By Andrea Thomas
BERLIN -- Europe's five largest economies on Monday warned the
U.S. its planned corporate tax reform could violate the country's
double-taxation treaties and breach world trade rules.
In a letter sent to Treasury Secretary Steven Mnuchin, and seen
by The Wall Street Journal, the countries' finance ministers said
that while tax legislation was an essential pillar of a state's
sovereignty, countries should respect international rules.
"It is important that the U.S. government's rights over domestic
tax policy be exercised in a way that adheres with international
obligations to which it has signed-up," the ministers wrote in the
letter. Some provisions of the Senate and House bills, they added,
"could contravene the U.S.'s double taxation treaties and may risk
having a major distortive impact on international trade."
Their letter comes after the Senate earlier this month passed a
tax overhaul plan that would include about $1.4 trillion in tax
cuts, a cut in the corporate rate to 20% from 35%, reshape
international business tax rules and temporarily lower individual
taxes.
Europeans have repeatedly clashed with the U.S. over trade
issues since President Donald Trump took office nearly one year ago
on an "America First" platform. While Mr. Trump has pledged to
reverse abuses of free trade by what he paints as unscrupulous
partners, allies have warned against what they see as protectionist
tendencies.
The ministers' letter, sent on Monday, echoes concerns among
European businesses that various aspects of the planned U.S.
tax-reform bills might be designed to offer American companies an
edge. The U.S. is the European Union's single most important trade
and investment partner.
Last week, the BDI Federation of German Industry, Germany's most
influential business lobby, warned some provisions of the bills
ostensibly aimed at curbing corporate tax avoidance had "clearly a
protectionist character."
"Companies in Germany and Europe face massive damage," Joachim
Lang, BDI managing director, warned last Monday.
The ministers took specific issue with provisions in both the
House and Senate versions of the tax bill, including proposed
excise-tax payments to foreign-affiliated firms in the House
version. They also cited a "base erosion" provision in the Senate
version that would add tax to cross-border financial
transactions.
Those provisions could impact a host of foreign manufacturers
that sell their wares in the U.S., like Japanese auto makers or
European pharmaceuticals companies.
"The excise-tax and base-erosion-tax provisions appear to have
the greatest impact on certain sectors, particularly those with
heavy sales in the U.S. but relying on integrated supply chains,"
said Albert Liguori, a tax expert at tax advisory firm Alvarez
& Marsal Taxand LLC.
Mr. Liguori said software makers like SAP SE, based in Germany,
could also get hit. An SAP spokesman declined to comment on
potential impact of the U.S. tax plans. The company's finance
chief, Luka Mucic, last month said in an interview that he wanted
to avoid speculation. "There are too many moving parts," he
said.
Even without those provisions, the reform would leave U.S.
businesses facing lower domestic-tax rates than some of their
European peers, putting governments under pressure to
reciprocate.
Business is particularly concerned in Germany, where prospects
for corporate tax cuts dropped after the collapse of coalition
talks involving Chancellor Angela Merkel and the pro-business Free
Democratic Party last month.
For years, European governments and the U.S. have sought to
combat beggar-thy-neighbor corporate tax policies, agreeing on a
series of multilateral initiatives against tax-base erosion and
practices by companies to shift their profits to low-tax
jurisdiction -- initiatives which the signatories of Monday's
letter now fear could be in danger.
In their letter, Germany's Peter Altmaier, France's Bruno Le
Maire, Italy's Pier Carlo Padoan, Spain's Cristóbal Montoro and
Philip Hammond of the U.K. contended that several provisions
included in the two U.S. tax bills and aimed at combating an array
of corporate tax-avoidance practices were protectionist in
nature.
A provision of the House bill for a 20% excise tax on payments
to foreign-affiliated companies, the Europeans warned, would
discriminate against non-U.S. businesses operating in the country,
contravene World Trade Organization rules and breach
double-taxation agreements.
Likewise, the proposed "base erosion and anti-abuse tax
provision" contained in the Senate bill could harm international
banking and insurance businesses because it would treat
cross-border financial transactions between a company and a
subsidiary as nondeductible, subjecting it to a 10% tax, the
ministers warned.
The finance chiefs also said a proposed preferential regime for
some types of foreign incomes, another provision of the Senate
bill, could be seen as an export subsidy banned under international
trade rules.
In their letter, they called on the U.S. to see the benefits of
continued close international-tax cooperation.
"We explicitly welcome U.S. action in the fight against base
erosion and profit shifting. However, we have strong concerns if
this is done via measures that are not targeted on abusive
arrangements as this would impact on genuine business activities,"
they said.
"This may lead to distortions in the international tax consensus
as well as the trade and investment environment," they added.
Write to Andrea Thomas at andrea.thomas@wsj.com
(END) Dow Jones Newswires
December 11, 2017 12:10 ET (17:10 GMT)
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