Earlier this week, several European heads of finance warned Donald Trump that his planned tax reform for the United States would hinder international trade and disregard rules set by double taxation treaties worldwide.
In a letter signed by representatives for some of Europe’s largest economies and sent to the White House, five Finance Ministers remarked that “it is important that the U.S. government’s rights over domestic tax policy be exercised in a way that adheres with international obligations to which it has signed up.”
This letter follows last month’s passing of new tax legislation that, as reported by Fox Business, “would include about $1.4 trillion in tax cuts, a cut in the corporate rate to 20% from 35%, reshape international business tax rules and temporarily lower individual taxes.”
More specifically, as explained by Fortune, the letter submitted by Spain, the UK, Italy, France and Germany said that “a ‘base erosion’ provision in the Senate bill that aims to prevent corporations from moving profits abroad could…adversely hurt banks by treating cross-border transactions as non-tax deductible,” while the “House [of Representatives] bill’s call for a 20% tax on payments made to a foreign subsidiary…could allow taxation of non-U.S. companies.”
Furthermore, according to The Financial Times, a provision submitted in Senate’s version of the legislation “would tax US exporters more favourably when they make profits from brands and other intangible assets,” which, per the letter submitted by the European leaders, could “face challenges as an illegal export subsidy.”
German lobbying group—BDI Federation of German Industry—joined the fray, saying parts of Trump’s tax bill has “clearly a protectionist character” and will cause “massive damage” to companies in the region.
Additionally, Albert Liguori, a tax specialist with Alvarez & Marsal Taxand LLC in New York, told the Wall Street Journal’s Andrea Thomas that this bill will hinder those companies like Japanese car manufacturers and European pharmaceuticals that do business in the US.
“The excise-tax and base-erosion-tax provisions appear to have the greatest impact on certain sectors, particularly those with heavy sales in the U.S. but relying on integrated supply chains,” Liguori said.
The Trump Administration Responds to European Tax Concerns
The Trump administration was quick to respond to Europe’s concerns.
First, the US Treasury Department thanked their European counterparts for their input and said they “are closely working with Congress as they finalize the legislation through the conference process.”
Furthermore, in a statement submitted to Bloomberg, spokeswomen for the House Ways and Means Committee and Senate Finance Committee, the groups in charge of developing this new tax policy, said the regulation, specifically the portion on base erosion and anti-abuse tax (BEAT), “has been studied, vetted, and is consistent with international standards, including WTO agreements.”
China Reacts to Donald Trump’s Tax Reform for the US
China has also started preparing for a possible US tax reform.
According to Business Insider, the Chinese government considers the planned tax legislation a “grey rhino” as it is worried it will “lead to large capital outflows from the country.”
Currently, as shown by research carried out by Unirule Institute of Economics, firms in China can pay up to 40 percent in taxes, a figure that has led many of the country’s most powerful firms to transfer their businesses to jurisdictions with lower tax rates.
Hence, Chinese Premier Li Keqiang has introduced plans to reduce the corporate tax rate and administrative fees and reform the country’s VAT in an effort to keep businesses in the country and potentially stymie the effects of the pending US tax reform.
Many Chinese analysts share this opinion and believe this new US tax legislation could impact the Chinese economy and competition between the two countries.
Andrew Choy, Head of International Tax at Ernst & Young in China, believes “the Trump administration’s tax cut plan will give US companies in China a shot in the arm to repatriate deferred profits back home.”
“China has already taken actions to offset the impact, as Beijing is working on plans to allow tax deferral on profits reinvested in China in an attempt to counter the repatriating impetus,” Choy added.
Furthermore, in a December 5th editorial, the 21st Century Business Herald wrote, “Tax cuts in the U.S. and their fallout will pose a challenge to China’s manufacturing and technological innovation, which China must cautiously brace for…We should look out for the long-term impact of the U.S. tax cuts, and be seriously prepared. This is also an important force to facilitate China’s reforms.”
What are your thoughts on these responses by both Europe and China? Is a tax war looming in the horizon?
Let us know in the comments section!