By Andrea Thomas in Berlin and Todd Buell in Frankfurt
The Trump administration's planned overhaul of U.S. corporate
tax law came under attack Monday from finance ministers of Europe's
five largest economies, voicing the growing anxiety among foreign
executives and officials that the proposals would give American
firms unfair tax advantages.
In a letter sent to Treasury Secretary Steven Mnuchin, the
finance ministers said the U.S. overhaul contains protectionist
measures that could violate double-taxation treaties and breach
world trade rules. They zeroed in on several technical points that
tax experts say could have greater impact internationally than the
proposed headline corporate tax cut -- from 35% currently to 20% --
that has become the centerpiece of the initiative.
That sharp proposed cut has separately prompted business and
political leaders in many countries to assess their own prospects
for headline tax reductions to keep them competitive with the lower
American rates. The five ministers -- from France, Germany, Italy,
Spain and the U.K. -- made no reference to the headline tax rate,
however, presenting their case as an issue of multilateral
standards.
The ministers' letter said some provisions of the Senate and
House bills "could contravene the U.S.'s double-taxation treaties
and may risk having a major distortive impact on international
trade." The U.S. is the European Union's single most important
trade and investment partner.
"We appreciate the views of the finance ministers," a Treasury
spokeswoman said in response to the letter. "We are closely working
with Congress as they finalize the legislation."
In China, meanwhile, officials are putting in place a
contingency plan to combat possible consequences of the U.S. tax
overhaul, according to people with knowledge of the matter. Beijing
fears the tax changes could make the U.S. a more attractive place
to do business and, combined with expected higher U.S. interest
rates, sap investment from China.
The Senate earlier this month passed a tax overhaul plan that
would result in about $1.4 trillion in tax cuts. the proposal would
deeply reduce the corporate rate, reshape international
business-tax rules and temporarily lower individual taxes for some
individuals.
Two provisions in particular have prompted pushback from foreign
executives, overseas trade bodies and politicians. One, contained
in the House version, proposes a 20% excise tax on U.S.-based
affiliates of foreign firms. Another provision, in the Senate
version, attempts to shore up "base erosion" -- or the decrease in
a country's tax base when firms shift profits to jurisdictions with
lower taxes. Critics say a proposal to impose higher taxes on many
cross-border financial transactions would hit foreign firms
hardest.
All those provisions could have an impact on a host of foreign
manufacturers that sell their wares in the U.S., such as Japanese
auto makers or German 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 New York-based tax advisory
firm Alvarez & Marsal Taxand LLC.
Last week, the BDI Federation of German Industry, Germany's most
influential business lobby, said some provisions of the bills had
"clearly a protectionist character."
"Companies in Germany and Europe face massive damage," Joachim
Lang, BDI managing director, warned last week.
Foreign car makers, which have big manufacturing facilities in
the U.S., are among those potentially most vulnerable to the
changes. Daimler AG, which this year announced a $1-billion
investment in its Alabama manufacturing operations, said it
supported "the overall concept of tax reform" but was waiting for
the final proposal from Congress before passing judgment.
European plane maker Airbus SE, which assembles some of its
planes in Alabama, said it would wait for the outcome of
congressional efforts to reconcile differences between the House
and Senate proposals before commenting on the tax plan. But it said
it opposed any tax revisions that would discourage foreign direct
investment in the U.S. or penalize companies doing business in
there.
Mr. Liguori, the tax adviser, said software makers like SAP SE,
based in Germany, could also get hit. An SAP spokesman declined to
comment on the potential impact of the U.S. tax plans. The
company's finance chief, Luka Mucic, last month said he wanted to
avoid speculation. "There are too many moving parts," he said.
Even without the provisions the finance ministers attacked as
protectionist, U.S. tax changes could leave American businesses
carrying lower domestic-tax rates than their foreign peers, putting
other governments under pressure to reciprocate.
Businesses are particularly concerned in Germany, where
prospects for corporate tax cuts faded after the collapse of
coalition talks involving Chancellor Angela Merkel and the
pro-business Free Democratic Party last month. Germany's average
effective corporate tax rate is roughly 30%, compared with 19% in
the U.K. and 12.5% in Ireland.
Japan's government, which is already cutting its main corporate
rate to 29.74%, is studying cutting the effective tax rate to as
low as 20% for companies that follow certain pro-growth
policies.
The tax debate in Japan "responds to developments in the U.S.
and Europe and is desirable from the viewpoint of competitiveness,"
said Takeshi Niinami, chief executive of beverage maker Suntory
Holdings. Suntory bought U.S. beverage maker Beam in 2014 for $16
billion.
The European critique also reflects a broader argument pitching
the Trump administration against traditional U.S. allies: Whether
countries should unite to combat perceived international ills --
from tax avoidance to terrorism -- or tackle those goals
unilaterally.
Since 2012, the Group of 20 largest world economies and the
Organization for Economic Cooperation and Development have pursued
initiatives to ostracize tax havens and stop big companies from
shifting ever more of their profits to low-tax jurisdictions.
European governments now see that multilateral effort under threat
from the U.S. tax reform.
--Paul Hannon in London, Richard Rubin in Washington, Megumi
Fujikawa in Tokyo and Lingling Wei in Beijing contributed to this
article.
Write to Andrea Thomas at andrea.thomas@wsj.com and Todd Buell
at todd.buell@wsj.com
(END) Dow Jones Newswires
December 11, 2017 17:31 ET (22:31 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.