Transatlantic Tiff

Europe must unite to win tax war

Lee Hsien Loong, Singapore's prime minster, speaks as U.S. President Barack Obama, right, listens during an official arrival ceremony on the South Lawn of the White House in Washington, D.C., U.S., on Tuesday, Aug. 2, 2016. The occasion marks first official visit by a Singapore prime minister since 1985. Photographer: Andrew Harrer/Bloomberg
The U.S. has criticized the E.U. for acting "willfully" on the issue of back taxes from companies like Apple and Starbucks.
  • Why it matters

    Why it matters

    An investigation into special tax incentives for U.S. corporations in some E.U. countries has triggered what has been described as a “tax war,” and it threatens to derail future trade deals.

  • Facts

    Facts

    • The dispute is basically about a distribution of funds. Everyone wants big corporations to pay their taxes. But should they pay them at home, in the U.S., or in Europe, where they made the money?
    • U.S. corporations park $2.4 trillion in profits overseas, depriving the U.S. Treasury of close to $700 billion in revenues.
    • The U.S. is putting pressure on the E.U., saying the dispute endangers future trade agreements, including the controversial TTIP deal. The author argues that Europe must face this pressure as a single bloc.
  • Audio

    Audio

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For once, everyone in Washington agrees: Congress, the administration, and even the Republicans and the Democrats. They are all concerned, alarmed even, about the European Union’s latest tax investigations, which have put major American corporations like Apple, Starbucks and Amazon in the European Commission’s crosshairs. Money and power are at stake, with potential back taxes reaching the double-digit billions.

Washington is already threatening “retaliatory action,” but has not provided details about what that might mean. The Americans are maximizing their attempts to intimidate the Europeans by keeping details of any possible escalation vague. What began as a European investigation into suspicious models for subsidies has turned into a serious burden on transatlantic trade relations. There is even talk of a “tax war.”

Several years ago, the Americans went so far as to describe a World Trade Organization decision in favor of the E.U. as an “atom bomb.” But the explosive force could be bigger this time, because the current dispute is occurring at a time when chauvinism and economic nationalism are being revived on both sides of the Atlantic.

Some say the outrage over the E.U. proceedings is a red herring, meant to cover up the failure of American lawmakers to enact comprehensive corporate tax reforms.

Globalization’s promises of prosperity have not panned out, and populists like Donald Trump are exploiting widespread yearning for a re-nationalization of the economy. “America First” is the slogan with which Mr. Trump seeks to overturn the consensus that’s been around since the end of World War II.

The tax dispute is ultimately a fight over the distribution of funds. Americans and Europeans agree that multinational corporations are exploiting the fragmented international financial order and have developed questionable models to avoid or minimize taxes they must pay. Both Americans and Europeans want this to change, they want companies to pay their fair share of tax. The only question is: Where? In Europe? Or in the United States?

It is only at first glance that the European Commission’s investigation appears to be an internal European matter. Competition watchdogs in Brussels are looking into whether E.U. member states like Ireland have violated the ban on government subsidies with their tax incentives; Ireland has become a popular place for American high-tech companies to set up shop because of attractive corporate tax structures there. If this proves to be the case, then U.S. companies could be ordered to pay massive amounts of back taxes. Investment bank JP Morgan estimates that Apple alone could face $19 billion in tax demands. In its latest quarterly report, the company has already warned investors that the E.U. investigation could lead to billions in charges.

The Americans feel that the Europeans are acting willfully. The Senate and the Treasury Department have accused the E.U. of reinterpreting existing tax and subsidy laws without prior warning. They characterize this as an assault on the investment security, especially as the Europeans apparently intend to assert these tax demands retroactively. The Americans also claim that the E.U. is hampering international cooperation in the fight against tax evasion.

One could also view the outrage over the E.U. proceedings as a red herring, a mock outcry that is meant to cover up the failure of American lawmakers to enact comprehensive corporate tax reforms. U.S. corporations park $2.4 trillion in profits overseas, depriving the U.S. Treasury of close to $700 billion in revenues. But obviously this is not the result of a European conspiracy, rather the consequence of ongoing political gridlock in Washington.

At any rate, the conflict is yet another blow to the Transatlantic Trade and Investment Partnership, or TTIP, which is already in serious need of help. The contentious issue of arbitration courts within that deal has new significance now. The U.S. is insisting on incorporating private courts of arbitration into the TTIP, where U.S. companies can take action against E.U. states, in part because they expect favorable rulings in cases like this current tax conflict.

The European Commission is willing to hazard the consequences of this dispute. It was long aware of American concerns, especially after the urgent letter U.S. Treasury Secretary Jack Lew sent to European Commission President Jean-Claude Juncker in February. For Europe, it is a matter of fair competition, a prerequisite for the functioning of the single market, and of the principle that income earned in Europe should also be taxed in Europe.

The many E.U. critics in Europe should take a careful look at this case. The Treasury Department is ruthlessly displaying the power it has as a result of the dollar’s global dominance. It has even cracked the Swiss banking secrecy law, which was long considered sacrosanct.

Do the E.U. haters – and fans of Euroskeptic parties like Alternative for Germany, France’s far-right Front National or the UK Independence Party – truly believe that German, French or British tax authorities can withstand that kind of pressure from the United States, a global financial power?

The answer is no. If it hopes to achieve a level, financial playing field, Europe can only oppose the U.S. as a single entity.

 

Contact the author at: koch@handelsblatt.com

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