European governments relieved by ruling

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European governments heaved a collective sigh of relief after Tuesday’s ruling by the European Court of Justice, which gave Marks & Spencer, the retailer, conditional rights to tax relief on overseas losses.

The judgment is unlikely to have a seriously damaging impact on Europe’s public finances, since the court ruled that M&S could only claim tax relief on losses incurred outside its home market when all possibilities of relief in the countries where its subsidiaries trade had been exhausted.

The German government, which had braced itself for claims for tax refunds running into billions of euros, said the ruling would not have a big impact on its budget. Barbara Hendricks, deputy finance minister, said: “We welcome that due to the ruling there is no longer any reason to fear tax revenue losses worth billions for the German state”.

The M&S judgment was also welcomed by the UK Treasury, which had previously faced the possibility that defeat at the ECJ could trigger claims from companies running into several billion pounds. Since yesterday’s judgment is expected severely to the limit companies’ claims for tax relief, the Treasury is likely to face claims for back taxes, probably in 2006-07, of around £200m ($351m, €297m) together with future claims of around £50m a year.

The ruling is likely to have a mixed response from businesses. Disappointment from some companies that are now unlikely to succeed in their claims for foreign losses will be tempered by a widespread sense of relief that governments will be unlikely to make unpopular changes to their tax system in an effort to protect tax revenues.

The UK Treasury’s view that the “the judgment means that the UK’s existing system of group relief can be preserved, broadly as it is now” has reassured companies that feared they would face extra costs from radical changes to the group relief system.

The Confederation of British Industry said the ruling meant there was no reason for the abolition of group tax relief, which would have been “very damaging to the UK’s global competitiveness”. The Institute of Directors said it was “a good result for British business”, even though some groups might see their claims to relief for foreign losses fail.

Most EU governments will need to make changes to their tax rules in the wake of the judgment, but they are likely to wait until its full implications are clarified in the courts. The UK Treasury said: “The government will bring forward detailed proposals in due course, and our intention is to consult with business on the detail of how the group relief should be amended to bring it fully in line with EU law.”

The European Commission said it would draw up new proposals next year to improve co-ordination bet-ween member states on cross-border tax relief, tackling issues raised by the M&S case.

Laszlo Kovacs, EU tax commissioner, welcomed the ruling and said: “It is clear that member states and the Commission will have to work together to draw conclusions from this judgment.”

Mr Kovacs’s spokeswoman said it was not yet clear whether the Commission would propose new legislation, or create a code to help member states bring their corporate tax systems into line.

She added that a key priority would be to ensure that “the burden of relief of losses is shared and doesn’t fall on any member state alone”.

Mr Kovacs is drawing up plans for a common EU corporate tax base, whose primary aim is to avoid double taxation and to cut red tape for companies operating in different countries.

Mr Kovacs says the new common base - which is opposed by five EU members including Britain - would help to clarify the question of where a company should declare its tax losses.

Europe’s finance ministers have become increasingly preoccupied about the ECJ’s rulings on corporate taxation in recent months, and have set up a working group to try to co-ordinate policy.

However a spokesman for the British presidency said the aim was to work with the court, rather than to confront the judges.

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