The EC announced on Wednesday that it is examining whether BT is paying unfairly low rates of tax on its network infrastructure and associated property, giving it an undue advantage over UK telcos.
This investigation was prompted by a complaint from Vtesse Networks, a small UK telecoms operator that sells services to businesses. It claims that BT is receiving illegal tax relief, and that the present situation, if not changed, will "destroy Broadband Britain, and turn the clock back 20 years on telecommunications liberalisation".
Vtesse Networks's allegations centre on the £300m that BT pays annually as the rateable value of its assets. This bill is calculated by a government body called the Valuation Office Agency (VOA), which assesses the economic value of BT's property and network.
The VOA uses a different formula for BT than for other smaller telcos. Vtesse Networks claims this is unfair, and that in effect BT has received state aid worth up to £12bn.
"The EC's action is the culmination of over a year's work with the Commission relating to what we maintain is the illegal and discriminatory application by the Inland Revenue, the VOA and the Office of the Deputy Prime Minister of non-domestic business rates to the telecommunications sector," said Vtesse Networks.
"This results in BT not only paying a lower level of taxation in relation to its business than any other telecoms operator, but also having a higher level of assets, for example its duct network, than any other operator."
BT, though, rejects Vtesse Networks' claims.
"BT is surprised that the European Commission is to investigate the UK government over the rates that BT pays. In BT's view, any allegation of state aid is groundless," said BT spokesman Ross Cook, adding that BT was confident that the EU would conclude that the UK ratings system was fair.
The investigation is likely to take at least 18 months.