LONDON - Britain's Inland Revenue has dealt a body blow to multinational corporations' hopes that they could establish pan-European pension funds any time soon.
A consortium of benefit consultants and multinational companies is expecting to get a private ruling this month on a test case filed by AMS Management Systems Ltd., a London subsidiary of Fairfax, Va.-based American Management Systems Inc. The issue involves whether the British government can tax contributions made to a Netherlands-domiciled pension scheme.
But consortium officials discovered in late March that the Inland Revenue recently ruled against a company that had lodged a similar application.
The company, said to be a large multinational, was unwilling to have its name publicized because its finance director, who oversaw the application to the Inland Revenue, left last month.
But the case almost certainly spells bad news for the AMS application, consortium officials said.
At odds with legislation
The agency's position pulls the rug out from under legislation adopted last month by the European Parliament that sought to pave the way for pan-European pensions. The directive, however, has no influence on individual countries' tax authorities, and still requires the approval of the European Commission, the EU's executive body.
The expected ruling by the Inland Revenue also directly contradicts the actions of the European Commission, which in February began legal proceedings against six EU countries for doing exactly what the Inland Revenue is now thought to be planning to do with the AMS Systems application.
The Inland Revenue "will delay the whole process of moving to pan-Euro pensions even further. It is bad news for us," said Geoffrey Furlonger, a partner with Lombard International, Brussels, a benefits advice firm that also is advising the consortium on the legal process.
The consortium would consider appealing to the British courts, then probably the European Court of Justice in Strasbourg, France, if the AMS application is rejected, said Mark Sullivan, a European partner with Mercer Human Resource Consulting Ltd, London, who is also advising the consortium.
"We'd expect that whole process to take two years, which is the likely implementation date of the (European Pensions Directive) anyway," he said.
Ruling could infuriate
The Inland Revenue's expected ruling likely would infuriate many finance directors involved in the consortium of companies, who were hoping that a ruling on the tax problem last year by the European Court of Justice, which set a binding precedent on the taxation of foreign pension contributions, would have solved their problems.
That ruling, involving Finnish-German physician Rolf Danner, tested whether an employee in Finland could contribute to German pension schemes without having tax deducted by the Finnish government.
The Finnish government argued it should be allowed to tax the contributions under Finnish law, but the court ruled that doing so would breach European law.
The Inland Revenue appears to be sidestepping this judgment, observers said.
Inland Revenue officials "were definitely aware of the implications of the Danner judgment, but it would seem they are making excuses as to why that judgment doesn't apply," Mr. Furlonger said.
Patrick O'Brien, press director at the Inland Revenue, London, said the agency could not comment on the matter, although he released a written statement saying the agency was aware of the case.
Most pension executives were careful not to directly criticize Inland Revenue's decision in public, but most privately expressed frustration.
"We do want to see the options there (for cross-border pensions), and it is a problem if the tax authorities in each state are going to block this," said Ian Hutchinson, head of European benefits at Hewlett-Packard Ltd., Bracknell, England.
Hewlett-Packard officials are closely following the debate on cross-border pensions. The company's recent merger with Compaq Computers Ltd, Reading, England, left Mr. Hutchinson with the task of sorting out more than 100 retirement schemes in European Union countries alone.
Derek Steptoe, group compensation and benefits director with Vodafone PLC, Newbury, England, said although his company supported the push for cross-border pensions, he was reluctant to enter the fray against the Inland Revenue.
"I think there is going to be a big problem with each country's tax authorities; they don't want to give up the revenue, it's a problem for them. But I don't want to be quoted in a magazine having a go at the Revenue," he said.
Like most other tax authorities around the EU, Inland Revenue officials believe allowing employees working in Britain to making non-taxable contributions to a foreign pension scheme without paying tax as a recipe for abuse.
"The government - and other member states (of the EU) - stand to lose billions if they allow this. It really will attract a tax-evasion culture, too. So that is what the governments in Europe have to weigh up," said Dale Fleet, an executive with Swiss Re AG, Zurich.
Such an arrangement could allow individuals to avoid taxation on pension savings by contributing to a scheme domiciled in a country where taxes are removed at the benefits stage, such as in Britain, then later moving it to a country where the tax is levied at the contribution stage, such as Germany, Mr. Fleet said.
With the much-debated European Pensions Directive now set to become law in the next few years, a positive ruling from Inland Revenue would have meant a large proportion of the obstacles for pan-European pension funds would have been removed.
This would allow multinational companies to reduce pension costs and increase efficiencies by centralizing their European benefits into one pool. BP PLC, London, for instance, estimated it would save $60 million annually if it could consolidate its pensions schemes.