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Sept. 19 — European Competition Commissioner Margrethe Vestager's three-day trip to the U.S. to smooth over cross-Atlantic frustrations over investigations into the tax practices of U.S. companies like Apple Inc. doesn't appear to be bringing the sides closer together.
Hours after Vestager spoke to reporters in Washington, a high-ranking official with the U.S. Treasury Department delivered yet another broadside to the European Union, questioning its ability to enforce complex international tax rules and claiming that discussions between the commission and the U.S. have produced little understanding.
“European Commission members who are charged with enforcing competition law applying the arm's-length standard is like bringing in a plumber to set up your electrical system,” said Robert Stack, deputy assistant secretary for international tax affairs with Treasury, speaking at a conference at an International Bar Association conference in Washington. “It might work, but I doubt it.”
In August, the European Commission shocked the tax world after unveiling a decision ordering Ireland to recover 13 billion euros ($14.5 billion) from Apple, the California-based computer and telecommunications giant, in what it said was impermissible state aid through rulings that allowed for lax tax treatment of billions of dollars in profit (169 DTR I-2, 8/31/16).
Meetings with congressional leaders also appeared to produce little agreement.
“Though our meetings were cordial, the Commissioner failed to build an effective case for this highly politicized ruling rooted in an erroneous interpretation of law, underscoring the need for additional action in international courts,” Sen. Orrin Hatch (R-Utah) said in a released statement. Hatch also accused the commission of “running roughshod” over Apple by applying retroactive tax penalties.
Hatch also accused the commission of failing to work with allies to “strengthen the international law framework.”
The decision was not brought by the EU's tax officials, but rather by its commission charged with enforcing its rules to ensure a level economic playing field. Stack claimed that distinction was producing results not in line with international norms and transfer pricing principles, including the arm's-length standard, the global benchmark for measuring cross-border transactions within companies.
“Is this the way to do international tax reform, moving the debate forward—by going in, changing the rules after the game, putting outsized penalties that have nothing to do with the functions, assets and risks in the countries we're looking at,” Stack said. “And, oh, by the way, along with that, inventing an arm's-length principle embodied in the penumbras of the EU treaties, with respect to equal rights.”
The commission's decision has provoked sharp rebuttals from Treasury, which preemptively released a white paper on the issue in August claiming that the European Commission was usurping its authority (165 DTR G-5, 8/25/16).
Stack said Treasury is standing by its arguments made in the white paper, especially its case against the retroactive application of penalties.
“We stand by our paper, we're very proud of it, we'll watch where it goes from here,” Stack said. “Read it. We have the better argument.”
Despite Vestager's trip to the U.S., Stack expressed no optimism about producing more understanding.
“The discussions with the commission have been very much a ships in the night affair,” Stack said. “They insist this is a long-standing principle, and nothing's changed. We'll have to watch.”
He did note, however, that the U.S. has held back on arguments that the commission was singling out U.S. companies—although he said U.S. companies may be attracting scrutiny due to the more “transparent” U.S. political system, as well as more political and media focus on American companies, including McDonald's Corp.
“We don't know, do we, how many other companies are using the McDonald's structure,” he said. “There's a circularity to the question of, isn't it just the U.S. companies that do that, because they're the companies that have been found, because they're the companies that have been made public?”
He also noted that the Apple decision didn't rely on a transfer pricing issue, but rather on how Ireland allowed Apple to attribute profits to a non-taxable branch. He accused the commission of nixing its structure without supplying an affirmative framework.
“All countries have been struggling with how you attribute profits to a branch. The OECD has certainly struggled with it,” Stack said. “But now we can ask the EU commission, what is their standard for attributing profits to a branch? Not clear.”
Whatever its logic, the commission is targeting companies it deems to have effective tax rates that are too low.
“It appears to be, if we don't like the effective foreign rate of the company we're investigating,” Stack said. “And I just ask us all, to challenge the intellectual basis of that particular line of thought.”
During a 45-minute news conference with reporters at the EU's office in Washington, Vestager defended the commission's investigations as a fair application of its long-standing treaty rules against state aid to create a competitive advantage for a single company or enterprise.
She also acknowledged the differences in outlooks between the U.S. and Europe.
“We have a different history in the U.S. and Europe, and we do not always see things in the same way, to put it mildly,” Vestager said. “Both unions are built on the rule of law.”
She insisted that she wasn't trying to become Europe's tax administrator.
“I never, ever dreamt about being a minister of taxation, just to make that perfectly clear,” Vestager said. “We are not now a tax authority. We enforce competition rules. We do not look into every tax ruling. We take examples, and we react if we then get input that gives us concerns.”
The commission has reviewed more than 1,000 tax rulings from EU member states—either voluntarily submitted, or obtained through the so-called LuxLeaks disclosures—and Vestager said the majority of those were “fine,” requiring no further action.
She also reiterated that U.S. companies weren't being targeted, noting that in the past 15 years, only 2 percent of the state-aid cases requiring the recovery of funds have involved U.S. firms.
“We have no national bias,” she said.
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