Handelsblatt Exclusive

E.U. May Declare U.S. a Tax Haven

  • Why it matters

    Why it matters

    The European Union is to put U.S. tax governance under stricter scrutiny as part of its broader effort to identify tax havens and avoidance-friendly regimes worldwide.

  • Facts

    Facts

    • The Trump administration has taken an aggressive stance toward Germany and the European Union, with the new president openly advocating for a break-up of the E.U.
    • On Tuesday, Mr. Trump’s trade adviser, Peter Navarro, accused Germany of currency manipulation.
    • By the end of 2017, the European Union will publish a detailed list of tax havens and avoidance-enabling jurisdictions.
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    Audio

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source REUTERS Bloomberg M – Montage – tusk Donald trump
European Council President Donald Tusk, right, is turning up the rhetoric against the U.S. Source: Reuters, Bloomberg [M]

As relations rapidly deteriorate between the United States and the European Union, a new topic may become a source of tension: possible tax malpractice on the part of the United States. And if matters escalate, the E.U. could add the U.S. to a black list of tax havens to be published this year, Handelsblatt has learned.

This week, the European Union will write to American tax authorities, asking for clarification on two areas of taxation policy, as part of its preparation of a list of “jurisdictions refusing to comply with good tax governance standards.”

A similar letter is being sent to almost 90 countries, all of which have strong economic ties to the European Union and a significant level of financial activity. The countries meeting these criteria have been ranked on a “scoreboard” of tax governance, prepared for the European Commission, the E.U.’s executive arm, in September of last year.

Countries were judged according to three risk factors for poor tax governance: transparency and information exchange, the existence of preferential tax regimes, and a zero-rated or non-existing corporate tax rate.

“It is absolutely right that the European Commission should take aim at the American tax system.”

Sven Giegold, MEP, German Green Party

Partly based on responses to its letters, the European Union will prepare a definitive list of tax havens by the end of 2017. In the course of this research, Handelsblatt has learned, the United States have been flagged for transparency shortcomings, as well as for preferring some companies over others in tax policy. Washington will be expected to clarify its policies.

It has long been known that some American states — notably Delaware and Nevada — attract companies and high-net worth individuals with special tax arrangements. For many years, the European Union looked the other way, unwilling to annoy their most important ally. But this could soon change.

“It is absolutely right that the European Commission should take aim at the American tax system,” said Sven Giegold, a representative of the German Green Party in the European Parliament.

Some U.S. states even allow the holders of escrow accounts to remain anonymous, which may present considerable assistance to tax evasion, and even money laundering. European money laundering laws strictly require banks to demand and disclose the identities of accounts’ “economic beneficiaries.” The European Union should pressurize the Americans to do likewise, said Mr. Giegold.

An increasing number of Europeans may agree with the Green parliamentarian. Readiness to give special treatment to the United States has been rapidly dwindling since the election of Donald Trump to the presidency. Even before his first day in office, he took an aggressive tone with the European Union. During a press conference with British prime minister Theresa May, he congratulated Britain on its decision to withdraw from the European Union.

He described the 28-member community of nations as a bureaucratic monster which made life hard for businessmen like himself. “I call them ‘the consortium’,” he jibed. Previously, in an interview with the Bild-Zeitung, Germany’s leading tabloid newspaper, he said that the European Union had been founded by the Germans in order to economically damage the United States.

01 p4 Tax Haven or Not-01

On Tuesday, Mr. Trump’s trade adviser, Peter Navarro, added fuel to his boss’s fire. Speaking to the Financial Times, he accused Germany of currency manipulation. Berlin, he suggested, was using a “grossly undervalued” euro to exploit its trading partners. Mr. Navarro described the euro as an “implicit Deutsche mark,” referring to the currency Germany used before the introduction of the euro in 2002. He said Germany was one of the main obstacles to a U.S.-E.U. trade deal, meaning there was little point in discussing a revival of the Transatlantic Trade and Investment Partnership, a draft trans-Atlantic trade agreement also known as TTIP.

After initial hesitation, European political figures have begun to vehemently respond to Mr. Trump’s attacks and decisions. In an open letter to leaders of all E.U. member states on Tuesday, Donald Tusk, the president of the European Council, listed the United States under Mr. Trump as one of the “dangerous” and “unpredictable” factors facing the European Union.

Sweden’s prime minister Stefan Löfven criticized Mr. Trump’s travel ban on citizens of seven predominantly Muslim countries, saying it was “deeply worrying.” German Chancellor Angela Merkel reasserted that “the fight against terrorism cannot justify this kind of generalized action against specific countries and people of a certain religious faith.”

In this tense atmosphere, it seems far from unlikely that Europe could also take a critical approach to American tax policy. In the fight against tax havens, the United States has always played a strikingly ambivalent role. The U.S. government, when it chose to, has put severe pressure on other states to reveal taxation secrets.

It was American pressure that brought an end to traditional Swiss banking secrecy laws, with the Swiss signing the American disclosure rules known as FATCA. These would later become the model for an agreement on automatic information exchange agreed by the Organization for Economic Cooperation and Development, or OECD.

However, when it comes to handing over its own tax data, the United States has not always been so energetic. It supported the OECD agreement on information exchange, but was at first reluctant to sign up to the new rules. Within the G20 and the OECD, the United States did push to make corporate tax avoidance more difficult. But it held back on implementing the new OECD rules. It remains unclear when U.S. tax authorities will make companies implement country-by-country reporting, a key measure of the new OECD rules, whereby multinational corporations report profits and taxes by country.

The United States also appears unconcerned by American companies which do not pay any tax on profits earned outside the United States: neither in America nor in Europe. “As long as profits do not flow back to the United States, they often simply go untaxed,” complained Fabio de Masi, a member of the European parliament for Germany’s Left Party. “So if in doubt, the European Union must take action.”

 

Ruth Berschens heads Handelsblatt’s Brussels office, leading coverage of European policy. Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin and is deputy managing editor of Handelsblatt’s Berlin office. Moritz Koch has been Handelsblatt’s Washington correspondent since 2013. To contact the authors: berschens@handelsblatt.com, hildebrand@handelsblatt.com, koch@handelsblatt.com

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