Editorial

M&S ruling may cost EU govts billions in tax refunds

Mon Dec 12, 2005 12:13 PM ET

By Jan Strupczewski

BRUSSELS, Dec 12 (Reuters) - The European Union's top court will rule on Tuesday in a landmark company tax case that may cost EU governments billions of euros in tax refunds and mean windfall gains for dozens of large European firms.

The European Court of Justice will rule around 0830-0845 GMT on whether British retailer Marks & Spencer (MKS.L: Quote, Profile, Research) can offset losses from subsidiaries in other EU countries against profits at home, just as it would be allowed if the subsidiaries were in Britain.

Marks & Spencer wants to reclaim 30 million pounds ($52.92 million) in back taxes, but experts estimate the total financial impact of a ruling in its favour could cost European Union governments billions of euros if other EU companies make similar claims.

Britain said M&S could not offset losses from other EU states -- a stance that the company said was discriminatory and went against its freedom to set up shop across the 25-nation bloc.

Scores of other British companies have claimed similar relief and are waiting for Tuesday's outcome.

Among companies that stood to gain from a M&S victory are telecoms operators Vodafone (VOD.L: Quote, Profile, Research) and BT Group (BT.L: Quote, Profile, Research) , Dutch construction firm BAM (BAMN.AS: Quote, Profile, Research) , Europe's biggest baby food company Numico (NUMCc.AS: Quote, Profile, Research) and the world's largest paper and board maker Stora Enso (STERV.HE: Quote, Profile, Research) .

EU finance ministers expressed concern over the potential budget impact of the ruling earlier this year, but governments would not comment on Monday as the court decision could come with various conditions.

"There is general agreement that the ministers do not want to confront the European Court of Justice, but work with it," said Jonathan Allen, spokesman for the British presidency of the European Union. "Let's wait and see what happens tomorrow."

ODDS IN FAVOUR OF M&S

Expectations of a ruling in favour of M&S were raised by an advisor to the court, Advocate General Poiares Maduro, who said in April firms should be allowed to claim tax relief on losses in other EU states. The court backs its advisors in most cases.

But the advisor said firms cannot claim tax relief on losses at home and in the EU member states where they are incurred, which would help reduce the level of possible payouts.

Apart from Britain, countries likely to be affected most by the ruling are Germany, France, the Netherlands, Finland, Greece, Ireland and Sweden -- all of which submitted comments during the court's proceedings.

"We will analyse the judgement very carefully," said Tommi Viikala, a Finnish finance ministry adviser.

Austria, Denmark and Italy already permit the write-offs that M&S is fighting for, according to the European Federation of Accountants.

German state finance ministers warned in June that a decision in favour of Marks & Spencer would have "grave consequences" for the country's budget, already strained by efforts to cut its deficit below the EU ceiling of 3 percent of GDP in 2007.

Some of the ministers then estimated the impact in double-digit billions of euros. France and Germany, the euro zone's two biggest nations, have been in breach of the EU deficit ceiling every year since 2002 and an unplanned return of tax would be an added financial headache.


CADBURY CASE

More pressure on budgets could come from another tax case that will be heard by the ECJ on Tuesday, led by Cadbury Schweppes (CBRY.L: Quote, Profile, Research) .

Cadbury says Britain's controlled foreign company law, which penalises companies that take advantage of lower taxes in other EU countries, is incompatible with EU law. If it wins, EU governments may lose 400-500 million euros in annual tax revenues, the Financial Times quoted a tax expert as saying.

Apart from Britain the controlled foreign company law is applied by Finland, France, Germany, Hungary, Italy, Poland, Spain and Sweden.

A ruling for Marks & Spencer could strengthen the European Commission's hand in making proposals to harmonise the way tax is calculated in the EU, leaving the setting of the levels of tax to national parliaments.

The Brussels executive is studying if it should propose a common tax base for companies in the EU, which would also help resolve the issue raised by the Marks & Spencer case.

EU Tax Commissioner Laszlo Kovacs has urged EU member states to back an EU approach to corporate tax to avoid national tax policies being determined by the European court. (Additional reporting by Daniel Frykholm in Helsinki and Huw Jones in Brussels)