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Marks & Spencer and tax harmonisation - The Advocate General's Opinion

Damon Lambert



    Critique of the Opinion


Thursday, 7th April 2005 saw the publication of the Advocate General's opinion on the Marks and Spencer case. This infamous, landmark tax case is an example of how the European Courts will ignore precedent and meaning to give effect to the over-ambition of the European Commission, to effect tax harmonisation. This article seeks to critically analyse the Advocate General's opinion, strip away the legal wording and see the true aim of his opinion. Based on all recent cases, his opinion will be followed by the ECJ.


The case concerns Marks and Spencer's continental operations. These were loss-making, whilst its UK business was profitable. Under UK tax law, UK groups can for tax purposes transfer losses within their groups, so that loss-making UK subsidiaries reduce the tax payable by profitable UK companies. This cannot be done with loss-making UK subsidiaries for the simple reason that they are not subject to UK tax. These rules have been in existence for many years. Marks and Spencer sought to use the losses of the overseas companies to reduce their UK tax bill, arguing that the inability to do so was discrimination under the Freedom of Establishment and Freedom of Capital Articles in the EU Treaty.

This case is estimated to have a cost to the UK Treasury of £2 to £3 billion and related cases are thought by Accountancy Age to be worth up to £20 billion, i.e. approximately half the annual corporation tax take of the UK.

The Advocate General all too predictably opined, that the existing UK tax law was discriminatory, and that UK Groups, and indeed the groups in certain other EU Member States shall have to allow corporate taxpayers to offset losses in overseas companies against their Home State profits, even though the Home State has no right to tax profits in such companies. He did however, restrict the opinion, to the fact that the use of such losses could be limited under UK legislation, if there were rules that enabled such losses to be used in the Overseas State, e.g. via its own group relief rules.

This article critically analyses the Advocate General's opinion, strips away the legal wording to see the true aim of his opinion.

Critique of the Opinion
Wrong from the start

The AG's bias for the EU project can be seen in the first few paragraphs of his opinion. He refers to the European Council Directives and the Commission's proposals for pan-Europe wide group relief, i.e. harmonisation of corporation tax. He even states that the Commission is of the "view that the absence of any provision on transnational offset of the losses of groups of companies in the Community constitutes a major obstacle to the proper functioning of the internal market". He then refers to the fact that "it is not for the Court to substitute itself for the Community legislature", before contradicting that entirely under the proviso of the objects of the EU Treaty. Never before, has the author seen a judge outline the political arguments of one side of the debate only, at the commencement of his judgement. Judges are meant to interpret law, not the political wishes of a small set of unelected bureaucrats. Its clear evidence that the AG's answer was determined to get one result, and one result only, from the start.

The AG was forced to counter the view that direct taxes were the authority of Member States. Old arguments were used that tax law cannot be contrary to Treaty Freedoms. These are Treaty Freedoms that, as the AG says, were mainly aimed at self-employed peoples and the right to practice their trade, not tax systems. Direct taxes were specifically carved out of the EU Treaty, this case frankly should not even have been referred to Luxembourg in the first place.
If its different it must be discriminatory?

The AG accepts that there will be differences between different countries tax bases. Yet, he does not extend that to the pragmatic conclusion that a different basis, is not necessarily a discriminatory basis. He ignores the fact that the UK treatment of overseas companies as being excluded from UK tax for both profit and loss purposes is common-sense fairness. Indeed, using the AG's analysis, how would a Member State not be operating a discriminatory basis? It would be most impractical, potentially contrary to existing bilateral tax treaties, and even laughable if Member States sought to tax, residents of other countries. The ECJ and AG toss around the word discrimination to obtain the result they want, without any sensible consideration of its real meaning, or indeed genuine consideration of whether there has been any actual discrimination. There also seems to be no reasonable evidence to back-up the view that the UK government has deterred UK plc's from setting up overseas subsidiaries, there are enough of them and prior to 1998 no-one was moaning that the UK system was unreasonable in this regard. Given the UK's increasingly burdensome corporation tax and regulatory regimes, the most coherent conclusion is that the current UK government does discriminate, but against UK business.

The AG views, with justification, that one of the purposes of the EU Treaty is to ensure neutrality between choices of location. Yet, the result of his judgement is that the UK Treasury effectively subsidises loss-making companies overseas but it cannot raise money the other way. The rules are a drain, never a reservoir, on the UK. That's not neutral!

The AG ignores the 'cohesion of the tax system' as a basis for Member States overriding Treaty law, despite this principle being accepted in an earlier case. He also raises the concern that the Treaty Freedoms cannot be used to override domestic law such that there is a loss of competence of the Member State's tax system. Yet, due to his opinion and judgements like them, many people are now confused as to what long-established UK tax law is, what UK tax law will be to counter this opinion and following ECJ judgement, and the hole in the UK Revenues has to be picked up somewhere. If you were an overseas group, would you wish to invest in a country that has a moving fiscal regime?

Same day, same Advocate, different rules

Within European case law, a principle has developed that Treaty freedoms cannot be used to abuse national laws, normally referred to as the 'abuse of rights' concept. For example take these quotes from an opinion issued by the very same Advocate General, on the very same day, in a different tax case.

" the context of fundamental freedoms, the Court stated that the improper circumvention of a Member State's rules by the exploitation of such freedoms is not permissible"

"More recently in Centros, a case in which an alleged abuse of the right of establishment was under discussion, the Court restated its position by holding that 'a Member State is entitled to take measures designed to prevent certain of its nationals from attempting, under the cover of the rights created by the Treaty, improperly to circumvent their national legislation."

You would have at least expected that the theory, as to whether a corporation using EU Treaty freedoms to try to overhaul traditional tax law in order to lower their tax bill was, abusive, would at least have been mulled over. Instead in was mauled over, the issue was not mentioned a single time in the Marks and Spencer opinion despite being the crux of the other tax opinion the AG issued on the same day. But, then in the other case there was not a policy issue such as tax harmonisation at stake.

Not subject to tax - that's discrimination

Having twisted the facts and reason so far, the AG basically ignores the decision of the UK Special Commissioners when they first heard this case over 2 years ago. In a long and considered judgement, given by one of the most experienced and respected tax lawyers in the UK, the view was taken that there was no discrimination, indeed the position of the UK and overseas subsidiaries were not comparable, as a UK company would be subject to UK tax on its profits, where as the overseas subsidiary would not. Indeed the AG takes the bizarre position that an overseas subsidiary is being discriminated against because it is not subject to tax.

The lawgiver, not the opinion giver

Its somewhat difficult to find anything positive to say about the quality of this opinion. I suppose that at least its consistent with all the other ECJ cases. As shown above, there are many holes in the Advocate General's opinion. Some have expressed a view that it is improper to launch attacks on the judiciary. This may be a reasonable opinion, when the judiciary sticks to its role of judging. But when unelected officials seek to become legislators, ignore both precedent and real meaning, act against the will of the people they are there to protect and twist the facts to suit their own desires then criticism becomes a necessity. Its merely defending our democratic rights against the EU's desire to rule our lives, regardless, of election, law, or Constitution referendum.


Despite Tony Blair's bleating about his negotiation of 'red-lines' on tax in the EU Constitution, no sensible commentator is seeing this opinion as being anything other than part of the EU-mob's drive towards a single EU-wide corporation tax law. The question has to be asked is this best for Europe? This was best expressed by Patience Wheatcroft in The Times, "tax harmonisation by law will produce standardised high rates, tax harmonisation by competition will produce low rates."

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