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By Joe Kirwin
The European Union has tasked the OECD’s forum on harmful tax practices with reviewing U.S. tax reform, the latest step in the bloc’s scrutiny of the new law.
The EU wants the OECD to conduct a “fast-track” review of the U.S. tax changes, following February discussions among EU finance ministers on how to react to the law, and whether to mount retaliatory measures in the World Trade Organization, an EU diplomat told Bloomberg Tax.
The U.S. cut its corporate tax rate to 21 percent from 35 percent in the 2017 tax act ( Pub. L. No. 115-97). The EU has been monitoring the situation for months, and has warned that several provisions—like a new base erosion and anti-abuse tax—may break international trade rules.
After discussion about provisions, including the the base erosion and anti-abuse tax (BEAT) and the deduction for foreign derived intangible income (FDII), “it was decided to request a fast-track review by the OECD Forum for Harmful Taxation,” an EU diplomat told Bloomberg Tax March 7. The decision was made Feb. 28, the EU diplomat said.
The BEAT provision is an additional tax on corporations with average annual gross receipts of more than $500 million for the last three years that make base-eroding payments of 3 percent or more of their deductible expenses, or 2 percent for certain banks and securities dealers. Foreign-derived intangible income receives a deduction under the law, and is taxed at a rate of 13.125 percent.
EU experts say the BEAT may be incompatible with the OECD Model Tax Convention’s non-discrimination Article 24, according to a document drawn up by Bulgaria, which holds the rotating EU presidency. The document was obtained by Bloomberg Tax.
“This is because the BEAT would in effect only apply to payments to foreign-related parties and would not apply to comparable payments to U.S. related parties,” the document said. “It could be further studied whether the BEAT would impact on genuine commercial arrangements that pose only a minimal risk to the U.S. tax base.”
The FDII deduction works alongside the law’s requirement that U.S. shareholders of controlled foreign corporations pay tax on their global intangible low-taxed income (GILTI), This raises the question “as to whether this complies with international standards such as Base Erosion Profit Shifting Action 5,” the document said.
The call for an OECD review follows an EU survey of bloc-based companies to determine the impact that the U.S. tax reform will have on their businesses. The survey is the first step the commission had to take in order to file a WTO complaint.
The provisions highlighted by the EU are also areas currently being reviewed by the U.S. Treasury Department. The House Ways and Means Committee is also fine-tuning the tax law’s international provisions.
“It is clear that the US Treasury is limited in the changes that it can make through implementing legislation and cannot undo the law that has been passed by Congress,” the document said.
The decision to request an OECD review was indication of the EU taking a “slow and steady” approach in addressing issues related to BEAT, FDII, and GILTI, Howard Liebman, a Brussels-based tax partner with Jones Day and the president of the American Chamber of Commerce in Belgium, told Bloomberg Tax.
“On the surface, they can be somewhat justified on the basis of BEPS but upon more digging, it is clear they create technical issues and perhaps some disparities,” Liebman added.
The OECD Forum on Harmful Tax Practices was launched more than 15 years ago after it issued a report on harmful tax competition. The forum’s mandate has been to monitor and review tax practices of jurisdictions around the world focusing on the features of preferential tax regimes. Since 2015, the reviews are done on the basis of compliance with the OECD base erosion and profit shifting reforms.
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