Diageo Warns of $350M Hit From EU’s Probe on U.K. Tax Scheme

An employee boxes bottles of Johnnie Walker Black Label Scotch on the postponement line at the Diageo Plc International Supply Center and Technical Centre. Photographer: Nicky Loh/Bloomberg

Diageo Plc, the maker of Johnnie Walker whisky, has warned the European Union’s state aid probe into a U.K. government tax scheme may cost it as much as 250 million pounds ($356.4 million).

The London-based company said Jan. 25 in its half-year results it “may be affected by the outcome” of the state aid investigation. While Diageo will face the financial hit if the EU upholds its preliminary findings, the business isn’t making a provision in its accounts for the moment, it added.

In October 2017, the EU’s executive arm said it had opened an “in-depth” state aid probe over whether the U.K. gave multinational companies an unfair advantage over their local competitors through exempting the larger businesses from specific measures to target tax avoidance.

Diageo’s disclosure marks the first time a company has estimated the probe’s financial impact.

Like Ireland’s battle over whether Apple Inc. owes it 13 billion euros ($16.1 billion) in unpaid tax, the EU may force the U.K. to recover the relief companies have gained with the exemption.

Diageo, the world’s largest distiller, said Jan. 25 that the state aid probe is likely to affect other U.K.-based multinational companies whose tax structures are “in line” with current U.K. CFC laws.

Imperial Brands Plc, the maker of JPS cigarettes, said two months ago in its full-year results that it is “monitoring” the investigation. U.K. software company The Sage Group Plc said this month its 2017 annual report, meanwhile, that it doesn’t expect a final decision on the matter this year.

Like Diageo, neither company has made a provision for the state aid probe in their accounts.

No Special Treatment

Laws “targeting tax avoidance cannot go against their purpose and treat some companies better than others,” the EU’s competition commissioner, Margrethe Vestager, said in an Oct. 26 statement. “This is why we will carefully look at an exemption to the U.K.’s anti–tax avoidance rules for certain transactions by multinationals, to make sure it does not breach EU State aid rules.”

Dating to the 1980s, the U.K.’s controlled foreign company rules aim to stop businesses from using overseas subsidiaries to cut their tax bills by shifting profits to low-tax jurisdictions.

When the U.K. last changed its CFC rules in 2013, however, it included a U.K. tax exemption for certain intra-group financing between two subsidiaries based outside the country.

“Thus, a multinational active in the U.K. can provide financing to a foreign group company via an offshore subsidiary,” the European Commission said in its statement last month. The exemption allows the parent company to avoid U.K. tax if the subsidiary receiving interest payments via the financing is in a tax haven, or if the financing income is not reallocated to the U.K., it added.

2010 Corporate Roadmap

Under former Chancellor George Osborne, the U.K. officially announced its intentions to change CFC rules seven years ago in the government’s Corporate Tax Roadmap.

After consulting on the changes during 2011, the Treasury said at the 2012 budget it would bring in the new laws in 2013, aiming to “better reflect” how modern businesses operate.

The changes included “a finance company partial exemption that in broad terms will result in an effective U.K. tax rate of one quarter of the main rate on profits derived from overseas group financing arrangements,” the 2012 budget said.

New Tax Dispute in France

In addition to the EU probe, Diageo said it faces a hit of up to 240 million euros in a dispute with the French government on the taxation of interest payments. Debt interest is a tax-deductible expense.

The company has also made headlines in the past 12 months with its 107 million-pound dispute over the U.K.’s diverted profits tax, nicknamed the “Google tax” when it was introduced in 2015.

Any company that receives a diverted profits tax charge from the U.K.’s tax authority must pay the disputed amount in question before they can attempt to recover it. Once they pay, businesses have a 12-month review period when they can try to negotiate with the government on the dispute.

Diageo said on Thursday it has entered a “process of collaborative working” with Her Majesty’s Revenue and Customs, the U.K.’s tax authority. “These discussions are ongoing,” it added.