European Finance Chiefs Hit Out at U.S. Tax Plans -- 2nd Update

By Andrea Thomas Features Dow Jones Newswires

Europe's five largest economies on Monday warned the U.S. its planned corporate tax reform could violate the country's double-taxation treaties and breach world trade rules.

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In a letter sent to Treasury Secretary Steven Mnuchin, and seen by The Wall Street Journal, the countries' finance ministers said that while tax legislation was an essential pillar of a state's sovereignty, countries should respect international rules.

"It is important that the U.S. government's rights over domestic tax policy be exercised in a way that adheres with international obligations to which it has signed-up," the ministers wrote in the letter. Some provisions of the Senate and House bills, they added, "could contravene the U.S.'s double taxation treaties and may risk having a major distortive impact on international trade."

Their letter comes after the Senate earlier this month passed a tax overhaul plan that would include about $1.4 trillion in tax cuts, a cut in the corporate rate to 20% from 35%, reshape international business tax rules and temporarily lower individual taxes.

Europeans have repeatedly clashed with the U.S. over trade issues since President Donald Trump took office nearly one year ago on an "America First" platform. While Mr. Trump has pledged to reverse abuses of free trade by what he paints as unscrupulous partners, allies have warned against what they see as protectionist tendencies.

The ministers' letter, sent on Monday, echoes concerns among European businesses that various aspects of the planned U.S. tax-reform bills might be designed to offer American companies an edge. The U.S. is the European Union's single most important trade and investment partner.

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Last week, the BDI Federation of German Industry, Germany's most influential business lobby, warned some provisions of the bills ostensibly aimed at curbing corporate tax avoidance had "clearly a protectionist character."

"Companies in Germany and Europe face massive damage," Joachim Lang, BDI managing director, warned last Monday.

The ministers took specific issue with provisions in both the House and Senate versions of the tax bill, including proposed excise-tax payments to foreign-affiliated firms in the House version. They also cited a "base erosion" provision in the Senate version that would add tax to cross-border financial transactions.

Those provisions could impact a host of foreign manufacturers that sell their wares in the U.S., like Japanese auto makers or European pharmaceuticals companies.

"The excise-tax and base-erosion-tax provisions appear to have the greatest impact on certain sectors, particularly those with heavy sales in the U.S. but relying on integrated supply chains," said Albert Liguori, a tax expert at tax advisory firm Alvarez & Marsal Taxand LLC.

Mr. Liguori said software makers like SAP SE, based in Germany, could also get hit. An SAP spokesman declined to comment on potential impact of the U.S. tax plans. The company's finance chief, Luka Mucic, last month said in an interview that he wanted to avoid speculation. "There are too many moving parts," he said.

Even without those provisions, the reform would leave U.S. businesses facing lower domestic-tax rates than some of their European peers, putting governments under pressure to reciprocate.

Business is particularly concerned in Germany, where prospects for corporate tax cuts dropped after the collapse of coalition talks involving Chancellor Angela Merkel and the pro-business Free Democratic Party last month.

For years, European governments and the U.S. have sought to combat beggar-thy-neighbor corporate tax policies, agreeing on a series of multilateral initiatives against tax-base erosion and practices by companies to shift their profits to low-tax jurisdiction -- initiatives which the signatories of Monday's letter now fear could be in danger.

In their letter, Germany's Peter Altmaier, France's Bruno Le Maire, Italy's Pier Carlo Padoan, Spain's Cristóbal Montoro and Philip Hammond of the U.K. contended that several provisions included in the two U.S. tax bills and aimed at combating an array of corporate tax-avoidance practices were protectionist in nature.

A provision of the House bill for a 20% excise tax on payments to foreign-affiliated companies, the Europeans warned, would discriminate against non-U.S. businesses operating in the country, contravene World Trade Organization rules and breach double-taxation agreements.

Likewise, the proposed "base erosion and anti-abuse tax provision" contained in the Senate bill could harm international banking and insurance businesses because it would treat cross-border financial transactions between a company and a subsidiary as nondeductible, subjecting it to a 10% tax, the ministers warned.

The finance chiefs also said a proposed preferential regime for some types of foreign incomes, another provision of the Senate bill, could be seen as an export subsidy banned under international trade rules.

In their letter, they called on the U.S. to see the benefits of continued close international-tax cooperation.

"We explicitly welcome U.S. action in the fight against base erosion and profit shifting. However, we have strong concerns if this is done via measures that are not targeted on abusive arrangements as this would impact on genuine business activities," they said.

"This may lead to distortions in the international tax consensus as well as the trade and investment environment," they added.

Write to Andrea Thomas at andrea.thomas@wsj.com

(END) Dow Jones Newswires

December 11, 2017 12:10 ET (17:10 GMT)