M&S ruling may cut Irish tax receipts

A European ruling facilitating the repatriation of foreign losses by EU companies could dent Irish corporation tax receipts.

Yesterday's draft decision of the European Court of Justice (ECJ) Advocate General in a case between Marks & Spencer and the British tax authorities opens the way for Irish companies to set losses incurred by foreign affiliates against their Irish tax bill.

The decision has yet to be ratified by the ECJ, but a number of Irish companies are understood already to have claimed refunds from the Revenue in relation to losses by affiliated companies operating in other EU states. It is considered unlikely the draft ruling will be overturned.

The case arose when Marks & Spencer tried to claim losses incurred from its operations in France, Belgium and Germany over four years prior to the company pulling out of the Continent in 2001.

The British Inland Revenue refused, saying that while "group relief" allowed related companies within the UK to offset losses in one company against profits elsewhere, the scheme did not apply to companies based outside the country.

M&S challenged this decision and the British high court eventually referred the matter to the ECJ. Ireland, whose tax code in this area is practically identical to British codes, was one of seven countries that made representations supporting Britain's position. However, advocate general Miguel Poiares Maduro ruled that the UK position was contrary to EU law.

Ernst & Young tax partner Joe Bollard said the ruling, if confirmed, will force a number of European states operating group relief schemes to change their law.

He said this would entail either ending group relief schemes - a move that would be seen as inimical by business and could deter inward investment - or amending the law.

This could be done along lines suggested by Mr Maduro, which would allow cross-border claims, only where such losses could not otherwise be offset in the country where they are incurred. Deloitte international tax partner Joan O'Connor said the wording of the ruling made it unclear to what extent companies would be able to reclaim losses across borders. She said Marks & Spencer had only "partially succeeded" in its case.

Brian Daly, financial services partner at KPMG, said the major challenge for the Government amending the law was "to ensure that tax harmonisation in the EU does not come in through the back door, having been rejected by the Council of Ministers".

Ireland is seen as less vulnerable to claims than other EU states due to its low corporation tax charge. Repatriating losses to Ireland would save companies just 12.5 cent in the euro, compared to 30 pence (43 cent) in the pound in the UK.