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EU Finance Ministers Fire Warning Shot on U.S. Tax Reform

Posted on December 12, 2017 by Stephanie Soong Johnston

Finance ministers from the five biggest EU economies have sent a joint letter warning U.S. Treasury Secretary Steven Mnuchin that specific proposals in the House and Senate tax reform bills could violate trade rules and U.S. tax treaties with other countries and distort international tax consensus.

In a joint letter sent December 11, Finance Ministers Peter Altmaier of Germany, Philip Hammond of the U.K., Bruno Le Maire of France, Cristobal Montoro Romero of Spain, and Pier Carlo Padoan of Italy discussed three proposed measures in the House and Senate tax reform bills that “cause significant concerns from a European perspective.”

The ministers criticized the excise tax proposal in the House bill, which calls for a 20 percent excise tax on some payments made by U.S. corporations to foreign affiliated corporations unless the related foreign company opts to treat the payments as income. Since the measure could target genuine commercial arrangements involving payments made for foreign goods and services, the proposal could discriminate in a way that would violate WTO rules, the letter says.

Additionally, the proposed excise tax would be out of line with the United States’ double tax agreements with other countries because it would impose a tax on the profits of a non-U.S. resident company that lacks a permanent establishment in the U.S., the letter says.

The base erosion and antiabuse tax (BEAT) in the Senate bill would also pose some risks, according to the letter. Specifically, the BEAT would have a negative effect on genuine commercial arrangements involving payments to foreign corporations that are taxed at an equal or higher rate than the U.S., the letter says.

The BEAT could have an especially harmful effect on the international banking and insurance sector, and lead to significant levies and harmful distortions in the global financial markets, the letter added.

The finance ministers also criticized the global intangible low-taxed income (GILTI) tax in the Senate bill, calling it a preferential regime that could be challenged as an illegal export subsidy under WTO rules and arguing that its design is “notably different” from other accepted intellectual property regimes because it provides a deduction for income arising from intangible assets other than patents and copyright software.

The GILTI provision would not be in line with the global consensus under the OECD’s base erosion and profit-shifting project, since it deviates from the agreed nexus approach under action 5 (harmful tax practices) by providing benefits to income from IP assets that have no direct connection with research and development activity, according to the ministers.

The finance ministers urged the U.S. to carry out its tax reform efforts in line with its international tax obligations. “In recent years, we have experienced an outstanding level of international cooperation,” the ministers wrote, adding that the OECD and its BEPS inclusive framework are the appropriate fora for reforming global tax principles on a multilateral basis. “With the BEPS compromise, we have opened up a new chapter of international cooperation in tax matters and fair taxation worldwide."

The letter comes shortly after the Economic and Financial Affairs Council meeting on December 5, where EU finance ministers voiced their concerns about U.S. tax reform proposals that seem to violate WTO rules.

According to French finance ministry sources, the five ministers sent the letter without waiting for input from the other EU member states because doing so would have taken too long. The sources also said that the letter would send a strong political message because it came from the United States’ five biggest EU partners, and that the governments are not looking at retaliatory measures at the moment because they were confident that Treasury will listen to their concerns.

A Treasury spokesperson said, “We appreciate the views of the finance ministers. We are closely working with Congress as they finalize the legislation through the conference process.”

Several other U.S. government officials, including Senate Finance Committee Chair Orrin G. Hatch, R-Utah, House Ways and Means Committee Chair Kevin Brady, R-Texas, and Senate Finance Committee ranking minority member Ron Wyden, D-Ore., were also copied on the letter.

“Ranking Member Wyden continues to be against the Republican tax plan,” a spokesperson for Wyden said. “Republicans have not included him in any substantive conversations on tax reform.” Representatives for Hatch and Brady did not respond to Tax Analysts’ requests for comment by press time.

W. Gavin Ekins, a research economist with the Tax Foundation, noted that the letter was not only sent to all the major players in the House and Senate who have some influence on the tax reform process, but also appeared to warn the U.S. exactly how the five EU countries plan to push back on each of the proposals mentioned because they lie outside the scope of international norms.

The ministers “are correct that the House and Senate bills are using techniques that are not conventional with the rest of the world,” Ekins said. The overarching message that the finance ministers appear to be sending is that countries have gone to great lengths through the OECD and the BEPS project to create a set of norms in the international community regarding tax, he said. “'You are flat-out flaunting these norms, and we don’t like it.’ That’s basically what they’re trying to tell Treasury,” Ekins said.

However, Douglas S. Stransky of Sullivan & Worcester LLP pointed out the irony of the EU’s position in the letter. “I find it laughable that the same ministers who have hammered away at U.S.-based multinationals over not paying their fair share are now crying when it looks like the attempts by the U.S. to reduce incidences of BEPS may actually have an indirect impact on these economies,” he said. “These are the same ministers who have time after time accused U.S.-based multinationals of base erosion and profit shifting in their countries.”

The letter represents growing concerns abroad about the international tax provisions in both the House and Senate bills. For example, Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration, on December 7 had warned that the GILTI, the Senate’s version of a patent box, is unlikely to be in line with the standards set out in action 5 of the BEPS project.

Nevertheless, the missive “is interesting on a variety of fronts,” John L. Harrington of Dentons said, pointing to the fact that the letter was jointly signed by the finance ministers of the five biggest EU members who are driving the BEPS agenda. “That should be viewed as a warning:  they are coordinating now and will in the future as well if enacted tax legislation continues to raise what the letter describes as ‘concerns,’” he said.

The letter also explains the finance ministers’ desire that enacted tax reform legislation be consistent with the BEPS project, “a project that preceded the Trump administration and over which Congress played at most an oversight role, but which the five countries have a real interest in preserving and building on,” Harrington added.

Elodie Lamer contributed to this report.