EU to Pursue U.S. Tax Law Complaints With Mnuchin in Davos

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By Joe Kirwin

European Union finance ministers will pursue complaints about the new U.S. tax law at a Jan. 25 World Economic Forum meeting in Davos, Switzerland, with U.S. Treasury Secretary Steven Mnuchin, despite warnings from some tax specialists that such a move is premature.

A delegation of EU finance chiefs, including French Finance Minister Bruno Le Maire, will register their month-old concerns that the tax law contains illegal export subsidies and other anti-tax avoidance measures that are discriminatory and violate bilateral tax treaties.

European tax specialists, including Johannes Becker, a professor at the University of Muenster in Germany, warned that while there are negative elements of the tax law for EU nations, there are positive components that should complement EU efforts to reduce profit shifting and tax avoidance.

“We need the U.S. to help in the fight against base erosion and tax avoidance,” Becker told Bloomberg Tax after speaking at a conference sponsored by the Brussels-based Bruegel Institute. “It would be a big mistake to take prompt action.”

‘Sit Tight’

Stef van Weeghel, a professor of tax law at the University of Amsterdam and a partner with PricewaterhouseCoopers in the Netherlands, concurred during his comments at the Bruegel conference.

“At this point in time, I believe it is better to sit tight and monitor the overall impact of the U.S. tax reform,” van Weeghel said. “There are definitely some discriminatory aspects, This is especially the case with the base erosion and anti-tax avoidance (BEAT) measures that restrict deductions of losses as a way to encourage companies to bring operations back to the U.S.”

“But the overall thrust is hard to gauge at this point,” van Weeghel added.

Becker and van Weeghel both also warned the EU against adopting a temporary equalization tax targeted at large internet companies included in digital taxation legislation set to be proposed by the European Commission in March.

“This legislation will be basically a tax on large U.S. internet companies and will definitely give the U.S. an excuse to ignore EU concerns about the U.S. tax reform,” Becker said. “It could trigger a tax war.”

Political Pressures Remain

Since the U.S. tax law was enacted in late December, some specialists, including Becker and van Weeghel, suggested certain measures in the law could ease EU concerns that large internet companies aren’t paying their fair share of taxes. They were referring to the tax on global intangible low-taxed income, as well as provisions designed to encourage repatriation of overseas profits by U.S. multinationals.

Dmitri Jegorov, under-secretary for taxation in Estonia, said the issue of large internet companies not paying tax won’t go away. Jegorov coordinated the digital taxation negotiations in the Council of Economic and Financial Affairs during the recently concluded Estonian presidency.

“The political concern is that these companies are not paying tax where profits are earned,” Jegorov said. “European governments want tax income on some of those profits.” He said he didn’t believe it would solve European Commission state aid cases relating to sweetheart tax rulings.

Jegorov expressed concerns that the upcoming EU digital taxation legislation could contain temporary provisions aimed at U.S. tech giants Facebook Inc., Google Inc., Apple Inc., and Amazon.com Inc.

“There is now talk that the tax proposal will be aimed only at advertising and at companies with a 750-million euros threshold,” Jegorov said. “This would be a mistake. The whole point of the digital taxation proposal is to come up with a new tax framework that covers all digital companies.”

Follow Up on December Warnings

According to an EU French diplomat with close ties to Le Maire, who spoke to Bloomberg Tax on the condition of anonymity, EU finance ministers from France, Spain, Italy, and Germany, along with European Taxation Commissioner Pierre Moscovici, discussed how to follow up on their earlier complaints about the U.S. tax law during a dinner on Jan. 22.

EU finance ministers in early December sent a letter to Mnuchin outlining their concerns and insisting that parts of the U.S. tax law could undermine transatlantic trade and harm the overall global economy. The European Commission followed up later in December with its own letter underlining the issues.

According to EU diplomats, Mnuchin’s recent reply tried to “allay and address” EU concerns. “This issue of U.S. tax reform will be raised during a meeting with Mnuchin on Thursday in Davos,” the French official said.

WTO Challenge?

When the U.S. tax reform legislation was approved without any changes to take into consideration EU complaints, the European Commission issued a Dec. 20 statement insisting that “all options are on the table,” including a possible World Trade Organization complaint over alleged illegal export subsidies. A European Commission official, speaking to Bloomberg Tax on Jan. 24, said the EU executive body’s position on the U.S. tax law hasn’t changed since December.

The EU previously clashed with the U.S. over WTO issues. In the 1990s, the EU successfully challenged the U.S. in the WTO over illegal export subsidies and won the right to impose billions of dollars of trade sanctions.

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

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