'Rushed' transfer pricing rules could fall foul of European law

Tax experts feel that Gordon Brown has 'rushed' through the draft legislation and as a result left it open to legal attack, as it still discriminates against European Union companies.

'I don't think they've got there yet in terms of not having a difference between the UK and the rest, so there has got to be a risk of illegality here,' said Steve Hasson, head of transfer pricing in the UK at PricewaterhouseCoopers.

'This is the first stab at it. We are obviously working on a very rapid timescale and getting the law right to avoid further questions of illegality is going to be extraordinarily difficult.'

Adam Craig, head of the EU tax group at Big Four firm Deloitte, said the government was 'trying to show that it listens' by introducing legislation that exempts small and medium-sized businesses and provides for 'balancing payments' so UK companies do not suffer financially from the legislation.

But he was quick to fire a warning shot. 'If you have any difference of treatment between UK companies and EU companies then that difference will have to be justified by the UK government, probably in front of a court,' he said.

The legislation is likely to fall foul of EC law because it still gives preferential treatment to UK companies. Because SMEs are exempt from the legislation, UK-based companies with an SME subsidiary in the EU would be discriminated against.

And the compensating reduction in profits, offered as an olive branch to UK corporates that will have to endure a raft of red tape as a result of the legislation, also discriminates against EU companies that have no such agreement with their respective tax bodies.

Mervyn Woods, head of tax policy at the CBI, said he was pleased the chancellor had responded to lobbying by exempting smaller companies, but was 'deeply worried' with the way larger firms will still get caught.

And because the obligation lies with the tax payer, rather than the Inland Revenue, companies will have to draw up 'hundreds of extra tax returns'.

He said that responding to the Treasury consultation would be the 'top priority over the next month'.

PwC's Masson agreed: 'I don't think that it's good enough yet, so we still think there's mileage in the consultation yet.'

Email David_Rae@vnu.co.uk.