Britain has said it will co-operate with a European Union investigation into whether a scheme exempting some multinational companies from tax avoidance measures is legal.
Competition commissioner Margrethe Vestager said the “in depth” inquiry would examine whether the scheme meant some multinationals were paying less UK tax than other companies, in breach of EU state aid rules.
Downing Street said the Government believed the scheme, which came into force in 2013, was compliant with EU law and that multinationals in the UK were required to pay “all taxes due”.
However Labour said the EU inquiry showed it was simply a “tax dodge” and should be shut down.
The scheme was originally introduced by then chancellor George Osborne as part of an overhaul of the “controlled foreign companies” (CFC) rules which prevent multinationals from artificially shifting profits between jurisdictions to avoid paying tax.
The “group financing exemption” means financing income received by the offshore subsidiary of a British parent company from another foreign group company is not liable to UK tax.
Launching the inquiry, the European Commission said such financing income was often used as “a channel for profit-shifting” by multinationals.
Ms Vestager said: “All companies must pay their fair share of tax. Anti-tax avoidance rules play an important role to achieve this goal.
“But rules targeting tax avoidance cannot go against their purpose and treat some companies better than others.”
A Number 10 spokeswoman said: “Multinational companies must pay all taxes due. We don’t settle for less. This includes paying tax on any profits they make in the UK
“Our rules prevent these profits being artificially diverted overseas. We do not believe these rules are incompatible with EU law.
“We will co-operate with the European Commission’s investigation.”
The commission refused to be drawn on how long the investigation would last despite speculation it would not be completed by the time Britain has left the EU in March 2019.
Deputy chief spokesman Alexander Winterstein told reporters in Brussels: “As long as a member state is a member of the internal market it is subject to the rules of competition, including European state aid rules.”
For Labour, shadow chancellor John McDonnell said the Government should act now to close down the exemption.
“Far from clamping down on tax dodgers, Conservative-led governments have made it easier for tax avoiders to duck their obligations to society and not pay their fair share of tax,” he said.
Ms Vestager has been involved in bringing a number of high-profile cases targeting the tax benefits granted to some companies, including ordering Ireland to recover up to 13 billion euros (£11.6 billion) in unpaid taxes from Apple.