The European Commission announced today that its Competition Directorate has opened a formal investigation to assess the way in the so-called “business rates” tax is applied to BT and Kingston Communications, the two fixed incumbent operators in the United Kingdom, compared to the way it is applied to competing operators.

In parallel, the UK’s Department of Trade and Industry, which is the Ministry responsible for the telecommunications sector, will conduct its own investigation.

The Competition Directorate (DG COMP) will examine in particular whether the way in which the “business rates” tax is levied on telecommunications infrastructure owned by BT and Kingston Communications complies with EC Treaty rules requiring Member States not to distort competition, and whether it does not amount to granting State aid or subsidies.

The base of the “business rates” tax is determined for each telecommunications operator by the Valuation Office Agency (VOA), an executive agency of the UK’s Inland Revenue.

Experts have known for many years, and DG COMP has today confirmed, acting upon a complaint filed by Vtesse Networks, that the VOA is applying differing asset valuation methods to assess the economic value (and hence the taxation basis) of the telecommunications networks of various operators.

According to DG Comp, the application of different methods may favour BT and Kingston Communications, resulting in a disproportionate tax burden for their competitors. Vtesse Networks claims that the different treatment amounts to a tax disparity of up £12bn over the past several years, and bases its claims on the taxable basis for local access lines, and in particular of unbundled local loops. BT has already responded that it has not received any benefit from the UK government.

The European Commission statement includes prudent wording as follows:

“State aid is in principle forbidden by the EC Treaty. Tax benefits restricted to some undertakings may under certain conditions distort competition and constitute illegal State aid. However, the presence of aid may be ruled out where the differential treatment is justified by the intrinsic features and inherent logic of the tax system. In view of the complexity of the case, the Commission has decided that an in-depth inquiry is necessary to analyse the justifications for applying different valuation methods to BT and Kingston in comparison with other telecommunications operators. […] The process of the Commission’s inquiry requires the details of the tax measure to be published in the EU’s Official Journal, allowing interested parties to provide the Commission with their comments. The Commission will also hear the detailed views of the UK authorities on the general nature of this tax regime, including its future evolution. The launch of an in-depth inquiry does not prejudge in any way the Commission’s final decision.”

T-REGS Note: Publication of the formal invitation for interested parties to file their not imminent. It is likely to take several weeks/months before this invitation, and the accompanying documentation, will be published in the Official Journal of the European Communities. For a discussion of the expected process, please contact Yves Blondeel.