U.S. Treasury angered by European Tax Probes

New interpretations create disturbing international tax policy precedents, says U.S. Treasury Secretary By Michael Cohn www.accountingtoday.com

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The European Commission has been probing special tax deals that U.S.-based multinational companies have set up with European countries with low tax rates such as Ireland, the Netherlands and Luxembourg. The Commission has also threatened to investigate Google’s parent company Alphabet’s arrangement with the United Kingdom.

U.S. Treasury Secretary Jacob Lew has fired off a letter to officials in the European Union complaining about these tax investigations of U.S.-based multinationals like Apple, McDonald’s, Amazon and Starbucks. In the letter he urges them to reconsider their approach; acknowledging that the United States share the EC’s strong interest in preventing major multinational companies from shifting income from higher-tax countries to low- or no-tax jurisdictions. 

However, Lew said the U.S. is disappointed that the European Commission’s Directorate-General for Competition, DG COMP, appears to be pursuing enforcement actions that are inconsistent with, and likely contrary, to the G-20 and the OECD Base Erosion and Profit Shifting (BEPS) project.

He added that the DG COMP has sought to impose penalties retroactively based on an expansive interpretation of state aid rules, adopting an entirely new legal theory and applying it in a broad and sweeping manner. This raises serious concerns about fundamental fairness and the finality of tax rulings throughout the entire European Union.

Lew also argued that the Directorate-General appears to be targeting U.S. companies disproportionately and that public reports suggest that DG COMP is seeking billions of dollars in penalties from U.S. firms-far more than what it is seeking from non-U.S. companies.

Lew also contended that DG COMP’s approach appears to target, in at least several of its investigations, income that EU member states have no right to tax under well-established international tax standards. U.S. multinationals generally do not conduct the cutting-edge research and development that creates substantial value in the European Union, and as a result, comparatively little of their income is attributable to their European operations.

The U.S. system will only tax this income upon repatriation, and many U.S. firms are choosing to defer paying tax liabilities by keeping income overseas in low-tax jurisdictions. This problem, however, does not give Member States the legal right to tax this income. Doing so would directly harm U.S. taxpayers. When U.S. companies repatriate revenue- as tax reform proposals from both U.S. political parties would require them to do within a fixed timeframe any assessments paid to Member States could be eligible for foreign tax credits. This loss of revenue would impose a direct cost on American taxpayers.

Lew further said the Directorate-General’s approach could undermine U.S. tax treaties with EU member states. 

Last month, Robert Stack, the U.S. Treasury’s deputy assistant secretary for international tax affairs, met with EU officials and relayed his concerns about the probes.

“While in the Starbucks case, the sums were relatively modest, 20 million to 30 million euros, they may be substantially larger, perhaps in the billions in other cases,” Stack told Bloomberg News. “The retroactive application of these new approaches calls into question the basic fairness of these proceedings.”

Lawmakers in the U.S. have also begun sounding the alarm about the probes. Last month, a group of senators from the Senate Finance Committee wrote to Lew warning the European Union’s state aid investigations could lead to retroactive taxation on multinational enterprises and have an adverse impact on U.S.-based companies.