Finance ministers from five big EU states have issued a warning to the Trump administration over its planned reform of corporation tax rules, saying the plan risked discriminating against foreign companies.
In a letter to the US Treasury Secretary, Steven Mnuchin, the finance ministers of France, Germany, Italy, Spain, and the UK said some of the bill’s measures would "contravene" the rules of the World Trade Organisation’s principles as well as double taxation resolutions.
Irish companies that are subsidiaries of US businesses could face significantly higher costs if some of the proposals in the US Congress become law.
The Irish Tax Institute said "the high level of inter-company trade between Ireland and the US would mean the proposed changes could have an impact on future business models".
The letter from the European finance ministers criticises one proposal in the House of Representatives tax reform bill – a 20% excise tax that the letter says "would impact on genuine commercial arrangements".
The proposed excise rate would apply even where a US company imports products from its own overseas factory back into the US.
And as it would apply only to foreign goods and services imported into the US, it "could discriminate in a measure that would be at odds with international rules embodied in the World Trade Organisation (WTO).
The minsters say that "almost half of transatlantic trade is inter company trade", and the proposed excise tax "risks seriously hampering genuine trade and investment flows between our two economies, which remain a central artery of the world economy".
This tax would also be "inconsistent with existing double taxation agreements" because it would impose a tax on the profits of a non-US resident company that does not have a US permanent establishment, they added.
Another provision in the bill, intended to limit the erosion of the US tax base, would, the minsters claim, hurt international banks and insurers doing business in the US because cross-border intra-group financial transactions would be treated as non-deductible for tax purposes and subject to a 10% tax.
This again would discriminate against foreign owned banks and insurers operating in the US, who could potentially be taxed on capital movements – even where such intra-group payments were required to comply with existing US regulatory obligations.
The letter also criticises a US Senate bill provision (known at GILTI), which provides for a preferential tax rate of 12.5% on "foreign derived intangible income".
The European minsters say this would amount to a subsidy on exports, again arguing it runs afoul of WTO regulations on illegal export subsidies.
The minsters also argue that such a regime would benefit income from Intellectual Property Assets that are not directly linked to R&D activity, contravening the so called "nexus" approach in the OECD BEPS process.
The ministers letter appeals to the US not to take unilateral action, but to work within the framework of the OECD.
It says "The OECD and the BEPS Inclusive Framework are the relevant forums for working on the evolution of international tax principles on a multilateral basis. Such dialogue ensures consistency, which is crucial for states and businesses".
This is somewhat ironic, as the same signatories - with the exception of the British - backed a French plan for a digital turnover tax, launched at an ECOFIN meeting in Estonia in September.
That plan called for a tax on digital services based on where sales were made, not where the company was headquartered for tax purposes.
Ireland opposed the measure, arguing , among other things, that such a move is best made within the OECD framework – which includes the United States – as it was unlikely to work without US backing.
The states behind the move want the EU to push ahead and legislate the measure as a way of putting pressure on the US and the OECD to come up with a measure of similar international effect.