Diageo (British multinational beverage and alcohol group – owner of numerus brands including Jonny Walker, Captain Morgan, Gordons Gin, Smirnoff and Guinness) is facing difficult tax challenges according to the group’s August 2020 SEC-filings During 2017 Diageo was in discussions with UK tax authorities to seek clarity on Diageo’s transfer pricing and related issues, and in the first half of the year ending 30 June 2018 a preliminary assessment for diverted profits tax notice was issued. Final charging notices were issued in August 2017 and Diageo paid £107 million in respect of the two years ended 30 June 2016.  In June 2018 an agreement was reached with UK tax authorities that diverted profits tax does not apply the Diageo and at the same time a resolution was reached on the transfer pricing issues being discussed. The agreement in respect of transfer pricing covers the period from 1 July 2014 to 30 June 2017 and has resulted in an additional UK tax charge of £143 million. In the year ended 30 June 2018 an additional tax charge of £47 million was recognised in current tax which is based on the approach agreed with UK tax authorities. In April 2019, the European Commission issued its decision in a state aid investigation into the Group Financing Exemption in the UK controlled foreign company rules. The European Commission found that part of the Group Financing Exemption constitutes state aid. The Group Financing Exemption was introduced in legislation by the UK government in 2013. In common with other UK-based international companies whose arrangements are in line with current UK CFC legislation Diageo may be affected by the ultimate outcome of this investigation. The UK government and other UK-based international companies, including Diageo, have appealed to the General Court of the European Union against the decision. The UK government is required to commence collection proceedings and therefore it is expected that Diageo will have to make a payment in the year ending 30 June 2021 in respect of this case. At present it is not possible to determine the amount that the UK government will seek to collect. If the decision of the European Commission is upheld, Diageo calculates its maximum potential liability to be approximately £275 million. Based on its current assessment, Diageo believes that no provision is required in respect of this issue. In July 2019 Diageo reached a resolution with the French tax authorities on the treatment of interest costs for all open periods which resulted in a total exceptional charge of €100 million (£88 million), comprising a tax charge of €69 million (£61 million), penalties of €21 million (£18 million) and interest of €10 million (£9 million).  This brought to a close all open issues with the French tax authorities for periods up to and including 30 June 2017. Diageo also has a large number of ongoing tax cases in Brazil and India. The current assessment of the aggregate possible exposures is up to approximately £285 million for Brazil and up to approximately £150 million for India. The group believes that the likelihood that the tax authorities will ultimately prevail is lower than probable but higher than remote. Due to the fiscal environment in Brazil and in India the possibility of further tax assessments related to the same matters cannot be ruled out. Based on its current assessment, Diageo believes that no provision is required in respect of these issues. Diageo states that payments were made under protest in India in respect of the periods 1 April 2006 to 31 March 2017 in relation to tax assessments where the risk is considered to be remote or possible. These payments have to be made in order to challenge the assessments and as such have been recognised as a receivable on the consolidated balance sheet. The total amount of protest payments recognised as a receivable as at 30 June 2020 is £117 million (corporate tax payments of £107 million and indirect tax payments of £10 million) ...

Back in 2017 the European Commission opened an in-depth probe into a UK scheme that exempts certain transactions by multinational groups from the application of UK rules targeting tax avoidance. The EU commission concluded its investigations in a decision issued 2 April 2019. According to the decision the UK “Group Financing Exemption” is in breach of EU State aid rules. Under the Scheme foreign multinationals would benefit from tax exemption of profits related to payments of interest on intragroup loans. “In conclusion, the Commission finds that the United Kingdom has unlawfully implemented the contested measure to the benefit of certain UK resident companies in breach of Article 108(3) of the Treaty. The Commission also finds that the Group Financing Exemption constitutes State aid that is incompatible with the internal market within the meaning of Article 107(1) of the Treaty, in as far as it applies to non-trading finance profits from qualifying loan relationships, which profits fall within Section 371EB (UK activities) of TIOPA. By virtue of Article 16 of Regulation (EU) 2015/1589 the United Kingdom is required to recover all aid granted to the beneficiaries of the Group Financing Exemption.” “The group financing exemption scheme, included in the Taxes Acts as Chapter 9 of Part 9A of Taxation (International and Other Provisions) Act 2010, constitutes aid within the meaning of Article 107(1) of the Treaty, in as far as it applies to non-trading finance profits from qualifying loan relationships, which profits fall within Section 371EB (UK activities) of Part 9A of TIOPA. It does not constitute aid when applied to non-trading finance profits from qualifying loan relationships that fall within Section 371EC (capital investments from the UK) of Part 9A of TIOPA and that do not fall within Section 371EB (UK activities) of Part 9A of TIOPA. To the extent that the group financing exemption scheme constitutes aid, it forms an ‘aid scheme’ within the meaning of Article 1(d) of Regulation (EU) No. 2015/1589. The aid granted under the aid scheme is incompatible with the internal market and was unlawfully put into effect by the United Kingdom in breach of Article 108(3) of the Treaty. “The United Kingdom shall recover all incompatible aid granted under the aid scheme from the beneficiaries of that aid.” “Recovery of the aid in accordance with Article 2 shall be immediate and effective.” “(1) Within two months following notification of this Decision, the United Kingdom shall submit the following information to the Commission: (a) a list of the beneficiaries that have received aid under the aid scheme; (b) a list of the tax payers that have applied the group financing exemption to non-trading finance profits from qualifying loan relationships falling within Section 371EC (capital investments from the UK) of Part 9A of TIOPA and not falling within Section 371EB (UK activities) of Part 9A of TIOPA; (c) for each beneficiary, the CFC charge actually charged in determining the beneficiary’s liability under the corporate income tax return, for each tax year that he has applied the group financing exemption, as well as the relevant corporate income tax return forms;128 (d) for each beneficiary, the CFC charge that would have been charged if he had not applied the group financing exemption, including underlying calculations, for each tax year that the beneficiary has applied the group financing exemption; (e) the total aid amount and its detailed calculation (principal aid amount and recovery interest) to be recovered from each beneficiary; (f) documents demonstrating that the beneficiaries have been ordered to repay the aid. (2) For each beneficiary, the United Kingdom shall supply the Commission with supporting evidence demonstrating how the extent to which non-trading finance profits from qualifying loan relationships fall within Section 371EB of Part 9A of TIOPA has been calculated. (3) For each tax payer, referred to in paragraph (1)(b) of this Article, the United Kingdom shall supply the Commission with supporting evidence demonstrating that the non-trading finance profits from qualifying loan relationships fall within Section 371EC of Part 9A of TIOPA and do not fall within Section 371EB of Part 9A of TIOPA. (4) The United Kingdom shall keep the Commission informed of the progress of the national measures taken to implement this Decision until recovery of the aid in accordance with Article 2 has been completed. On request by the Commission, it shall immediately submit information on the national measures already taken and on those planned to be taken, in order to comply with this Decision, including detailed information on the amounts of aid and recovery interest already recovered from the beneficiaries.” The UK government together with a long list of 75 Multinational Groups benefitting from the Scheme have appealed the decision to the General Court of the European Union. Related TP guidelinesRelated TP case laws TPG2022 Chapter X paragraph 10.66As a credit rating depends on a combination of quantitative and qualitative factors, there is still likely to be some variance in creditworthiness between borrowers with the same credit rating. In addition, when making comparisons between borrowers using the kind of financial metrics... TPG2022 Chapter X paragraph 10.96In considering arm’s length pricing of loans, the issue of fees and charges in relation to the loan may arise. 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