U.S., EU Experts to Review Tax Reform’s ‘Unintended Consequences’

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By Joe Kirwin

U.S. Treasury Secretary Steven Mnuchin has agreed to address any potential “unintended consequences” the new U.S. tax reform law might have on European Union companies, including competitive disadvantages and revenue losses from new base erosion measures.

Following a Jan. 25 meeting with French Finance Minister Bruno Le Maire at the World Economic Forum in Davos, Switzerland, a French diplomat told Bloomberg Tax that Mnuchin agreed that “experts should discuss” EU complaints “in detail, with practical examples, and then consider how to address them. This will now take place.”

The French diplomat said EU concerns that the tax law contains illegal export subsidies and is discriminatory haven’t changed. “We will be attentive to results on the ground, and the issues remain numerous and complex,” the diplomat said.

Bulgaria Poses Questions

The meeting with Mnuchin came as the 28 EU member nations continue to debate how to respond to the U.S. over concerns that the new tax act ( Pub. L. No. 115-97) violates not only World Trade Organization rules but also bilateral double taxation treaties and Organization for Economic Cooperation and Development base erosion and profit shifting reforms.

Based on a confidential document obtained by Bloomberg Tax, EU presidency holder Bulgaria called on EU member states to respond to the following four questions:

  •  “How is the U.S. tax reform likely to impact on your national economy and double taxation treaties, and which elements of the U.S. tax reform are of most concern?”;
  •  Should a “common reaction,” such as a letter by Bulgaria on behalf of the 28 member nations, “be envisaged at the level of the EU in reaction to these developments?”;
  •  “How do you assess their impact on international tax reform, notably through the OECD and G-20 strands, and to what extent should the EU in this respect speak with one voice?”; and
  •  “Should the EU consider changing its tax policy strategy (notably in respect of EU Value-Added Tax and corporate income taxation) in reaction to the U.S. tax reform with a view to preserving its competitiveness?”

According to EU officials, tax experts from EU member nations addressed the Bulgarian questions at a Jan. 17 meeting, and will take them up again Feb. 28.

“The discussions were general,” an EU diplomat, who took part in the Jan. 17 meeting, told Bloomberg Tax on the condition of anonymity. “There is a lot of concern not only on the substance of complaints. There was also a consensus that the European Commission should pursue aspects of the reform that include trade law violations, as it has the legal mandate to represent all EU member states on trade issues at the WTO.”

The EU diplomat also said there is dissatisfaction among smaller EU member nations that France, Germany, Italy, Spain, and the U.K. have pursued their complaints with Mnuchin apart from the other 21 EU countries. The five EU countries wrote a letter in December to Mnuchin outlining their concerns.

No VAT Change

Joachim Englisch, a tax law professor at the University of Muenster, told Bloomberg Tax in a Jan. 26 email it would be a mistake for the EU to consider VAT law changes to counter negative competitive aspects of the U.S. tax reform. However, he said the EU should challenge the foreign-derived intangible income regime that imposes a 13.125 percent effective tax rate on excess returns earned directly by a U.S. company from foreign sales, including licenses, leases or services.

“This is a clear export subsidy,” Englisch said. He added that EU member nations also should adopt withholding taxes on royalties paid to entities in non-EU member states when they are benefiting from a preferential regime as a counter-measure.

“If that is not feasible, member states should be given more flexibility in deviating from” Action 5 of the Organization for Economic Cooperation and Development’s Action 5 on patent boxes, Englisch said.

As for the EU speaking with one voice in challenging the U.S. at the OECD, Englisch said a unified reaction would be preferable, but “it will be difficult given the diversity of tax policy positions in the EU.”

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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