U.S. Tax Plan Draws Attacks and Prompts Calls for Cuts Abroad -- 4th Update

By Andrea Thomas in Berlin and Todd Buell in FrankfurtFeaturesDow Jones Newswires

The Trump administration's planned overhaul of U.S. corporate tax law came under attack Monday from finance ministers of Europe's five largest economies, voicing the growing anxiety among foreign executives and officials that the proposals would give American firms unfair tax advantages.

In a letter sent to Treasury Secretary Steven Mnuchin, the finance ministers said the U.S. overhaul contains protectionist measures that could violate double-taxation treaties and breach world trade rules. They zeroed in on several technical points that tax experts say could have greater impact internationally than the proposed headline corporate tax cut -- from 35% currently to 20% -- that has become the centerpiece of the initiative.

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That sharp proposed cut has separately prompted business and political leaders in many countries to assess their own prospects for headline tax reductions to keep them competitive with the lower American rates. The five ministers -- from France, Germany, Italy, Spain and the U.K. -- made no reference to the headline tax rate, however, presenting their case as an issue of multilateral standards.

The ministers' letter said some provisions of the Senate and House bills "could contravene the U.S.'s double-taxation treaties and may risk having a major distortive impact on international trade." The U.S. is the European Union's single most important trade and investment partner.

"We appreciate the views of the finance ministers," a Treasury spokeswoman said in response to the letter. "We are closely working with Congress as they finalize the legislation."

In China, meanwhile, officials are putting in place a contingency plan to combat possible consequences of the U.S. tax overhaul, according to people with knowledge of the matter. Beijing fears the tax changes could make the U.S. a more attractive place to do business and, combined with expected higher U.S. interest rates, sap investment from China.

The Senate earlier this month passed a tax overhaul plan that would result in about $1.4 trillion in tax cuts. The proposal would deeply reduce the corporate rate, reshape international business-tax rules and temporarily lower individual taxes for some individuals.

Two provisions in particular have prompted pushback from foreign executives, overseas trade bodies and politicians. One, contained in the House version, proposes a 20% excise tax on U.S.-based affiliates of foreign firms. Another provision, in the Senate version, attempts to shore up "base erosion" -- or the decrease in a country's tax base when firms shift profits to jurisdictions with lower taxes. Critics say a proposal to raise taxes on many cross-border financial transactions would hit foreign firms hardest.

All those provisions could have an impact on a host of foreign manufacturers that sell their wares in the U.S., such as Japanese auto makers or German 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 New York-based tax advisory firm Alvarez & Marsal Taxand LLC.

Last week, the BDI Federation of German Industry, Germany's most influential business lobby, said some provisions of the bills had "clearly a protectionist character."

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

Foreign car makers, which have big manufacturing facilities in the U.S., are among those potentially most vulnerable to the changes. Daimler AG, which this year announced a $1-billion investment in its Alabama manufacturing operations, said it supported "the overall concept of tax reform" but was waiting for the final proposal from Congress before passing judgment.

European plane maker Airbus SE, which assembles some of its planes in Alabama, said it would await for the outcome of congressional efforts to reconcile differences between the House and Senate proposals before commenting on the tax plan. But it said it opposed any tax revisions that would discourage foreign direct investment in the U.S. or penalize companies doing business in there.

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

Even without the provisions the finance ministers attacked as protectionist, U.S. tax changes could leave American businesses carrying lower domestic-tax rates than their foreign peers, putting other governments under pressure to reciprocate.

Businesses are particularly concerned in Germany, where prospects for corporate tax cuts faded after the collapse of coalition talks involving Chancellor Angela Merkel and the pro-business Free Democratic Party last month. Germany's average effective corporate tax rate is roughly 30%, compared with 19% in the U.K. and 12.5% in Ireland.

Japan's government, which is already cutting its main corporate rate to 29.74%, is studying cutting the effective tax rate to as low as 20% for companies that follow certain pro-growth policies.

The tax debate in Japan "responds to developments in the U.S. and Europe and is desirable from the viewpoint of competitiveness," said Takeshi Niinami, chief executive of beverage maker Suntory Holdings. Suntory bought U.S. beverage maker Beam in 2014 for $16 billion.

The Canadian economy could benefit from the Trump administration's tax-relief package if it stokes faster growth in the U.S., given how deeply integrated the two economies are. But Canada also faces risks the U.S. will become more attractive on a tax basis, an advantage that could widen should the Trump administration withdraw from the North American Free Trade Agreement.

"Canadian politicians cannot afford to keep taking our competitiveness for granted, as they have been," said Jack Mintz, head of the University of Calgary's public-policy school. According to his research, Canadian forestry, power generation, and transportation and warehousing would find themselves at the greatest disadvantage over the Trump tax changes.

The European critique of the tax proposals also reflects a broader argument pitching the Trump administration against traditional U.S. allies: Whether countries should unite to combat perceived international ills -- from tax avoidance to terrorism -- or tackle those goals unilaterally.

Since 2012, the Group of 20 largest world economies and the Organization for Economic Cooperation and Development have pursued initiatives to ostracize tax havens and stop big companies from shifting ever more of their profits to low-tax jurisdictions. European governments now see that multilateral effort under threat from the U.S. tax reform.

--Richard Rubin in Washington, Natalia Drozdiak in Brussels, Megumi Fujikawa in Tokyo, Paul Vieira in Ottawa, and Lingling Wei in Beijing contributed to this article.

Write to Andrea Thomas at andrea.thomas@wsj.com and Todd Buell at todd.buell@wsj.com

(END) Dow Jones Newswires

December 11, 2017 18:41 ET (23:41 GMT)