EU: Diageo caught in a row between the EU and the UK

Diageo, the world’s largest premium alcoholic beverage group, is caught in the crossfire in a row between the European Union and the UK Treasury which could cost it £278 million in back tax, The Drinks Business reported on April 8.

The dispute centres on a tax scheme introduced in 2012 by the then Chancellor of the Exchequer George Osborne. It involves complex “controlled foreign company rules” covering how tax is levied on interest payments on inter-company loans made by offshore subsidiaries.

After an 18-month investigation, the European Commission has ruled that Osborne’s tax scheme gave an unfair advantage to multinational companies based in the UK and has ordered the Treasury to reclaim more than £1 billion from about 50 companies including Diageo.

The EU says the scheme falls foul of its rules designed to stop big companies avoiding tax by moving profits into countries where taxes are low. It says the measures introduced by Osborne were tantamount to state aid.

Tax experts say the position is a muddle and expect either HM Treasury, the companies involved or both to make legal challenges to the Commission’s ruling.

The EU’s Competition Commissioner, Margrethe Vestager is quoted by The Sunday Times as saying: “Anti-tax avoidance rules are important to ensure that all companies pay their fair share of tax. But they must apply equally to all taxpayers. The UK gave certain multinationals a selective advantage by granting them an unfair exemption.”

In its latest interim accounts, published in January, Diageo said it was “monitoring developments” in the investigation and said that its total liability could be £278 million but that it had made no provision to meet any such bill.

At the weekend Diageo said: “We operate in accordance with UK law and are transparent about our maximum potential liability. We await the detailed decision [from the EU] and the UK government’s response in order to assess what it means for us.”

HM Treasury said it would “carefully consider” the Brussels ruling.

However, if Britain leaves the EU with a deal in the near future, the ruling from Brussels may be meaningless as the tax potentially to be collected would be due to the Treasury, not Brussels, and the government could choose not to change its position. The ruling could also be challenged if the UK leaves the EU without a deal. A long delay in Brexit could complicate matters.

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