Europeans Getting Into a Lather About Proposed U.S. Tax Changes

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As befits a letter from European treasury ministers to U.S. Treasury Secretary Steven Mnuchin, the wording is couched in polite and respectful terms. The letter acknowledges the U.S. has every right to set its internal tax code, but draws attention to proposals they fear could have serious consequences for global trade.

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According to an article in The Telegraph, the letter asks the U.S. government to consider certain issues raised by a series of measures President Donald Trump has put forward that would increase the tax burden on foreign companies operating in the U.S. and distort domestic U.S. manufacturers’ behaviour.

“It is important that the US government’s rights over domestic tax policy be exercised in a way that adheres with international obligations to which it has signed up,” the letter is reported to say. “The inclusion of certain less conventional international tax provisions could contravene the US’s double taxation treaties and may risk having a major distortive impact on international trade. We would therefore like to draw your attention to some features of the proposals being discussed that cause significant concerns from a European perspective.”

The diplomatic terms mask serious worries in the treasury departments of the signatories: Britain, France, Germany, Italy and Spain. President Trump’s intention is to encourage reshoring and the return of American jobs perceived to have been lost in the process of globalization.

But the fear is the proposals would seriously hamper trade and investment — not just between the U.S. and Europe but also between the U.S. and the rest of the world, without achieving the president’s desired outcome.

According to the article, one of the issues is a proposed cut in corporation tax from 20% to 12.5%, specifically for income derived from exported goods. The treasury ministers (not unreasonably as that’s clearly what it is designed to do) believe the tax cut would violate U.S. obligations under World Trade Organization (WTO) rules, which ban countries from introducing fiscal incentives that distort trade by making exports cheaper or imports more expensive.

The ministers are also quoted as saying that a 20% “excise tax” on financial transactions, including on a U.S. firm importing goods from its own factories abroad, could “discriminate in a manner that would be at odds with international rules.”

The U.S. Senate has already agreed to moves that would lower the corporate tax rate from 35% to 20%, and some Europeans have objected, saying it would go against a series of agreements between the U.S. and Europe to keep corporate tax rates broadly in line with each other.

That argument, however, is on shakier ground. The U.K., for example, already has a 19% corporate tax rate and some smaller European states have even lower rates.

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Whether the U.S. will take notice of Europeans’ concerns remains to be seen. The president’s ambivalence to the WTO is well known, but even he can see such extreme moves as differential taxation for domestic and imported goods could kick off a tit-for-tat reaction; that is no more in the U.S. interest than it is for other major trading blocs, like Europe.

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