that the losses need only be incapable of use at the date the claim for group relief was made. Marks and Spencer, who by then had put the foreign subsidiaries into liquidation, then issued further group relief claims periodically as the liquidations progressed and the matter was remitted to the First Tier Tax Tribunal to establish whether, as a matter of fact, Marks and Spencer met the necessary requirements. HMRC s response was again to set up another Catch 22. They contested the right to issue new claims, contending that the tax payer was stuck with the original claims made at a time long before it knew, or could have known, of the no possibilities requirement. As M&S had at that time not met a test which was not known to exist until some 5 years later their claims, HMRC contended, therefore fail. Alternatively they argued that the no possibilities test could only be met upon the dissolution of the subsidiaries. However, once the companies were dissolved there was no entity left to surrender the losses, nor any officer authorised to sign the consent. It was too early to surrender losses before dissolution and too late after. All claims must always fail. In what I expect is the first judgment ever of the new First Tier Tax Tribunal (it was only formed on 1 April and this judgment was delivered on 2 April) the Tribunal found for the tax payer. In Marks and Spencer s circumstances it set the date of commencement of the liquidation as the date when it would be fanciful to suggest that any remaining losses could have been utilised. Trade had ceased many years before and establishing the nominal amount of income which might be received during the period of liquidation was not challenging. The decision still leaves the vexing question of how losses are to be computed for cross border surrender, suggesting in principle that the losses left after local utilisation must be subjected to UK tax adjustments to ensure that losses cannot be surrendered cross border which could not be surrendered domestically. HMRC have of course argued that the loss available for surrender in any accounting period is the lower of the loss computed on a local or UK basis. The effect is that HMRC would benefit from any timing difference in bringing deductions into account between local and UK rules. In the M&S context the aggregate amount of available losses, whether computed on a local or UK basis, was effectively the same. Differences are almost all timing. In response M&S has come up with two new methods for computing losses to accommodate local utilisation and still make UK tax adjustments but which avoid the differing timing effects. Judgment is awaited very shortly. The case will then proceed upon HMRC s appeal to the Upper Tier Tax Tribunal to become in all likelihood the very first appeal heard in that jurisdiction. Next we had the ongoing battle for conforming interpretation in Vodafone 2. Not unexpectedly the Court of Appeal overturned the High Court s wholesale rejection of the CFC provisions as incompatible with community law in May. The grounds for doing so

5 Taxation of Multinationals: Autumn Introduction (continued) however, are a bit unclear. While accepting the well known principle that the court cannot, in seeking to interpret national legislation, re-write that legislation, the Court of Appeal has reached the conclusion that the CFC provisions can be read compatibly with community law but only by inserting into the provisions a further 23 words. The tax payer has sought leave to appeal to the new Supreme Court, which application is still being decided. Also in May the High Court returned again to the issue of the availability of compound interest upon community law claims in the judgment in the VIC GLO which has now been supplemented by a judgment of the Upper Tribunal in the parallel statutory appeal proceedings for the same claims. At present the case stands as a paradigm of a pyrrhic victory. Of great assistance to us all is Henderson J s conclusion that the community law requirement of an effective remedy requires compound interest upon repayments of tax. Of less utility to the immediate claimants in that case was his conclusion that their claims were however out of time and the parallel conclusion of the Upper Tier Tribunal that the only forum available for a compound interest claim is the High Court. Those cases too proceed on further appeal. For those of us not involved in the VIC GLO cases, they have nevertheless produced considerable work in issuing protective compound interest claims, while those actions proceed. Looking into the second half of the year the Dorsey team is awaiting a judgment in the Thin Cap Group Litigation as well as the loss quantification issue in Marks and Spencer. The Thin Cap judgment will address whether the pre 2004 thin cap rules simply fall as incompatible with community law, or whether they are only incompatible where the circumstances involve a genuine commercial arrangement not designed solely to obtain a tax benefit. The judgment will then decide what a genuine commercial arrangement might be, as well as linked issues of remedies. We will also have two weeks in the Court of Appeal in the FII Case, followed by trials in ACT Class 2 (on an outstanding issue of causation), ACT Class 4 and the CFC and Dividend GLO. Our published writings over the first half of the year appear in this booklet and include articles from International Tax Review, Tax Notes International, FITAR and other publications. With this edition we have also commenced including relevant extracts from our monthly newsletters. I end as always with my thanks to our clients for their continuing support and to the team for their great work and commitment. In these difficult times it is good to be busy. n

6 4 Taxation of Multinationals: Autumn 2009 U.K. Tribunal Issues Judgment in Marks & Spencer Simon Whitehead Originally published in Tax Notes International, May 11, 2009 (Vol. 54 No.6 p.454) The U.K. Tribunal Judges decision of May 1 effectively represents the third stage in the resolution of the claims by Marks & Spencer seeking group relief against U.K. profits of the losses made by subsidiaries resident and trading in other EU member states. (For the decision, see Doc or 2009 WTD ) In December 2005 the European Court of Justice concluded 1 that the U.K. s group relief provisions, by not providing for the surrender of cross-border losses in some circumstances, were incompatible with European Community law. At the second stage, first the High Court the court that had referred the issue to the ECJ and then the Court of Appeal sought to interpret that ruling in judgments in April 2006 and February The latest stage represents the return of the case to the Tribunal Judges (formerly the Special Commissioners) to apply that guidance to the facts and to consider how best to apply the U.K. s provisions in a way that conforms with the overriding requirements of Community law. At this stage the focus shifts from the broad policy concerns of the ECJ level to the nitty-gritty. How does a group make a claim for the group relief of nonresident losses? When will a loss be capable of surrender? How are the losses to be computed? The decision will therefore primarily interest practitioners who have been grappling with these concerns for over four years. This article summarizes where the U.K. now stands regarding claims for the surrender of cross-border losses as a result of the first authoritative guidance on the practicalities. It also identifies some of the issues that still remain after eight years of litigation. Describing the Tribunal Judges judgment as the first practical guidance might seem an overstatement. It was preceded by the revisions introduced to the group relief rules by Schedule 1 of Finance Act 2006 and accompanying guidance that HM Revenue & Customs said reflected the principles of the ECJ s judgment in Marks & Spencer. Then in September 2008 the European Commission revealed that it had commenced 1 C-446/03, Marks & Spencer v. Halsey, [2005] ECR I-10837, Doc , 2005 WTD Marks & Spencer plc v. Halsey, [2006] All ER (D) 129; [2007] All ER (D) 232. See Doc or 2007 WTD infringement proceedings against the U.K. on the grounds that those revisions imposed too restrictive an interpretation of that ruling. Yet neither of these steps produced reliable practical guidance. HMRC s position before the Tribunal Judges in Marks & Spencer was that the 2006 changes represented a brand-new code and were not relevant to understanding how claims for periods ending before April 1, 2006, could be made. The precise aspects of the 2006 changes that the commission took issue with are not publicly known. The History By this stage of the proceedings, the claims concern the losses of German and Belgian indirect subsidiaries of a U.K. resident parent. Both subsidiaries ceased trading in 2001 after several years of mounting losses but were not put into liquidation. Claims for group relief were made between March 2000 and February 2003, covering a number of accounting periods, some under the pay-and-file system (that is, accounting periods ending before July 1, 1999) and some under the corporation tax self-assessment system (CTSA) (that is, subsequent periods). The distinction is important because different procedural rules govern the making of group relief claims: Schedule 17A of the Income and Corporation Taxes Act 1988 for the former and Schedule 18 of the Finance Act 1998 for the latter. The earlier of these claims, covering both pay-and-file and CTSA periods, were the subject of the reference to the ECJ. The ECJ judgment found the U.K. provisions disproportionate because they failed to permit the group relief of cross-border losses in circumstances when the possibilities to use the losses in the local jurisdiction for past, current, and future periods had been exhausted (the no-possibilities condition paras. 55 and 56 of the ECJ judgment). Both the High Court and Court of Appeal concluded that the time when the no possibilities condition had to be met to enable losses to be surrendered cross-border was the date of issue of the claim. The House of Lords refused HMRC permission to further appeal that finding. After the ECJ judgment in December 2005, Marks & Spencer took steps to liquidate these two otherwise redundant subsidiaries. Liquidators were appointed in

7 Taxation of Multinationals: Autumn U.K. Tribunal Issues Judgment in Marks & Spencer (continued) October 2006, but the liquidations were ongoing by the Court of Appeal s judgment in February 2007 and were not actually completed until December It is at this point when the important distinctions between the rules governing pay-and-file and CTSA periods emerged. Under the pay-and-file system, claims for group relief could be made only up to six years and three months after the end of the accounting period in which the corresponding losses and profits arose. 3 That period had expired for every pay-and-file period even before the ECJ judgment was delivered and the existence of the no-possibilities condition was revealed. For CTSA periods, however, if a claim for group relief was made within two years of the end of the accounting period and there was an open enquiry or an appeal against an amendment to a return on the closure of an enquiry, a new claim for group relief could be made up to 30 days after the completion of the enquiry or appeal. 4 Because all the relevant CTSA years concerned were under enquiry, Marks & Spencer could issue new group relief claims up to and even following the final determination of the appeals and have the nopossibilities condition assessed at that time, namely when the companies were in liquidation, or perhaps even after dissolution when it was apparent the no possibilities condition would have to be fulfilled. The Court of Appeal suggested a way to resolve this otherwise illogical dichotomy by stating that a reasonable transitional period existed to enable new claims to be made for pay-and-file periods as well, once taxpayers became aware of the requirements for making claims. No taxpayer could possibly have been aware of those requirements until the ECJ revealed that the no possibilities condition existed (December 2005). Indeed, taxpayers continue to justifiably argue that those requirements are still not really known. Yet another issue arose for CTSA periods. Although, without the need for any transitional arrangements, the making of new claims might appear to suggest an answer to meeting the no-possibilities test for cross- 3 Para. 5(2) of Schedule 17A Income and Corporation Taxes Act 1988, unless HMRC agrees to accept the claim late. 4 Para. 74(1) of Schedule 18 of the Finance Act 1998, unless HMRC agrees to extend time para. 74(2). border claims concerning CTSA periods, how did this address paragraph 73(2) of Schedule 18 of the Finance Act 1998: a claim for group relief may not be amended, but must be withdrawn and replaced by another claim? Did that mean that Marks & Spencer was required to abandon its earlier claims to make later ones? Given the lack of guidance on procedure and on what circumstances met the no-possibilities condition, there would be obvious risks in withdrawing accepted claims to make new ones that might encounter new procedural objections. The Battle Lines The Tribunal Judges judgment details the approach adopted. The taxpayers had issued further claims for both pay-and-file and CTSA periods shortly after the Court of Appeal s judgment in early 2007 and then periodically through the liquidation process issued the latest claims for the Belgian losses coming after formal dissolution and for the German losses a couple of days before the final step in the dissolution of that subsidiary. They issued the claims as alternative claims, without withdrawing the previous claims. Of course, accommodating claims for nonresident losses requires other changes to the formalities for making claims within the U.K. s group relief provisions, which are designed only for U.K. companies with U.K. tax inspectors and U.K. accounting periods. The parties were, however, able to agree on a formula and wording that adequately met those requirements. Instead, the grounds for denying the claims for group relief were more fundamental. HMRC contended: At the time the original claims were made in , the no-possibilities condition was not met. When the earliest claims were made, the companies were still trading. Afterwards it was always possible that the new lines of business might have been introduced, the profits from which could have been used to absorb the losses. It is not possible to make alternative claims for group relief. All subsequent claims were a procedural nullity to be ignored. The subsequent claims for the pay-and-file periods were late anyway.

8 6 Taxation of Multinationals: Autumn 2009 U.K. Tribunal Issues Judgment in Marks & Spencer (continued) For German and Belgian losses, the no possibilities condition could not be met short of the dissolution of the loss-making companies. There is nothing to stop a company being taken out of liquidation and new trades introduced. All the German claims were made before that company was liquidated and therefore must fail. While Belgian claims were made after dissolution, once a company is dissolved, it ceases to exist and is no longer able to consent to the surrender of its losses. Those claims therefore fail as well. It is difficult to imagine a more extreme position. The conditions to make a claim cannot be achieved short of dissolution, and by then no company exists to complete the necessary documentation. The Ruling The Tribunal Judges found largely in favor of the taxpayers. They concluded: In the objective circumstances of the taxpayers, once the companies were put into liquidation, the no-possibilities condition was met. It would be fanciful (the standard recommended by the Court of Appeal) to suggest that they might have been taken out of liquidation and new lines of business introduced at that time. On the other hand, such a step was a possibility when the original claims were issued around the time trading ceased but prior to liquidation. Accordingly, the no-possibilities condition was not met at the time the original claims were made in However, as those claims therefore did not meet the no-possibilities condition they were not valid and effective claims it follows that for the CTSA years, the claims made once the companies were in liquidation (that is, after the Court of Appeal s judgment and subsequently) were procedurally fine and succeed. For pay-and-file periods when the time for making claims had expired prior to the ECJ s decision, Community law did require the ability to make new claims once the conditions were known. This covered the subsequent alternative claims made in These subsequent claims were also unaffected by the original claims made in for the same reasons as the alternative CTSA claims the original claims were not valid because at that time the no-possibilities condition was not met. This, however, does not extend to claimants who, unlike Marks & Spencer, failed to act on their rights and only now seek to issue claims outside the period prescribed for doing so. The Tribunal Judges have also addressed the probable reason why HMRC sought to distance the current case from the 2006 changes to the rules, which were ostensibly intended to make the rules explicitly compliant with the ECJ ruling in the case. The 2006 rules permit group relief claims after the dissolution of the loss-maker by permitting the surrender to be signed by the claimant company itself. The tribunal notes this as revealing the disproportionately restrictive interpretation of the ECJ judgment offered by HMRC, a position probably inconsistent with local law anyway (the evidence suggesting that in Belgium, a liquidator could execute documents on behalf of a company after its dissolution). Implications for Other Claims The judgment naturally does not deal with other group structures in which the common parent company between profit-maker and loss surrenderer is not a U.K. resident company. The U.K. appears to deny group relief in these circumstances on the grounds that the Marks & Spencer judgment does not apply. This is a matter for other claims. On the positive side for claimants, the Tribunal Judges give some welcome guidance on how to make claims. Clearly for CTSA years, claims can be remade while enquiries remain open or appeals are pending to perfect claims without the risks of withdrawing existing claims. For pay-and-file years, provided claimants have been proactive and issued claims at the proper time, new claims should be permissible even if outside the statutory time, should the no-possibilities condition now be met. The case obviously deals with the specific facts of the Marks & Spencer claims. It concludes in those objective circumstances that the commencement of liquidation

9 Taxation of Multinationals: Autumn U.K. Tribunal Issues Judgment in Marks & Spencer (continued) was sufficient to meet the no-possibilities test. What might meet the test in other cases presumably will rely on those objective facts. For Marks & Spencer, the tribunal has concluded that other lines of business might have been introduced to absorb the losses before liquidation. Whether or not that was correct in Marks & Spencer s case, the point would seem to be that the analysis is case by case. What, for instance, of a business continuing to trade, but with losses that will take 200 years to use? In its objective circumstances, surely there are no possibilities, whatever the company might do, of using the vast majority. More problematic for claimants is the conclusion the judgment reaches on how to compute the losses available for surrender once the no-possibilities condition is met. The taxpayer had provided detailed figures for the calculation of the losses on three bases, which produced roughly comparable results. One method took the accounting losses of the subsidiaries computed using local generally accepted accounting principles, made tax adjustments for local tax rules, and established the losses used according to local tax law. The second took the local accounting losses adjusted for local tax and distinguished those losses that would be available for group relief in the U.K. from those that would not (for example, between trading and capital losses) and established those losses that remained unused within those categories. The third method was a complete recomputation on a U.K. basis that is, adjusting the accounting losses in accordance with U.K. tax rules and establishing the amounts used in accordance with U.K. tax law. HMRC chose, in contrast, to deal with this issue of computation as one of principle only, without engaging in the actual calculation of the results. On this occasion, HMRC s approach borrowed from that used in the 2006 changes to the rules. HMRC maintained that one first needed to establish the level of local losses that remained unused under local rules and then recompute those remaining losses on a U.K. basis in order to surrender them. The Tribunal Judges have followed HMRC s approach, concluding that if this were not done a nonresident subsidiary could obtain a greater amount of relief for losses than a UK subsidiary in the same circumstances, which goes further than necessary to give effect to the no-possibilities test (paragraph 51). The taxpayer s recommended approach had not advocated a better result than would have been achieved from a domestic surrender but merely a consistent one. Indeed, the best result for the taxpayer was obtained by a purely U.K.- centric recomputation. It is also not obvious why the cross-border surrender might result in a better result than a domestic one, given that the former is limited to stranded losses incapable of local use while the latter is not. As HMRC was not required to calculate the losses on its approach, that a better result might have been produced on any of the taxpayer s suggested methods is an untested hypothesis. But a more fundamental objection arises to this worst case approach. Take the example of a German company whose results applying local principles and tax adjustments produce a loss in year 1. U.K. rules may calculate the loss in precisely the same amount but simply allocate the loss to a different period say, year 2. An obvious example would be the difference between the treatment of depreciation in other jurisdictions and capital allowances in the U.K. In this example, however, the Tribunal Judges approach produces no losses capable of surrender at all: In year 1 there are local losses but no U.K. recomputed losses and vice versa in year 2. Through nothing more than timing differences, the loss escapes the Marks & Spencer ruling even though it may be beyond any possible use. Conclusion Claimants with group structures not incorporating a common U.K. resident parent between loss- and profitmaker will still need to establish whether their group structures exclude them from the same treatment. The judgment is of considerable assistance in establishing when and how claims can be made, although for payand-file periods claimants will need to consider what steps they took to preserve their rights to rely on the conclusions the Tribunal Judges have reached. On the down side, the worst case approach to computing surrenderable losses may well, for the reasons discussed above, produce unfair and anomalous outcomes. All in all, the judgment provides welcome guidance but not a complete answer. n

10 8 Taxation of Multinationals: Autumn 2009 FII GLO: Weighing Up The Impact Kelly Coutinho and Zoë Hooper-Smith Originally published in Financial Instruments Tax and Accounting Review, March 2009 (Vol.14 Issue 2). The High Court judgment in the FII GLO and the anticipated changes to the statutory rules for taxation of foreign dividend income are good news for mediumsized and large corporate groups. But, argue Zoë Hooper- Smith and Kelly Coutinho of Dorsey & Whitney (Europe) LLP, the story is far from over. Introduction The High Court judgment in the Franked Investment Income Group Litigation Order was handed down hot on the heels of the Government s announcement that the taxation of foreign dividends is to be abolished, subject to a worldwide debt cap. The case raises a number of issues, both of substantive law and relating to the availability of remedies for restitution and damages. The judgment permits claims in the following circumstances: (a) where corporation tax was actually paid under Sched D Case V in respect of the EU-source dividends; (b) ACT paid by a UK company receiving dividends direct from an EU subsidiary and remaining in surplus where that subsidiary paid tax on its profits; (c) ACT paid in the circumstances described at (b) above and utilised against unlawful Case DV tax; and (d) the time value of ACT paid in the circumstances described at (b) above and utilised against lawful mainstream corporation tax (MCT) from the date on which the ACT fell due until the date on which it was utilised. Unlawful dividend taxation Tax on dividends received by UK companies from holdings of 10% or more in EU/EEA companies is discriminatory and unlawful. This is because the rate of corporation tax incurred on domestic distributed profits is commonly lower (taking into account reliefs and allowances) than the rate applied to distributed profits from the EU/EEA. Because dividends from a domestic subsidiary are not taxed in the hands of its UK parent, that parent can take advantage of any reduction in the effective tax rate of the domestic subsidiary. By contrast, any lower rate of tax in the non-resident subsidiary was equalised up to the UK rate applicable to the parent. This High Court finding supplements the existing ruling by the ECJ that the taxation of portfolio dividends is discriminatory (C-101/05 A and C-201/05 (CFC and Dividend GLO)). It remains lawful to charge tax on dividends from direct investments such as subsidiaries resident outside the EU. In principle, taxpayers could invoke EU capital movement rights under art 56 of the EU treaty in relation to third countries for both portfolio dividends and dividends from direct investments. However, the applicable law pre-dates 1994 and therefore the grandfathering provisions in art 57 prevent the application of art 56. It was argued that the system to take account of eligible unrelieved foreign tax (EUFT), introduced in 2001, represented a substantial change in the rules so that the protection of the grandfathering provisions was no longer available. This argument was rejected on the basis that the changes wrought by the EUFT rules did not alter the underlying tax liability. Unlawful ACT As a result of the unlawful FII rules, unlawful ACT is repayable to the extent that it remains in surplus or was offset against unlawful Case DV tax. Time value claims can also be made in respect of the utilisation of unlawful ACT against lawful MCT. To calculate the amounts of these repayments, dividends from the EU/EEA are to be treated as franked investment income. They should have carried a credit as if they were dividends from a UK company. There is no need to undertake a reconstruction exercise tracing the source of foreign income distributed by the UK parent. The precise calculation of the quantum of claims is necessarily subject to a number of assumptions and variables due to the complexity of both the ACT rules and the tax computations for the types of international group most profoundly affected by them. Corporate tree The ECJ did not specifically determine whether or not it makes a difference which company in the UK group paid the ACT. In most cases, a group income election would have been made under which the ACT was paid not by the UK company receiving the dividend but by its ultimate UK parent. Furthermore, the ECJ did not explicitly decide whether the corporation tax on the EU profits distributed to the UK must have been paid by the EU subsidiary that paid the dividend or, alternatively,

11 Taxation of Multinationals: Autumn FII GLO: Weighing Up The Impact (continued) whether it would suffice that an EU subsidiary further down the group structure made a payment of corporation tax on those profits. These questions are known as the corporate tree points. The judge examined the ECJ s reasoning and tentatively concluded that the corporate tree points should not be a bar to a claim. However, he refrained from making a decision in this regard and notes that at some future stage in the proceedings these points will need to be referred back to the ECJ for clarification. He also notes that a further ECJ reference will be required to determine whether relief equivalent to the surrender of ACT to a UK subsidiary should have been given for EU subsidiaries. Foreign income dividends The judge held that the foreign income dividend (FID) regime was unlawful in relation to dividends received from the EU. In relation to ACT claims under FIDs, the corporate tree points apply in relation to ACT claims under FIDs in the same way as they apply to other claims for restitution of unlawful ACT. The FID regime was also unlawful in relation to third countries; however, in this case, because the rules were introduced after 1994, the grandfathering provisions in art 57 did not remove the protection of the capital movement rights under art 56. Consequently, the FID regime was also held to be unlawful in relation to dividends from third countries. Remedies The complex remedies issues in the case amounted to two principal questions. First, whether the remedies claimed were claims for damages or restitution and, second, the consequential question of recoverability of monies under the threshold for each of the different tests. The points at issue regarding remedies between the parties were: (a) Which of the remedies sought are damages claims and which are restitution (or repayment) claims? (b) Insofar as they are damages claims, was the UK s breach of community law sufficiently serious? (c) Has HMRC changed their position by spending the tax revenue collected in breach of community law on public purposes; furthermore, if so, does it afford them with a defence in the present case? (d) Given HMRC s contention that the value of these claims was such that it would disrupt the economy to settle them (making it unconscionable and inequitable to do so), should English law recognise this defence? (e) Can the claimants rely on the extended limitation period contained in s32(1)(c) of the Limitation Act 1988 (LA 1988), which delays the start of the sixyear limitation period in the case of mistake claims to the date the mistake was discovered or could with reasonable diligence have been discovered? In this case, the effect would be to extend claims back to Although in principle it was accepted that they could do so, legislation had been introduced without warning and with retrospective effect in s320 Finance Act 2004 and s107 Finance Act 2007 purporting to remove tax claims from the ambit of that provision. Accordingly, were s320 FA 2004 and s107 FA 2007 lawful? Findings Uncontroversially, Mr Justice Henderson found that at Community law, the difference between a repayment claim and a damages claim was significant. This is because a repayment claim under Community law was a claim following the San Giorgio principle and was, therefore, recoverable as of right, but a damages claim needed to meet the threshold of being a sufficiently serious breach of Community law. He categorised the claims in the following way. He found that at Community law claims for the repayment of tax actually paid are repayment claims. Examples of these are surplus ACT, the loss of use of utilised ACT and dividend taxation. He also found that claims arising from the enhancement of FIDs to compensate exempt shareholders for a lack of a credit and the incidence of lawful corporation tax caused by waiving reliefs to enable unlawful ACT to be utilised more quickly are damages claims. Falling between the categories of repayment claims and damages claims as defined by the ECJ are claims arising from the utilisation of reliefs to shelter unlawful tax liabilities. Here the judge ruled that this category of claim was also not a restitution claim under English

12 10 Taxation of Multinationals: Autumn 2009 FII GLO: Weighing Up The Impact (continued) law because claims are limited to repayment of tax paid by mistake and the reversal of any directly associated benefits retained as a result of the mistaken payment. In Henderson J s view, the link was not direct. With regard to claims for tax paid, such as DV or ACT (including the loss of use of utilised ACT), he held that the claims are restitution claims which are based on mistake. These, he held were recoverable back to Henderson J considered whether HMRC had committed a sufficiently serious breach of statutory duty in failing to give serious consideration to whether the UK s tax provisions fell foul of Community law. Here he found that although the approach taken was one of insular insouciance, it still did not amount to a sufficiently serious breach of statutory duty, meaning that claims which were damages claims would fail. Evidentially very little material was disclosed in the FII proceedings. When compared with the volume of documents disclosed in the Thin Capitalisation GLO, which Henderson J also tried in the High Court in February 2009, it is surprising to say the least that in the case of FII the Inland Revenue (as it was then known) was did not consider more closely the possibility that their legislation was contrary to Community law. In their defence, HMRC argued that they had changed their position by spending the tax that had been paid to them on public purposes and that they should therefore not be asked to repay the money. Henderson J held, however, that although in principle that argument could amount to a valid defence, it could not apply to Community law repayment claims because as a matter of Community law there must be an effective remedy. HMRC also argued in their defence that it would be unconscionable and inequitable to require them to repay the money because this would disrupt the UK economy. Henderson J found that this was a Community law matter that could only be the subject for a temporal restriction of the judgment of the ECJ itself. The Government had attempted through ss320 Finance Act 2004 and 107 Finance Act 2007 to limit the claims that could be brought by cutting short the limitation periods for restitution claims based upon mistake. Both sections did so without any transitional period. Although HMRC argued that these sections assisted them in their defence, Henderson J held that the claims were contrary to Community law because of the lack of transitional period. He also held that the statutory provisions for error or mistake claims in s33 of the Taxes Management Act 1970 do not preclude claims for restitution that rely on Community law. Comment Draft legislation has been published under which all dividend income from the foreign subsidiaries and portfolio holdings of large and medium-sized groups will be exempt from tax in the hands of the UK company receiving those dividends. The exemption will be subject to a worldwide debt cap that is intended to prevent the taking of disproportionately large corporation tax deductions in respect of interest on intra-group loans. These reforms have been widely welcomed, although the detail, and in particular the application of the debt cap, is proving controversial. The substantial claims either already achievable in principle under the FII GLO, or resting solely on resolution of the corporate tree points, together with these reforms, should represent a significant success for multinational groups parented from the UK. The story, however, is far from ended. The draft legislation is subject to further amendment, and in the meantime the FII GLO proceeds to the Court of Appeal, where a hearing is anticipated in late 2009 or early n The UK has, however, made two applications of this nature before the ECJ in this case and has failed on both occasions. Had HMRC s defence that it would disrupt the UK economy to repay a sum that was approximated to be at most 5bn been heard in the current context of the scale of the recent bail-outs it might be considered to be rather less of a good argument.

13 Taxation of Multinationals: Autumn Artificiality or Commerciality? The Thin Cap GLO: Back in the UK Robert Waterson and Kelly Coutinho Originally published in Tax Planning International Review, February 2009 (Vol. 36 No.2). Now that the Thin Cap GLO trial in the High Court is over, this article will look back at the course of the litigation and the questions facing the court today. I. Luxembourg and back again From the perspective of a tax authority, the purpose of Thin Cap rules is always the same: combating taxavoidance. The avoidance in question is achieved by replacing taxable distributions with artificially engineered non-taxable loan interest repayments. The method for combating this involves limiting crossborder debt finance against equity ratios to acceptable levels and treating as a distribution anything above that level. This may seem simple but it begs a fundamental question: what is artificial and what is acceptable? Following the European Court s judgment in Lankhorst- Hohorst 1 a number of companies brought claims challenging the legality of the UK s Thin Cap legislation in its various guises from 1988 to These restitution/compensation claims, issued in the High Court in London, were subsequently referred to the European Court of Justice on December 21, 2004 for the determination of certain points of principle. The questions referred inter alia sought to ascertain whether the UK s Thin Cap legislation breached the principles of free movement of capital, freedom to provide services and/or the freedom of establishment. 2 Advocate General Geelhoed delivered his opinion on June 29, 2006 and the court gave its judgment on March 13, 2007 which closely followed the Advocate General s reasoning. The court recognised that although direct tax matters fall within the competence of the national courts, legislation must be consistent with community law. 3 In deciding which of the three freedoms was engaged by the UK legislation, the court following earlier authority, 4 stated that, as the UK legislation applies only to group situations the matter is 1 [2002] ECR I Articles 56, 49 and 43 respectively. 3 The Test Claimants in the Thin Cap Group Litigation C-524/04, para Baars [2000] ECR I one of freedom of establishment. Consequently, the other two freedoms were not considered. The test claimants in the ECJ case were chosen because of the variety exhibited in their claims. One element was the variations in corporate structure which existed between the claimant companies. These included situations where the direct parent and/or lending company were located outside of the European Union. Those claimants were relying on the court finding a breach of the freedoms of movement of capital or provision of services: rights which could have covered the third country arrangements. By finding that the legislation primarily affects [the] freedom of establishment because it targeted relationships within a group of companies the court stated that, to the extent that infringements of other freedoms occurred, such effects must be seen as an unavoidable consequence of any restriction on freedom of establishment and do not justify an independent examination. 5 This removed the possibility of challenges for third-country parented group under the provisions of the free movement of capital. For the period between 1988 and 1995, in circumstances where loan interest was paid to a non- UK resident companies, that payment was treated as a distributed profit by the Revenue except in circumstances where a Double Tax Convention ( DTC ) was in place between the United Kingdom and the nation in which the receiving company was resident. Between 1995 and 2004 similar rules applied except in circumstances where both companies paid corporation tax in the United Kingdom. Throughout the period, the DTCs relieved UK taxation to the extent that the level of debt and interest repayable was that which would be agreed by a third party lender: the so-called arm s length test. In light of the above, it is perhaps unsurprising that the ECJ found that: national provisions relating to thin capitalisation [gave] rise to a difference in treatment between resident borrowing companies according to whether or not the related lending company [was] 5 Thin Cap, para. 101.

14 12 Taxation of Multinationals: Autumn 2009 Artificiality or Commerciality? The Thin Cap GLO: Back in the UK (continued) established in the UK. 6 However, in a decision which must have come as some considerable relief to HM Treasury, the court found that the difference in treatment could be justified by overriding reasons of public interest, 7 specifically, the combating of tax-avoidance schemes. So far, so good for the Revenue. However, the judgment goes on to state that justification was only possible where the legislation in question specifically targets wholly artificial arrangements designed to circumvent the legislation of the Member State concerned 8 It remains necessary to determine whether or not that legislation goes beyond what is necessary to attain that objective. 9 The United Kingdom relied (and relies) on the arm s length test as the measure of a non-artificial loan relationships. This method had its origins in the original OECD model and is present in most DTC agreements around the world. This test aims to demonstrate what a third party lender would do (whether it actually succeeds, particularly in light of recent variations in assessments of credit-worthiness, is another matter). This, for the ECJ, is not enough. It is necessary to demonstrate that the circumstances in which the loan is made are wholly artificial. The test applied has to be objective and verifiable to the extent that the tax authority gives the taxpayer the opportunity, without being subject to undue administrative constraints, to provide evidence of any commercial justification that there may have been for [an] arrangement. 10 Inevitably, the Revenue argues that they did give an opportunity to provide evidence through negotiations. The taxpayer is not so sure. II. The High Court hearing In approaching the issue of the interpretation of the 6 Ibid para Ibid para Ibid para Ibid para Ibid para. 82. definition of what a thinly capitalised company might be, the parties to the case were, as one barrister put it, like two ships passing in the night. The interpretation of what test should be used to ascertain the capitalisation of a company was completely different. HMRC considered that the arm s length test was the appropriate method of ascertaining whether a particular transaction was appropriate and on that basis they applied debt to equity ratios which were generally 1:1. The test claimants, by contrast, considered that the appropriate test for ascertaining whether a particular transaction was appropriate was to consider whether there was a commercial purpose to the transaction and, if there was a genuine commercial purpose, then the transaction (and therefore the amount of interest claimed) should be allowed. HMRC s argument as to the arm s length test was, in our opinion, tenuous. They argued that in fact the arm s length test was accepted by the ECJ, prima facie, but that the concern held by the ECJ was whether in practice Article 43 was infringed by taxpayers not having the ability to produce evidence of their particular circumstances. HMRC argued that the taxpayer had the opportunities of negotiation and appeal to the Special Commissioners and that this satisfies the requirements it considers are imposed by the ECJ. HMRC s interpretation of which test is the appropriate one is simply not borne out by a sensible reading of the judgment. It fails to recognise the part of the judgment which says at paragraph 87: Whilst, at first sight, the criteria laid down by those provisions appear to require a consideration of objective and verifiable elements in order to determine whether a purely artificial arrangement, entered into for tax reasons alone, is involved, it is for the national court to determine whether those provisions allow taxpayers, where the transaction does not satisfy the arm s length criterion, to produce evidence of the commercial justifications for that transaction, under the conditions referred to in the preceding paragraph. The test claimants argument relied upon quite different reasoning. That reasoning was that the UK rules are unlawful because they are disproportionate to the objective of preventing purely artificial situations.

15 Taxation of Multinationals: Autumn Artificiality or Commerciality? The Thin Cap GLO: Back in the UK (continued) They do not allow for a subjective test which allows taxpayers to provide a commercial justification for their transactions and that subjective test is required by the judgment of the ECJ. Further, HMRC s application of the arm s length test is artificial and restrictive (the UK acknowledges in its tax manuals that it uses far more restrictive debt to equity ratios than other Member States) to the point where it becomes an inappropriate test. It remains to be seen which of those arguments will be preferred by Mr Justice Henderson and his judgment is eagerly anticipated. The way in which the claimants argue for one conceptualisation of the test for ascertaining whether a transaction is inappropriate for thin capitalisation purposes and the defendants argue for a test which is so far removed from the claimants claim might seem odd or unusual. Ordinarily in legal proceedings the differences between the parties relate to differing opinions of the same concept, in a simple example, whether words in the legislation are interpreted in one way or another, or which of two differing interpretations is the most appropriate for the situation. In this case, the approaches taken by HMRC and the test claimants differed to the extent that they were simply different animals. The arm s length test has well documented drawbacks. Some of the test claimants are companies of the type that simply do not have competitors with whom they could ascertain the appropriate interest rate by using the comparable uncontrolled price method. Similarly, some claimants are of the nature that neither the resale method nor the cost plus method can be used effectively to ascertain the appropriate interest level for the transaction. The difference in the arguments comes down to this: In addressing whether a company was thinly capitalised, HMRC used the arm s length test which is accepted by the OECD as an appropriate test for a situation in which transfer pricing rules are being applied. In relying on the commercial purpose behind the transactions which took place, the test claimants used an argument which goes to the heart of thin capitalisation rules. Thin capitalisation rules are in place to prevent the abuse of the deductibility of interest rates by artificially inflating rates and amounts of interest on loans. To apply the arm s length test which is essentially a transfer pricing test is to miss the fundamental difference between transfer pricing and thin capitalisation. Although both transfer pricing and thin capitalisation rules are rules which are essentially aimed at abusive tax planning practices involving the amounts of money allocated to different jurisdictions based upon how favourable the tax rates are (and of course in many cases, transfer pricing rules can be used to deal with situations in which companies are thinly capitalised and vice versa), the rules are aimed at different scenarios. Thin capitalisation rules are aimed at working out the appropriate level of debt to equity in a company but this exercise must be carried out in light of what the company intends. On a transactional basis, lenders may well have very good commercial justifications for lending a larger amount of money than the equity level of the company would suggest is sensible. There are also perfectly proper and sensible reasons why a company would wish to choose to have a higher level of debt than equity at certain times in its life. In takeover bids, as recognised by the material disclosed by HMRC, there are often many legitimate commercial reasons for having a much higher level of debt; reasons which include decreasing the level of risk in taking over a company about which relatively little is known (and therefore wishing to preserve one s position in a potential liquidation); allowing for appropriate cash flow to repay lenders and to make distributions as is convenient and in cases of cross-border takeovers; to allow the currency of the funding to match the currency of the asset which is being acquired to protect against exchange rate fluctuations. To restrict a company from going about its business in a sensible commercial way by, for example, forcing risks upon a company in terms of exchange rate fluctuations or the risk taken on buying another company, simply so that a country can protect its tax yield is an inappropriate to say the least. An interesting question is whether the arm s length test in the transfer pricing rules is subject to similar

16 14 Taxation of Multinationals: Autumn 2009 Artificiality or Commerciality? The Thin Cap GLO: Back in the UK (continued) complaints of artificiality. On the one hand, it could be argued that there are fewer commercial reasons for setting a low transfer price on a transaction between related companies. On the other hand, there are plainly situations in which a parent company may wish to assist its subsidiary by setting a low transfer price for good commercial reasons. In these economic times, such a situation is not difficult to envisage. However, it remains the case that transfer pricing rules are designed to address profit shifting through setting low prices and thin capitalisation rules are designed to address profit shifting through inflated interest payments. These two situations are of a different level of sophistication and there are more factors to take into account in a thin capitalisation context. Questions can be asked about whether the arm s length test is too artificial for transfer pricing, but the arm s length test on its own is plainly too artificial to deal with a thin capitalisation situation. III. Conclusion Sometimes companies are able to raise debt on more favourable terms than they might otherwise do so for all sorts of proper, good commercial reasons. They should be allowed to do so, unhindered by tax provisions where the tax motivation in doing so is a side consideration and therefore the only appropriate test for whether a company is thinly capitalised is the test of whether there was a genuine commercial purpose behind the debt funding. The fundamental difference between HMRC s approach and the test claimants approach is that HMRC are applying a transfer pricing test to a thin capitalisation situation. Whilst in many cases that proves to be an effective solution, conceptually it is not the right response to a thin capitalisation situation. n

17 Taxation of Multinationals: Autumn Tribunal Clarifies Cross-Border Group Relief Claims Alison Last Originally published in the International Tax Review, June In the most recent chapter in the history of its challenge to the UK s provisions for group relief, Marks and Spencer plc (M&S) has successfully had appeals allowed for group relief in respect of losses in its German and Belgium subsidiaries by the First-Tier Tribunal. The story so far M&S suffered losses in its French, German and Belgium subsidiaries which it sought to surrender, using group relief, against profits within the UK group. To qualify, however, the UK group relief rules provided that for periods ending on or before March the losses had to be those of a UK resident company group member and for later periods the loss had to be derived from either a UK resident or the UK trade of a nonresident through a branch or agency. On this basis, HM Revenue and Customs (HMRC) rejected the claims. The taxpayer appealed on the grounds that the UK s rules on group relief were incompatible with the Community law right to freedom of establishment enshrined in articles 43 and 48 of the European Community Treaty (EC). The Special Commissioners decided those appeals on 17 December 2002 and the matter was later referred by the High Court on appeal to the European Court of Justice ( ECJ ) for a preliminary ruling. In a judgment delivered on 13 December 2005, the ECJ decided that the UK group relief rules were contrary to Articles 43 and 48 EC because they restricted the surrender of losses by a non-uk resident company where that company had exhausted the possibility of using the losses in its own state of residence in either past, current or future accounting periods (the no possibilities test ). Subsequently the case went to the High Court and the Court of Appeal where it was determined that the date at which the no possibilities test had to be met was the date of the claims for group relief. Following on from that, HMRC was denied leave to appeal to the House of Lords, so the case was returned to the Special Commissioners to decide whether, on the facts, M&S could satisfy the no possibilities test so that it could succeeded in its claims. That hearing took place on February 23 to and the decision, which is the subject of this article, was released on April 2 but made public on May Before the First-Tier Tribunal The essential issues to be determined by the First- Tier Tribunal ( the Tribunal ) which began operating subsequent to the hearing, were: Whether the losses incurred by M&S s German and Belgian subsidiaries satisfied the no possibilities test set down by the ECJ. (The company subsequently dropped its claims in relation to the losses of its French subsidiary as it had been sold on and the losses used by the purchaser.) If so, whether the no possibilities test was satisfied at the date of the claims made for group relief. If the claims were to be allowed, how the losses available for group relief should be computed. M&S had made a number of claims for group relief for the same periods at different times during the course of the litigation. That turned out to be an important factor in the determination of the appeals. The original claims for group relief by M&S were made between March and February The claims covered accounting periods under both the Pay and File and Corporation Tax Self Assessment ( CTSA ) systems. The deadlines for making group relief claims under the two systems were quite different. Under the Pay and File system, taxpayers had a period of six years and three months from the end of the accounting period in which the profits arose to bring a claim. For the latest claims under the Pay and File system made by M&S, that meant that the period had expired by the end of June 2005, that is before the ECJ s judgment. The CTSA system, however, provided that new claims for group relief could be made where there was an open enquiry or an appeal against an amendment to a return. Following the Court of Appeal ruling in 2007, the circumstances in which group relief claims for foreign

18 16 Taxation of Multinationals: Autumn 2009 Tribunal Clarifies Cross-Border Group Relief Claims (continued) losses could be made became clearer, particularly in relation to the time periods for making claims. In the judgment of the Court of Appeal, Lord Justice Chadwick had commented that M&S could not have known at the time the original group relief claims were made that it had to satisfy the no possibilities test. Community law and in particular the principle of effectiveness, he said, would in those circumstances extend the time period for making a claim to within a reasonable period from the time that M&S was aware of such a Community law right. The German and Belgian subsidiaries had ceased trading in August 2001 after the M&S Board decided to exit Continental Europe. M&S, however, did not resolve to liquidate the companies until some time later in October/November The German subsidiary was dissolved in December In Belgium, the company was dissolved on December and the court approved the distribution of assets in January After steps were taken to liquidate the companies, further, alternative claims for group relief were made in respect of the losses of the German and Belgium subsidiaries. Before the Tribunal, in respect of the Pay and File years, M&S argued that its Community law rights entitled it to make claims within a reasonable period after it had become aware of those rights, (that is the date of the ECJ judgment at the earliest) and so these alternative claims were within time. As to the CTSA periods, M&S argued that it was still in time to make the alternative claims as of right. HMRC submitted that the original group relief claims had to fail as they did not satisfy the no possibilities test. It also argued that M&S was not entitled to make the alternative claims as it was not possible to do so without first withdrawing the original claims, which in the light of the uncertainty surrounding this issue, M&S understandably had not done. So, it also fell to the Tribunal to determine the validity of the later, alternative claims for group relief made by M&S between March and June The Tribunal Decides No Possibilities Test To satisfy the no possibilities test, M&S had to show that the losses could not be used in the Member States in which they arose, i.e. Germany and Belgium respectively. That test had to be satisfied in respect of prior and future accounting periods. Before the Tribunal was evidence (including expert evidence) submitted by both parties as to the status of the losses in Germany and Belgium. Both specialists agreed that there was no remaining possibility of utilising the losses locally. The tax authorities argued that the original claims should still fail because the no possibilities test could not have been satisfied at the time they were made. The Tribunal agreed that the no possibilities test was not satisfied as at the date of the claims - the companies had not ceased trading at that time so there was nothing to prevent the losses from being used in the future. So the Tribunal said that those claims were invalid as there were no losses available for surrender. The Tribunal then went on to consider the later claims, which were of course made after M&S had taken steps to wind up the subsidiaries. HM Revenue & Customs argued that because at the time the alternative claims were made, there still existed the possibility that the liquidations could be reversed, the claims could never satisfy the no possibilities test. A further limb of HMRC s argument was that if some of the losses could be used, then the no possibilities test would not be satisfied as to any of the losses. The Tribunal found that these alternative claims were made validly. They also found that the no possibilities test was satisfied at the time they were made. Its reasoning was that any profits likely to have been made during the liquidations of the German and Belgian subsidiaries would not have exceeded the amount of losses available for surrender. The Tribunal also soundly rejected the submission that use of any of the losses against non-trading profits after the group relief claims had been made would taint the remaining losses.

19 Taxation of Multinationals: Autumn Tribunal Clarifies Cross-Border Group Relief Claims (continued) Computation The issues here are essentially ones of practicality. Different jurisdictions have different generally accepted accounting principles (GAAP) and different methods for calculating tax losses. How then is a UK taxpayer supposed to account for foreign losses in its claims for group relief? M&S put forward three different methods of computing the losses: Method A, which computed losses under local rules Method B, which applied the UK s cross-border group relief rules to losses calculated under Method A Method C, which calculated the losses in accordance with UK GAAP HMRC chose in contrast to deal with this issue of computation as one of principle only, without engaging in the actual calculation of the results. They maintained that one first needed to establish the level of local losses which remained unutilised under local rules and then re-compute those remaining losses on a UK basis to surrender them. The Tribunal has followed HMRC s approach concluding that if this were not done the part of a non-resident subsidiary could obtain a greater amount of relief for losses than a UK resident subsidiary in the same circumstances, which goes further than necessary to give effect to the no possibilities test (paragraph 51). It is not obvious why the cross-border surrender might result in a better result than a domestic one given that the former is limited to stranded losses incapable of local use while the latter is not. Indeed the best result for the taxpayer was obtained by a purely UK-centric re-computation. More fundamentally the worst case approach runs the risk that losses meeting the no possibilities test might nevertheless fail to be eligible because the different timing provisions for bringing them into account in the local jurisdiction and the UK left a situation where they did not produce losses under the two methods in the same accounting period. Take the example of a German company whose results applying local principles and tax adjustments produce a loss in Year 1. UK rules may calculate the loss in precisely the same amount but simply allocate the loss to a different period, say, Year 2. An obvious example would be the difference between the treatment of depreciation in other jurisdictions and capital allowances in the UK. On this example however the Tribunal s approach produces no losses capable of surrender at all: in Year 1 there are local losses but no UK re-computed losses and vice versa in Year 2. Through nothing more than timing differences the loss escapes the M&S ruling even though it may be beyond any possible use. It is clear that this approach may well produce unfair and anomalous outcomes. What the decision means for other taxpayers It is obvious that taxpayers in a similar position to M&S can benefit from the decision. However, there will of course be many taxpayers with pending claims seeking group relief of losses in a range of other situations. Taxpayers with losses in foreign subsidiaries which are, for example, time barred from being carried forward under local laws should be in a strong position to satisfy the no possibilities test. However, there are a number of grey areas which fall to be determined. For example, say a foreign subsidiary had made significant losses and has subsequently returned to a modest profit but that it would take an inordinately long time for the losses to be used by the foreign subsidiary, maybe 50 years or more. In that case, it would seem absurd that the totality of those losses was barred from cross border group relief because a small portion of the losses was likely to be used within a reasonable period. That is surely a real issue for a number of companies wishing to make group relief claims and one that will no doubt have to be litigated at a later date. The Future Regrettably further appeals remain a prospect. Most significantly, it is also not the end of the matter in a European context, with a complaint pending by the European Commission for the failure of the UK to amend its group relief rules sufficiently to make them compatible with Community law after the ECJ

20 18 Taxation of Multinationals: Autumn 2009 Tribunal Clarifies Cross-Border Group Relief Claims (continued) judgment. Despite the amendments to the rules made by the Finance Act 2006, it is seemingly still impossible for taxpayers to benefit from the judgment in many circumstances, without seeking their own redress in the Tribunal. As well as the prospect of further appeals in the M&S case, therefore, HMRC may well face the prospect of a further trip to Luxembourg to justify its position yet again to the ECJ. n

21 Taxation of Multinationals: Autumn GLO Verdict Produces Mixed Result for Taxpayers Savina Kanagasabay Originally published in the International Tax Review, July /August The decision of the English High Court in the VIC GLO (The VAT Interest Group Litigation, (1) FJ Chalke Limited (2) AC Barnes (Wokingham) Limited and the Commissioners for her Majesty s Revenue & Customs [2009] EWHC 952 (Ch)) is good news for taxpayers. It creates an unfettered entitlement to compound interest for breaches of European Community law. This is a farreaching development in English jurisprudence by finally enabling the taxpayer to recover interest on a compound basis, a decision that might lead to the amendment of statutory provisions. But is was a hollow victory for the test claimants involved in the VIC GLO as their claims were dismissed. When tax has been paid by a mistake, section 32(1)(c) of the Limitation Act 1980 postpones the time period for seeking restitution of the payment from running (usually six years) until the mistake has been, or should have, been discovered. Thus tax paid in, say, 1973, might still be recoverable if it was within six years that the European Court of Justice (ECJ) had decided that the levy had been unlawful revealing that the payment had been mistaken. The question of when the mistake was discovered, and consequently when the time period starts, was at the heart of the judgment in this case. Input and output The VIC GLO is a group of motorcar dealers who were claiming overpayments of value added tax (VAT) with simple interest pursuant to section 78 of the VAT Act 1994 and compound interest as a restitutionary claim pursuant to the House of Lords decision in Sempra Metals (Sempra Metal Limited (formerly Metallgesellschaft Limited) v Her Majesty s Commissioners of Inland Revenue and another [2007] UKHL 34). The two test claimants were family-run businesses, FJ Chalke Limited (Chalke) and AC Barnes (Wokingham) Limited (Barnes). The facts of Chalke demonstrate our example. In July 1999, Chalke submitted claims from May to April (the claim period being limited by a three year cap for repayment claims introduced by HMRC) for overpayment of VAT on demonstrator vehicles. the mixed use of demonstrator cars created problems in identifying the correct VAT application as while demonstrator cars are purchased for the company for business use, they are also used by employees for private purposes. In deciding the appropriate treatment HM Revenue & Customs (HMRC) dispensed with any analysis of use and applied an all-encompassing block to the recovery of input tax on the purchase of the car. In addition, HMRC decided that output tax would be charged on the sale of the car on the margin between the purchase price and the sale price, known as the margin scheme. The margin scheme was deemed unlawful in 1997 in the ECJ decision in Italian Republic (Case-45/95 EC Commission v Italian Republic [1997] STC 1062). In September 1999, Chalke submitted claims from May to April for overpayment of VAT in relation to manufacturer s bonuses. Generally, bonuses paid by manufacturers to dealers on demonstrator vehicles or by the dealer to a customer, for example on a bulk order, were treated as a supply of services between those parties. The immediate problems of this approach stemmed from the artificiality of the process and secondly, allowed the value of the supply to remain the same even though the bonus would be a discount from the price of the supply. The ECJ decision in the case of Elida Gibbs (Case C-317/94 Elida Gibbs Limited v Customs and Excise Commissioners [1997] QB 499, [1996] STC 1387) deemed this treatment unlawful in 1996 and HMRC issued a business brief to this effect in In 1999 HMRC repaid Chalke s claims for overpaid VAT on demonstrator cars and in relation to manufacturers bonus payments with simple interest for the period 1996 to Following the ECJ judgment in Marks & Spencer (Case C-62/00 Marks and Spencer v Customs & Excise Commissioners [2002] ECR , [2003] QB266) in 2002 HMRC introduced a transitional period in which to submit claims for overpayments from Chalke submitted an uncapped claim and by 2004, he had received repayments together with simple interest. Chalke submitted its High Court restitutionary claim in March 2007, seeking additional interest at a commercial rate and on a compound basis. Shortly afterwards the House of Lords, in Sempra Metals, did conclude that compound interest was available in restitution cases.

22 20 Taxation of Multinationals: Autumn 2009 GLO Verdict Produces Mixed Result for Taxpayers (continued) Chalke was able to contend that its 2007 restitution claim was within time by relying on the provisions in section 32(1)(c) where acting under a mistake. But when was the mistake discovered to start the time period running? The mistake was obviously paying the VAT when it was not due and there were three candidates for when the mistake was discovered: The mistake was discovered when the ECJ decided in 1996 and 1997 that the payments were contrary to community law. Therefore the time periods started in 1996 and 1997 and the six year period to bring a restitution claim would have expired before Chalke submitted its restitution claim. But in 1996 and 1997 they did not know they could make a claim to cover a period beyond the three year cap. Therefore the second possibility was the ECJ judgment in Marks and Spencer in 2002 that started a time period for claims back to Therefore Chalke s claim for restitution, submitted in 2007 was in time as the time period expired in But in 2002 they did not know they could claim the restitutionary remedy of compound interest. So the third possibility was the House of Lords judgment in Sempra in 2007 that allowed for compound interest in restitution claims. This is when they knew that the payments of tax were not only unlawful but compound interest was due. Therefore the time period for restitution claims for compound interest started in 2007 and Chalke s claim for restitution was in time. The court considered the first candidate to be the only relevant mistake and that is why Chalke and Barnes lost their claims. The relevant mistake The effect of this result is that the VIC GLO judgment could provide a remedy that from inception, you could be time-barred from claiming. The effect prohibits claims for restitution for breaches in community law, where the principal sum has been discovered more than six years ago. All non-liability mistakes are ignored as the casual link to the original payments of tax are considered tenuous. Let s take the efficient tax manager, who is aware of the law and discovers that the ECJ has determined that tax was overcharged, he might be still unaware he has a claim because he is banned on procedural grounds and by the time he is aware, he will be time-barred. Therefore it does not matter when the mistake was discovered or whether the mistake was discovered by reasonable due diligence, the taxpayer would still be time-barred from its restitution claim. The nature of restitution claims Restitution is concerned with a generic group of remedies which arise by operation of the law encompassing the principles of unjust enrichment, the prevention of a profiting from a wrong doing and the reparation of property rights. This group of remedies have a common function which is to restore the loss of the claimant by depriving the defendant of the gain. In some cases the claimant will be restored to a position that is different to before as the benefits gained by the defendant have increased since the claimant was originally deprived and this situation still falls within the law of restitution. The reverse may also occur where the benefit has decreased since the claimant was originally deprived, also marketed by HMRC as a change of position defence when funds have been depleted. While it is widely considered that a claim for compound interest is not a stand-alone claim and in this case stems from the original overpayment, this consideration should not prevent proper restitution and requires a different analysis. Chalke s claim for restitution stemmed from the original overpayment and was a claim of which, by definition, the remedy forms an integral part. Chalke s claim was for restitution and the remedy was for compound interest. This is in contrast to the suggestion that the claim is simply for the one element which remains unsatisfied of Chalke s restitutionary claim arising from the overpayments. Therefore, the restitution claim, in accordance with the principles governing the laws of restitution, must be considered in its entirety to achieve the required restoration. Even though the only element capable of being satisfied was the applicable remedy of compound interest, the claim was still a claim in restitution. Separating the component parts of a restitution claim

23 Taxation of Multinationals: Autumn GLO Verdict Produces Mixed Result for Taxpayers (continued) and determining each part of its individual validity creates an automatic bar to the rights being sought in the first place. This analysis was affirmed by Lord Nicholls in the Sempra judgment: Restitution, if it is to be complete must encompass both heads. Restitution by the Revenue requires (1) repayment of the amounts of tax paid prematurely (this claim became spent once set off occurred) and (2) payment for having the use of the money for the period of prematurity. Of course Sempra Metals was concerned with payments of ACT as opposed to over-payment of VAT; however, this should not affect the analysis. Compound interest in restitution claims Before the VIC GLO, compound interest was not a restitutionary remedy available at common law following Westdeutsche Landesbank Gironzentrale (Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669). Sempra Metals clearly states the position before July 2007: At present the court s considered to have no jurisdiction, that is, no power to make an award of compound interest on a personal claim for restitution of a sum of money paid by mistake or following an unlawful demand. The court has power to make an award of simple interest under section 35A of the Supreme Court Act But, as the authorities now stand, English Law does not recognise that a restitutionary award at common law should include restoration to the claimant of the time value of the money he transferred to the defendant and which the defendant enjoyed by having the money in his possession. In Sempra Metals, the House took the opportunity to reexamine this point of law and it was widely considered that an award of compound interest was necessary to achieve full restitution. The strong assertions from Lord Goff and Lord Woolf in Westdeutsche Landesbank Girozentrale that English law required this remedy at common law were recognised by the majority of the Lords in Sempra Metals as necessary to achieve full restitution. The Court of Appeal decision in Sempra Metals indicated that UK jurisprudence was about to recognise the importance of this restitutionary remedy and it was reaffirmed when the case reached the House of Lords. However, it was not until the May that Mr Justice Henderson confirmed that Community law does override the otherwise exhaustive and exclusive statutory scheme for the payment of interest on overpaid VAT, where the overpayment arose from breach of directly effective provisions of Community law and the required jurisdiction for this restitutionary remedy was established. Appropriate time limits In the VIC GLO it was suggested that the examination of the principle of effectiveness does not preclude HMRC from relying on the expired limitation period. Perhaps not, but surely the protection of the principle of legal certainty must force a return to an Emmottstyle consideration of the postponement of time limits in exceptional circumstances, such as the remedy of compound interest for breaches of community law being established (Emmott v Minister for Social Welfare (Case C-208/90)). This would achieve a decision based upon fairness and legal certainty as opposed to Fantask considerations of the financial management of public bodies (Advocate General s opinion) in Fantask A/S v Industriministeriet (Case C-188/95), [1997] ECR I-6783). As stated by Lord Hoffman in DMG, the real issue involved extending the concept of mistake.because the law was now deemed to have been different at the relevant date, he was deemed to have made a mistake. But the reasoning is based on practical considerations of fairness and not abstract juridical correctitude. It should be remembered that, as in the VIC GLO, in Sempra Metals the subject of the restitutionary claim, the ACT payments, had been set-off before the inception of the claim and it was held that: Setting off a payment of ACT against Sempra s mainstream corporation tax liability did not extinguish the Inland Revenue s restitutionary liability in respect of the interest benefits it had by then obtained from the ACT payment. Interest benefits that in the commercial world are widely calculated on a compound basis.

24 22 Taxation of Multinationals: Autumn 2009 GLO Verdict Produces Mixed Result for Taxpayers (continued) Paying up in full To return to our example, by 2003 Chalke had received the majority of its overpayments from HM Revenue and Customs with interest, though on a simple basis. There was nothing to suggest that the remainder of the payments would not be repaid eventually, providing little reason to submit a restitutionary claim as there was no applicable remedy. As soon as the restitutionary remedy of compound interest could have possibly existed, Chalke submitted its High Court claim for restitution and yet the unfortunate result is that the claim was still timebarred. It is highly likely that this is not the final chapter of this story and therefore it remains to be seen whether Chalke and Barnes will receive proper restitution finally in the Court of Appeal. n

25 Taxation of Multinationals: Autumn C-282/07 Truck Center SA (ECJ Judgment): Withholding Tax on Interest Upheld Michael Anderson Originally published in Dorsey London Tax Update, 10 March This case stands out from the crowd of withholding taxes seemingly summarily struck down by the ECJ recently. As a decision of the 4th Chamber (with judges who were on the bench for Denkavit and Amurta) it would be unlikely that the Court had intended to change tack though. Belgium is permitted to maintain a regime where an interest payment to a 48% parent company resident in Luxembourg is subject to withholding tax whereas no withholding tax would be levied had it been Belgian resident. The distinction from the previous withholding tax cases appears to be that Luxembourg gave credit for Belgian withholding tax against the liability to tax upon the interest receipt in Luxembourg. The system was not comparable to the taxation of interest payments to residents as some different system was required to reflect the fact that in the cross border context the right to tax had been split between the two states. There was also no cashflow difference as Belgium imposed advance corporation tax on the payment of interest to resident lenders. In the very simplest of cases, ignoring different tax rates, perhaps it might be said that there was no difference between provisions which imposed one level of corporation tax domestically while imposing the same aggregate charge cross border, just split between the two states concerned. However as soon as you introduce common commercial realities the differences become obvious. If the lender itself borrowed the funds from a third party, the net interest income would be reduced by the interest expense decreasing the domestic lender s tax liability but the cross border lender would still incur withholding tax on the gross amount of interest. No further information is known of the circumstances of the case which may only have been presented to the court on the simplest example. n

26 24 Taxation of Multinationals: Autumn 2009 Withholding Tax on French Dividends to Non-Resident Pension Funds Found Unlawful Alex Steyne Originally published in Dorsey London Tax Update, 10 March The French Supreme Administrative Court on 13 February 2009 held that the withholding tax due by EU pension funds levied on French dividend payments is contrary to the free movement of capital guaranteed by the EC Treaty. Under French law, domestic pension funds are considered as non-profit organisations for tax purposes and are exempt from tax on dividends received from French companies. Foreign funds are subject to withholding tax on the same income. The Supreme Court stated that the restriction could not be justified either by the assertion that only domestic pension funds are serving the French general interest or by the need for fiscal coherence. This should have implications for other EU pension funds, where they are able to show that they are in a position akin to French caisses de retraite (pension funds). n

27 Taxation of Multinationals: Autumn VAT: HMRC Drops Unjust Enrichment Defence for Periods Prior to May 05 (BB 05/09) Robert Waterson Originally published in Dorsey London Tax Update, 10 March Following the recent decision of the House of Lords in Marks & Spencer, HMRC has released a Business Brief announcing that it will not use the defence of unjust enrichment against VAT claims by businesses for periods before 26 May In certain circumstances the defence of unjust enrichment enabled the Revenue to refuse to pay claims on the basis that the majority of the overpaid tax had been passed down the VAT chain. This defence was only available in situations in which the Claimant was a payment rather than a repayment trader. M&S challenged this disparity. The ECJ ruled that the distinction offended the principles of equal treatment and fiscal neutrality and could not be objectively justified. When the case returned to the Lords, HMRC was ordered to repay the excess VAT which had been incurred over a period of some 20 years. The law changed on 26 May 2005 ostensibly to repair the discrepancy between payment and repayment traders. Until now the Revenue have continued to plead unjust enrichment as a defence to pre-may 05 claims. Finally, however they have abandoned this position and are settling claims made before this date (subject to verification). Please contact us if you have any queries on how this decision may impact upon your business. For claimants who have been put off making claims by HMRC s position on unjust enrichment, the announcement confirms that the defence will not apply to claims for periods pre May 05 made within unspecified relevant deadlines. It is generally thought that that deadline is 31 March 2009, the end of the Fleming window (see next item) but it remains questionable whether if such a deadline is observed it might itself also fall foul of the requirement for a reasonable transitional period. n

28 26 Taxation of Multinationals: Autumn 2009 The Swedish Supreme Administrative Court, applying the ECJ ruling in Marks & Spencer, Rules That the Swedish rules on Group Contributions Are Contrary to EU Law. Paul Farmer Originally published in Dorsey London Tax Update, 13 March Sweden operates a system under which a company may make a group contribution to another company. The group contribution is deducted from the taxable profits of the contributing company and is accounted for as taxable income by the recipient company. Under Swedish law it is required that both the contributing and the recipient company are liable to tax on business income in Sweden. The Swedish Supreme Administrative Court, applying the ECJ s decision in Marks & Spencer, held that a Swedish parent was entitled to deduct a cross border group contribution made to its Dutch subsidiary. The contribution was made during the tax year in which the Dutch subsidiary was finally liquidated. The Court also held that a contribution could only be made in respect of categories of losses recognised by Swedish law. The Swedish Court s ruling is interesting because the Swedish group contribution rules had previously been thought to be compatible with EC law in the light of the ECJ s ruling on the Finnish group contribution rules in OY AA. The Swedish Court thought that the principles of the Marks & Spencer decision on UK group relief applied equally to the Swedish system. n The Court distinguished between losses which became unusable through the trading position of the company and losses which became unusable through the operation of foreign tax provisions. Thus while the contribution made to the Dutch subsidiary was allowed, the Court did not allow a contribution to an Italian subsidiary whose losses could no longer be used by operation of Italian law.

29 Taxation of Multinationals: Autumn VAT: Fleming Window Closes 31 March 2009 Savina Kanagasabay Originally published in Dorsey London Tax Update, 31 March Further to the House of Lords decision in Fleming and Condé Nast, HMRC s 3 year cap for the recovery of underclaimed input tax will take effect from the beginning of next month ie upon the expiration of an appropriate transitional period. In practice, the current position is that any taxpayers with outstanding input tax claims for the period 1973 (ie the introduction of VAT in the UK) to 1 May 1997 can submit claims for repayment (without the requirement for copy invoices due to the timescale involved) until 31 March 2009 (inclusive). However, with effect from 1 April 2009, all such input tax claims will be restricted to the preceding 3 year period. n

30 28 Taxation of Multinationals: Autumn 2009 VAT: C-29/08 AB SKF (AG s Opinion): VAT Reclaims for Disposals of Subsidiaries Robert Waterson Originally published in Dorsey London Tax Update, 31 March The taxpayer had attempted to demonstrate that costs incurred by the parent in disposing of a subsidiary by a sale of shares, including valuation, negotiation and legal fees, represented part of the general overheads of its broader business. Accordingly, SKF had attempted to recover the input tax paid on those supplies. The Advocate General has concluded that share dealing can be an economic activity (within the scope of VAT) where a shareholder s involvement in the affairs of its holding go beyond that of a mere shareholder. However, the sale of those shares is still caught by Art 13B(d)(5) and should be considered an exempt supply for VAT purposes. The AG, following the decision in BLP, found that the direct and immediate link between the services and the exempt supply broke the VAT chain and were non-recoverable. This is distinct from the situation in Kretztechnick where input tax paid on similar fees was found to be deductible because the issue of share capital was found to be outside the scope of VAT and the transactions only referable to business overheads. n

31 Taxation of Multinationals: Autumn Planned Restrictions to Claims (Compound Interest) Simon Whitehead Originally published in Dorsey London Tax Update, 22 April Currently claims for the recovery of taxes unlawfully levied under community law can be made in a variety of ways. One important way is as a common law claim in restitution for payments made under a mistake of law which, as the law currently stands, have an extended time period for making claims (in some cases back to 1973) and permit claims for compound interest. Starting at page 203 of the notices issued today with the budget are BN87 and BN91 which propose changes to the way claims can be made for overpaid tax and how interest on overpayments is to be assessed. For income tax, capital gains tax and corporation tax the intention is to extend the statutory remedies currently available, limit claims to a 4 year claim period and exclude HMRC from any other liability to repay. These changes will take effect from 1st April Presumably the objective of these changes is to exclude tax matters from the ambit of restitution claims. The previous legislative attempts to do so (s320 FA 04 and s107 FA 07) were found to be ineffective in the recent judgment in the FII Group Litigation case, now under appeal. With effect from Finance Bill 2009 receiving Royal Assent (ca July 09) rules will also be introduced to harmonise interest rates paid on refunds of overpaid tax. No mention is made as to whether this is intended to exclude claims for compound interest although the combined effect of excluding liability other than for certain prescribed claims and limiting those claims to simple interest may have the same effect. If these proposed changes have the result of rendering it practically impossible or excessively difficult to enforce community rights then they may fail before the courts. We understand from PwC that the draft of FB 09 is due on 30 April. Clearly for claimants considering issuing claims particularly including compound interest and/or seeking to rely on a longer time limit than 4 years will wish to consider acting as soon as possible and before June- July For those with existing claims it may be worthwhile reviewing them before the same deadline expires. n

32 30 Taxation of Multinationals: Autumn 2009 Compound Interest Generally Available In Community Law Claims Simon Whitehead Originally published in Dorsey London Tax Update, 14 May The High Court has concluded in the VIC GLO that there is a general entitlement to compound interest in Community law claims. Clients with potential claims (either VAT or direct tax) for the recovery of tax with compound interest may well wish to consider issuing protective claims now to avoid the same trap as the test claimants in that case whose claims were found in any event to be out of time. Legislation is also intended to restrict rights and time limits to seek the recovery of overpaid tax starting in July The Judgment in the VIC GLO The High Court delivered its judgment on 8 May 2009 in the VAT Interest Cars Group Litigation ( VIC GLO ) confirming that, for restitution claims for overpaid VAT based on Community Law, compound interest should be paid. The VIC GLO, a group of motor vehicle dealers, were claiming repayment of overpaid VAT with simple interest pursuant to Section 78 of the VAT Act 1994 ( VATA ) and compound interest following the Sempra Metals case. The claims concerned the repayment of VAT incurred on the onward sale of demonstrator vehicles and on manufacturers bonuses. VAT incurred in these circumstances became reclaimable after the ECJ judgments following the ECJ judgments in EC Commission v Italian Republic [1997] STC 1062 and in Elida Gibbs Limited v Customs and Excise Commissioners [1997] QB 499, [1996] STC Those cases were decided in 1996 and This judgment stands as a victory in the compound interest debate but also a cautionary tale for taxpayers in respect of the time limits for submitting overpayment claims as the test claimants were held to be time-barred and consequently their claims were dismissed. Claims for Compound Interest The route for reclaiming overpayments of VAT and interest is under the statutory regime of the VAT Act and at the discretion of the Tribunal (Sections 80, 78 and 84(8) respectively). Henderson J, following the Court of Appeal decision in Monroe, held that for claims based on domestic UK law the statutory regime was exhaustive and excluded common law remedies in restitution in the High Court. This means that interest can be awarded only by way of the provisions set out in Section 78 or by the Tribunal, which generally means simple interest. Whilst there have been cases where the Tribunal has awarded compound interest, the decisions are few and far between and sometimes overturned on appeal. However, Henderson J went on to hold that, for claims based on Community law, the exclusion of High Court restitutionary claims was overridden by the Community law requirement of an effective remedy. Community law required that taxpayers be fully reimbursed with compound interest for breaches of Community Law. The judgment follows and amplifies the decision in Sempra, where the House of Lords held that compound interest was payable on ACT repayment claims following the Hoechst judgment. The judgment makes it clear that the entitlement to compound interest is generally available under Community law and not just in the restricted circumstances of the Sempra claim. Time Limits The basic time limits for submitting restitutionary claims is 6 years from the date the cause of action accrued, generally the date of the overpayment. However if the overpayment is made under a mistake, this period does not start until the mistake is discovered or could be reasonably discovered with due diligence. In the DMG and FII GLO cases the mistake was held not to be discovered until at least the date of the relevant ECJ judgment that had found the tax to be unlawfully levied. That approach would not help the test claimants in the VIC GLO who had issued their claims in 2007 well outside 6 years from the dates of the relevant ECJ judgments (1996 and 97). They argued therefore that the mistake was not just as to the liability for the tax but that until the Marks and Spencer case in 2002 (rendering the 3 year cap unlawful) they were also mistaken as to the time period in which they could bring claims. They also argued that they were mistaken in not claiming compound interest until the Sempra case found it was available in Their claims were within 6 years of those dates.

33 Taxation of Multinationals: Autumn Compound Interest Generally Available In Community Law Claims (continued) The Court concluded however that a claim for compound interest on its own cannot be a free standing claim independent of the claim for the overpaid tax itself with simple interest. It has therefore found that, as the mistake as to the time period for claiming compound interest did not cause overpayments of VAT, nor did the mistake as to the availability of compound interest, they are not relevant. The only relevant mistake that VAT was due was discovered following the ECJ s judgments in 1996 and 97. The claims were therefore out of time.. Implications for both VAT and Direct Tax Claims VAT We do not know yet whether the Claimants will appeal. It is arguable that the time limit should be overridden in circumstances where the Claimants were not aware until the date of Henderson J s judgment that they had a remedy in restitution. If the Claimants do appeal then a cross-appeal by the Revenue on the compound interest point seems inevitable. The fact that it was upheld as a Community law entitlement is bad news for the Revenue because it means it cannot be reversed by Parliament. The judgment confirms advice we have previously given that claims for compound interest are not standalone claims but should be combined with claims for restitution of the overpayment (or time value if the tax has already been repaid). Where we have already made claims for clients, they have been made on that basis. Clients considering making new claims should bear in mind that, as the law stands, they must be brought within 6 years of the discovery of the mistake which led to the overpayment of tax, e.g. discovery of the ECJ judgment finding the UK rules unlawful. Clients may wish to review recent developments which have given rise to VAT repayments in the light of the judgment. Claimants making High Court claims should also consider making parallel statutory claims to cover the eventuality that higher courts uphold the requirement for compound interest claim but insist relief be obtained through the statutory route under Autologic principles. In this way they can be fully protected. For existing or new claims that are within time there may be the possibility of seeking an interim payment at this stage. Direct tax For direct tax claims based on EU law the judgment is helpful because it establishes that entitlement to compound interest arises from EU law and that the right relates not merely to the calculation of the Hoechst time value component of claims but to claims for interest on overpaid tax in general. n

34 32 Taxation of Multinationals: Autumn 2009 Authors Simon Whitehead +44 (0) Wilson Street London EC2M 2TD Tel +44 (0) Fax +44 (0) Dr. Simon Whitehead is a Partner at Dorsey & Whitney and the Co-Head of Trial for Europe. He specialises in claims by companies against the UK Rev enue 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 and 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. Kelly Coutinho coutinho.kelly@dorsey.com +44 (0) Previously employed at the European Commission in DG Taxation and Customs and as a Judicial Assistant to the Court of Appeal, Kelly brings both European and litigation experience to the Tax Litigation Group. Currently, the main part of her practice consists of work on several of the Group Litigation Orders conducted by Dorsey & Whitney. She is also involved with assisting on indirect tax and non contentious matters. 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. Savina Kanagasabay kanagasabay.savina@dorsey.com +44 (0) Savina Kanagasabay is an Associate in the London Trial Group advising on commercial and tax litigation matters. She has experience of a wide variety of contentious tax disputes involving direct and indirect tax and is engaged on a number of the Group Litigation Order cases. She is involved in hearings at all levels of the UK Courts including the Tax Tribunals, High Court and Court of Appeal and has detailed experience of references to the European Court of Justice. 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. 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.