HMRC sues General Electric to annul $1bn tax deal
HMRC has accused US industrial giant General Electric (GE) of “fraudulent misrepresentation” in a billion dollar suit filed in the UK high court.
An investigation by the charity TaxWatch charity explains that the case arose from an international financing operation routed through the UK that HMRC approved in 2005.
According to the UK tax department, however, the AUS$5bn that was supposed to go to subsidiaries in Australia was cycled in a between the US, Luxembourg, the UK and Australia before ending up back at corporate HQ a few days later.
The transactions had no commercial purpose other than to create a “triple dip” tax advantage, HMRC alleged. Having discovered the deception, the department petitioned the High Court to annul its original agreement, which would mean GE had to pay back tax on the transaction, plus penalties and interest amounting to US$1bn.
GE denied that it deliberately misled HMRC about the deal. In its 2019 annual report, the US giant acknowledged the potential impact of the UK tax department claim and said it was contesting the attempt to disallow the relief granted.
“We comply with all applicable tax laws and judicial doctrines of the United Kingdom and believe that the entire benefit is more likely than not to be sustained on its technical merit,” the company said.
The GE scheme applied the concept of tax arbitrage to take advantage of differing tax treatments applied by authorities in different jurisdictions. In late 2004, GE undertook a series of multi-billion dollar transactions that were intended to fund the acquisition of a new subsidiary in Australia.
Under the arrangement, GE Commercial and Consumer Finance in Australia borrowed money and paid interest to GE Capital Finance, a UK entity. Routing the cash through the UK exploited a mismatch between Australian and UK tax law. The Australian partnership was considered a taxable entity in its native country, but was viewed as a transparent entity for UK tax.
As TaxWatch explained it: “The effect of this hybrid arrangement was that two tax deductions were made on the same loan, one in Australia, one in the UK. The Australian Partnership deducted interest payments on the loan it received from the UK against profits made in Australia. For UK tax purposes the loans created a loss for its UK based partners and so was tax deductible in the UK against UK profits also.
“In addition to this, the money loaned by GE Capital Finance in the UK to the Australian Partnership had itself been borrowed from a GE company based in Luxembourg.
“The interest being paid to Luxembourg resulted in a double deduction of interest in the UK on the same loan. This double deduction was partially offset by the fact that interest payments made by the Australian Partnership would be coming back into the UK. However, the overall effect of the transactions was that GE would be able to deduct interest payments from their profits in the UK on a loan taken out by an Australian entity.”
The missing minutes
Anti-arbitrage rules were already in place at the time, so GE spent six months negotiating with HMRC to get clearance for the deal.
HMRC repeatedly stressed its view that there was no commercial reason for GE to make investments in Australia via its UK subsidiaries using a hybrid structure. Despite HMRC’s reservations, the tax department did give GE partial clearance, but is now alleging that the decision was reached based on redacted minutes that concealed the full picture.
After it received an unedited version of GE’s document, HMRC found that deleted passages revealed the AUS$6bn loan taken out by GE’s UK subsidiaries was vastly higher than the $529m value of the company being acquired. In its defence, GE is claiming the documents were not relevant, and that it had made clear the contested document it sent HMRC was an “extract” and that HMRC never requested a full copy.
As things stand, the action is likely to be heard in the autumn. FT.com is also taking a close interest in the case as an example of a “newly assertive” HMRC taking action against a multinational giant.
“This appears to be the first time that HMRC has accused a major company of engaging in fraudulent misrepresentation in order to gain a tax advantage,” TaxWatch director George Turner told the FT. “It will send shockwaves through the world of tax.”
Some of the waves from the case could wash up at the door of Big Four firm PwC. The FT reported that back when GE lobbied HMRC to endorse its funding arrangement, its tax team was viewed as “Harvard of tax departments”. Following a reorganisation, most of that team transferred to PwC.
You might also be interested in
AccountingWEB’s interim Editor in Chief has been with the site since 1999 and returned to the editorial hot seat in March 2020 to lead the hunt for a long-term successor... Send a DM if you're interested! When not tending to the needs of AccountingWEB members and geeking out on their technology habits, he devotes much of his time to his oddball...