• Treasury's Lew says state-aid cases unfairly target U.S. firms
  • Central EU tax oversight poses growth risks due to uncertainty

Conflict over trans-Atlantic tax practices escalated this week as U.S. Treasury Secretary Jacob Lew complained to European Commission President Jean-Claude Juncker that American firms are unfair targets of state-aid investigations.

Lew wrote Juncker Thursday saying the tax probes are hurting international efforts to crack down on corporate tax evasion. He said European Union inquiries are creating “disturbing international tax precedents” and seem to target U.S.-based firms without sufficient justification. The letter raises the U.S. concerns to a higher level, building on previous comments from a senior Treasury tax official.

The EU is pursuing investigations of member nations’ tax arrangements with companies including Apple Inc. and McDonald’s Corp. The commission “appears to be adopting an entirely new legal theory and applying it retroactively in a broad and sweeping manner,” Lew said in the letter. “We respectfully urge you to reconsider pursuing these unilateral actions and instead focus on our collective work.”

Established Standards

Lew said the U.S. already is working to stamp out the practice of American companies moving their revenues overseas to avoid paying taxes at home. At the same time, “well-established international tax standards” don’t give the EU a right to increase levies, his letter said.

“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,” Lew said.

Apple, McDonald’s and Starbucks Corp. are already subject to EU investigations, and EU Competition Commissioner Margrethe Vestager last month signaled she’s willing to add Google parent Alphabet Inc.’s recent 130 million-pound ($188 million) tax deal with the U.K. to her growing list of investigations. At the same time, the EU has maintained it’s not singling out U.S-based corporate titans.

In response to Lew’s letter, the Brussels-based commission insisted its actions aren’t targeted and are in line with the bloc’s longstanding principles. “EU law applies indiscriminately to all companies operating in Europe -- there is absolutely no bias against U.S. companies,” the EU’s executive arm said.

Belgian Investigation

Vestager last month announced a probe into Belgian pacts with mainly European firms, seeking to recover as much as 700 million euros ($793 million) in tax breaks for at least 35 companies, including Anheuser-Busch InBev SA and BP Plc. Responding to Lew’s letter, the commission said its tax-ruling decisions have so far mostly sought to recoup taxes from European companies.

EU laws allow nations to set their own tax rates and require unanimous approval of overarching tax regulations. In addition, the commission monitors government benefits to corporations to make sure different types of firms can compete fairly.

If the EU continues to crack down on the tax letters that its member nations offer companies, U.S. firms may decide to take their business elsewhere, said Ryan Dudley, an international tax partner at Friedman LLP in New York, in a telephone interview. He said countries offer individual tax rulings to companies to provide certainty to employers, not as a means of evading their own tax laws. Cross-border companies use this guidance to choose where to put down roots, Dudley said.

“Where there’s uncertainty there’s going to be an unwillingness to engage in business,” he said. “If the components of the business that they put into Luxembourg or any other country will be taxed favorably, and any taxpayer who puts components of their business into Luxembourg is taxed in the same way, I don’t see how that’s state aid.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE