EU Finance Chiefs Warn of U.S. Tax Plan’s Harmful Trade Effects

Trust Bloomberg Tax's Premier International Tax offering for the news and guidance to navigate the complex tax treaty networks and business regulations.

By Joe Kirwin

Finance ministers from France, Germany, Italy, Spain, and the U.K. warned U.S. Treasury Secretary Steven Mnuchin that pending U.S. tax reform legislation risks “seriously hampering” transatlantic trade that “serves as central artery of the world economy.”

In a letter—also sent to National Economic Council Director Gary Cohn and key U.S. lawmakers—finance ministers flagged a pending excise duty in the House and Senate bills targeting multinational companies’ profit shifting.

“The inclusion of certain less conventional international tax provisions could contravene the U.S.'s double taxation treaties and may have a major distortive impact on international trade,” the letter states. The U.S. Senate passed a tax bill ( H.R. 1) early Dec. 2 and Senate Republicans are now negotiating with House members to agree on a final product, which they hope to pass by Christmas.

The European Commission has been monitoring tax reform developments since Dec. 5 amid concerns the plan will break World Trade Organization principles. The letter isn’t dated.

‘At Odds with International Rules’

The 20 percent excise tax in the current House version, which would apply to some payments to foreign affiliates, would be discriminatory because it would apply only where payments are being made for foreign goods and services, the finance ministers said. This, they said, “could discriminate in a manner that would be at odds with international rules embodied in the WTO.”

While welcoming moves to curb base erosion and shifting, the five EU finance ministers said a provision in the Senate version was “poorly targeted at erosion of the U.S. tax base” as it would penalize commercial arrangements involving payments to foreign companies because it doesn’t apply to two related domestic companies. The proposal is a tax on payments made between a U.S. company and an offshore affiliate.

“This is most evident in the financial sector where the provision appears to have the potential of being extremely harmful for international banking and insurance business, as cross-border intra-group financial transactions would be treated as non-deductible and subject to a 10% tax,” the letter said. “This may lead to significant tax charges and may harmfully distort international financial markets.”

No Worries Here

In statements sent to Bloomberg Tax Dec. 11, spokeswomen for the House Ways and Means Committee and Senate Finance Committee, the panels writing tax legislation, said lawmakers are confident the tax provisions are in compliance with international rules.

The Senate provision, sometimes known as BEAT, applies equally to foreign and domestic companies subject to U.S. tax, a spokeswoman said. “It has been studied, vetted, and is consistent with international standards, including WTO agreements,” the spokeswoman said.

A spokesperson for the Treasury Department said officials “appreciate the views of the finance ministers.”

“We are closely working with Congress as they finalize the legislation through the conference process,” the spokesperson said.

To contact the reporter on this story: Joe Kirwin in Brussels at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax