On February 11, U.S. Treasury Secretary Jack Lew continued to fan tension between the United States and the European Union (EU) concerning retroactive taxes placed on U.S. multinational companies. Secretary Lew sent a letter to European Commission President Jean-Claude Juncker that American companies are unfair targets of European tax investigations. Specifically, Secretary Lew claims that 1) the EU is imposing penalties retroactively on an expansive interpretation of “state-aid” rules, 2) the EU is “targeting U.S. companies disproportionately,” 3) the EU does not have authority to tax such income under established international tax standards and 4) the EU approach undermines U.S. tax treaties with EU member states. 

Companies such as Apple, McDonald’s and Starbucks have become the subject of investigation in Europe over transfer pricing issues, location of profits and special agreements with EU member countries. Lew claimed that the EU is also seeking billions of dollars in penalties from U.S. companies—far more than from their European counterparts. The result is “disturbing international tax precedents” that are inconsistent with the OCED’s recent BEPS project. While the EU is concerned that money may go untaxed, Treasury argues that income will properly be taxed by the U.S. upon repatriation. Further, the companies argue that value creation such as research and development is not taking place in the EU and therefore little of their profits should be attributable to Europe.

On February 29, EU Competition Commissioner Margrethe Vestager replied to Secretary Lew with a letter rejecting his claims. Vestager argues that Lew’s objections are based on misunderstandings of EU’s legal framework. Multinationals must be required to price transactions on arm’s length terms in the spirit of preventing base erosion. In response to Lew’s claims that U.S. companies are being targeted disproportionately, Vestager counters that only a handful of the 170 decisions since 1990 involving recovery of state aid have dealt with U.S. companies. Little agreement seems to be breaking out.

In response, U.S. Treasury expressed its intentions in a letter to the Senate Finance Committee concerning available options. In the letter, Treasury stated that they are considering using IRC section 891 as a mechanism to combat EU actions. One of the most intriguing and least used sections of the tax code, Congress has granted the President authority to double the rate of tax on citizens and corporations of a country that is subjecting U.S. citizens or corporations to “discriminatory or extraterritorial taxes.”

It appears this fight is far from over. The disagreement amongst friends may also stir the concerns of Congress, which already is looking at the BEPS proposals with considerable skepticism.

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