Lew blasts EU tax probes of US companies

Treasury Secretary Jack Lew is accusing European Union officials of disproportionately targeting U.S. companies in a sweeping corporate tax investigation.

Lew leveled the heavy criticism against the EU for a new and expansive interpretation of rules about whether companies are unfairly receiving state aid. He said the approach raises “serious concerns about fundamental fairness and the finality of tax rulings throughout the entire European Union.”

{mosads}“While we recognize that state aid is a longstanding concept, pursuing civil investigations — predominantly against U.S. companies — under this new interpretation creates disturbing international tax policy precedents,” Lew wrote to Jean-Claude Juncker, president of the European Commission and other EU officials, in a letter obtained by The Hill.

As evidence, Lew said that the EU is seeking billions of dollars in penalties from U.S. firms, which is far more than from non-U.S. companies.

“It could undermine the well-established basis of mutual cooperation and respect that many countries have worked so hard to develop and preserve,” Lew wrote.

He urged EU officials to rethink their probe into whether U.S. firms such as Apple, Amazon and Starbucks received tax breaks that may be deemed as illegal state aid that could lead to retroactive penalties “in a broad and sweeping manner.”

Lew argued that the new approach goes after income that the EU has no right to tax under international tax standards.

“U.S. multinationals generally do not conduct the cutting-edge research and development that creates substantial value in the European Union, and as a result, comparatively little of their income is attributable to their European operations,” he wrote in his first comments on the EU tax issue.

The uncertainty around the investigations could damage the business climate in Europe and deter foreign investment, he added.

The commission denied there is any bias toward U.S. multinationals in the investigations and that previous cases have focused mostly on European companies, according to news reports.

Lew told the House Ways and Means Committee on Thursday that the European probe is one of several “very troubling trends” in the tax world and called on Congress to tackle business tax reform.

“I sent a letter today objecting to action being taken in Europe in the name of state aid subsidy actions that essentially makes an attempt to undermine our tax code by having a tax imposed overseas on what should be income in the United States,” he told the panel.

“We need to fix the business tax code to get that money back.”

In December, Bob Stack, Treasury’s deputy assistant secretary for international tax affairs, criticized the EU investigations during hearings in the House and the Senate.

Since then, Lew said he and his Treasury staff have held extensive talks with Commissioner Margrethe Vestager, another recipient of the letter on the issue.

Lew told the House panel that the consequences of delaying business tax reform are “enormous” and an overhaul of the business tax code is the only way to combat these tax problems, including corporate inversions.

“This is the year to look forward to getting it done,” he said during a hearing about President Obama’s fiscal 2017 budget. “We need to put the effort in to make it a possibility.”

House Ways and Means Committee Chairman Kevin Brady (R-Texas) sounded eager to work with Lew and the White House to craft a tax plan this year, but acknowledged the difficultly of brokering a deal in a presidential election year.

The budget proposal, which Lew also presented in the Senate on Wednesday, includes the same business tax plan as last year — a one-time 14 percent tax on the untaxed earnings of U.S. companies held overseas and at least a 19 percent tax on that foreign income moving forward.  

The blueprint also suggests curbing corporate inversions by lowering the ownership threshold for a company to be considered foreign for tax purposes to 50 percent from 80.

Lew argued in the letter that the problem with inversions — when a U.S. company merges with a foreign firm to lower its tax burden — doesn’t give the EU the right to tax that income.

“We recognize that the U.S. system will only tax this income upon repatriation, and many U.S. firms are choosing to defer paying tax liabilities by keeping income overseas in low-tax jurisdictions,” he wrote.

“This problem, however, does not give member states the legal right to tax this income. Doing so would directly harm U.S. taxpayers.”

Lew said that there is growing concern in the Treasury Department and among lawmakers on Capitol Hill about the investigations and that the “United States remains firmly committed to working with Europe and the rest of the world to prevent the continuing erosion of our corporate tax base.”