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Europe Caught Up in U.S. Tax Debate

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A BASF plant in Freeport Texas.
  • Why it matters

    Why it matters

    The fight to create new regulations intended to prevent so-called “tax inversions” may have unintended negatives consequences for European firms with large subsidiaries in America.

  • Facts

    Facts

    • The U.S. is planning legislation that makes it harder for American companies to avoid taxes by moving divisions abroad.
    • A U.S.-based lobbying group representing German giants including Bayer AG, BASF SE and Siemens AG warns that the new proposals could affect European multi-nationals.
    • The concerns relate to how cash infusions from foreign companies to U.S. operations would be taxed in America.
  • Audio

    Audio

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Efforts by U.S. Secretary of the Treasury Jacob Lew to stop American companies from relocating their corporate addresses overseas to pay less taxes is aimed at companies in his own country.

But the Washington, D.C.-based Organization for International Investment (OFII) warns new regulations against so-called “tax inversions” could have unintended consequences for European companies with subsidiaries in the U.S. These include several German companies including Bayer AG, BASF SE and Siemens AG, which are represented by the lobbying group.

“We are worried that foreign companies could get caught in the crossfire in the debate over tax inversions,” said Nancy McLernon, chief executive officer of OFII. After all, companies such as Siemens and BASF have structures similar to U.S. companies that have moved corporate addresses overseas.

While Mr. Lew has released some initial information about how he plans to make it harder for U.S. companies to avoid taxes, many details remain unclear, particularly concerning foreign companies, Ms. McLernon said, adding her organization fears foreign companies in the future will not be able to send as many top managers as before to their American subsidiaries.

 

Treasury Secretary Lew Speech On Wall Street Reform
Jacob Lew, U.S. treasury secretary. Source: Bloomberg.

 

“That would have a negative impact on the expansion strategies of the companies,” she said.

Congress has looked at several proposals in recent months, all of which aim to make tax inversions less attractive for U.S. companies by making it harder to move large American subsidiaries abroad. But these proposals could have unintended consequences for European companies.

The OFII expresses concern that its  in the U.S. could be subjected to a tax disadvantage if laws surrounding the  ability of a U.S. subsidiary to take loans from its foreign parent company and still deduct the interest payments from American taxes, change. Ms. McLernon said, it remains unclear how this element of the debate will shift.

German companies are watching the situation closely, but are keeping a low profile.

The German chemical company BASF, which has been on a major shopping spree in the U.S., making acquisitions this year totaling more than €82.10 billion, said only that it it “supports OFII’s position” on the matter.

Investors on both sides of the Atlantic are nervous.

Mr. Lew’s efforts to stifle “creative techniques used to avoid U.S. taxes” is, at the same time, making it less appealing for American companies to acquire European firms. Shares of the British-Swedish multinational pharmaceutical and biologics company, AstraZeneca, plunged by 5 percent on the London Stock Exchange, while its competitor, Shire Plc, tumbled 6 percent. Both were once viewed as attractive takeover targets.

 

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