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  • Oct 28th, 2017
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The EU announced Thursday a major probe into a British scheme protecting multinationals from tax avoidance rules in the latest move in the bloc's campaign to get international companies to pay their share, as London and Brussels haggle over the terms of Brexit. Europe's competition chief Margrethe Vestager will investigate whether certain exemptions allowed under British rules amount to a breach of European Union regulations against state aid.

The EU has waged a major crackdown on member states bending rules to give big international firms unfair tax breaks in recent years, with US tech giants such as Apple and Google in the firing line. "We will carefully look at an exemption to the UK's anti-tax avoidance rules for certain transactions by multinationals, to make sure it does not breach EU State aid rules," EU competition commissioner Vestager said in a statement.

The announcement of the investigation comes as London and Brussels are mired in slow-moving negotiations over Britain's departure from the EU in March 2019.

The commission said that as long as Britain remains in the bloc, "it has all the rights and obligations of the membership". "In particular, EU competition law, including EU State aid rules, continue to apply in full to the United Kingdom and in the United Kingdom until it is no longer a member of the EU," the commission said in a statement.

The scheme the commission will investigate centres around an exception to Britain's "controlled foreign companies" rule, which was brought in to stop multinationals moving profits to offshore subsidiaries to avoid paying tax.

The so-called "group financing exception" introduced in 2013 exempts from British taxation the interest received by a parent company's offshore subsidiary from another foreign subsidiary.

"Generally speaking, financing income is often used as a channel for profit shifting by multinationals, given the mobility of capital," the commission said.

A spokesman for Britain's Treasury said its rules prevented profits from being artificially diverted overseas to avoid tax and defended the financing exception, introduced by former finance minister George Osborne.

"We do not believe these rules are incompatible with EU law but will cooperate with the European Commission's investigation," the spokesman said.

Investigations of this kind usually last over 18 months and so the result could come after Brexit, but commission spokesman Alexander Winterstein insisted it was still right to run the investigation.

"One thing is clear - as long as a member state is a member of the single market, it remains subject to European competition rules, including rules on state aid and everything else," he said. Major international businesses have warned they may have to move operations out of the UK after Brexit, depending on what kind of deal is struck with the EU, and large financial institutions including HSBC, UBS, JPMorgan and Morgan Stanley have already announced plans to moved some activities to mainland Europe.

Jacques Lafitte of the Brussels-based consultancy Avisa said the probe could be seen as a shot across London's bows, warning Prime Minister Theresa May's government not to try underhand tactics to hold on to businesses post Brexit. "There are persistent rumours about a transition period where the United Kingdom will remain part of the single market and so will continue to be subject to the same competition rules as EU members," he said.

"And it is also a strong signal to warn the British, to dissuade them from trying to use favourable legislation to attract multinationals to set up there."

Some European nations have been stepping up pressure on big multinationals, many of them American, which they accuse of booking huge profits while denying state-coffers much-needed money.

France has a led a major push in the EU to increase taxes on mega tech firms such as Google and Facebook, but met with resistance at a summit last week from the likes of Ireland and Luxembourg, which have become major centres for big tech firms.

The EU has turned the screw on US tech giants recently, earlier this month ordering Amazon to repay Luxembourg 250 million euros in back taxes and taking Ireland to court for failing to collect billions from Apple. Vestager last year ordered iPhone manufacturer Apple to repay 13 billion euros ($14.5 billion) in back taxes to Ireland, and in June the EU slapped Google with a record 2.4-billion-euro ($2.8-billion) fine for illegally favouring its shopping service in search results.



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