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ECJ’s decisions to have significant impact Back  
Following on from the judgment issued by the European Court of Justice (ECJ) in the Arthur Andersen case on March 3rd, which confirmed that the Advocate General’s opinion that ‘back office’ insurance services provided by a third-party outsourced agent do not qualify for VAT exemption, the ECJ has made two recommendations in favour of the tax payer. However, the full decision on both issues won’t be made for another six months.
The Advocate General (AG) made a recommendation on April 7th to the European Court of Justice (ECJ), which ruled in favour of the taxpayer, Marks & Spencer (M&S), in a case which has generated huge interest from Europe’s business community.

M&S brought the case as it has claimed ?30 million of tax relief refund in the UK for losses made by subsidiaries in other European countries. But the Inland Revenue refused to allow tax losses from its overseas subsidiaries to be offset against its UK profits, based on current UK domestic law. Over one hundred international groups have made comparable claims for loss relief in their UK tax returns and they will now need to consider whether they are still entitled to a windfall.

Some Irish companies have already lodged claims with the Irish Revenue in the hope of a successful outcome to the M&S case. The quantum of these claims is not known but Irish tax payers will be very interested in the final outcome of this case.

However, according to Pat Cullen, senior tax partner of Deloitte, ‘This is a partial victory for M&S - they have won on a point of principle, but it is still not clear that they, and companies like them, will necessarily be successful in their claims’.

He adds that, ‘The AG opinion, if followed by the ECJ, gives room for Member States to protect their revenues. The AG opinion says that the UK must give tax relief for foreign losses, but only if those losses cannot be used abroad. Governments will point out that in many circumstances the foreign losses can be used abroad – and so, in practice, UK tax relief need not be given.

The tax legislation in Ireland in respect of the granting of relief for losses within a group is almost identical to that in the UK, and thus changes can be expected should the court adopt the AG’s opinion, as the Governments will need to bring in measures to limit loss relief, so as to prevent companies from double dipping their losses i.e. get relief for the same losses twice. The final ECJ decision can be expected in approximately 6 months time.

VAT planning
Writing on another ECJ case in this month’s Tax Monitor on page 12, Terry O’Neill, a VAT partner at KPMG, discusses three cases which confirm the right of taxpayers in Europe to enter into legitimate tax planning arrangements in the context of VAT. In its preliminary opinion,which has yet to be confirmed by the Court, the ECJ confirmed that this right is subject to the general principle that these rights must not be abused. Pending the final decision of the Court, there must now be uncertainty regarding the legality of the general anti-avoidance rule contained in Irish law in so far as it applies to VAT and other taxes governed by European law.

The ECJ was considering the legality of three separate VAT arrangements entered into in the UK by Halifax plc, BUPA and the University of Huddersfield. The UK tax authorities had challenged these arrangements, arguing that they should be entitled to withdraw the VAT advantages gained.

From an Irish perspective, one effect of the opinion, says O’Neill, is to cast doubt on the application of the general anti-avoidance rule contained in Irish law insofar as it might be applied to any EU harmonised tax such as VAT, capital duty or insurance premium tax. He says that this is a significant statement from the ECJ, and is a welcome development which should help to return some balance to the debate regarding the use of legitimate tax reliefs. Again, it is expected that the final decision will be issued by the European Court within the next six months.

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